Senate Reaches Bipartisan Deal with Sharp Spending Increases

The US Senate reached a 2-year budget deal that sharply increases defense spending and for a range of health care programs. The deal, which will boost the federal deficit and doesn’t deal protection of Dreamers, still must pass muster in the House and with President Trump, even though it doesn’t appear to provide funding for his border wall

The US Senate reached a 2-year budget deal that sharply increases defense spending and for a range of health care programs. The deal, which will boost the federal deficit and doesn’t deal protection of Dreamers, still must pass muster in the House and with President Trump, even though it doesn’t appear to provide funding for his border wall

[UPDATE: Early on Friday, February 9, the Senate passed a continuing resolution in effect until March 23 that authorizes spending levels contained in the bipartisan Senate budget deal. Later in the morning, the House passed the continuing resolution and President Trump signed it. The temporary government shutdown lasted only a few hours. Federal government employees reported to work as normal.]

 

The Senate reached a bipartisan budget deal that will boost federal spending by $300 million over the next two years and suspend the debt ceiling for one year, but without resolving immigration issues. The House and President Trump still must agree, which is not automatic.

House conservatives voiced concern about increased spending that will push up the federal deficit even further after GOP-backed tax-cut legislation late last year. House Democrats were furious the Senate deal didn’t include protection for Dreamers who may face deportation after Trump’s March 5 deadline. Speaker Paul Ryan said he believes the votes exist in the House to approve the Senate compromise.

There also may be some procedural issues slowing the vote in the Senate that could result in a temporary government shutdown scheduled for midnight tonight. And President Trump has yet to officially sign off on the deal, which doesn’t appear to include money for his border wall.

The biggest spending increase goes for defense – $80 billion in Fiscal Year 2018 and $85 billion in Fiscal Year 2019. Caps on non-defense discretionary spending would increase by $63 billion this year and $68 billion next year. Almost $90 billion is provided for disaster relief. There appears to be a $20 billion down payment on the Trump infrastructure package.

The increases give both political parties plenty to crow about and resolve a nagging budget issue that is a hangover of sequestration that went into effect in 2011.

If the Senate budget deal survives, congressional appropriators are expected to write an omnibus FY 2018 appropriations bill that moves up total spending from $1.065 billion allowed under current law to $1.208 trillion as provided in the Senate budget agreement.

The deal also includes some other significant provisions:

  • A one-year extension of expired tax breaks that were not included in the December 2017 tax reform bill, including the Alternative Fuels Tax Credit.
  • Four additional years of extension of the CHIP program after the six-year extension enacted last month runs out.
  • Two years of renewed funding at around $7 billion for community health centers, $6 billion for mental health treatment and opioid addiction and $2 billion in additional funding for the National Institutes of Health. Notably absent, however, was funding to shore up the Affordable Care Act, which was the concession promised to Maine Senator Susan Collins in return for her vote for the GOP tax cut. The deal does continue to delay any cuts to hospitals that serve a disproportionately high share of low-income patients.
  • Accelerated elimination of the “doughnut” in Medicare in pre-catastrophic care drug coverage and elimination of the controversial Medicare Payment Advisory Board. The limit on Medicare coverage for physical therapy would be permanently repealed.
  • $500 million to the National Health Service Corps and $363 million for the Teaching Health Center Graduate Medical Education program to encourage doctors to practice in underserved areas.
  • Creation of a new Joint Select Committee on Solvency of Multiemployer Pension Plans, to produce legislation fixing the Pension Benefit Guaranty Corporation by December 2018 with a guarantee that the bill will get a vote in the Senate under “fast track” procedures.
  • Creation of a new Joint Select Committee on Budget and Appropriations Process Reform, to produce legislation fixing the broken congressional budget process by December 2018 with a guarantee that the bill will get a vote in the Senate under “fast track” procedures.

An estimated $100 billion in “pay-fors” were included in the package to mitigate the effect of non-defense spending on the federal deficit. They include:

  • An extension of the portion of Transportation Security Administration aviation security fees that go towards deficit reduction into fiscal 2026 and 2027, estimated to total $1.64 billion in 2026 and $1.68 billion in 2027.
  • Selling oil from the Strategic Petroleum Reserve.
  • Taking money from the Federal Reserve’s surplus fund.
  • Extending sequestration of non-exempt mandatory programs (mostly Medicare) into fiscal 2026 and 2027.

    Joel Rubin is a partner and leader of CFM’s federal affairs team based in Washington, DC. He has worked on Capitol Hill and now represents Pacific Northwest interests in Congress and with federal agencies.

Congress Faces Yet Another Spending Deadline

 In what might be an omen for this week on Capitol Hill as Congress faces yet another spending deadline, the train carrying Republicans to their West Virginia retreat site. Just as ominous, Democrats are scheduled to begin their 3-day retreat the day before this week’s deadline.

 In what might be an omen for this week on Capitol Hill as Congress faces yet another spending deadline, the train carrying Republicans to their West Virginia retreat site. Just as ominous, Democrats are scheduled to begin their 3-day retreat the day before this week’s deadline.

In the aftermath of President Trump’s first State of the Union Address and the hullabaloo over release of the GOP surveillance memo, the looming government spending deadline this Thursday almost slipped out of sight. Almost.

As bitter and battle-weary Members of Congress trudge back to Capitol Hill this week, the deadline will be anything but invisible. What’s hard to see is any compromise that can win enough support from Senate Democrats, House conservatives and the Trump White House. Before they resolve differences on spending, they need to agree on immigration.

Senate Democrats want protection for so-called Dreamers, but House conservatives object to granting them an eventual path to citizenship. Trump offered up long-term protection for Dreamers, but at the price of a $25 billion “trust fund” for his promised border wall, which Senate Democrats reject.

Republican Congressman Will Hurd, a former undercover CIA officer whose Texas congressional district includes the longest stretch of the US-Mexican border, has proposed a simple compromise, along with Democratic Congressman Pete Aguilar of California. Their proposal would protect Dreamers and provide for enhanced border security, but not necessarily a huge investment in a physical wall. It’s uncertain whether Trump or a majority of House Republicans would support their proposal.

immigration may be the roadblock to a compromise, but disagreements over spending, especially for defense and health care programs, are like a washed-out bridge. The inability to agree on spending in the current federal fiscal year has led to four continuing resolutions – stopgap funding measures that generally allow federal agencies to keep plugging along with the same budget as the previous year.

The disagreement isn’t just over on how to spend federal dollars, but how many federal dollars to spend. After Republicans pushed through a $1.5 trillion tax cut, which may add as much as $1 trillion to the federal deficit this year, House conservatives are wary of spending even more. Democrats are pressing for restoration of funding for community health centers and more generous disaster relief for states affected by hurricanes, floods and wildfires.

Stop-and-go spending authorization has prevented agencies from the Pentagon to the Centers for Disease Control to pursue new objectives and resulted in an added layer of government inefficiency. Defense Secretary James Mattis has warned that the inability of Congress to pass a budget has weakened US security.

While there is broad bipartisan agreement on the need for infrastructure investment, there is widespread disagreement on how much should come from direct federal spending – and how whatever level of funding is approved will be paid for. 

Since the three-day partial government shutdown that ended with another continuing resolution and the February 8 deadline, there isn’t much public evidence of productive negotiations. Most of last week was consumed by Trump’s speech and bitter partisan back-and-forth about the memo released by the House Intelligence Committee’s GOP majority. That’s not a great starting block for negotiations to avoid another government shutdown the end of this week.

Rep. Adam Schiff, the lead Democrat on the committee, said over the weekend he will press for a vote as soon as today on the Democratic rejoinder to Chairman Kevin Nunes’ memo. Nunes has hinted he may be working on additional memos that he says may show anti-Trump bias in the State Department.

Despite Trump’s plea for bipartisanship in his State of the Union speech, his administration continues to provide fodder to deepen partisan divides. He has virtually gutted the Consumer Financial Protection Bureau, refused to impose congressionally approved sanctions on Russian oligarchs and watched as his appointee to lead the Centers for Disease Control resigned after disclosures that she bought and sold tobacco stocks.

Still hanging around, but as far in the shadows as before, is the need to increase the national debt ceiling. Treasury officials say congressional action is needed in February. GOP congressional leaders almost certainly need Democratic votes in both the House and Senate to approve a debt limit increase, but that may prove politically complicated as well with so many other higher profile disagreements.

It will be an interesting week on Capitol Hill, which Vox chided will be punctuated by Republican and Democratic caucus retreats on the weekends before and after the latest spending drop-dead date. Perhaps as an omen, the train carrying Republicans to their West Virginia retreat site ran into a garbage truck. Just as ominous, Democrats are set to begin their 3-day retreat in Maryland the day before the spending deadline. Don’t bet against yet another temporary continuing spending resolution, as well as more political bickering. On the bright side, the Winter Olympics start this week.

 

New Leak Confirms Infrastructure Package Outline

The long-promised Trump infrastructure package may be unveiled later this month when the President delivers his State of the Union Address. A new leak confirms what we reported several weeks ago, including money that could be used to expand broadband access in rural areas.

The long-promised Trump infrastructure package may be unveiled later this month when the President delivers his State of the Union Address. A new leak confirms what we reported several weeks ago, including money that could be used to expand broadband access in rural areas.

