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.