This week: The House passed a bill to reauthorize Department of Defense programs for fiscal year 2018. The Senate confirmed several nominations.
Next Week: The House will vote on legislation to reauthorize Federal Aviation Administration programs and another bill to phase in the implementation of new federal ozone standards. The Senate is scheduled to vote on various nominations and a bill to repeal and replace Obamacare (see below).
Financial Services Issues
Arbitration Fight. The Consumer Financial Protection Bureau (CFPB) this week issued a rule that will block financial companies from including mandatory arbitration clauses in contracts covering a range of consumer financial products (including credit cards, bank accounts and student loans), making it easier for class action lawsuits to proceed. The hotly contested rule generated serious criticism from the financial industry and some in Congress who argue that it ultimately will harm consumers by effectively removing arbitration as an efficient and cost-effective means of resolving disputes. One fellow regulator that supervises national banks also raised its own concerns about the rule’s impact on the safety and soundness of banks. The rule likely will be contested in court. Moreover, Republicans in the House and Senate already are taking steps to try to overturn the rule under the Congressional Review Act, which they’ve employed to successfully roll back more than a dozen other Obama-era regulations this year. However, this will not be easy, particularly given the tight timeframe to get this done and the broad Democratic opposition to this effort.
Other Issues in Play
Recess Mess. Senate Majority Leader Mitch McConnell's (R-KY) decision to postpone half of the Senate recess in August is a big deal in Washington and a logical political move as long as Senate Republicans can produce a few legislative victories in that extra two-week period. The month-long recess has historically been precious time for lawmakers to spend time with both their families and constituents back home. As the Senate begins its work in August, it is possible the Majority Leader could further alter the schedule. In the past, Senate leaders have often threatened to force the chamber to work through a planned recess as a way to encourage compromise among members who don't want to give up their extra time at home. However, that dynamic isn’t as strong in this highly-charged political environment. The dynamic to watch will be whether McConnell extends the session further into August rather than letting the members go home sooner.
Senate Health Care Vote. Leader McConnell pledged a Senate vote on the revised health care bill late next week, but the vote date could slip into the following week. He will take the time he needs to lock down the 50 votes needed to pass this bill. Despite substantial changes made to the first draft of the bill, we still do not see a pathway for this current bill to pass next week. Too many Republicans remain uneasy with the bill's scaled-back Medicaid coverage (moderates) or the absence of enough provisions to lower health care premiums (conservatives). The coalition of the uneasy includes about ten Republican senators, while no more than two can oppose the bill in order to pass it (if no Democrats support it). We believe that the bill will fail next week or be withdrawn for further revisions and rescheduled for a vote in late July or August.
If the Senate Passes a Bill. If we are wrong and the Senate is able to pass a bill, the Senate bill would then be considered by the House a few days later. Some House members will demand a reconciliation of the House and Senate bills, but that objective is a pipe dream given the very limited timeframe to act. House Republicans would be left essentially with a "take it or leave it" choice, and how they would vote is a complete unknown to us at this time. There would certainly be significant grumbling about many of the bill's provisions and resentment over being forced to vote on the Senate bill, but the bill would also represent their final opportunity to "repeal and replace Obamacare" and fulfill a major campaign promise. Either way, the obituary for the repeal and replace effort will be written by mid-August or there will be fascinating behind-the-scenes reports on how Senate and House Republicans somehow pulled this bill from the brink and passed it.
If the Senate Doesn't Pass a Bill. Then what? Some lawmakers and President Trump will call for a vote to fully repeal Obamacare without any replacement plan. We do not think such a vote would be successful. Pressure will build instead for Republicans and Democrats to find agreement on targeted reforms to Obamacare, especially on the viability of the state insurance exchange plans. This will be a very difficult process for all involved and at best result in only modest reforms. If a compromise is reached, these limited reforms would be added to the must-pass bill to reauthorize the State Children's Health Insurance Program, which expires on September 30. Obamacare, with some potential modest modifications, would remain the law of the land.
Obamacare Taxes. The House bill to repeal and replace Obamacare that passed in May eliminates all Obamacare-related taxes, including the 3.8% net investment income tax and 0.9% Medicare surtax that apply to individuals with earn more than $200,000 per year or couples making over $250,000 per year. However, the revised Senate bill keeps these two taxes intact. This is a significant blow to many Republicans and high-income taxpayers. If these two taxes are not eliminated as a part of the Obamacare repeal effort, which looks very likely now, there will be efforts by Republicans to eliminate them as part of the tax reform bill later this year. However, we do not believe that effort would be successful. The odds are clearly more in favor of these taxes being retained than eliminated anytime soon.
Impact on Broader Tax Reform. We can understand anyone's skepticism in believing Republicans could ever pass a tax reform bill if they cannot pass a health care measure. However, the political pressure to successfully deal with tax reform will be very intense if health care fails. We believe a failed health care exercise actually increases the chance that a tax bill will be passed early next year. The details of a final tax reform bill are still far from being known, but it's likely that any bill that moves forward will be scaled back to focus on tax cuts (with fewer actual reforms to the tax code). Look for a House draft bill to be released in September, which will get the ball rolling on this issue in a more public way.
Speaking of Tax Reform. The first substantive step to enacting a tax reform bill is the passage of a fiscal year 2018 budget in the House and Senate that contains "reconciliation" instructions to allow for such a bill to pass the Senate with a majority vote (50) instead of the 60 usually needed for the passage of legislation. A draft budget proposal may move forward in the House Budget Committee next week and is expected to be approved by the full House before the August recess. The Senate will likely wrap up its budget in September. This is an important exercise, and a final budget must be approved before any meaningful Republican tax reform legislation can move forward. Various Republican factions are fighting over how to allocate federal funds in next year's budget proposal, but these differences must be reconciled if tax reform has a chance.
Senate Races in 2018. You would think that the anti-Washington sentiment in the country would pose a challenge to the approval ratings of the 34 senators who face re-election in 2018. However, according to a ranking of approval ratings for those senators up for re-election issued this week, only one -- Senator Jeff Flake (R-AZ) -- has a higher disapproval rating than approval rating. Most of the other senators show a fairly respectable approval rating, which reinforces the old adage that most voters dislike Congress as an institution but like their own member of congress. Of the 34 senators up for re-election, only nine are Republicans, which gives the GOP a big opportunity to limit losses and pick up seats from among the 25 Democrats are defending. Of those 25, ten are from states that Donald Trump won last year. 2018 has for some time represented a golden opportunity for Republican to gain new seats in the Senate, but with President Trump's low approval ratings and a failure of the party to pass its priority policy items (health care and tax reform), it now looks like the results of 2018 will mirror the status quo without either party making any sizeable gains.