Washington Weekly: Government Funding Limps On

Both the Senate and House passed legislation to avert a partial government shutdown by extending government funding in two stages through March 1 and March 8 (see below). The House also passed a nonbinding resolution condemning Biden administration border policies, a bill to require colleges and universities that receive federal funding to provide information and resources to pregnant students and a bill that would block a Biden administration rule that restricts certain pregnancy centers from receiving federal funds.

The Senate will vote on various Biden administration nominees and continue work on an aid package for Israel, Ukraine, Taiwan and the southwest border (see below). The House will be out of session until January 29.

Government Funding Limps On.

To avert a partial government shutdown, both the Senate and House yesterday passed legislation to extend government funding until early March. Under the measure, four of 12 government funding bills will have a new expiration date of March 1 (these bills had faced a deadline of today, January 19), while the other eight bills will have a new deadline of March 8. The extension gives lawmakers more time to finalize all of the bills. Yesterday’s actions were preceded by bipartisan agreement on the total amount of federal spending for the current fiscal year, which was an important first step. Lawmakers now have to decide on the details of funding in each of the 12 bills. We believe Congress will be able to pass the funding bills on a bipartisan basis by March. The government shutdown threat should fade for a month, but likely will resume as we get closer to the March deadlines (and will return in October when a new fiscal year will start and require a fresh round of funding). Potential for a government shutdown will loom throughout the year now as lawmakers struggle with completing the funding bills on time.

Southwest Border Reforms Still Elusive.

A bipartisan group of Senators is close to reaching a compromise on immigration reforms on the southwest border, which has been a stumbling block for a broader funding bill covering aid to Ukraine, Israel and Taiwan. The compromise provides funding for immigration enforcement and makes some reforms to an asylum process that many undocumented migrants have used to gain entry into the US. However, House Republicans will reject this compromise as insufficient to halt the flow of asylum-seekers and others who have crashed the southwest border in large numbers. They want more extensive changes to the asylum process, stronger barriers at the border, and other changes that are reflected in border control legislation they passed last year. However, this approach is a non-starter with Senate Democrats and President Biden. We think a compromise still is possible, but it will be very difficult. There is clear passion on both sides of this issue, which also will be high on the minds of many voters in this year’s elections.

The Speaker’s Dilemma.

As most people know by now, any member of the House can call for a vote (known as the “motion to vacate”) to replace the Speaker at almost any time. With some House Republicans unhappy with the way Speaker Johnson has handled legislative efforts on government funding, a few also have publicly stated that this option remains on the table. We believe that the Speaker still will follow a bipartisan course on the government funding bills but strongly oppose any Senate agreement on the southwest border that not all House Republicans support. House Republicans assign a higher priority to addressing the southwest border (relative to government funding bills), and this is where the Speaker will make a firm stand. If he fails, calls for the Speaker’s removal will be louder and could be followed by action, rather than just more threats.

Tax Package Coming Together.

The two chairmen of the Senate and House tax-writing committees, Senator Ron Wyden (D-OR) and Congressman Jason Smith (R-MO), have reached a bipartisan deal on a roughly $80 billion tax package (a summary can be found here). The bill is paid for by eliminating the pandemic-era Employee Retention Tax Credit, which has had problems. The deal includes enhancements to the child tax credit (CTC) and business tax incentives for research and development, interest deductibility and full expensing. These business incentives will primarily benefit a number of key industry sectors, such as defense, telecommunications and pharmaceuticals. While a deal has been reached by some key lawmakers, it faces additional hurdles. Many Democrats are displeased that the enhancements for the CTC are not as generous as under previous iterations of the program. Some Republicans, meanwhile, are frustrated that the CTC components are in the bill at all. Despite the challenges, we believe there is a path forward for this bill to become law. The goal is to pass the bill by January 29, when the tax filing season begins. That deadline won’t be met, and the bill champions will seek to pass this bill in February.

Basel Endgame.