Expectations are building that President Trump will unveil his long-promised infrastructure package during his State of the Union Address January 30.

A well-publicized leak of his proposal emerged this week, which conforms closely with what we reported – also based on leaked material – last month in this blog.

There will be four pots of money. The largest, totaling $100 billion, is intended to provide a federal incentive for transportation, water, hydroelectricity and brownfield reclamation projects. Money from this pot would cover 20 percent of project costs and non-federal funding would make up the rest.

A second pot sets aside $50 billion for rural projects, which also can include broadband investments. The last leak indicates $40 billion from this pot would be allocated to states after they produce a comprehensive rural investment plan.

A third pot would give the Department of Commerce the discretion to spend $20 billion on what are called transformative projects, including higher-risk and higher-reward projects.

Around $30 billion would be dedicated to federal capital financing and credit programs including TIFIA and WIFIA that are intended to spur public-private partnerships such as toll roads.

There are congressional proposals on infrastructure, so the final shape of a package that can pass remains to be seen. But it is encouraging to see the debate over an actual package may begin soon in Congress.

Congressional attention has been focused – and will continue to focus – on reaching an agreement on spending. The nation is operating under its fourth continuing resolution, with a February 8 deadline to negotiate a longer-term agreement under the shadow of other issues that range from increased military spending and immigration.

The three-day partial federal government shutdown that ended Monday may be a precursor of what’s to come. Senate Democrats want to use their limited leverage to filibuster to secure the future of 800,000 “Dreamers.” Trump and conservative Republicans in the House want to use the Dreamers as a bargaining chip to get up to $18 billion for a border wall and other changes in immigration policy.

The consensus view of political observers is that Senate Democrats folded fairly quickly because they weren’t geared up for a war of words in print and on social media. Republicans pounded them, saying they shut down the government to protect illegal immigrants.

Government shutdowns probably don’t shower any political party with praise, but Democrats may be better armed to defend their position if February 8 rolls around and there is no deal on immigration, border security or military spending.

Global Leaders Gather to Patch a ‘Fractured World’

Global leaders, including President Trump, will gather next week in Davos, Switzerland to wrestle with serious risks that threaten to make the world even more fractured. It should be worth watching.

Global leaders, including President Trump, will gather next week in Davos, Switzerland to wrestle with serious risks that threaten to make the world even more fractured. It should be worth watching.

For world leaders, including President Trump, who will attend next week’s World Economic Forum in Davos, Switzerland, the agenda will be anything but a walk in the park.

This year’s theme, “Creating a Shared Future in a Fractured World,” will also present a challenge for some attendees who have deepened global divisions, as well as divisions in their homelands.

“Our world has become fractured by increasing competition between nations and deep divides within societies. Yet the sheer scale of the challenges our world faces makes concerted, collaborative and integrated action more essential than ever,” says Klaus Schwab, founder and executive chairman of the Forum. Trump is scheduled to deliver a keynote address at the end of the four-day event.

What’s most startling is the report about potential “future shocks” that will inform discussions at the Forum. The report lists 10 of them. Some are obvious (even if denied). Others less obvious (and rarely discussed).

At the top of the list of global risks, as you might expect, is accelerating climate change, which threaten world food supplies. Extreme weather events such as hurricanes and floods combined with prolonged drought have impacted global food supply chains.

While those impacts have already left parts of the world hungry, a graver risk looms if trade relations break down, political instability cripples cultivation or crop disease spreads. The ensuing food crisis would be bad enough, but could lead to steep price hikes and widespread conflict, which would literally be international food fights.

The report acknowledges fears over how automation will change the complexion of the workforce, but it warns a different scenario may be of greater concern. “As we become more reliant on codes that can write their own code (the crux of Artificial Intelligence), we’ll lose the ability to track and control it. The world relies heavily on the internet; the disruption will be massive.”

The “end of trade as we know it,” according to the report, could lead to a world “grappling with rapidly spreading trade disputes” that “adversely affects economic activity, output and employment.”

Cracks in democracy pose a global risk, the report says. “The polarization of politics could worsen, leaving people even further apart ideologically and with less room for compromise. In the worst-case scenario, political debate could be replaced by the use of force. Those in opposition could then take up arms, a situation particularly worrisome in areas with ready access to weapons or a history of political violence.”

Other threats cited by the report include depletion of ocean fish stocks through use of the unmanned drone fishing boats, another global financial crisis, war fought without rules and the break-up of the internet because of cyber attacks or nationalistic policies.

Two other threats identified in the report are widening inequality throughout the world juxtaposed with rising nationalism and efforts to expel ethnic or religious minorities from regions or entire countries.

Inequality goes beyond the gulf between rich and poor, extending access to critical resources or innovations. The report says bioengineering and cognition-enhancing drugs hold the promise of considerable benefits, but contribute as the same time to a wider gulf between haves and have nots.

Attendees also will be exposed to Forum initiatives, which range from food security to international trade and investment to shaping the future of mobility, energy and the environment. You might call the event a crash course on how the world turns.

For supporters and critics of Trump, the Davos meeting raises intriguing questions. What, for example, is the candidate who campaigned as a populist in support of “America First,” going to say in his keynote address at an event attended by the world’s elite globalists? Critics may hope some of the threats discussed at the event wise up Trump, but worry his rejection of issues such as climate change and open trade could further alienate the United States from world leaders and its longtime allies.

Trump might view his moment on the world stage as a platform to announce something dramatic, such as a pullout by the United States of the North American Free Trade Agreement.

Based on the agenda and how things are shaping up in the world, this year’s World Economic Forum may merit more attention than usual, which is virtually assured because Trump is attending.

 

States Poised to March Through Tax Loophole

Tax loopholes are normally associated with corporations and wealthy individuals, but top officials in New York and California have announced plans to march through a loophole that would allow their taxpayers to bypass a new federal limit on the deductibility of state and local taxes.

Tax loopholes are normally associated with corporations and wealthy individuals, but top officials in New York and California have announced plans to march through a loophole that would allow their taxpayers to bypass a new federal limit on the deductibility of state and local taxes.

High-tax blue states such as New York and California may join the parade of tax avoidance planners looking for loopholes to march through in the GOP-backed federal tax overhaul to contravene the $10,000 deductibility limitation on state and local taxes.

With the ink hardly dry on new federal tax legislation, New York Governor Andrew Cuomo and California state Senator Kevin de Leon are proposing schemes that would effectively convert state income tax payments into charitable contributions, thus making them eligible as deductions on federal income tax returns.

These aren’t clandestine tax maneuvers. Cuomo announced his intention in his State of the State Address and de Leon spelled out his plan in an interview with NPR’s Robert Siegel. Other states with legislative sessions this year may follow suit.

According to de Leon, “We have no other choice but to move forward with this type of policy because, in the end, the tax policy that was just passed in Washington will disproportionately hurt a state like California. And when you hurt a state like California, you're hurting the rest of the country, because we are the economic engine for the nation.”

One estimate indicates the limitation on state and local taxes (known as SALT) could save the federal government as much as $100 billion per year based on 2017 numbers. Democrats – and Republicans – from states with high income and property taxes claim their constituents would pay a disproportionate share of that $100 billion.

Like most tax issues, there is a lot of room to argue.

Supporters of the $10,000 SALT deduction cap contend that will cover most middle-income taxpayers who itemize expenses on their federal tax returns. Republicans say many more taxpayers will skip itemization and opt to claim the substantially higher standard deduction in the tax bill, arguably simplifying their tax returns.

Critics of the SALT limitation say it will subject middle- and upper-income taxpayers in high-tax states, including Oregon, to double taxation. Data shows 50 percent of the federal deduction for local property taxes comes from just six states – California, New York, New Jersey, Illinois, Texas and Pennsylvania.

The Cuomo-de Leon strategy seeks to exploit a 2011 IRS ruling that treats a donation to a state’s General Fund as a charitable contribution and therefore a deductible expense. De Leon contemplates a California tax scheme where every $1 in “contributed” taxes qualifies a taxpayer for a $1 tax credit.

“That is the law,” de Leon says. “That is permissible. So what we're doing is en masse taking advantage of this opportunity to do a roundabout, if you will, against policies from Washington that are very hurtful towards a state like California.”

Asked by Siegel if his scheme passes the “smell test,” de Leon said, “It does pass the smell test because we're already doing it here in California. I authored a measure back in 2014 that allows for charitable donations to state college affordability grants.” He add that other states, including red states such as Florida and Arizona, had enacted similar tax provisions.

Cuomo called the SALT deduction limit “economic civil war” as he called for “dramatic action to save ourselves and preserve our state's economy.” In addition to pursuing the tax-payment-as-contribution loophole, Cuomo said New York would pursue legal action to challenge the constitutionality of the limitation, though legal observers questioned whether legal action will succeed.

Of course, a simpler approach would be for Congress to modify the federal tax legislation to eliminate or raise the state and local tax limitation. After the dust settles and IRS rules emerge implementing provisions in the tax bill, there may be a need for what lawmakers call a technical correction bill to clean up, clarify or cashier hazy, hasty or poorly thought-through provisions.

