Washington Weekly: The Power of One

The Senate confirmed various Biden administration judicial appointees. The House passed a competition bill to enhance US technological capabilities (see below).

The Senate will continue to vote on Biden administration nominees. The House will consider bills to eliminate arbitration agreements in sexual assault and harassment cases and to impose sanctions on foreign individuals who violate human rights against LGBTQ individuals.

The Power of One.

It was disclosed this week that Senator Ben Ray Luján (D-NM) had a stroke and may need six weeks or more to recover before returning to the Senate. This is a significant development in a Senate evenly split 50/50 between Democrats and Republicans. Senator Luján’s absence means that Democrats will have a much harder time approving some Biden administration nominees and certain legislation (namely the Build Back Better Act) considered under budget reconciliation rules that only require a simple majority vote. This loss could be offset by the absence of a Senate Republican (for example Senator Mitt Romney (R-UT) this week needed to stay home due to a Covid infection). A lack of a majority in the Senate likely will force Democrats to rearrange their agenda and focus on bipartisan bills (such as the technology competition bill mentioned below). A more prolonged absence by Senator Luján would be especially problematic in a year when the calendar is already shortened by the mid-term elections.

Government Funding Deadline.

With government funding set to expire on February 18, Congress must pass an extension by then to avert a government shutdown. The current fiscal year (2022) began last October 1, but Congress has not been able to agree yet on a full-year government funding plan. With the increase in partisanship in Congress, these sorts of delays have become commonplace. Lawmakers differ over what federal spending should be prioritized this year, with Democrats favoring more domestic spending and Republicans seeking more in defense funding. Congress will soon avert an immediate crisis by passing a temporary funding extension (based on last year’s approved funding levels) for another few weeks. However, the inability to agree on a full-year funding plan is chaotic for government agencies and programs that rely on a predictable flow of funding (including the Defense Department). Approving this short-term extension and making progress on an overdue longer-term plan will be the top priority in Congress for at least the next month.

Supreme Court Vacancy.

President Biden and his team will spend this month conducting due diligence on a slate of individuals under consideration for nomination to serve on the high court. A nomination is expected to be sent to the Senate late this month. The Senate is likely to take about two months to review the nominee’s credentials, which would push Senate hearings and a final vote into May. Justice Breyer indicated in his resignation letter that he will stay on the court through June, so a new judge could formally replace him in the summer, well before a new session begins in October. This nomination is a big opportunity for the President to strengthen support with his political base and to make his mark on the court, though it also comes with risks if the nominee struggles in confirmation hearings. All presidents want an opportunity to make a nomination to the Supreme Court and this is a very welcomed development for the White House.

Build Back Better in Pieces?

In his televised press conference two weeks ago, President Biden suggested that Congress may have to pass his Build Back Better (BBB) initiative in separate pieces. However, as Senate Democrats try to revive a slimmed-down BBB bill, their focus is on crafting a single bill, not several bills. It is doubtful that the complex rules surrounding budget reconciliation, which is the process being used to pass a BBB bill with a simple majority vote, will allow Senate Democrats to pass several bills enacting the BBB components. Once the government funding bill is fully resolved (perhaps around March 1), negotiations will intensify on a compromise BBB bill and we will then have a better idea of whether a bill will make it across the finish line or not. Senator Joe Manchin (D-WV) basically holds all the cards at this point. To get a BBB bill done, Senate Democrats will have to accept his demands for a much more scaled-down bill that is fully paid for through various tax increases. Little progress has been made to date, and the chances that Democrats pass a BBB bill become more and more remote with each passing week.

Technology Competition Bill.

