This Week:

The Senate passed a resolution to overturn Washington, DC’s police accountability and reform bill and a resolution to block a Biden administration rule on the “public charge” criteria for immigrants to qualify for green cards. The House passed various law enforcement bills (see below).

Next Week:

The Senate will be out of session. The House will vote on a bill to permanently classify fentanyl-related substances as Schedule 1 drugs and resolutions to overturn President Biden’s student loan forgiveness plan and to overturn an Environmental Protection Agency rule that established new emission standards for heavy-duty vehicles. Also, the House may take up a bill to increase the debt ceiling if negotiations go well over the coming days (see below).

The Lead

Debt Ceiling Extension Slog.

Some progress was made this week as congressional leaders and President Biden met and pledged to negotiate toward a bipartisan solution. That pledge is not a breakthrough, but it is an indication that each side knows that its preferred solution is a non-starter with the other and that a third way must be found. Until now, each side has focused more on criticizing the other’s position. However, with more regular and frequent staff meetings, the two sides have identified a few issues that could receive bipartisan support, such as energy infrastructure permitting reforms, the recission of unused Covid funds and a cap on federal spending for two or more years. Those issues sound to us like a good basis for a meaningful compromise, but the details of those plans are not close to being resolved. If the closed-door staff meetings don’t make clear progress over the next week, the level of urgency surrounding this issue will rise considerably unless the X-date is revised to a later date.

X-Date Urgency.

Treasury Secretary Janet Yellen reiterated this week that the X-date could be as soon as June 1, but she also indicated that she would provide another forecast by Monday. Indeed, many lawmakers with whom we spoke this week believe the X-date will be pushed back to the end of June (or later). We don’t have an exact sense of when the X-date will be, but, if it remains June 1, the negotiators are going to be in a real time crunch.

House Democrats’ “Secret Plan.”

A week ago, the media reported on a “secret plan” by House Democrats to try to resolve the debt ceiling problem. The plan is to force the House to vote on a clean extension of the debt ceiling through the use of a discharge petition, which allows for a majority of the House to force a vote on a bill that is bottled up in a committee. To make this process work, House Democrats must get a majority of House members to sign the discharge petition and then get a majority to vote for it. It then must be approved by the Senate. House Democrats began the process of lining up support for the petition this week, but they are likely to fall short of a majority in the House given that at least a few Republicans would need to support it. Additionally, even if Democrats were able to pick up enough Republicans to force a vote on the discharge petition, there may not be enough time for it to be acted upon. While there are many House Republicans who would support a clean extension of the debt ceiling under different circumstances, they currently prefer waiting to see what sort of compromise could emerge from the ongoing negotiations.

Other Issues

Continued Focus on Bank Failures.

Committees on both sides of the Capitol were active this week with another slew of hearings on recent bank failures. In one set of hearings, lawmakers from both sides of the aisle heaped criticism on top executives of the failed banks. There continues to be bipartisan focus on executive compensation, but developing consensus around any legislative proposal on claw-backs will be difficult. In another set of hearings, the committees heard from financial regulators following recent post-mortem reports from the Federal Reserve and FDIC on the failures. As in previous discussions, lawmakers were divided between those who focused more on supervisory failures and those who focused more on insufficient regulatory requirements as a main culprit in the failures. Federal Reserve Vice Chairman Michael Barr continued to make clear his intent to make a broad range of regulatory changes and indicated that a major proposal revising capital requirements would be issued by the Fed in the summer. While many members of Congress, particularly Republicans, will push back against these changes and argue that lapses in supervision shouldn’t be a basis for new regulatory requirements, the Fed and other banking regulators have broad authority to act.

IRS Filing Your Taxes for You?

