Special Washington Update: What to Expect From Washington in 2023

The 118^th Congress has completed most of its organizational formalities and will begin in earnest next week. As most know by now, the new Congress will feature divided government. Republicans will hold a slim four-seat advantage in the House, while Democrats will have an also slim two-seat majority in the Senate. Meanwhile, President Biden will complete his first term in the White House over the next two years and is positioning to run for re-election in 2024.

Divided government can sometimes yield productive agreements on pressing policy issues when there is the political will for lawmakers on both sides of the aisle to come together in a spirit of compromise. However, divided government more often is characterized by fractiousness and typically results in legislative gridlock. We think that will be the case in this Congress given that we don’t detect that political will from the two parties to compromise and strike deals not completely on their own terms. Indeed, Congress got off to a bumpy start right out of the gate when it took 15 rounds of votes for the House just to elect a new Speaker.

With these dynamics in mind, we believe the following issues and developments will dominate Washington in 2023.

Amidst the theatrics of all of the floor votes, new House Speaker Kevin McCarthy (R-CA) had to agree to key concessions to secure the support he needed to become Speaker. Most notably, Speaker McCarthy agreed to a new rule that will allow any single House member, regardless of party, to demand a vote on removing the Speaker from his position. That provision could result in regular votes on the Speaker’s job status, which, in turn, could disrupt the regular functioning of the House. More fundamentally, the very threat of this action puts Speaker McCarthy into an effective straightjacket. If he isn’t able to accommodate all House Republicans, he runs the risk of being voted out of office. With daily threats to his job security, will Speaker McCarthy have a chance to govern effectively? This dynamic will play out in the most pronounced way in the fiscal policy issues mentioned below.

House and Senate committees will conduct oversight hearings on a wide range of issues, many of which are hot-button political issues. Most of the focus will be on the House hearings, where Republicans haven’t had a majority in four years and have lacked any meaningful oversight responsibilities. As such, House Republicans have a long list of policies and issues to investigate, including the origins of Covid, the federal government’s Covid policies, China, Hunter Biden, the FBI and Department of Justice, classified information abuses and corporate “wokeness.” The hearings will occur weekly, and some will generate significant media coverage. Whether any of these issues gain traction with the public will depend on whether compelling information and revelations are provided. House Republicans hope the hearings can lead to reforms if a Republican presidential candidate is elected in 2024 or can at least tarnish the Democratic brand ahead of the presidential election.

Particularly with a divided Congress making legislative wins much harder to come by, the Biden administration will need to rely even more heavily on executive and regulatory action to pursue its policy priorities. To give a sense of the scale of potential regulatory action, the administration earlier this month published a list of over 2,500 possible rulemakings (covering both new proposals and existing proposals to be finalized). A big part of the regulatory agenda will be focused on climate change. Other areas of focus include consumer and labor protection and health care. Following passage of a bipartisan competition bill last year, the administration is also focused on measures to strengthen the resiliency of US supply chains and a potential executive order focused on limiting US outbound investment in China. In the financial services sphere, the SEC in particular has been advancing an aggressive reform agenda, having issued over 30 proposals ranging from new corporate disclosures on climate risk to most recently a proposed overhaul of US equity markets. While the SEC and other regulators will face headwinds and significant criticism from House Republicans, we expect the Biden administration’s parade of regulations to continue.

Border security remains a top tier issue for House Republicans, and Speaker McCarthy has agreed to have a vote in the full House on a border security plan early this year. The bill will increase border enforcement and security and maintain Title 42, which keeps migrants seeking asylum outside of the US while their applications are considered. As the year evolves and the Senate does not act on these measures, Republicans will continue to press their case as part of the consideration of the government spending bills. President Biden will continue his calls for comprehensive legislation addressing a wider set of legal and illegal immigration challenges, but such a bill is unlikely to move forward. As long as the southwest border remains stressed with new migrants, this issue will remain a leading one heading into the 2024 presidential election.

This bilateral relationship will continue to be tense this year, and Congress will no doubt provide oversight over many of the issues challenging the two countries. House Republicans have created a new select committee, the “US House Committee on Strategic Competition between the United States and the Chinese Communist Party,” which will provide oversight over a long list of grievances the US has with China relating to trade, technology competition, Covid, national security, Taiwan and others. Separately, the House and Senate will consider and advance legislation to provide further military assistance and security measures to Taiwan. All of these issues will stand out in Washington because they are among the few that will be bipartisan this year.