Despite Democratic opposition to the tax-cut legislation itself, a fix that includes a modification of the SALT limitation could attract bipartisan support and easily pass.

 

Prospects for Bipartisanship in an Election Year

Senate Majority Leader Mitch McConnell said 2018 should be a year of bipartisan compromise, but that may be easier said than done after the GOP-controlled Congress shoved through a massive tax cut at the end of 2017 and ideological differences in the House threaten to blunt deals with Senate Democrats. [Photo Credit: AP/Susan Walsh]

Senate Majority Leader Mitch McConnell said 2018 should be a year of bipartisan compromise, but that may be easier said than done after the GOP-controlled Congress shoved through a massive tax cut at the end of 2017 and ideological differences in the House threaten to blunt deals with Senate Democrats. [Photo Credit: AP/Susan Walsh]

Will 2018 be the year of congressional bipartisanship or a retreat to political trenches before the November general election? It is a critical question that could determine the shape of spending, immigration, pension protection, defense, foreign policy and border security legislation.

It is also a question of time as the Senate returns to work this week and the House comes back next week.

The next Waterloo date for Congress is January 19 when the current short-term spending measure expires. Reconciliation rules don’t apply, which means whatever legislation emerges must pass the 60-vote cloture hurdle in the Senate. Christmas has passed, so GOP congressional leaders can’t rely on Democratic reluctance to allow a holiday federal government shutdown.

Before the holiday break, Senate Majority Leader Mitch McConnell signaled a need to seek bipartisan approaches in 2018. House Speaker Paul Ryan has focused more on trimming spending on so-called entitlement programs, which is unlikely to attract much bipartisan support. Congressional Democrats can be expected to weigh compromise against electoral advantage.

There is no better example of the political watershed than Deferred Action for Childhood Arrivals (DACA). Democrats want a clean bill to secure their place in America and a path to citizenship. President Trump plopped the issue in the lap of Congress with a March 5 deadline as leverage to gain Democratic support for his promised border wall. Congressional Republicans may stop short of the Trump wall, but want fortified border security as part of any deal.

Trump gave Congress until March to reach a compromise. Latino interest groups expressed displeasure at Democratic failure to force the DACA issue in the pre-Christmas spending showdown, which foreshadows a more aggressive stance by Democrats in January negotiations. Conservative Republicans equate protection for children brought to America by their parents illegally as amnesty, which they have pledged to oppose.

There aren’t any obvious silver-bullet issues to inspire bipartisanship. The closest no-brainer issue is continued funding for the Children’s Health Insurance Program (CHIP). Before heading home for Christmas, Congress ponied up $3 billion to sustain CHIP for three months. Democrats want CHIP to continue while House Republicans appear to view it as a vehicle to dismantle additional parts of the Affordable Care Act.

During the holiday break, Democrats floated a new issue that could be a wrench in the works or a possible bargaining chip. On “Face the Nation,” Michigan Congresswoman Debbie Dingell and New York Congressman Joe Crowley called for government-backed private pension protection. Even though the recent run-up in the stock markets have boosted retirement accounts, Dingell and Crowley argued many Americans remains under water because of the Great Recession and pressure on private pensions continues to mount. The proposed solution involves government securitization of pension benefits, much like protection for savings accounts in banks, through some form of bonding. Democrats figure this issue would especially appeal to middle-class Americans.

Republicans, supported by Trump, want to boost military spending. The price for Democrats is increased social spending – or avoiding cuts in Medicaid. There eventually will be a deal on spending and an increase on the debt ceiling, but the deal that Senate Democrats would support may splinter the GOP majority in the House.

How forceful each side remains could depend on public reaction to the GOP-passed tax-cut legislation. Backers of the $1.5 trillion tax cut are counting on bolstered take-home pay as early as February to start changing American opinion about the legislation, which Democrats branded as heavily benefitting corporations and wealthier taxpayers.

If fatter paychecks turn heads, it may embolden Republicans. If the tax cuts seem insignificant, then Democrats may become more obstinate.

The congressional agenda is chocked full of other issues, including an extension of FISA court orders required to conduct domestic surveillance and additional disaster relief for states and territories hit hard by hurricanes, flooding and wildfires. Both offer some glimmer of hope for bipartisan cooperation.

Another possible bipartisan topic is stabilization of health insurance markets. Maine GOP Senator Susan Collins voted for tax-cut legislation on promises by here Republican colleagues to address the issue by agreeing to give insurers as much as $10.5 billion to compensate for coverage for high-cost and poor people. The conservative wing in the House has given that idea a cool reception as it warns about more spending driving up the federal deficit.

On philosophical grounds, the most likely bipartisan target is increased funding on infrastructure. Trump has promised to submit his plan to Congress this month and congressional leaders also have been working on proposals. Again, the pain point may be more spending and a higher deficit. That argument inevitably will revive the debate over the GOP-backed tax cut and whether it starts paying off in 2018.

A Peek Inside a Percolating Infrastructure Package

With the tax bill passed and despite looming spending decisions, the next big thing in Congress could be the long-promised, but still percolating Trump infrastructure package.

With the tax bill passed and despite looming spending decisions, the next big thing in Congress could be the long-promised, but still percolating Trump infrastructure package.

With the tax bill in the rear-view mirror, the next big thing for Congress could be the long-promised $1 trillion Trump infrastructure package.

Based on conversations with Hill committee staff members and leaked reports, details of the package, which President Trump says he will unveil in January, are coming into view. Here is a sneak preview:

One of the four funding pots in the Trump package would invest in innovative transportation projects such as Elon Musk’s proposed hyperloop subsonic train.

One of the four funding pots in the Trump package would invest in innovative transportation projects such as Elon Musk’s proposed hyperloop subsonic train.

  • There is a 70-page outline of the package under review in the bowels of the Office of Management and Budget.
  • Four pots of money will be created, backed by $200 billion in direct federal spending.
  • Half of the $200 billion would be distributed to states to use as financial incentives for road, transit, broadband, water and housing projects that can attract at least 80 percent of non-federal funding. This would theoretically attract $500 billion in new infrastructure investment from public and private sources.
  • A separate pot would be established for rural projects, using the more tradition 80 percent federal/20 percent non-federal funding split.
  • The third pot would be assigned to innovative projects such as Elon Musk’s hyperloop initiative or other technological advances that revolutionize transportation systems.
  • The fourth pot would add financial incentives to the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Water Infrastructure Finance and Innovation Act (WIFIA), which provide federal credit assistance in the form of loans, guarantees or lines of credit.
  • All projects receiving funding from the $200 billion would be exempt from federal requirements such as NEPA (environmental review), Davis-Bacon (prevailing wages) and Buy America.

The Trump plan would face a rough road to passage, especially in the Senate where the Republican majority has been trimmed to just 51-49. GOP congressional leaders are reportedly working on their own infrastructure proposal, with an eye on what it would take to attract at least some Democratic support.

While there will be vigorous debate over how to invest billions of dollars, the main political stumbling block will be resistance of GOP conservatives to spend more money and drive up the federal deficit even further. That stumbling block is already in the path of Congress finding a way to avoid a partial federal government shutdown by a self-imposed deadline of December 22.

Congress may skirt by the December 22 deadline by agreeing to another short-term spending resolution until January 19. Sooner or later, Congress will have to face the larger spending and deficit picture, which includes GOP demands for a major increase in defense spending, $200 billion for hurricane and wildfire relief, another $2.4 billion for the Veteran’s Choice Fund, $50 billion extension of the Children’s Health Insurance Program and continued funding for health insurance stabilization.

The spending splurge in Washington has already prompted GOP leadership to talk openly about mandatory spending cuts for SNAP, Social Security, Medicare and Medicaid. Trump’s decision to postpone signing the $1.5 trillion tax-cut bill until January is an attempt to push off mandatory cuts until 2019, after the 2018 mid-term election. GOP Senate Majority Leader Mitch McConnell has announced the Senate won’t look at what Republicans refer to as “entitlement reform” in 2018.

There also could be pushback from economists who warn that adding a major transportation bill on top of huge tax cuts intended to stimulate the economy could resurrect the sleeping bear of inflation.

Despite all that, Trump is expected to push for his infrastructure package and McConnell appears to be a willing ally. The package might be the best shot for a major bipartisan legislative effort during 2018.

 

The Unintended Legacy of the GOP Tax Cut

Congressional Republicans are on the precipice of passing a major tax cut that modestly boosts US economic growth while achieving a lasting legacy of helping US corporations integrate even more into the global economy by keeping earnings offshore and shifting profits to tax havens.

Congressional Republicans are on the precipice of passing a major tax cut that modestly boosts US economic growth while achieving a lasting legacy of helping US corporations integrate even more into the global economy by keeping earnings offshore and shifting profits to tax havens.

Lost in the hoopla over the GOP-backed tax bill that Congress passed and sent to President Trump are statistics showing a steadily expanding global economy.

While tax bill backers promise a domestic economic boom and Trump rails against unfair trade deals, the International Money Fund reports the global economy has grown this year by 4.2 percent. That doesn’t square with all the talk of protectionism. It also suggests that the United States may not be the only kid on the block.

