Washington Weekly: Government Funding

The Senate approved House-passed legislation to reform the US Postal Service. The House passed a bill to ban energy imports from Russia. Both the Senate and the House passed a fiscal year 2022 government funding bill, which will fund the government through the fiscal year (September 30) (see below).

The Senate will continue to vote on Biden administration nominees. The House will vote on a bill that would nullify all pre-dispute arbitration agreements and a bill that would prohibit hair discrimination in the workplace.

Russia and Ukraine.

The debate in Washington will continue to focus on what additional actions the US might employ to apply further economic and other pressure on Russia. While the Biden administration already has applied significant sanctions on Russia and generally has legal authority to implement other options under consideration, lawmakers undoubtedly will continue to offer input and possibly pass legislation to advance their own priorities. Notably, President Biden announced a ban on Russian energy exports to the US this week amidst strong bipartisan calls for this action in Congress. Some members also have expressed support for sending US military aircraft to Ukraine, though this is not a majority viewpoint at this time. The Biden administration also joined a growing bloc of lawmakers and has called for suspending Russia’s “most favored nation” trade status, which allows it to export goods to the US at lower tariff levels. Removal of this designation would allow the US to raise tariff levels on imports from Russia (as well as Belarus). Other ideas that have been floated include the removal of Russia from the World Trade Organization (which is unlikely) and a freeze on Russia’s gold reserves. We’ll hear about other ideas on almost a daily basis, with some likely to be implemented by the White House as it continues to ratchet up pressure on Russia.

Energy Dominates.

Many of the top tier issues concern gas prices and energy. Particularly following the US’s ban on Russian energy imports, there has been some discussion of the US taking a more drastic step of sanctioning Russian energy exports to other countries. Meanwhile, the war in Ukraine and the economic response to it has led to a disruption in the supply of energy and to significantly higher prices in the US and around the globe. In response, many Republicans would like to see the US increase oil and gas production rather than rely on other global oil producers like Saudi Arabia, Iran and Venezuela to increase production. Discussion about these and other important energy issues will be front and center in Washington over the next few weeks.

Government Funding.

After weeks of negotiations, lawmakers came to a bipartisan agreement on government funding. The House passed the bill on Wednesday and the Senate followed suit last night. The bill includes $13.6 billion for humanitarian and military assistance to Ukraine, and the urgency around that funding item helped bring about the bipartisan compromise. Passage of the bill will fund government agencies for the rest of the fiscal year (through September 30). The agreement increases discretionary spending by 6%, with Democrats and Republicans respectively citing higher spending for social programs and defense as the basis for their support. Fiscal discipline was the loser in this compromise given the bill’s increase to the budget deficit and the federal debt, which already stands at $30 trillion.

Democrats’ Domestic Agenda.

Senate Democrats hope to resume consideration of President Biden’s “Build Back Better” initiative (now re-named “Build Back a Better America” - BBBA) in May. By that time, they hope to have already approved President Biden’s Supreme Court nominee, Judge Ketanji Brown Jackson. Hearings between now and then will set the stage for Democratic leaders to revive negotiations with Senator Joe Manchin (D-WV). A potential agreement could focus on climate and healthcare spending, with that spending offset by a corporate minimum tax and prescription drug pricing reforms. Senator Manchin would like to use tax changes to lower the budget deficit though this idea has received a cold reception from his Democratic colleagues. Democrats will begin a push on BBBA soon, although developing a deal with Senator Manchin will be difficult and they are not close to one currently. Look for Democrats, through hearings over the coming weeks, to pitch BBBA and other initiatives (spanning drug pricing reforms, a gas tax holiday, clean energy measures and anti-trust reforms) as potential remedies for inflation.

Crypto Order.

The White House this week issued a much-anticipated executive order on digital assets. While financial regulators already have been focused on digital assets (in recent months, a group of agencies issued a report on the regulation of stablecoins and the Federal Reserve issued a report on central bank digital currency (CBDC)), the order calls for a more comprehensive approach across the whole of government. It directs a wide range of agencies to examine the intersection of digital assets with such matters as financial stability risk, payments systems, investor protection, criminal activity, climate change, and competition policy, among others. Perhaps most notably, the administration expressed a clear interest in having the Fed act with greater urgency on the development of a CBDC. With respect to many key issues involving digital assets (including CBDC), regulators have been looking to Congress to provide direction and new authorities through legislation. For their part, lawmakers have been active in exploring digital assets in hearings. However, given that these issues are complex, cut across different committees and engender different ideological responses, it will be a long time before Congress is able to fashion a viable legislative solution.

Retirement Policy.

The bipartisan package to enhance retirement savings known as SECURE 2.0 remains in flux as Congress tries to juggle other priorities, including the war in Ukraine. This package includes an increase in the required minimum distribution age to 75 and an allowance for companies to match employees’ student loan payments with retirement contributions. This package has passed the House Ways and Means Committee, but not yet the full House. A group of interested parties and lawmakers tried to get this package attached to the government spending bill, but that effort failed given some Senators’ interest in adding other provisions to the SECURE 2.0 measure. The Senate is likely to pick up this legislation in the spring or early summer and hold a hearing in the Senate Finance Committee. Given the bipartisan support, we think SECURE 2.0 could become law near the end of the year.

Research and Development Tax Credit.

Starting this year, taxpayers will no longer be able to deduct research and development (R&D) expenses in the year incurred. Instead, these expenses will now be amortized over several years. Companies in sectors like defense, tech and pharmaceuticals that invest heavily in development R&D will be negatively impacted by the change. Given that, there is growing bipartisan support for legislation to reinstate immediate deduction of R&D expenses. Businesses were interested in adding such a provision to the government spending deal but ultimately were unsuccessful. We think that Congress eventually will pass this change, but this too is likely to be an end of the year exercise.

Increasing Crime.

There is increasing concern in Washington about rising crime rates (particularly violent crime in bigger cities), even if there isn’t much of a consensus about how to effectively address it. While crime and safety issues are mostly within the jurisdiction of state and local governments, federal action can be helpful. The issue is complicated by Second Amendment concerns. Most Democratic lawmakers see the rise in crime as gun-related with a need to address systemic social issues, while most Republicans cite underfunded local policing and lax prosecution as primary reasons. Congress did include some additional funding for police departments in the government funding bill, but more meaningful action on crime won’t happen until the differences cited above are reconciled in some way, something that will not happen in an election year.

Independent Legislature Theory.

On Monday, the Supreme Court declined to hear GOP challenges to the new congressional maps in Pennsylvania and North Carolina, which were determined by the states’ respective supreme courts. The maps were being challenged primarily under the “independent legislature” theory. That theory, which has its roots in the 2000 election recount in Florida, argues that legislators have the ultimate power over elections in their states and that state courts have limited or no ability to check it. While the Supreme Court declined to hear the cases, it is notable that its reason for doing so was on procedural grounds and not merit. In fact, at least four Justices (Alito, Gorsuch, Kavanaugh and Thomas) were somewhat favorable toward the theory underlying the challenges. Were this theory to be validated by the Supreme Court, it would drastically change the political landscape. Legislatures would no longer have to compromise with the governor when drawing new district lines at the state and federal level. It even could change the way in which electors are chosen for the electoral college. All eyes will be on Chief Justice Roberts and Justice Barrett as the deciding votes when a similar case comes before the Supreme Court again.