This Week: The House passed legislation aimed at lowering gun violence at schools (see below). The Senate passed a financial reform bill (see below).
Next Week: Both the House and Senate need to pass legislation extending government funding beyond March 23, when funding is due to expire (see below). The Senate will also pass a number of nominations.
Financial Services Issues
Fiduciary Overturn. A federal appeals court just last night overturned the Department of Labor's (DOL) fiduciary rule. The DOL had delayed the implementation of some of the more burdensome aspects of the rule and, at the direction of the White House, was in the process of studying the impact of the rule on retirement savers before deciding whether to repeal it or make changes to it. It remains to be seen whether the court's decision will be appealed. Regardless, the SEC will continue to move forward in developing its own best interest standard (and may issue an initial proposal in the next few months), particularly in the midst of continued action by states in this area.
Big Step for Reg Relief. The Senate this week passed its first major financial reform bill since the passage of the Dodd Frank Act in a strong bipartisan vote (67-31). The debate, which included squabbling (both on and off of the Senate floor) between Democrats opposed to the bill’s reforms and those supporting them, began to peter out as the bill cleared the necessary procedural steps for passage. The legislation, which provides relief to community banks and increases the asset threshold at which mid-sized banks are subject to enhanced regulation, now heads to the House where Republicans would like to expand its scope. Although the Senate package includes a variety of House-passed bills, House Financial Services Committee Chairman Jeb Hensarling (R-TX) has highlighted a few dozen other bills that he would like to incorporate into the Senate legislation. House Republicans will continue to push for additional regulatory relief to be included in a final bill, but the Senate’s lack of appetite to reopen its bill and jeopardize its strong bipartisan support ultimately may leave the House with little choice but to pass the Senate bill as is if they want to enact any reforms at all.
Other Issues in Play
School Safety Measure Passes. The House passed bipartisan legislation providing training to law enforcement, school personnel and students in an effort to reduce violent activity at schools. The bill also expands anonymous reporting for the public by including mobile apps, hotlines and websites as a part of the reporting structure. Meanwhile, the Senate also appears ready to act in the next few weeks on different legislation that would improve background checks for gun purchases. Both the House and Senate bills are likely to be enacted at some point. While these measures aren't as ambitious as other proposals made after the Parkland school shootings, they do represent an effort by Congress to do something, which is noteworthy given Congress' lack of action in the aftermath of other school shootings. The timing of these bills' consideration is no accident – lawmakers want to pass something before the planned March 24 anti-gun protest in Washington. We believe that the national debate over gun control has enough staying power with young voters and other voters – particularly suburban women – that it will linger as a significant campaign issue in the fall.
Funding Deadline Next Week. Government will shut down unless the House and Senate both pass legislation extending funding beyond the current March 23 deadline. These threats of a government shutdown can be tiring and are too frequent, but we believe a bill will pass next week without too much drama. Financial markets used to react to these shutdown threats, but they seem to have learned that these budget struggles have become a part of the Washington process and more often than not end with a bill passing at the last minute.
Mobile Workforce. Last June, the House passed the "Mobile Workforce Act," which simplifies state income tax rules for employees that travel across state lines. Specifically, employees would only be subject to another state's tax if they worked in that state more than 30 days per calendar year. The 30-day threshold would apply to all states and prevent states from establishing a different threshold. An employee would still be subject to taxes in their home state. This bill has passed the House in prior years but has always floundered in the Senate. However, the bill now has 59 cosponsors in the Senate and is on the verge of reaching the threshold of securing enough votes to overcome a filibuster. We have previously been bearish on the chances of enactment of the Mobile Workforce Act, but now there is a good chance for advancement, which would be welcome news to workers who routinely travel for work.
Trade Action Against China Looming. We had a good conference call this week with employees and clients on the various trade policy issues in play that are causing some tension around the world. The consensus among our experts is that the tariffs imposed on most steel and aluminum imports last week by President Trump are an annoyance to many of our trade partners but not the beginning of a "trade war." However, an escalation of trade tensions is likely to occur in April as the North American Free Trade Agreement (NAFTA) is further renegotiated and possibly stalled. More urgent, however, are expected U.S. actions to retaliate against China for its trade practices, specifically on intellectual property. These actions could take the form of new tariffs, quotas, restrictions on US market access, visa limitations or other measures that will certainly trigger significant U.S.-China trade tensions and prompt further retaliatory action against U.S. exports to China. This will be a big development, and we believe the Trump administration is finalizing its plan now, which will be rolled out through a public announcement in the next few weeks.
Tax Extenders. About two dozen tax provisions were retroactively renewed for 2017 as part of the Bipartisan Budget Act passed into law last month. It's a new year, and the fate of a variety of tax preferences – including those for fuel cell motor vehicles, renewable diesel fuels, and energy efficient home construction, among others -- now hang in limbo. House lawmakers are currently working through these provisions and determining whether to make them permanent, phase them out or not renew them at all. A hearing was held this week in the House on these issues, and the overriding sentiment seemed to be that the provisions should not be renewed in light of lower tax rates contained in last year's big tax bill. We have faith in the lobbyists promoting these tax breaks and believe that some of them will again be renewed, but not until very late this year (for 2018).
Farm Stuff. Congress must pass a comprehensive farm bill by September 30, or various federal farm, conservation and nutritional programs will lapse. The House plans to mark up a bill in April, while the Senate will follow suit later in the month. These programs are very important to a powerful political constituency of farmers, ranchers and agricultural businesses. Notably, 80% of the funding in the bill will address future levels of funding for the Supplemental Nutrition Assistance Program (SNAP), more commonly known as the food stamp program. While the farm issues are not very contentious among lawmakers, the food stamp provisions will be. Republicans will want less money and more work requirements put around food stamp funding, while Democrats will want more money and no work requirements. This issue alone could complicate any bill's forward movement and will be difficult to resolve in the weeks and months ahead.
Other Farm Stuff. Earlier this year, we discussed a provision in the new tax law that gives farmers a tax incentive to sell certain products to co-ops instead of private companies. This provision has become known as the "grain glitch." While many lawmakers would like to make "fixes" to the tax bill, the grain glitch provision is the one with the best chance of advancing in Congress in the near-term, namely as a part of the government spending bill that will move forward next week. If that bill does not accommodate the fix, the current provision will likely remain law until it has another chance of being changed late this year after the November elections.
The Final Word
Pennsylvania Race Bottom Lines. Yes, this was a big race with likely ramifications for the mid-term elections in November. A few takeaways from the race: (1) Many Trump '16 voters from this particular congressional district – between 10% and 15% -- didn't like the President enough to vote for the Republican candidate, a phenomenon we believe is due to their being turned off by Trump's governing style; (2) Democrat Conor Lamb, who ran as a moderate, was a more attractive candidate than Republican Rick Saccone, making it easier for those disgruntled Trump voters (mentioned above) to vote for him; (3) Democrats won't always have this type of candidate advantage in the 40-50 competitive House districts around the country in November, so don't assume they will win all of these competitive seats; and (4) watch for more House GOP retirements in the near future, most likely after the recess period ends in early April, which will further complicate the Republicans' efforts to keep the House. The result this week gives added momentum to Democrats' efforts to take the House this year, at least for the foreseeable future, but a lot can and will happen over the next 265 days before House control is determined. Nonetheless, Republicans need some wins between now and November to regain momentum.