One reading is that the world has become more economically integrated, regardless whether political leaders like it or not. That explains why many US corporations have lobbied against major changes proposed by Trump in the North American Free Trade Agreement or why the 11 other nations that signed the Trans-Pacific Partnership are still pushing ahead even though the United States pulled out.

PwC, a British economic consultancy firm, predicts 2018 will see another expansion of the global economy that is broad-based. One exception noted by PwC will be Britain, which is facing economic headwinds as it tries to negotiate its way out of the European Union following the Brexit vote.

The statistics don’t reflect the damage to regional economies and local communities caused by globalization. But they do reflect what appears like an irreversible force toward more globalization in trade for goods and services and in capital flows.

Conservative-leaning think tanks predict the GOP tax-cut bill will promote economic growth. The Heritage Foundation projects corporate tax cuts will add to US capital stock, but also lower the numbers of hours worked, presumably because of increased investment in automation. The Tax Foundation model, a reliably aggressive pro-growth calculator, predicts tax cuts will boost US Gross Domestic Product in 2018 from 2.01 percent to 2.45 percent, far less than Republican architects of the legislation predicted and not enough to offset the increase in the federal deficit.

U-Penn's Penn-Wharton model, run by a former Bush administration economist, forecasts the GOP tax bill will increase national debt by $1.9-$2.2-trillion by 2027 – after incorporating "dynamic" estimates of economic growth effects.

Amid skepticism the tax bill will stimulate domestic economic growth, many tax advisers think the legislation’s corporate alternative minimum tax provision will encourage more, not less offshore manufacturing. The deferral of tax on foreign income will provide an incentive to keep earnings from foreign operations offshore and to shift profits to offshore tax havens. Ironically, these provisions may bolster US-benefitted global economics.

In his national security speech this week, Trump warned of intensifying economic competition in the world. His solution: To look inward. The data suggests that’s old school. Obsessing about our border security and overlooking the very economic competition he called out in his speech is a strange brew and a broken policy.

When the tax-cut legislation finally passes this week, as expected, there will be a lot of high-fives and political backslaps. Congressional Republicans will have handed Trump his first significant presidential victory and kept a promise to GOP donors.

What may follow is a political uprising over the decidedly non-populist bent of the tax bill and, eventually, an even greater gasp when the tax legislation’s greatest advance is to speed automation and engage in even greater global economic integration. Ironically, that might turn out to be the legislation’s most lasting, if unintended legacy.

 

The Wonder and Worry Surrounding Washington, DC

The nation’s capital is preparing for Christmas, but there isn’t much cheer on Capitol Hill as lawmakers narrowly avert a government shutdown, try to unsnarl problems in tax-cut legislation and muddle through sexual misconduct scandals

The nation’s capital is preparing for Christmas, but there isn’t much cheer on Capitol Hill as lawmakers narrowly avert a government shutdown, try to unsnarl problems in tax-cut legislation and muddle through sexual misconduct scandals

Congress temporarily averted a pre-Christmas federal government shutdown by approving a two-week spending resolutionHouse and Senate conferees are trying to work out differences, including an apparent $287 billion math error, in a $1.4 trillion tax-cut measure. House Speaker Paul Ryan foreshadowed entitlement spending cuts next year to curb a ballooning federal budget deficit.

A prominent Democratic House member and senator have resigned amid sexual misconduct scandals. An Arizona GOP congressman is quitting after discussing surrogacy with two staff members. Alabama is likely to send a new senator to Washington, DC who has been accused of dating teenage girls, denies any wrongdoing and says he would bring Alabama values to Capitol Hill.

President Trump announced he will send his long-promised infrastructure funding package to Congress in January without mentioning that private activity bonds, a key financing tool for transportation and affordable housing projects, may be eviscerated beforehand in tax legislation he has championed.

Trump efforts to rewrite the North American Free Trade Agreement are faltering amid concerns by many business sectors that what Trump wants in a new deal would hurt existing trade and endanger US manufacturing jobs. The United States has walked away from a trade deal with its Pacific Rim neighbors, but the deal is not dead. Japan is leading continuing talks, which could lead to provisions less favorable to the United States and, eventually a seat at the table for China.

Ignoring warnings by top Cabinet officials, Trump recognized Jerusalem as Israel’s capital while urging progress on stalled peace talks between Israelis and Palestinians. Two days later, Palestinian leaders refused to meet with Vice President Mike Pence.

Revelations in the Russian election meddling investigation continue to roll out, inflamed by a Trump tweet, a whistleblower’s account and Donald Trump Jr. who said what he told his dad after the infamous meeting with Russians last summer was protected by attorney-client privilege.

People abroad might be excused for wondering and worrying what is happening in the United States. People who live in the United States are wondering and worrying, too.

The President goes out of his way to stir the pot – retweeting inflammatory videos, pulling the rug out from under his GOP Capitol Hill colleagues and amping up rhetoric aimed at North Korea. Congress has failed to deliver a major legislative victory to Trump in his first year in office and is still fumbling with the last-chance tax bill. A late addition to the Senate version that would retain the corporate alternative minimum tax has caused corporate leaders – putatively the biggest winners in the measure – to voice concern. Polling indicates the tax bill is unpopular, including with many Republicans.

Democrats and Republicans are growing even more polarized. After a Trump tweet, the House and Senate Democratic leaders refused to join a White House pow-wow on spending and debt ceiling legislation. Their GOP counterparts called the snub rude. Trump said Democrats were putting border security at risk.

The parties have been split over cultural issues for a long time, but sexual misconduct scandals have turned litmus tests into flash points. The resignations of Democratic Congressman John Conyers and Senator Al Franken, which were accelerated by a collective shove in their backs by fellow Democrats, put the party on presumably higher moral ground to denounce Alabama senatorial candidate Roy Moore and Trump, each of whom has been accused by multiple women for sexual misconduct. Arizona Congressman Trent Franks apparently got the message.

Ryan’s prediction that action will be needed next year to stem the budget deficit could push Congress onto third-rail political issues such as Social Security and Medicare, as well as Medicaid. Conservative GOP members want to boost military spending while trimming spending and the deficit. Democrats are pressing for more domestic spending and to keep hands off Social Security and Medicare.

It is not a pretty picture, with a bruising holiday mash-up looming between now and December 22 over a longer spending measure and an increase in the debt ceiling.

 

What Lurks in the 479-Page Senate Tax Cut?

New Yorker Magazine’s Andy Borowitz spoofed that a child’s scribbled drawing accidentally was included in the Senate GOP tax-cut legislation. With time to read the actual 479-page bill that the Senate passed, the buried provisions might be more disturbing than a scribbled drawing.]

New Yorker Magazine’s Andy Borowitz spoofed that a child’s scribbled drawing accidentally was included in the Senate GOP tax-cut legislation. With time to read the actual 479-page bill that the Senate passed, the buried provisions might be more disturbing than a scribbled drawing.]

New Yorker Magazine’s Andy Borowitz spoofed that a scribbled drawing by one of Senate Majority Leader Mitch McConnell’s grandchildren made its way into the GOP-backed tax cut bill approved late last week. With time to read the bill this week, people may uncover a lot worse than scribbling tucked away in the Senate measure’s 477 pages.

Nothing will be final until a House-Senate conference committee resolves differences in their tax cuts and the compromise goes back to both chambers for final passage. Media coverage will focus on the size of the corporate tax rate decrease, the number of individual taxpayer brackets, the impact on the federal deficit, benefits accruing to wealthy taxpayers and the fate of the Obamacare individual health care mandate.

There also will be stories searching the shadier corners of the tax bill and how they got there.

Wielding a copy of the Senate tax bill with what appeared to be margin notes as amendments, independent Maine Senator Angus King told Face the Nation that a bill to cut corporate and individual tax rates would take, at most, 50 pages. He wondered aloud on camera what the remaining 420 or so pages contain. “We’re going to find some really stinky stuff,” King predicted, pointing to provisions dealing with oil and gas extraction.

One of the clear winners in the GOP tax-cut legislation, according to Tony Nitti writing for Forbes, are tax attorneys and CPAs. “As an American taxpayer, I’m saddened by the way the process played out. As a tax adviser, I’m downright giddy. The eventual signing of the Senate bill into law, regardless how it is ultimately married with the House bill, will signal the start of hunting season for tax professionals who…will find ample opportunity to game the system and minimize their clients’ tax liability.”

“Business owners or managers that plan well and pay for good advice will be able to achieve much more favorable rates,” Adam Looney, a senior fellow at the Brookings Institution and a former Treasury Department official, told The New York Times. “I’m not sure if that is a loophole or the intent of the legislation.”

So much for a simple tax code. But who benefits from all the complexity? Nitti offers one example. The Senate version reduces the depreciation period for rental property from 27.5 years to 25 years and excludes landlords from a limitation on mortgage interest deductions. The House version piles on landlord benefits by capping pass-through taxation at 25 percent, as opposed to the current law 39.6 percent.

Another headscratcher was a decision by Senate Republicans to retain “bonus depreciation” for corporations at the expense of retaining the corporate minimum tax.

The eventual tax bill could have unintentional effects. The Hill.com ran a story saying, “Preemptively removing private activity bonds as a financing tool for infrastructure projects would undermine the stated goal of Congress to leverage a $1 trillion investment in our nation’s infrastructure.” Eliminating the tax deduction on private activity bonds was included in the House GOP tax cut bill to save $40 billion over the next decade.

