Wednesday, November 28, 2018

Fiscal Policy after the Mid-term Elections

David Super

      The mid-term elections changed many things in Washington.  The full implications will not be apparent until the major players – the House and Senate Republican Caucuses, the House and Senate Democratic Caucuses, and the President – settle on their agendas.  We can anticipate a bit more about fiscal policy, however, because existing substantive and procedural rules dictate much of the agenda without regard to the wishes of the partisan actors.  This is the second of two posts about the mid-term elections’ procedural implications. 

     The first impacts are being felt already, even before the new Congress convenes.  Well in advance of the election, Congress passed and the President signed five of the twelve appropriations bills that together fund the vast majority of government functions.  In a striking departure from prior practice, Democrats insisted on moving bills containing their priorities, particularly the bill funding the Departments of Labor, Health and Human Services, and Education, apace with Republican priorities, such as the Department of Defense.  This changes the stakes in a potential government shutdown. 

     Of the seven appropriations bills remaining to be passed those for Agriculture and for the Departments of Transportation and Housing and Urban Development have been agreed to privately and are not controversial.  The bill for the Interior Department has been controversial because of non-financial riders that have been attached to it, largely on environmental matters.  The bill for Financial Services and General Government has been stuck due to battles over raises for federal workers and some attempted Republican budget gimmickry.  With the election over, the disputes on these bills seem likely to resolve quickly. 

     That leaves the bills for Homeland Security (controversial because of the President’s proposed border wall and other immigration-related matters), for Commerce, Justice, and Science (controversial because it contains funding for Robert Mueller’s investigation), and for the Department of State and Foreign Operations (long controversial for many Russia-related reasons and now perhaps because of concerns about Saudi Arabia and our role supporting the slaughter in Yemen). 

     The President lately has seemed to signal that he does not expect to get much funding for wall.  His removal of Attorney General Sessions gives the President more direct leverage on the Mueller investigation, potentially removing that issue from the appropriations struggle.  If these matters get resolved, Congress likely can avoid a partial government shutdown.  The continuing resolution that is funding the agencies under these seven bills expires December 7, and appropriators likely will need an extra week to finish up, but unless the President suddenly reverses course appropriations for the current fiscal year should be completed by the middle of December.  House Republicans are especially eager to finish and leave town because, as the beginning of the new Congress approaches, departing Members begin to have to give up their office space to their newly-elected replacements, making the logistics of being in session progressively more uncomfortable.  The fact that the remaining bills cover a mix of Democratic and Republican priorities also has made a partial shutdown less attractive.

     In the new year, Congress is likely to face four sets of important fiscal issues. 

     First, Congress will have to address the nagging problem of sequestration.  Under the budget legislation congressional Republicans forced President Obama to sign as the price for raising the debt limit, discretionary appropriations – appropriations for everything other than “direct spending” programs such as Social Security and Medicare – are capped at levels far below historical spending.  Most experts across the political spectrum believe that the federal government cannot operate at the sequestration level without either a serious degradation in services that the public expects or a fundamental reduction in the federal government’s role. 

     For the past several years, Congress’s solution has been to enact two-year deals that raise the statutory caps on discretionary spending and offset the costs through cuts in entitlements, often permanent ones.  With half of the cap increases going to military spending, Democrats have found these deals distasteful.  But with the political difficulty of denying the Defense Department what it desires – either through the regular appropriations process or through “emergency” supplemental appropriations – tying these defense increases to domestic ones has seemed the most that could be achieved.  After Republicans diverted much of the money from the first of these two-year deals into their own priorities, Democrats have taken to pre-negotiating, sometimes in considerable detail, how domestic discretionary funding will be allocated before agreeing to cap adjustment legislation. 

     Without an increase in the discretionary caps, Congress will have to cut appropriations $300 billion below the level required to continue current government operations, with the reduction theoretically divided about equally between defense and non-defense accounts.  No one believes that appropriations bills with cuts of that magnitude could pass Congress.  Yet if Congress does not enact legislation adjusting the caps, the failure to make those cuts legislatively will result in a new sequester – across-the-board budget cut – to make up the difference.

     Second, Congress will have the regular appropriations process.  Some of the higher-level issues may be resolved by deals made in connection with the cap adjustment legislation.  Some significant challenges will remain.  Among these is funding the decennial census.  Historically, the Census Bureau has received steady increases in funding leading up to census years to allow it to prepare.  For the most part, that has not been happening.  Without a dramatic infusion of funding, having insufficient enumerators could lead to a significant undercount, skewed heavily toward low-income people. 

     The politics of appropriations riders also will change.  In recent years, most appropriations riders considered in conference committees have come from House Republicans, and most have been rejected as incapable of getting fifty votes in the Senate.  With Democrats now able and motivated to propose numerous riders of their own to constrain the Administration, it is unclear whether conference committees will continue to insist on “clean” bills or whether the two parties will trade riders with one another.

     Third, Congress will need to raise the debt limit.  With control of Congress now divided, and with polls suggesting that the electorate is well-aware of the 2017 tax law’s role in increasing the deficit, Republicans seem to have little prospect of blaming Democrats successfully for a crisis over failure to raise the limit.  Democrats have generally supported clean increases to the debt limit and appear to have little leverage to extract more.  Indeed, now that House Republicans are in the minority and feel insulated from blame, they seem likely to vote “no” en masse to force as many vulnerable Democrats as possible to vote for the increase. 

     Finally, despite losing the House, Republicans are likely to try to put tax cuts back on the agenda.  They have been agitating for technical corrections to the hastily-drafted December 2017 tax bill.  Democrats, of course, have been seeking technical corrections to the hastily-drafted Affordable Care Act for eight years now, with Republicans refusing to address even the smallest glitches.  Whether a “technicals for technicals” deal is possible likely will depend on the fiscal impact of each proposed package as well as on whether Democrats believe the Administration will faithfully carry out any health care technical amendments. 

     Republicans also will propose legislation to make the “middle class” portions of the 2017 tax bill permanent.  (To comply with budget process rules forbidding budget reconciliation legislation from increasing the deficit in years beyond the current budget resolution, the tax bill sunset some of its more politically popular provisions after 2025.  This has caused my Tax students great consternation.)  Although technically the Senate may not originate revenue legislation, Senate Republicans likely will seize on any revenue-related bill coming over from the House, no matter how trivial, and amend it to make the 2017 cuts permanent.  (This prospect could cause the House to withhold action on routine matters to avoid presenting the Senate with a tax vehicle:  it can be surprising how many seemingly unrelated matters have an incidental revenue aspect.)  House Republicans also may try to pressure vulnerable Democrats into signing a discharge petition to bring tax legislation to the floor. 

     If Republicans succeed in extending the 2017 tax cuts, the pressure for deep cuts in domestic spending will intensify.  Although the 2017 law heavily favored the affluent, its total cost was so great that even extending its “middle class” provisions would create a huge additional hole in the budget – all the more so given the capacious definitions of “middle class” that arise in tax debates.  Similarly, politically attractive proposals to uncap deductibility for state and local taxes would be both costly and quite regressive.  With no politically plausible path toward reducing the deficit with increased revenues, and with Republicans returning to attacks on the deficit in record time after enacting an unfunded $1.9 trillion tax cut, any further reduction in revenues is likely to lead to a roughly dollar-for-dollar reduction in spending, the great majority of which will be domestic.  Democrats could propose making the “middle class” provisions permanent in exchange for offsetting changes to the corporate and upper-income tax cuts that have failed to generate the promised increase in investment, but Republicans seem unlikely to agree.  

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