Washington Weekly: Key Takeaways from the Biden Speech

The Senate approved a few Biden administration nominations and voted to reverse a regulation put into effect during the Trump administration regarding methane emissions. It also passed a $35 billion drinking water and wastewater infrastructure bill. The House did not schedule any votes this week.

The Senate will continue to vote on various Biden administration nominations. The House is not scheduled to have any floor votes next week.

Key Takeaways from the Biden Speech.

The Family Plan. 

President Biden outlined a third comprehensive spending proposal that he believes is a necessary investment in education and safety net programs for families. This plan follows the $1.9 trillion COVID relief bill that was signed into law earlier this year and the administration’s $2.2 infrastructure proposal. This new $1.8 trillion bill covers a wide range of spending on social services like child care, education, health care and workplace development. The newest plan, particularly when combined with the administration’s previous spending proposals, likely will be too big to pass in Congress. We think the infrastructure plan has a better chance of success. By the time Congress finishes its work on that bill, it may not be practical to then begin work on a third massive spending bill. This latest plan will be discussed at length given its boldness and appeal to progressive Democrats, but we are skeptical of its ability to pass as a single package. Rather, parts of it will be integrated into the annual spending bills that Congress will work on this fall, while other parts will remain on a wish list of spending for some lawmakers for many years to come.

Tax Increases. 

It’s clear the President wants to partially pay for both the infrastructure bill and the latest social spending plan through tax increases on corporations and high-income individuals. However, the President was vague on the content of many of those tax increases in his speech. He reiterated his interest in increasing the corporate tax rate and in increasing the highest marginal rate for individuals back to 39.6%. Beyond that, though, he implored big businesses and wealthy individuals in general to pay their “fair share” and expressed support for the closure of tax loopholes. As usual, the devil will be in the details of how Congress crafts these and other tax proposals. Congress has its own ideas and will view Biden’s goal of a more progressive and tightly enforced tax system as a guide as it fills in those key details on who and what is taxed. This process already has begun behind the scenes and will continue over the next month before more developed proposals are publicly released.

The Deficit/Debt. 

It’s our sense that all of the spending proposed by the President and Congress will soon be questioned by a larger segment of the public as worries about the nation’s budget deficit and debt grow. The six combined COVID relief bills have already added $6 trillion to the deficit and debt. If signed into law, the infrastructure and Family Plan bills are unlikely to be fully paid for and therefore also would add to the deficit/debt. Appropriations for the government’s operations in the upcoming fiscal year are expected to rise by close to 10%, which will further increase the deficit. The majority of Americans seem to accept deficit spending in times of crisis but scrutinize it more under normal economic conditions. A key question is whether more Americans will focus on the deficit and debt as the economy finds a more stable footing. At present, neither party in Congress has real credibility on the deficit, so this issue offers opportunities and perils for both. It could be a significant dark horse political issue that impacts the 2022 mid-term elections.

Foreign Policy. 

In a roughly hour-long televised speech before Congress, any President would have difficulty determining what specific issues should be included and excluded. Foreign policy seemed to have a relatively low priority in President Biden’s address, which otherwise covered a full landscape of issues. No new initiatives or developments were announced in the international arena. The President’s focus was clearly on COVID recovery and his proposals to accelerate the economic recovery. The administration’s approach to foreign policy has been slow to take shape, making it fair to ask how our traditional allies, as well as China and Russia, are interpreting this inward focus.

Estate Taxes and Step-up Basis. 

Congressional Democrats’ internal deliberations on the estate tax are indicative of the complexities associated with the behind-the-scenes tax discussions we mentioned above. President Biden’s plan to eliminate step-up basis, which would tax an asset based on when it was first acquired and not at the time of inheritance, is getting more attention from lawmakers. However, the administration’s tax plans have been silent on related issues like the estate tax exemption level and tax rate, which have been areas of focus for Democrats in Congress in the past. So, will Democrats choose to increase the tax, lower the exemption amount or eliminate stepped-up basis? Or decide to do all of the above? This is an open question given that Democratic lawmakers are beginning to hear from constituents who would like to preserve step-up basis and current estate tax levels. Our gut instinct tells us that the path of least resistance may prevail, which favors a lower exemption level and higher tax rate. That is not a given as there are at least two Democratic Senators who have opposed such legislation in the past. We regard everything in the broad tax space to be on the table for consideration, and Democrats will go through these types of deliberations before we see any public proposals.

GameStop Hearing on Deck. 

The House Financial Services Committee next week will hold its third hearing on the implications of the market volatility earlier this year in GameStop and other stocks. While lawmakers have heard from market participants, academics and other stakeholders in the previous sessions, this hearing will feature testimony from a key regulator, new SEC Chairman Gary Gensler. The SEC has been conducting its investigation into market events, including whether any market manipulation took place. Chairman Gensler will share the agency’s preliminary findings and discuss potential policy areas of focus. In particular, he is interested in reviewing payment for order flow practices and the gamification of certain retail trading platforms and in reducing the settlement cycle for stocks. Lawmakers also will propose legislative solutions in many of these areas. However, the SEC already has sufficient authority to act and tangible policy changes likely will happen through regulatory rather than legislative action. 

Southwest Border Immigration Problems. 

Bipartisanship has finally made an appearance in addressing the current asylum and immigration problems along the southwest border. A bipartisan quartet of lawmakers from Arizona and Texas have joined forces to introduce legislation that would bolster the US response to the surge in migrants by establishing more facilities to process asylum cases and increasing the number of immigration judges and asylum officers to deal with the growing caseload. The proposal also includes measures to protect unaccompanied migrant children. These are modest steps but nonetheless steps forward. This legislation would likely pass both the House and Senate without any significant opposition if there was a vote on it, but lawmakers with stronger views on broader immigration issues will insist that their priorities are included in the bill, which would likely doom it to defeat. Most Democrats would insist on a legal pathway for “dreamers,” while most Republicans would insist on stronger border enforcement and protections. While Congress fights over these issues, the smaller and more modest improvements to address the current surge of migrants are likely to wither.

Reapportionment Results. 

As we mentioned last week, the Census Bureau released the updated population data for each state (and the overall country) this week. With this release, we now know what the congressional reapportionment will look like for the next decade. Despite expectations that as many as 20 states could be impacted by reapportionment, the actual results were much more modest. Texas was the big winner, gaining an additional two congressional seats, which brings its total up to 38 seats in the House. Additionally, Colorado, Florida, Montana, North Carolina and Oregon all picked up a single House seat. New Yorkers had feared the loss of two House seats but only lost one. California, Illinois, Michigan, Ohio, Pennsylvania and West Virginia also each lost a single seat. If the 2020 presidential election results had occurred with this new map, Joe Biden would have won with 303 electoral votes instead of 306. Initial estimates are that while these shifts might slightly favor Republicans in the upcoming House elections, those gains likely will be modest. The real fight will occur behind the scenes later this year when redistricting will begin and all states will redraw their congressional districts (except in states where there is only one district). House Democrats have a razor thin majority with only four seats to spare, so shifts due to reapportionment and redistricting could shift the balance in which party controls the Speaker’s gavel in 2023.