Published stories in the last few days have pointed out other buried provisions in the House and Senate tax measures:

  • Elimination of a tax credit for pharmaceutical companies to develop drugs for so-called orphan medical conditions;
  • Elimination of a tax credit to small businesses who provide accommodations for workers or customers with disabilities;
  • Elimination of the New Markets Tax Credit intended to spur investment in communities with high unemployment or poverty rates;
  • Eliminates deduction for student loan interest;
  • Eliminates deduction for sexual harassment settlements with gag orders;
  • Allows unborn children to qualify for college savings accounts;
  • Reduces taxes on beer and wine;
  • Lowers taxes on storing and staffing private jets;
  • Retains ability by banks to avoid taxes by making payments to offshore subsidiaries;
  • Allows up to $10,000 per year from 529 college savings plans to pay for religious schools and some home schooling;
  • Excludes car dealers from any limitation on interest deductions; and
  • Provides an employee credit for paid family and medical leave, except for employees in states that require paid family and medical leave.

While the merits and demerits will be discussed ad nauseam in the days ahead, the evidence is pretty clear that the legislation billed by Republicans as a middle-class tax cut is at once a whole lot more – and less – than that.

So Much Work, So Little Time

The congressional agenda is chock-full. The congressional calendar is rapidly dwindling. Tax cuts, a spending measure and a debt ceiling increase are pending priorities, with a government shutdown looming as a possibility.

The congressional agenda is chock-full. The congressional calendar is rapidly dwindling. Tax cuts, a spending measure and a debt ceiling increase are pending priorities, with a government shutdown looming as a possibility.

With only a dozen or so working days before the holiday break and the end of the year, Congress faces a daunting agenda that keeps growing longer and more challenging.

Based on published schedules, the Senate has 15 and the House 12 working days left in 2017. In that time, GOP congressional leaders want to pass tax-cut legislation and need to take action on a spending and debt ceiling bill to prevent a government shutdown.

Mixed in the politics of all that is the Dreamer’s Act and extension of funding for the Children’s Health Insurance Program (CHIP) that expired September 30, which has created a budgetary challenge for states trying to keep the popular insurance in place until Congress acts.

Then there are the series of subplots that fill headlines and color the policies and politics on Capitol Hill:

  • The intensifying investigation into Russian election meddling;
  • The Roy Moore scandal and Senate race in Alabama;
  • Unfolding disclosures about sexual behavior by Members of Congress;
  • An attempt by the Senate to repeal the Obamacare individual health care mandate as part of tax legislation; and
  • The Federal Communication Commission’s decision to end net neutrality.

Lurking in the wings are stalled talks over revisions to the North American Free Trade Agreement (NAFTA), continuing tensions over North Korea’s nuclear capabilities and the hope for an infrastructure investment package.

Dealing with all that is more like a year’s agenda, not one for a short month.

Egged on by President Trump, Republicans want to deliver tax legislation to the White House before heading home for Christmas. While GOP leaders continue to sell the tax cut as a boon for the middle class, the push to pass it quickly is aimed at satisfying the expectations of Republican donors.

When the Senate returns to work this week, it will try to pass its version of tax legislation under special rules that prevent a Democratic filibuster. It can only lose two Republican votes. It also will vote on the bill under a cloud of criticism from economists across the ideological spectrum who say it will do little for the middle class and compromise the nation’s ability to deal with an economic downturn by sharply increasing the federal budget deficit.

If the Senate passes a tax measure, it then faces a House-Senate conference committee to iron out differences, which could highlight contentious and regionally divisive issues such as home mortgage and state and local tax deductibility.

Even though Republicans are trying to pass their tax legislation without any Democratic support, they need Democratic votes to pass a spending measure and increase the debt ceiling. The tight time frames before the holiday break amplify Democratic leverage. CHIP funding, which provides coverage for 9 million children, is one enticement the GOP is trying to use. The Dreamer’s Act could be another, but it could backfire and drive away some conservative GOP votes.

The troubled Moore Senate campaign to fill the seat formerly held by Jeff Sessions comes at an especially awkward political moment on December 12. If Moore, who faces accusations of sexual misconduct with minors, loses to Democrat Doug Jones, it will make GOP control of the Senate razor thin, which could be a factor if tax legislation gets pushed into next year.

Congress is also getting some pushback on the tax plan from corporations that have become more concerned about Trump objectives in NAFTA negotiations. A fifth round of talks among Canada, Mexico and the United States failed to produce agreement, which leaves open the possibility that Trump may unilaterally pull out of the trade deal. A business coalition led by the U.S. Chamber of Commerce has lobbied Capitol Hill in opposition to radical changes to NAFTA, warning they could lead to US job losses and ironically lead to more US manufacturing moved offshore.

The special prosecutor investigation into Russian election meddling and possible collusion by the Trump campaign has taken another ominous turn. Former National Security Advisor Michael Flynn has broken off contact with the Trump defense team, signaling a possible plea deal that involves cooperating with the special prosecutor on other targets. There have been signs Special Prosecutor Robert Mueller and his team have expanded their scope to include financial dealings by the Trump Organization with Russian oligarchs associated with money laundering.

The FCC decision to end net neutrality has stirred up a wide range of opponents who fear it will hand too much power to telecommunications companies. Supporters downplay that concern, saying it will lead to more investment in digital technology. But this isn’t just a garden-variety policy issue. Net neutrality supporters have taken to social media to voice their concerns, galvanizing many people who ordinarily shun politics. Those activated voters could make a difference in the looming 2018 mid-term election.

Budget Expert Calls Tax Plan ‘Economic Insanity’

Stan Collender is widely regarded as a congressional budget guru. He says the GOP-backed tax cut legislation moving through Congress equates to ‘economic insanity.’

Stan Collender is widely regarded as a congressional budget guru. He says the GOP-backed tax cut legislation moving through Congress equates to ‘economic insanity.’

It’s not every day that Forbes publishes an op-ed, as it did over the weekend, proclaiming a pending congressional tax cut is the “end of all economic sanity.”

Written by veteran congressional budget analyst Stan Collender, the op-ed says Republican leaders are forging ahead on tax-cut legislation “without having any idea of what this policy will actually do to the economy.” Collender says it won’t be pretty.

Collender predicts the tax cuts will provide little economic stimulus to an already thriving economy, increase structural US deficits, raise interest rates and limit the ability of Congress to deal with economic downturns. “They [GOP congressional leaders] have wishes, hopes and prayers, but in reality nothing beyond the economic equivalent of pagan superstition.” Did we mention this op-ed was published in Forbes?

This makes Paul Krugman’s criticism of tax cuts seem timid.

Tax cut zealots may dismiss Collender as a kook. He isn’t. He has been around Congress for years, with his nose stuck under piles of congressional budgets. If you want to criticize Collender, call him a congressional budget nerd, which is what he is.

Collender’s context – the US economy, which may not be groovy for everybody, is humming along with an expanding gross domestic product, unemployment at around 4 percent and corporate profits at record levels. If there is an economic concern, it centers on lagging wage growth relative to inflation and growing income inequality. The tax measures that have passed the House and are pending in the Senate don’t address wage growth or income inequality and, in fact, may exacerbate both.

Republican leaders says Americans want a tax cut, but polling doesn’t bear that out. Even if Americans did want a broad-based tax cut, the GOP plans may not meet the mark. Benefits appear slanted toward corporations and wealthy individuals. That may not be the intent of GOP lawmakers working on the tax cuts, but impartial analysts say that would be the result.

Collender cuts even deeper. He says even though the House tax cut measure is scored as raising the US budget deficit $1.4 trillion over 10 years, the likely impact is even larger, perhaps as much as $2 trillion. That’s a byproduct of modified scoring decisions dictated by GOP political leaders.

Adding $2 trillion to the US deficit when the economy is solid doesn’t leave a lot of room for a President or Congress to stimulate the economy during an inevitable downtown, Collender says.“The federal government will have far less ability to respond to economic downturns unless previously unimaginable and politically intolerable deficits, tax increases or spending cuts suddenly become acceptable,” he predicts.

The ultimate victim, Collender says, will be programs such as Medicare, Medicaid, Social Security and even military spending. American’s ability to invest in infrastructure and research will also be severely limited. Collender labels this “economic insanity.”

If a foreign adversary proposed a strategy to strangulate the US economy, politicians would call it an act of aggression. On Capitol Hill, passing this tax policy is viewed as essential before Christmas.

 

Are We Missing a Death Threat to American Security?

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While Capitol Hill buzz centers on tax cuts and GOP Senate candidate Roy Moore’s alleged sexual abuse of teenagers, a more troubling story has quietly unfolded about the unmasking of US cyber secrets, which could expose the nation and its businesses to relentless hacks, ransoms or worse.

A group calling itself the Shadow Brokers apparently breached the cyber moat protecting the National Security Agency last year, resulting in a stream of leaked information that threatens to compromise America’s national security. It could be the equivalent of an invasion, without missiles, tanks and soldiers.