The Internal Revenue Service (IRS) is exploring the cost and feasibility of offering a free electronic service that would allow certain taxpayers to prepare and file tax returns directly. The IRS released a study this week extolling the benefits of such an offering and plans to launch a pilot program before the next filing season. Firms (like H&R Block and Intuit) that already perform such tax services are opposed to this initiative (called “Direct E-File”). Additionally, many Republican lawmakers have their own concerns with the tax-collecting agency and its ability to accurately tell taxpayers what they owe. Nonetheless, the pilot program should take effect next filing season, and its future will to a certain degree depend on how it works and whether it can survive Republican attempts to reduce funding for the agency.

US-China Spotlight.

US-China issues once again were the subject of significant attention in Washington this week:

  • G7 Meetings. The annual summit of the G7 countries (US, UK, Canada, France, Italy, Japan and Germany) is occurring now in Japan, and much of the group’s focus is on broad concerns over China. Notably, India and Vietnam, two countries viewed by G7 members as alternatives to China for greater trade and supply chain outlets in the Indo-Pacific, were invited to take part in some of these discussions. In addition to reiterating their strong support for aid to Ukraine, the G7 allies also will issue statements of concern over security and economic threats they perceive from China. While the G7 alliance is pursuing this action, China is working to broker a peace agreement between Russia and Ukraine. Both sides continue to be busy promoting their competing visions for China’s place in the world.
  • China Investment Restrictions. There have been rumors for months of the Biden administration’s efforts to develop an executive order focused on limiting investment in China from the US. The proposal is expected to require US companies to alert the government of investments in China on technology. It also may prohibit investments in certain sensitive and critical areas like semiconductors and artificial intelligence. The administration has largely completed the policy but wanted to share it with allies this week at the G7 meetings and get their support to impose similar restrictions. Senate Majority Leader Chuck Schumer (D-NY) has also announced plans to craft a broader China competition bill and may have ideas that will be integrated into the President’s impending executive order. We believe the President’s action will be announced in the coming weeks and be subject to a formal consultation period.
  • Dialogue, Finally. One obstacle to improved US-China relations has been a simple lack of dialogue between the two countries since the infamous balloon incident in February. The dialogue drought broke this week when President Biden’s national security advisor, Jake Sullivan, met with China’s most senior diplomat, Wang Yi, in Austria for a full day. There are also indications that Treasury Secretary Yellen and Commerce Secretary Raimondo may visit China soon. Increased dialogue won’t make the two countries friends overnight, but they will hopefully avert miscommunications that could lead to disasters.

Police Week. You may not have known, but this week was designated as “National Police Week,” a national recognition to honor law enforcement officers who lost their lives in the line of duty. In recognition of that, both the House and Senate passed bills affecting local law enforcement and policing. The House passed bills that would make an assault on a law enforcement officer a deportable offense for immigrants and that would allow law enforcement officers to buy retired service weapons. It also passed a resolution that condemns efforts to defund the police. The Senate also passed a resolution that would overturn Washington, DC’s police accountability legislation, which the House passed last month, but President Biden has said he would veto it. Of course, politics played a role as Republican lawmakers want to get Democrats on the record for not adequately supporting the police. This will be an ongoing theme throughout the 2024 election season.

The Final Word

McCarthy's Rise. Polling this week shows that Speaker Kevin McCarthy's (R-CA) favorability is on the rise for the fourth consecutive month and is at an all-time high, with 46% of those surveyed approving of the job he's doing, and 36% disapproving. This is up from a 32%/37% approval split in January following his long and rocky road to becoming Speaker. The positive trajectory is somewhat of a rarity among Congressional leaders who are typically well-defined and often negatively perceived. The recent poll provided no definitive reasoning for why the Speaker has seen his stock shoot up, but it's likely due to his having exceeded expectations in dealing with a very politically diverse caucus and his ability to be a foil to President Biden and Senate Majority Leader Chuck Schumer (D-NY). Regardless of the reasoning, Republicans are bound to feel positive that their party's standard bearer is on the rise, especially when it's in contrast to the President, whose approval ratings remain underwater.