Federal banking regulators have received significant pushback on their proposed changes to increase bank capital requirements since they were introduced over the summer. With the deadline for public comments on the proposal (often dubbed Basel 3 Endgame since it is based upon standards developed by international banking regulators in Basel, Switzerland) passing this week, the agencies received a multitude of detailed comments from industry and other stakeholders. In addition, lawmakers on both sides of the aisle weighed in with letters to express their concerns about the potential impact that higher capital requirements would have on the cost and availability of credit and other financial services for consumers and businesses alike. Both the industry and Congress also have raised objections about the lack of economic impact analysis underpinning the proposal, and the agencies have committed to doing a more robust quantitative impact analysis. The Fed and the other banking agencies will have their work cut out for them as they try to finalize this lengthy and complex rule by the end of the year (and potentially right before the election) and will be under pressure to make significant revisions. The advocacy efforts have been a case study in how to rally disparate interests against a major regulation of an administration that has a very ambitious regulatory agenda.

Overdraft Fees.

The Consumer Financial Protection Bureau (CFPB) this week issued a proposal to significantly limit bank overdraft fees, which are fees banks charge when an individual spends more than the amount in his/her bank account. The move is part of a broader Biden administration agenda against so-called “junk fees” (the administration’s term for what it sees as hidden fees charged for goods or services with little or no value) and follows a move last year by the CFPB to limit credit card late fees. While some banks have taken their own steps to eliminate or curtail overdraft fees, the banking industry will push back hard against the overdraft proposal, as it did against the credit card late fee proposal. It argues that the proposal would amount to an effective ban on overdraft fees and that consumers value overdraft protections as a source of backstop liquidity. The proposal received mixed reviews from Congress, with some Republicans attacking it and some Democrats praising it. The CFPB will try to finalize the credit card fee proposal in the coming weeks and will be in a rush to finalize the overdraft proposal later in the year.

Iowa Takeaways.

The results of Monday’s Iowa Republican Caucus shouldn’t have been a surprise to anyone as former President Trump was a heavy favorite heading into the evening. Due to bitterly cold temperatures and snow, turnout for the caucus was low (110,000 compared to 187,000 in 2016). This was expected to negatively impact Trump’s performance, but he cruised to victory with a majority of votes (51%), winning all but one county and having the state called for him in record time despite being outspent by nearly $6 million on TV by Florida Governor Ron DeSantis. DeSantis, the second-place finisher, gambled his entire campaign on performing well in Iowa and doesn’t appear to have a viable path forward. Ambassador Nikki Haley meanwhile has staked her campaign on performing well in New Hampshire and then spinning that momentum into her home state of South Carolina. However, her (narrow) third place finish in Iowa made that pathway less plausible. Only 17% of Iowa caucus-goers picked her as their choice. Trump has momentum on his side heading into New Hampshire, though the contest in the Granite State will have its own unique dynamics. No Republican candidate in a contested primary has ever won in both Iowa and New Hampshire since the Iowa caucus moved to the start of the primary calendar in 1976, and we’ll see on Tuesday if Trump can break that record.

Last Stands in New Hampshire?

Both parties will hold primary elections on Tuesday in New Hampshire, but let’s focus on the race on the Democratic side, which will be unusual this year. Last year, the Democratic National Committee overhauled its primary election schedule to put South Carolina as its first state. This nudged out New Hampshire, which has historically held the coveted first-in-nation primary election status (Iowa is a caucus, not a primary election). A bipartisan group of New Hampshire state officials, led by Governor Chris Sununu, resisted and chose to still hold their primary election as the first in the nation for both parties. This earned them a boycott from the DNC. While the primary election will occur on Tuesday, President Biden’s name will not be on the ballot. It is anticipated that he will still win the state through a significant write-in campaign. However, this awkward situation does potentially open the door for Congressman Dean Philips (D-MN). Phillips has built his entire campaign around New Hampshire, calculating that he can take advantage of Biden’s lack of campaigning and a potentially weak write-in campaign effort. A Biden vs Trump rematch in November seems inevitable at this point, but if either candidate is going to stumble on the campaign trail, Tuesday in New Hampshire is perhaps the most likely point.