Leon Panetta, former director of the Central Intelligence Agency, told The New York Times, “These leaks have been incredibly damaging to our intelligence and cyber capabilities. The fundamental purpose of intelligence is to effectively penetrate out adversaries to gather vital intelligence. By its very nature, that only works if secrecy is maintained and our codes are protected.”

Infiltrating US cybersecurity is a lot cheaper and potentially more effective as a strategy.

Months of investigation have uncovered three leakers, but there is a lingering lack of confidence that all leakers have been discovered. The damage already done, experts say, exceeds what former NSA contractor Edward Snowden leaked, even though his disclosures earned more ink. Security experts say Snowden released code words; the Shadow Brokers shared actual code.

The Times article indicated that morale at NSA has plummeted. President Trump’s comments at the tail end of his Asia Pacific trip that expressed greater confidence in Russian President Vladimir Putin than US intelligence didn’t bolster sagging morale.

Tax cuts, universal health insurance and the size of national monuments are important issues, but none may have the long-term impact of cyber leaks. Which makes the relative silence in the White House and on Capitol Hill unnerving. It’s possible there is a high-security secret effort to counter the damage. It’s also possible top US officials are paralyzed by the staggering task of building a new, more impenetrable cybersecurity system.

One of the fundamentals of any conflict is the ability to identify the enemy. US intelligence sources pin the ultimate blame for leaks on Russian cyber operatives. Ironically, US public opinion polls show Republicans view Putin and his credibility more favorably than many Russians.

The recurring dissonance between the Trump White House and US intelligence officers in the cyber trenches adds to the puzzlement. Writings by the Shadow Brokers reflect a knowledge of US politics, using phrases like “deep state,” and seem to back Trump. One message said, “The Shadow Brokers is wanting America to be great again.”

Russian operatives can be expected to reveal US malware planted in other nations’ systems, which could further undermine the US security apparatus. There is a fear, not unjustified, that American could be blocked out of what’s happening in the world’s shadows, including nefarious activity potentially affecting US safety.

If this seems to dwarf tax cuts, the Obamacare individual mandate and Roy Moore’s sexual peccadillos in terms of significance, it does. Maintaining US security is the undisputed role and responsibility of the federal government. That security seems as tenuous today as it did when Pearl Harbor was bombed by the Japanese. Americans responded collectively to the attack in Hawaii. The response to a possible Russian cyberattack has been muted to non-existent. That is scarier than the attack.

A Look at Fast-Moving House GOP Tax Plan

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The delayed release of the GOP tax plan last week and scheduled markups this week in the House Ways and Means Committee hasn’t allowed much time to analyze the myriad tax cuts and tax increases and their impact. No matter, more tweaks are expected.

The plan includes benefits and costs to corporate and individual taxpayers, municipalities and other stakeholders. You can’t rely on either political party, media outlets or interest groups to explain fully or fairly all of the tax provisions. They either have an agenda, are narrowly focused on their special tax treatment or don’t have the sophistication to analyze the entire package.

It’s obvious to everyone the GOP is rushing this bill through the process. This is a deliberate tactic to hide the bill’s warts and gives less time for lobbyists to mobilize on individual tax items. There are pros and cons to this strategy. GOP rank and file members also have little time to absorb the consequences of the bill and may be reluctant to support a bill they don’t understand. That’s a risk GOP leadership is willing to take.

The House markup will start Monday and go through Thursday, so there will be time next week to weigh in. There may be an opportunity to amend the bill on the House floor the week before Thanksgiving. The Senate is expected to produce its own tax package and won’t be using the House bill as its base bill. Because of the nature of the Senate, it’s likely to be a more moderate proposal.

The Joint Tax Committee prepared a useful chart that provides a snapshot of the many individual, corporate and foreign tax changes in the GOP House tax reform plan. Here are a few observations and comments on the proposal:

  1. The implications and impacts of the bill vary by household, zip code and state for each taxpayer. Thus, it’s difficult to make a simple recommendation of whether you should support, oppose or take no position on the bill. For example, there are concerns with the state and local tax (SALT) deduction being partially eliminated, but the tax rate for a household making up to $90,000 is reduced from 25 percent to 12 percent. So many households, especially those that don’t own a home, may pay less taxes. Homeowners could pay more. Local government interests are mounting an effort to change the SALT limitation.
  2. Americans Against Double Taxation is a group made up of NACO, NLC, Conference of Mayors and a ton of public sector groups. They put out an analysis the day before Ways and Means Chairman Kevin Brady’s bill was published. You can see the findings here. They modeled the impacts of the Brady plan on an average family of four that owns a home and earns between $50,000 and $200,000. Their data suggests that middle-class homeowners in all 50 states would see a tax increase ranging from 3.7 percent to 26.4 percent. More than half of all states will experience double-digit percentage increases. For Oregon, the increase would be 18.4 percent increase and Washington 9.5 percent. These numbers are for homeowners only, not all middle-class families. For people who don’t own a home, many may receive a tax benefit.
  3. Private Activity Bond Elimination: PABs are a type of bond to fund private projects that have a public benefit, and the interest for the bonds is exempt from federal taxation (just like the interest for bonds issued directly by state and local governments). The bond market considers PABs to be a part of the municipal bond sector. The change came as a complete surprise to the infrastructure community – the White House has been discussing significant expansion of PABs in its forthcoming infrastructure proposal. It also was a surprise to states and cities – Emily Brock, director of the federal liaison center for the Government Finance Officers Association, told Bond Buyer magazine, “We’ve had over 90 Hill meetings and there was absolutely no talk of advance refundings, private activity bonds or tax credit bonds…”
  4. Regarding the Commuter Tax Benefit, under current law, “transportation fringe benefits” (employer-provided parking, mass transit passes, and bicycle commute cost reimbursement) are currently tax-free both to employers (as a deductible business expense) and to employees (the dollar value of the benefits are excluded from their income tax calculation). In the tax plan, the pretax payroll deduction option is retained, but the ability of employers to deduct the cost of this benefit is eliminated. This could provide a disincentive to employers from offering this key benefit which promotes job connectivity and growth.
  5. The proposal eliminates the New Markets Tax Credit and the Historic Buildings Tax Credit programs. Both of these programs have facilitated investment in large and small communities.

See the chart below for a summary of the major individual, corporate and foreign tax changes:

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As Vice President, Federal Affairs, Joel brings to CFM broad public policy experience as a senior Congressional aide and successful private sector lobbyist.

Business Groups Call NAFTA Changes ‘Dangerous’

NAFTA, Trump administration, U.S. Chamber of Commerce, cross-border trade, tariffs, US manufacturing, Robert Lighthizer, Mark Zandi, tax cuts, CFM Federal Affairs

NAFTA, Trump administration, U.S. Chamber of Commerce, cross-border trade, tariffs, US manufacturing, Robert Lighthizer, Mark Zandi, tax cuts, CFM Federal Affairs

Business groups, organized by the U.S. Chamber of Commerce, are combing Capitol Hill to warn of the economic harm that could result from changes proposed by the Trump administration to the North American Free Trade Agreement (NAFTA). They call many of the provisions “dangerous.”

The groups, which range from automakers to retailers to agricultural interests, say the negative effects of NAFTA changes could offset any economic benefits corporations might receive through tax reform. “It doesn’t matter what your tax rate is if you’re not competitive,” Bill Lane, chairman of the Trade Leadership Coalition, told The New York Times. “NAFTA makes North American manufacturing competitive.”

US trade officials are following up on President Trump’s persistent condemnation of NAFTA, including a threat to pull out of the trade deal. Negotiators from the United States, Mexico and Canada have begun working on revisions, raising a concern that Trump is following through on his campaign promise.

Lane said business groups have largely remained silent about NAFTA because they assumed Trump’s threat to withdraw was “bluster.” That view has changed as business groups review the proposals Trump’s team is pushing. In particular, they dislike the idea of putting a 5-year sunset on the trade pact, which would require a new round of negotiations and remove the relative certainty businesses now have with NAFTA.

Business groups also dislike Trump proposals to require higher domestic content standards for imported goods sold in the United States, a move intended to increase US manufacturing jobs, but which could upend tariff-free North American supply chains. They point to the analysis of economists, such as Mark Zandi of Moody’s Analytics, who say Trump NAFTA proposals would have negligible impact on US job levels and potentially devastating impacts on the overall economy. Recasting NAFTA with Trump changes, Zandi’s research indicates, could stunt the US economy at the same level of a $150 billion tax increase.

US Trade Representative Robert Lighthizer concedes corporate interests would take a hit if Trump gets his way with NAFTA, but he minimized the impact. In comments to The New York Times, Lighthizer said, “I think it’s possible to take a little bit of sugar away and have them [businesses] say, ‘Yeah, we’re still doing pretty well.’”

Business groups swarming Capitol Hill disagree. They say imposing cross-border restrictions and introducing uncertainty into trade policy could push manufacturing out of North America and wind up increasing prices paid by consumers. The negative impacts could be disproportionately high for states such as Oregon and Washington with economies that rely heavily on foreign trade.

U.S. Chamber officials report their lobby barrage has received a sympathetic ear on Capitol Hill, especially among Republicans. However, few lawmakers offered much hope that they can influence Trump on this issue. It probably wasn’t coincidental that Arizona Senator Jeff Flake, in his speech last week announcing his decision not to seek re-election, lamented GOP desertion of its long-time free trade positions.