Congress will continue its focus on the collapse of crypto exchange FTX and on crypto regulation this year with additional hearings across different committees. Lawmakers already have introduced a variety of legislative proposals on aspects of the regulation of digital assets, and Senate Banking Committee Chairman Sherrod Brown (D-OH) has called on the Treasury to help Congress develop a comprehensive framework. However, while the FTX collapse has only created greater urgency and interest in these issues, there will be many challenges to reaching any sort of comprehensive and workable bipartisan legislative response. Notably, the issues are complex, jurisdiction is fractured over multiple different committees, and lawmakers have competing approaches and philosophies that will be difficult to reconcile. While Congress could build on progress made last year on developing bipartisan agreement on discrete issues (like regulation of stablecoins), legislative success will be hard to come by this year.

We do not expect any major legislation impacting individual or corporate taxes to be passed into law this year. However, there will be some smaller tax items that will be worth watching. Repealing the $80 billion in new IRS funding passed by congressional Democrats last year will be an ongoing priority for House Republicans, and they passed a bill last week to do so. They’ll try again during the debate over government spending, though none of their efforts will advance in the Senate. In the executive branch, the Treasury Department will be working to implement new tax provisions enacted as part of the Inflation Reduction Act passed by Democrats last year. For example, many car companies are eager for Treasury to give guidance on the tax incentives for electric vehicles in March. Further, US lawmakers are keeping an eye on efforts by other countries to enact a global minimum tax given concerns about its potential impact on US companies. Congress will thump its chest, but it is unlikely to respond with tax changes at this time. Overall, things will be relatively quiet on the tax front, although many lawmakers are already thinking ahead to 2025 when the tax cuts for individuals enacted by the Tax Cuts and Jobs Act in 2017 will expire.

Congress will need to pass a comprehensive bill to reauthorize US farm and food aid programs by September 30. Provisions relating to climate change will have to be resolved on a bipartisan basis for a bill to move forward. Congress will also need to pass a reauthorization of the Federal Aviation Administration by September 30. That bill could contain new rights for airlines passengers who face unreasonable flight delays or cancellations. In the first half of the year, Congress will be asked to approve new arms sales to both Turkey and Greece. The separate deals may help pave the way for getting broader support within NATO for adding two new members this year – Finland and Sweden. The House will likely pass an energy infrastructure reform bill that will streamline the permitting and regulatory processes for new US energy projects, but its prospects in the Senate are not good. Congress must also renew the contentious Foreign Intelligence Surveillance Act (FISA) law before the end of the year (relating to certain federal surveillance authorities). President Biden’s judicial nominees will continue to be approved in the Senate, padding the President’s judicial legacy. As usual, Congress will be on summer recess for all of August unless the debt ceiling debate is still unresolved at that time.

With the 2022 midterm elections in the rearview mirror, all eyes are turning to the 2024 presidential contest. On the Democratic side, President Biden is expected to seek re-election, which will likely force any other interested Democratic presidential candidates to push off their ambitions to 2028. On the Republican side, former President Trump has already announced his candidacy, but a number of other Republicans will no doubt enter the fray in the first half of the year. The Republican with the most momentum, Florida Governor Ron DeSantis, is in no hurry to announce his plans, and we expect him to jump into the race later than others. Announcement time for candidates has moved up the campaign calendar significantly over the past century, with most modern candidates choosing to announce between February and June. We expect most Republican candidates and perhaps an outlier Democrat to announce their plans in this time period and for televised debates to occur at least on the Republican side later in the year.

The vast majority of elections are still nearly two years away, but three states are holding gubernatorial elections this November. Kentucky, Louisiana and Mississippi are all traditionally red states, but both KY and LA currently have Democratic governors. Kentucky is the race likely to attract the most attention as Governor Andy Beshear (D) holds very high favorable ratings and will run for re-election. This may make it difficult for Republicans to win back the governor’s mansion, even if the state has overwhelming voted for the party’s candidates in recent federal elections. Louisiana is a much better pickup opportunity for Republicans, as Governor John Bel Edwards (D) is term-limited in a state with a dearth of competitive statewide Democratic candidates. The last of the three, Mississippi, is unlikely to have a competitive general election. Governor Tate Reeves’ (R) biggest challenge likely would come from another Republican. Both parties see these odd year contests as a preview of the more prominent elections to follow the next year.