Washington Weekly: Tax Day and X-date

The Senate passed a bill to reauthorize federal grants and programs for local fire departments and confirmed various Biden administration judicial nominees. The House passed a bill that would prohibit federally funded schools from allowing transgender students to compete in female school athletics and a resolution to block a Washington, DC law that overhauls the district’s police practices.

The Senate will continue to confirm Biden administration nominees. The House may vote on a bill to raise the debt limit and reduce discretionary spending levels (see below).

Real Debt Ceiling Debate to Begin.

At an appearance before the New York Stock Exchange, House Speaker Kevin McCarthy (R-CA) put forward a plan to extend the debt ceiling as part of a broader legislative package that would include significant deficit reduction measures. The political reality is that House Republicans must demonstrate their ability to pass this bill in order for Senate Democrats and President Biden to take them seriously enough to begin negotiating a deal. House Republicans aim to pass their bill late next week, but a vote could possibly spill into May if Speaker McCarthy does not have the necessary votes by next week. We believe House Republicans will pass a bill, though there will be plenty of intra-party fighting over its specific provisions from now until then (current bill provisions can be found here). This plan certainly will not be the final one to extend the debt ceiling, but its passage in the House at least would mark a starting point for the difficult bipartisan negotiations that hopefully will yield a final resolution.

Tax Day and X-date.

Now that Tax Day has passed, we expect Treasury Secretary Janet Yellen to soon announce the X-date (the effective date when the government will no longer be able to pay its bills). The milestone of Tax Day is significant as incoming tax revenue will allow Treasury to calculate and hone in on the X-date, which will serve as an effective deadline by which Congress will need to act to extend the debt ceiling in order to avoid a default. The announcement of this date could coincide with the aforementioned upcoming House action on the debt ceiling. The combination of the two should be a catalyst for negotiations between the Biden administration and House Speaker McCarthy that will intensify as we get closer to the X-date. The negotiations should result in a deal, but the process will be difficult and highly political. Though it is unclear exactly what a final deal will look like, what is clear is that the process will be contentious and unlikely to bear fruit until very close to the X-date.

A Third Way?

A bipartisan group in the House has proposed a solution outside of what most Democratic and Republican lawmakers have advocated. The Problems Solvers Caucus, which is comprised of 64 members split evenly between members of both parties (32 Democrats, 32 Republicans), has proposed a plan to provide a short-term extension of the debt ceiling (through the end of December) to provide time and a mechanism for deficit reduction efforts. Under the plan, an independent commission would be charged with recommending ways to reduce the budget deficit and Congress would be required to vote on the commission’s proposal by February 2025 (after the 2024 elections). The short extension to December would allow Congress a window to first resolve in the fall government funding bills for fiscal year 2024. The hope is that those efforts could result in some spending reductions or controls that could be a part of a longer debt ceiling extension solution. This proposed solution isn’t plausible at this early stage where most lawmakers and the President will stick with their more partisan positions, but it could be an appealing fallback option as the X-date approaches and other proposals fail to gain traction.

SEC Regulatory Pushback.

At a contentious hearing in the House Financial Services Committee earlier this week, SEC Chair Gary Gensler faced a rough reception from Republicans. Given that Chair Gensler had not appeared before the committee for 18 months and that this was his first appearance in front of the committee under Republican leadership, there was a lot of pent-up energy. In particular, Republicans attacked him for the SEC’s proposal on climate disclosure and for its regulatory approach on crypto assets (they charged that the SEC had not provided clear rules to distinguish which crypto assets were securities and instead was engaging in regulation via enforcement actions). While Democrats circled the wagons in defending Chair Gensler on climate/ESG issues in particular, he also faced bipartisan pushback in other areas. Under Chair Gensler’s leadership, the SEC has pursued a blistering regulatory agenda, putting forward 53 rule proposals to date. Lawmakers on both sides of the aisle raised concerns about the volume, breadth and pace of the regulatory agenda and about the adequacy of the SEC’s comment periods and economic analysis. Committee members from both parties also raised concerns about the potential impact of specific proposals, including the SEC’s proposed overhaul of U.S. equity markets, which came out late last year. While the SEC likely will continue to pursue an aggressive regulatory agenda, its efforts will continue to face significant Congressional pushback and many of its rules will be subject to inevitable legal challenges.