One area where there is bipartisan agreement is in increasing US technology capabilities to address competitive threats from China. The Senate last year passed (68-32) a bill that included $52 billion of funding to enhance semiconductor production in the US and $120 billion to bolster science and technology research and other activities at the National Science Foundation and other relevant agencies. The House this week passed its own version of the competition bill on a mostly party-line basis. Republicans were opposed to this sprawling bill (totaling almost 3,000 pages) because it was replete with more contentious provisions (particularly on labor and environmental matters) not contained in the Senate version. House and Senate negotiators likely will now form a conference committee to iron out differences between the two bills. Inevitably, the final package will need to hue more closely to the Senate version given the necessity for bipartisan support in the upper chamber. President Biden and Democratic lawmakers hope a final bill can be reconciled by the State of the Union address on March 1, where it would be prominently mentioned as a bipartisan accomplishment.

Fed Nominations.

The Senate Banking Committee held a hearing this week to consider Lisa Cook, Philip Jefferson and Sarah Bloom Raskin to serve on the Federal Reserve Board (Ms. Raskin, a former Treasury official and Fed governor, is the nominee to serve in an influential vice chair position that leads Fed efforts on bank regulation). The committee still has yet to formally vote on the pending nominations of Fed Chairman Jay Powell to serve another term and Fed Governor Lael Brainard to serve as Vice Chair. Senate Banking Committee Chairman Sherrod Brown (D-OH) plans on having the committee vote on all five of these nominations on February 15. That will clear the way for Senate votes on the nominees. While Chairman Powell has broad bipartisan support and will be approved quickly, some of the other nominees are more controversial. For example, Ms. Raskin was criticized by Republicans for her views on the role of the Fed in regulating climate risks. They (and other Biden nominees) may be on a slower track in a 50-50 Senate where Democrats will be down one critical vote as Senator Luján recovers.

Tax Season is Here.

The Internal Revenue Service (IRS) is now accepting tax returns for 2021 (the deadline to file is April 18). It will be a challenging filing season for the agency. As of mid-December, the IRS still had not processed over 10 million returns from 2020. Even if Democrats pass nearly $80 billion of IRS funding as part of a BBB bill, the infusion is unlikely to provide timely help. This proposed funding is largely dedicated to enforcement (increased audits) and would take years to scale up. Lawmakers are exploring options to mitigate further delays at the IRS with additional funding in the pending government funding bill. Republicans may not accept this proposal given that the IRS still has yet to spend additional funding, over $1 billion, that was approved by Congress last year. With these dynamics, we should all expect a chaotic tax season.

SALT Update.

Democratic Senators remain divided on whether to provide potential relief from the current $10,000 cap on the state and local tax (SALT) deduction as part of the BBB bill, which is itself a major question mark. Many Democrats, including Senator Manchin, believe relief from the SALT cap primarily helps upper-income earners, while others from higher-tax states have promised relief to their constituents. If a BBB package does move forward, we still believe there is a good chance that SALT relief would be included though it is likely to be far more modest than the increase in the cap to $80,000 that was in the House-passed BBB bill. Additionally, with tax filing season having already begun, the possibility of SALT relief being applied retroactively to 2021 is quickly fading away. If there is a BBB bill that moves forward in the Senate, SALT will be one of the last issues resolved.

Electoral Count Act.

While the Democrats’ voting reform legislation stalled in the Senate last month, momentum has been quietly building this year for a more modest and bipartisan update to the Electoral Count Act (ECA). Congress passed the ECA in 1887 in order to clarify the procedures outlined in the Constitution for the process of counting electoral votes following a presidential election. The law clarifies that states should resolve disputes and send to Congress a final slate of electors (several states in the 1876 presidential election sent different slates to Congress for approval). A key issue in the current reform effort relates to the role of the Vice President in accepting the states’ electoral results (as the official president of the Senate). While there is bipartisan support for general updates to the 1887 law, cooperation may break down depending how this issue is resolved. We all remember well President Trump’s plea for Vice President Pence to reject the states’ electoral votes after the 2020 election, an authority the Vice President said he didn’t have. While this new bill will seek to further clarify that, it may be too much of a political hot potato to resolve in any meaningful way.