tax cut

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.

GOP Gets Breathing Room to Pursue Priorities

The appointment of special counsel Robert Mueller to lead the Russian meddling  investigation has given GOP congressional leaders breathing room to work on their stalled legislative priorities that reflect campaign promises.

The appointment of special counsel Robert Mueller to lead the Russian meddling  investigation has given GOP congressional leaders breathing room to work on their stalled legislative priorities that reflect campaign promises.

The appointment of former FBI Director Robert Mueller as special counsel in the ongoing Russian meddling probe may be bad news for President Trump and his associates, but good news for congressional Republicans. It could give them the political space to tackle their major legislative priorities before congressmen head home for an August recess.

And the agenda is daunting – replacing Obamacare, a major tax cut, progress on the Fiscal Year 2018 federal budget, an infrastructure package and passage of a debt ceiling increase.

The drip, drip of news revelations about the Trump’s team entanglements with Russians has distracted the White House and seemingly delayed any substantive tax proposal. The House narrowly passed an Obamacare replacement bill, with Trump’s support, but that legislation has bogged down in the Senate. The Trump FY 2018 budget proposal was pronounced dead on arrival on Capitol Hill, at least in part for what critics call a $2 trillion math error on how to pay for a major tax cut.

GOP congressional leaders felt under the gun to intensify committee probes into Trump’s Russian connections, until the Department of Justice appointed Mueller to lead the criminal investigation. Many Hill Republicans are hopeful that, with the investigative burden shifting from Congress to Mueller, they can focus less on the scandal and more on addressing their list of looming deadlines and campaign promises – a long list that Congress has made little headway on achieving.

However, the breathing space they now have still may not be enough time to pass their legislative agenda.

Senate leadership staff huddles this week to begin drafting from scratch a new alternative to the House-passed American Health Care Act (AHCA). The Senate has the benefit of the Congressional Budget Office score, which estimates 23 million people would lose health insurance over the next decade. New public opinion polls indicate Obamacare is more popular than the AHCA. Even if they are successful, it make take time to ensure all the details fit together.
 
On the other side of Capitol Hill, House appropriators are trying to figure out how to keep the government’s doors open when the new fiscal year begins October 1. Delayed action on fiscal 2017 spending, combined with the GOP’s decision to start with a health care overhaul, has put Congress months behind schedule on appropriations for FY 2018.

House appropriators are weighing an ambitious plan to pass a 12-bill omnibus appropriations package ahead of the August recess.  Given the very late start, appropriators would need to mark up their respective bills at a record pace to bring a full package to the floor before July 31. Even if they can pull off this monumental task, they will face an even bigger political hurdle garnering the necessary Democratic votes in the Senate.

Democrats retain some leverage in both the House and Senate in regard to passing a debt ceiling increase, which GOP conservatives won’t support, even though failure to raise the debt ceiling could result in US default on loans. How much leverage Democrats have and what they will use it for remains unknown.

Hope of passing tax and infrastructure legislation before August is dim, but getting a health care bill and an FY 2018 budget approved but the August recess would improve odds for addressing those issues by the end of the year.

While Mueller’s appointment gives breathing room to GOP lawmakers to work on their priorities, success is still tied to Trump and his ability to focus on advancing legislation without more self-inflicted controversy, such as his unsolicited comment about spending more on health care even though the AHCA, which he supported, would spend less.

Michael Skipper is CFM’s Federal Affairs Associate. Before joining the team in Washington, D.C., Michael worked on state affairs in Oregon, where he also studied political science and environmental policy at OSU. In his free time, Michael enjoys traveling, reading and spending time with friends and family. You can reach him at michaels@cfmpdx.com

 

 

Garrett, who will be CFM’s Manager, Federal Affairs, can be reached at his CFM email address: kirbyg@cfmdc.com.