Focus on Artificial Intelligence.

There has been significant attention from lawmakers and from the media on the need to balance the opportunities and perils of artificial intelligence (AI). Much of the discussion has been on what regulation, if any, should guide the development of AI in the US. Given that the debate over appropriate regulation of the broader technology industry in the US has been going on for over the past three decades, no one should expect Washington to produce an effective regulatory blueprint for AI anytime soon. AI expertise in Congress or in the Biden administration significantly lags that of the private sector, and there is no consensus on how to proceed at this time. Some in Congress and the administration have called for the establishment of a federal commission to oversee emerging AI products, similar to how the Food and Drug Administration approves new drugs. The Biden administration will be more active than Congress on AI policy, but its work will be mostly around the edges and will not trigger a ”pause” in AI technological developments, as some groups have publicly suggested.

Social Security and Medicare Taxes.

Senator Sheldon Whitehouse (D-RI) used Tax Day this week as an opportunity to introduce legislation that would apply the 12.4 percent payroll tax (split by the employee and employer) that funds Social Security to annual income above $400,000. Currently, that tax is applied to earnings up to $160,200. Additionally, this bill would increase the Medicare payroll tax by 1.2 percent on annual income over $400,000, which would make for a top Medicare tax rate of 5 percent. It is estimated that these two changes would bring in an additional $650 billion in revenue to fund these two programs. While there will be plenty of political rhetoric over the two bedrock programs in the coming weeks and months, we do not anticipate any material changes, including to their tax structure. Taxes such as these may very well come into play instead near the end of the decade when the solvency of these two programs comes into question.

Alimony and Taxes.

Embattled Congressman George Santos (R-NY) introduced a bill this week that generated a little buzz and a few calls to our office. His bill would reinstate the tax deduction for alimony payments that was eliminated in the 2017 tax bill. The 2017 tax law not only eliminated the tax deductibility of alimony payments, but it also eliminated a requirement that alimony payment beneficiaries count the payments as income for tax purposes. Interestingly, while most of the 2017 tax law will expire at the end of 2025, this provision does not expire. Nonetheless, we don’t expect any action on Congressman Santos’ bill in the foreseeable future.

Inflation in the Mail.

The US Postal Service (USPS) will raise the price of a first-class stamp from 63 cents to 66 cents on July 9. Higher rates also will be imposed on other forms of USPS mail delivery. This impending rate increase will be the fourth over the past two years. The goal of the increases is to allow the USPS to break even financially in 2023. The agency posted a $1.03 billion loss in the last quarter of 2022. Some lawmakers are seeking to stop the price increase and will try to add a prohibition to legislation like the government’s annual funding bills. We don’t think these efforts will succeed and expect the rate increases to kick in as expected in July.

First Quarter Clarity.

As everyone knows, political campaigning never really stops. With the 2022 mid-term elections in the rear-view mirror, if just barely, all eyes have turned to candidates’ first quarter fundraising results for the 2024 cycle. On the presidential front, there’s not much to be gleaned yet since only former President Trump ($14.4 million) and former Governor Haley ($8.3 million) have officially declared a run for president as major candidates. That being said, one possible Republican contender, Senator Tim Scott (SC), has over $21 million of funds in his Senate account that could be transferred to a presidential run. In key Senate races, several vulnerable incumbent Democratic Senators put forth strong opening fundraising quarters, including Senators Jon Tester ($5 million), Sherrod Brown ($3.6 million), Jackie Rosen ($2.4 million) and Tammy Baldwin ($2.1 million). However, while those senators all made it clear that they intend to run for reelection, several others up for re-election have raised eyebrows with their comparative lack of fundraising. These include Senators Joe Manchin (D-WV), Mitt Romney (R-UT), Tom Carper (D-DE) and Ben Cardin (D-MD). The first quarter of this year is just the starting point in what will be a long and expensive election cycle. While many Americans are likely trying to avoid thinking about the upcoming elections, campaigns don’t have that luxury and the past three months have laid the groundwork for the next 20.