Democratic lawmakers, especially from Rust Belt states that have suffered losses in traditional manufacturing sectors, are generally on board with Trump’s NAFTA agenda. “Any trade proposal that makes multinational corporations nervous is a good sign that it’s moving in the right direction for workers,” said Ohio Democratic Senator Sherrod Brown.

If talks falter to revise NAFTA, tariffs on exports to Mexico and Canada could be re-imposed. Many tariffs would be relatively low, but tariffs on US exports could be substantial – 25 percent on beef, 45 percent on turkeys and 75 percent for chicken, potatoes and high-fructose corn syrup.

The Federal Fiscal Sudoku Game

Keeping up with a pending federal budget, a growing federal deficit, a looming massive federal tax cut and a surging stock market is a lot like playing fiscal Sudoku.

Keeping up with a pending federal budget, a growing federal deficit, a looming massive federal tax cut and a surging stock market is a lot like playing fiscal Sudoku.

For fiscal junkies, these are the best of times. The GOP-controlled House and Senate passed versions of a $4 trillion Fiscal Year 2018 budget, the United States logged last year the sixth largest budget deficit in history and the stock market reached record highs last week in anticipation of a major corporate tax cut, which the budget makes easier to pass.

In many ways, the fiscal news is like a jig-saw puzzle with pieces that don’t exactly fit together:

  • The Senate-passed FY 2018 budget measure leaves federal spending at current levels and provides for a major tax cut, which Republicans concede will increase the federal deficit in the short-term.
  • US Treasury announced the federal government finished FY 2017 with a $666 billion budget deficit, $80 billion more than the previous year, as spending grew by 3 percent, but revenues only increased by 1 percent.
  • Even though tax legislation hasn’t been finalized, Wall Street became giddy over a congressional budget with a reconciliation process that makes it politically easier to pass a tax cut without any Democratic support. The Dow Jones industrial average on Friday surged more than 165 points to a record 23,328. Shares of JP Morgan Chase hit an all-time high.

Republicans have campaigned for decades on fiscal discipline and shrinking the federal government. The recent news about tax cuts and budget deficits run contrary to that ideology, though House Speaker Paul Ryan assured in a media interview that deficits were still concerning to his political party.

Not concerning enough to blunt the drive to enact a tax cut by the end of the year that no one denies will increase the federal deficit. GOP supporters say tax cuts will stimulate the economy and eventually economic growth will erase the red ink. Democrats disagree, claiming supply-side, trickle-down economics hasn’t produced the bonanza of benefits promised by its supporters, just widened income inequality at the expense of the US middle class.

The FY 2018 budget, which retiring GOP Senator Bob Corker of Tennessee called a “hoax,” seems designed to enact a tax cut, not implement a spending strategy. The tax cut is viewed by GOP leaders – and their wealthier supporters – as must-pass legislation to overshadow congressional failure to repeal Obamacare before the 2018 mid-term elections.

In addition to the impact of a tax cut, there will be pressure on the federal budget over the next year as Congress approves substantial funding to pay for severe hurricane and wildfire relief. Trump administration efforts to undermine Obamacare may have unpredictable negative economic consequences. The prospect of military conflict with North Korea along with accelerated modernization of the US nuclear arsenal also could dramatically push up spending levels.

To counter higher deficits, the FY 2018 budget points to $1.5 trillion in spending cuts on Medicare and Medicaid over the next decade. Higher outlays for Social Security, Medicare, Medicaid and payments on the national debt were blamed for pushing up the deficit last year, which now equals 3.5 percent of US gross domestic product. The national debt now exceeds $20 trillion. The Congressional Budget Office has estimated the national debt will rise to 91 percent of the US economy as early as 2027 absent any fiscal policy changes.

Keeping up with all this US fiscal activity is a little like playing a 3D Sudoku puzzle:

  • The House and Senate still need to agree on a final budget, which might come as early as this week if the House decides to accept the Senate version and skip a conference committee to iron out differences.
  • President Trump has dangled some tantalizing numbers about his dream tax-cut legislation, but there isn’t an official tax bill to review.
  • The budget reconciliation process might make it theoretically easier to pass tax legislation, but only three Senate Republican defections could doom the plan, a la Obamacare repeal. Given Trump’s testy relationships with a number of senators, a political roadblock isn’t inconceivable.
  • The budget reconciliation process isn’t a free ride. There are limits on how much the tax cut can raise the deficit, which could stoke a ferocious intra-GOP debate over what taxes cut.
  • While Democrats haven’t been consulted so far, they have been courted to support the tax cut. There are a lot of side issues that could come into play in the attempt to earn some level of bipartisan support.
  • Ryan has threatened to keep House members in session through Christmas to pass a tax bill. It may not be an idle threat.

If All Else Fails, an Infrastructure Package Might Pass

The much ballyhooed $1 billion Trump infrastructure package has slipped into the shadows as the White House and the GOP-led Congress dote on repealing Obamacare and passing major tax cut legislation. But it all else fails, a bipartisan infrastructure deal might be a surprise Christmas gift to take home to voters.

The much ballyhooed $1 billion Trump infrastructure package has slipped into the shadows as the White House and the GOP-led Congress dote on repealing Obamacare and passing major tax cut legislation. But it all else fails, a bipartisan infrastructure deal might be a surprise Christmas gift to take home to voters.

As a second child, I know what it’s like to live in the shadows of an older sibling. I have plenty of friends and neighbors with three kids and I can only assume the level of attention drops off even more for number three.

President Trump’s $1 trillion infrastructure package seems more and more like that third kid. He or she keeps jumping up and down for attention, but the first two children, in this case, health care and tax legislation keep getting all the love. The question is, if health care and tax legislation keep misbehaving, how quickly will the third child become the center of attention? It’s possible it may be sooner than you think.

The ultimate backdrop is this: President Trump needs a big legislative victory in 2017 and, despite what he says, he hasn’t landed one yet. If all three of these big-ticket items get pushed to 2018, an election year, it’s going to be extremely difficult to get anything done. 

Democrats already have a disincentive to work with Trump. Their base despises him and generally doesn’t want to see their party leaders giving him any “wins.” This problem will only get worse with every passing day as we get closer to November 2018 and the mid-term elections. 

With only a two-seat majority, the Senate is generally the biggest impediment to moving any party-line legislation. We should know shortly whether tax cuts will have a chance of getting through the Senate.

This week, the Senate will be taking up the FY18 budget resolution. The centerpiece of the resolution is a broad outline for $1.5 trillion in tax cuts – and a secret parliamentary passageway to approve the tax cuts with only a simple majority.

Passage of the resolution doesn’t ensure that a tax package will be passed later in the year, but if the budget resolution is defeated, tax reform is basically dead. Then where does that leave us? Oh yeah, our new industrious, job creating and hardworking favorite child, Infrastructure Package.

The Trump administration could quickly turn its attention to a broad bipartisan deal that is supported by most Democrats and moderate Republicans. Infrastructure projects for roads, bridges, transit, housing, water infrastructure and veteran’s facilities are all politically popular and could quickly come together in the final months of 2017. It may be the first Christmas in years that the third child gets a bigger present than his two siblings.

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As Vice President, Federal Affairs, Joel brings to CFM broad public policy experience as a senior Congressional aide and successful private sector lobbyist.

Budget Reconciliation, Round Two

After failing to repeal Obamacare using budget reconciliation procedures, GOP congressional leaders will try again, this time with major tax legislation, which President Trump calls a “middle-class miracle,” but critics berate as a tax giveaway to corporations and wealthy Americans.

After failing to repeal Obamacare using budget reconciliation procedures, GOP congressional leaders will try again, this time with major tax legislation, which President Trump calls a “middle-class miracle,” but critics berate as a tax giveaway to corporations and wealthy Americans.

The GOP-controlled Congress is gearing up for another budget reconciliation battle, this time over taxes. The parliamentary scenario is eerily similar to the failed effort to repeal and replace Obamacare.

Like the flawed plans to scrap the Affordable Care Act, Republican congressional leaders are snubbing bipartisan efforts to write a tax plan. Oregon Senator Ron Wyden, the ranking Democrat on the Senate Finance Committee, has worked on bipartisan tax legislation before, but he says he wasn’t consulted on the latest proposal, which President Trump calls a “middle-class miracle,” but critics say gives large tax cuts to corporations and wealthy Americans.

That major tax legislation is attached to budget reconciliation is itself an issue, reflecting GOP unease over the impact of large tax cuts on the federal deficit. Republicans want to make a critical one-word change in budget procedures – from “current law” to “current policy” – that would have the effect of substantially reducing the apparent loss of federal revenue from tax cuts, perhaps by as much as $500 billion. Rep. Richard Neal, the ranking Democrat on the House Ways and Means Committee, criticized the new set of numbers as a “sleight of hand to fool the public.”

Making the deficit impact shrinks is intended to mollify House budget hawks who want to trim federal spending – and who typically refuse to vote to raise the federal debt ceiling, an action that also is pending, but rarely discussed. The budget package approved by a 219-206 vote in the House calls for a $5.8 trillion in spending reductions over the next decade for Medicaid, Medicare, education and national infrastructure.

