Washington Weekly: US-China Tensions

The Senate confirmed various Biden administration nominees. The House passed a bill that would require the administration to include inflation estimates for any major executive order. Both the Senate and House passed a resolution that would overturn a Department of Labor (DOL) rule to include environmental, social and governance (ESG) factors in retirement plans (see below).

The Senate will continue to confirm Biden administration nominees. The House will likely vote on a bill that would prohibit federal officials from censoring speech on social media platforms.

US-China Tensions.

Not a day passes when lawmakers and administration officials do not talk about new or ongoing policy conflicts with China. This continued focus has given momentum to and raised public awareness of legislative efforts to address the China challenge. This week, a key House committee passed several bills to provide further US assistance to Taiwan. Meanwhile, the newest House committee – the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party – began its deliberations. It is likely to emerge as the key oversight panel this Congress on the US-China relationship. The committee wants to dive into a wide range of issues, many of which will be contentious and have never been explored in great detail before. That scrutiny will ensure that US-China policy conflicts are kept in the spotlight for the foreseeable future. Given that the Congressional focus on China is bipartisan and that concern about China is a growing issue for voters, we expect the 2024 candidates (regardless of party) to be uniformly urging a tough US position on China and the issue to be a dominant one for the foreseeable future.

ESG Retirement Investments.

Toward the end of the Trump administration, the DOL finalized a rule that would have mandated that retirement plan fiduciaries consider only financial factors when considering investments. The rule would have placed limitations on including ESG investments in retirement plans. This rule was subsequently revoked by the Biden administration, and the DOL issued a rule last November to put ESG investments on equal footing with other types of investments. However, with ESG having become a political lightning rod, this rule has drawn the ire of Republicans in Congress. This week, the House and Senate voted to approve a resolution to overturn the DOL’s ESG rule. Though the resolution will be vetoed by President Biden, it is notable that two Senate Democrats joined Republicans in voting for it. In addition, the issue has gained plenty of traction at the state level. Twenty-five Republican state attorney generals have pending litigation against the DOL’s rule and a growing number of Republican states (notably Florida) have passed or are about to pass bills to prohibit state investment funds from investing in funds or strategies that consider ESG factors. Finally, the mobilization of political and legal opposition to the DOL’s rule sends a clear warning to the SEC as it finalizes its more complex and far more controversial corporate climate disclosure rule in the coming months.

Biden Budget Coming.

President Biden will submit his fiscal year 2024 budget for the federal government next Thursday. This document will be a big story in Washington but not elsewhere. Presidents are required by law to submit budgets each year to Congress. While Congress may adopt some of its provisions, it will largely follow its own course in funding the government next year. Still, the budget proposal is important since it reflects the priorities of the President. The President’s budget and any budget resolution the House and/or Senate might pass also would tee up the battle over increasing the debt ceiling, which will heat up as we move toward the summer. Particularly given that debate about the level of federal spending and deficit reduction will be important issues in that battle, both parties aim to have credible budget proposals that can generate public support. If House Republicans are able to muster the support within their ranks to pass a budget resolution (this will be difficult), it may contain clues on how an agreement on a debt ceiling increase could be reached. It would contain key deficit reduction priorities that House Republicans would want in any debt ceiling compromise.

Tax Increases?

The President’s budget is very likely to include a range of familiar tax increases on higher-income individuals and corporations. The extra revenue gained from those proposed tax increases will offset proposed spending increases in the budget. That will enable President Biden to say that his budget proposal doesn’t increase the budget deficit. However, none of these tax increases will be enacted this or next year. Senate Democrats couldn’t pass them last year when they had control over both the House and Senate (thanks to Arizona Senator Kyrsten Sinema), and Republicans control the House this year. These tax-the-rich proposals will be showcased next week during the budget release, but they will not advance.

Rail Safety.

In response to the horrific train derailment in East Palestine, Ohio last month, bipartisan rail safety legislation was introduced this week by Ohio Senators Sherrod Brown and JD Vance. The bill would specifically target new safety requirements for trains carrying hazardous materials. The bill is notable for its strong list of bipartisan supporters, which suggests it could advance in the Senate this year. Most of the harder work to improve things on the ground in East Palestine, however, will be done by the citizens, the state, the railroad and the US Environmental Protection Agency. The CEO of Norfolk Southern will testify in a Senate hearing next week, and it won’t be pretty. Most lawmakers will focus on getting a commitment from the company to pay for all of the damages associated with the derailment and clean-up, which is expected to be exorbitant.

Housing Tax Credit.

The Senate Finance Committee will hold a hearing next week on “Increasing Affordable Housing Supply.” Specifically, the committee will be looking at tax policies that could help spur new housing built for lower and middle class working families. A prime example is the Low-Income Housing Tax Credit (LIHTC), which issues a federal tax credit to state and territorial governments. State housing agencies then award the credits to private developers of affordable rental housing projects through a competitive process. Developers generally sell the credits to private investors to obtain funding. Once the housing project is placed in service (essentially, made available to tenants), investors can claim the LIHTC over a 10-year period. Senators may try to make improvements to the LIHTC this year. The LIHTC is bipartisan and reforms to it could pass if they were considered on a standalone basis. However, the temptation for lawmakers to add other tax measures or address other social issues could weigh it down and erode its bipartisan support.

Coming To Your Town.

Increasingly, DC area residents won’t be the only people who can enjoy access to Congressional hearings in their hometown. House Republicans have begun a series of field hearings around the country. The House Energy and Commerce Committee held two hearings in Texas, while the House Ways and Means Committee held a hearing in West Virginia. The latter committee is also holding a hearing in Oklahoma next week. Other committees are following suit. Bringing the federal government to the people is part of a theme that you will hear from Republicans over the next two years. Many Republicans, including Florida Governor Ron DeSantis, have even called for moving some federal agencies outside of Washington, DC. He and many others believe that centralization of power in DC has led to a federal government detachment for many Americans. These field hearings are designed to highlight that disconnect.

Presidential Veto.

With Senators Joe Manchin (D-WV) and Jon Tester (D-MT) joining with Republicans to pass a resolution overturning a Biden administration retirement investment rule (see above), President Biden is expected to soon issue his first veto of legislation. Ironically, Biden’s first veto will occur almost exactly at the same point in his presidency as President Trump’s first veto (March 15, 2019). In addition, both presidents are in somewhat similar situations. Both had the two branches of Congress united under their party banner for the first two years of their presidency. And both faced a divided Congress for the next two following a flip of the House in the midterm elections. A president’s first veto is a memorable occasion, but not unexpected as only seven presidents (John Adams, Thomas Jefferson, John Quincy Adams, William Henry Harrison, Zachary Taylor, Millard Fillmore and James Garfield) did not veto legislation during their presidential terms. It appears that Biden won’t join the short list of presidents who never had to issue a veto, but so far he appears to have a good chance of becoming the first president since Lyndon B. Johnson to not have a veto overridden by Congress.