Trying to pass a tax cut under budget reconciliation procedures is largely a gambit to skirt by the 60-vote cloture rule in the Senate. Under reconciliation, Senate Republicans would only need 50 “yes” votes, plus an “aye” vote by Vice President Pence, to pass the tax cuts. There are only 52 GOP senators, so the margin, as shown by the Obamacare repeal, is tight.

Unlike the effort to repeal Obamacare, Senate Democrats aren’t all in lockstep in opposition to the GOP plan. Three Democrats who face re-election in 2018 have kept their powder dry on tax legislation. Their votes may not be needed to pass the tax cuts, but Republicans are courting them to give their tax legislation the patina of bipartisanship. Trump flew to Indiana to put pressure on Senator Joe Donnelly, promising that “we will campaign against him like you wouldn’t believe” if he didn’t vote for the tax plan.

The battle lines over Obamacare translated more easily into mobilization and messaging – millions of Americans would lose health insurance. Taxation is more abstract. It is harder to get worked up over rich people getting tax breaks than people losing access to health care. Senate Democratic Minority Leader Chuck Schumer’s opening salvo – calling the GOP tax plan “wealth-fare” – hasn’t caught on.

Another dimension of the looming tax debate is its many parts. For example, the child care credit that Republicans have indicated will be included, is popular among Democrats. The potential removal of a deduction for state and local taxes will hit some states, including Oregon that relies heavily on personal income taxation, harder than others. The Portland Tribune reported Oregonians deducted $5.9 billion in state and local taxes from their federal income tax returns in 2015. About half of that amount came on tax filers with income between $100,000 and $500,000 and twenty-nine percent of Oregonians could see higher state taxes as a result, state officials say.

Oregon Democratic Senator Jeff Merkley is taking a point position in opposing the GOP tax plan, describing it as a “massive giveaway to the rich.” And Vox reports that campaigns, such as “Not One Penny” and the Trump tax chicken, are heating up.  TrumpTaxScam.org is posting a calculator to help people determine how the tax changes will affect them.

 

Economic and Political Realities of Climigration

Devastation caused by Hurricane Irma has paralyzed Puerto Rico and spurred Puerto Ricans to become climate refugees.

Devastation caused by Hurricane Irma has paralyzed Puerto Rico and spurred Puerto Ricans to become climate refugees.

The hurricane-caused devastation in Puerto Rico that has left large chunks of the island in the dark and without drinking water poses a major challenge for humanitarian aid. It may also pose an unexpected political challenge as many Puerto Ricans flee their island home, perhaps for good.

They are climate refugees. Not in the technical and legal sense of “refugees,” but in the practical meaning of the word. They are fleeing what they view as an untenable existence, not because of a perceived slow response by the Federal Emergency Management Agency, but because they see a worsening climate affecting their safety and economic well-being.

Climigration may not be limited to Puerto Rico, which has been hit by back-to-back Category 5 hurricanes. Residents in the US Virgin Islands, Florida Keys and southeast Texas may retreat to higher ground to avoid future exposure to winds, flooding and water surges in floodplains and coastlines.

These climate refugees may or may not believe in human-caused climate change, but they no longer doubt the climate is changing in potentially dangerous ways. The specter of entire islands with flattened buildings, no electricity and a decimated economy can be deeply disheartening. In Puerto Rico, death counts and damage estimates are impossible because many areas remain virtually inaccessible.

FEMA and President George W. Bush took a beating for a sluggish response to Hurricane Katrina. FEMA has gotten higher marks for its response to Hurricanes Harvey, Irma and Maria. For Puerto Ricans standing in an impossibly long line to get on a cruise ship bound for the mainline, FEMA isn’t the issue. They just can’t picture themselves trying to put their lives back together on an island with dim prospects.

If you have a serious illness, you don’t see much chance of getting the care you need. If you are in the tourism industry, it is hard to imagine many of the 2.3 million tourists who visit Puerto Rico returning any time soon. If you are living on the economic edge, falling into poverty seems likely. If you are a political official for a territory already in deep debt, there may not be any light in the tunnel.

US-citizen climigrants will settle in new places, with a likely concentration in Florida. Like Cuban refugees, Puerto Rican refugees will bring their political views with them, including their views about the impacts of climate change. Experiencing historic back-to-back hurricanes can leave a lasting impression. And that’s the political dilemma.

Apart from a herculean effort to rebuild Puerto Rico and other devastated Caribbean islands, there is a huge question mark about their future economic footing. As an island without any commercially viable natural resources, Puerto Rico must rely on manufacturing and tourism, both of which need to count on basics like electricity. Puerto Rico already has seen an out-migration of its population – a net loss of almost 450,000 people between 2005 and 2015. Island flight may accelerate, as evidenced by the exodus on flights bound for the mainland.

Climigration isn’t new in the long history of earth. That’s probably how many people wound up where they are. Most recently, more than 400,000 residents pulled up stakes and left New Orleans after Hurricane Katrina. Chunks of the city remain more or less in ruins.

Congress passed an initial hurricane relief funding package in response to the devastation in Texas, but has been preoccupied with other issues, including a proposed massive tax cut, after the devastation in Puerto Rico. The perceived slight is becoming a political issue on Capitol Hill, with Democrats urging swifter, stronger actions to assist Puerto Rico.

Ultimately as many as 1 million Puerto Ricans may move and take their first-hand view of climate change – and the political response – with them to new constituencies.

Consensus Plan to Reduce Poverty and Enhance Opportunity

Speaking of strange bedfellows, the conservative American Enterprise Institute and liberal Brookings Institution teamed up in 2015 to produce a consensus report on addressing poverty and enhancing opportunity. It started with facts and contained policies that crossed partisan divides.

Speaking of strange bedfellows, the conservative American Enterprise Institute and liberal Brookings Institution teamed up in 2015 to produce a consensus report on addressing poverty and enhancing opportunity. It started with facts and contained policies that crossed partisan divides.

Since strange bedfellows became the order of the day on raising the debt ceiling, providing disaster relief and keeping the federal government running for three more months, maybe it is time to revisit more cats and dogs proposals.

One of the more interesting products of diametrically opposed groups is the 2015 American Enterprise Institute-Brookings Institution consensus report on how to reduce poverty in America. The report was published after 14 months of painstaking work by 15 experts from AEI, a conservative think tank, and Brookings, its liberal counterpart.

On its website, Brookings touts the report “as a consensus plan to reduce poverty and restore the American Dream [that] bridges the partisan divide and suggests a way forward despite the political polarization and gridlock that paralyzed much of Washington.”

In the nearly two years since the plan was made public, little in the nation’s capital has changed. The unexpected deal last week between President Trump and Democratic congressional leaders on the debt ceiling, spending authority and disaster relief is probably just a political blip.

Instructively, the AEI-Brookings report begins with “facts on poverty and opportunity that progressives and conservatives can agree on.” Even if the report contained no recommendations, agreeing on the facts would be a major boon.

According to the report, the percentage of single women with children has quadrupled to 40.8 percent as marriage rates declined between 1970 and 2010. In 2013, single-parent households earned an average of $36,000 annually, roughly a third of married-couple family incomes. Most troubling, only 4 percent of children born to poor families ever become high wage-earners, while 43 percent remain poor into adulthood. The data draws a correlation between family composition and education, employment and wages, which have downstream effects on poverty rates and economic mobility.

To address family trends, the AEI-Brookings report recommends policies that promote marriage, delayed and responsible childbearing, parenting skills and job skill development for men and women.

Brookings experts conceded the importance of marriage and family structure, while AEI experts acknowledged the benefits of family planning, which can include use of contraceptives as well as abortions.

On the jobs front, the report cites the need for higher-level skills in the workplace and how people, especially men, without advanced skills can fall behind and never climb the economic ladder.  Recommended policies included making more jobs available and make work pay better than it does now for lesser educated and skilled workers.

Reinforcing that “a good education is important to achieving the American Dream,” the report says achieving the American Dream now more than that ever requires hard work and a good education. “The education level of adult heads of households has been increasingly associated with their income as the income gap between the well-educated and the less-educated has grown steadily over the last four decades,” according to the report.

Policies to cope with a shrinking American Dream include increased public investment in preschool and postsecondary education, modernizing the organization and accountability of educational systems, closing funding gaps and educating the “whole child” to promote social-emotional as well as academic skills.

The way forward, the AEI-Brookings report concludes, should adhere to three core values:

  1. That all Americans should have the opportunity to apply their talents and efforts to better themselves and their children, regardless of the circumstances of their birth;
  2. That all Americans have a responsibility to provide for themselves and their families to the best of their abilities before asking others for help;
  3. That all Americans are entitled to a basic level of security against the vacissitudes of life and, in a nation as rich as ours, to a baseline level of material well-being.

“The only way forward, we believe, is to work together,” the report’s authors insist. “No side has a monopoly on the truth, but each side can block legislative action.”

It is striking in these passages to see conservative and liberal thinking crisscross as policy recommendations converge on addressing poverty and enhancing opportunity. There are significant give-and-takes in the report, but the challenges facing many Americans rise above partisan thinking or ideological purity.

“Poverty is changing,” the report’s authors say, “and policy responses must change, too.” So far, despite the good work of strange bedfellows, they haven’t.