Washington Bulletin 11/20

November 21, 2017
Washington Update

On Capitol Hill

Senate Panel Approves Tax Plan as GOP Leaders Gird for Fight

Hours after House Republicans passed their tax bill, their colleagues on the Senate Finance Committee approved a far different version — one that postpones difficult questions as lawmakers rush to refashion much of the U.S. economy on a tight timeline.

The Senate plan’s most pronounced differences from the House bill include provisions to delay a corporate tax-rate cut by one year and to make various individual tax breaks expire by 2026. Due to an 11th hour change by the Senate Finance panel, the two plans would both create new limits on the carried-interest tax break that benefits investment managers.

The GOP’s sternest challenges may arise from other provisions. Early opposition among Senate Republicans has emerged over the tax treatment of partnerships and other pass-throughs, the repeal of the Affordable Care Act (ACA) individual mandate and the potential deficit implications of the plan. Questions abound regarding international tax measures.

For Republican leaders, each such dispute represents a loose thread — if anyone is pulled too hard, the entire tax package could unravel.

The four-day long Senate Finance Committee markup, which lasted almost 12 hours on Thursday, November 16 was filled with heated exchanges. Democrats fumed about what they described as an unusually speedy and secretive process, while Chairman Orrin Hatch (R-UT) called Democrats’ efforts to use the amendment process to attack the legislation “a charade.”

The rancor reinforced what many had already anticipated — that the GOP tax plan is unlikely to get any Democratic senators on board. That makes it crucial for Senate Republicans — who control only 52 votes in the chamber — to lose no more than two members. Under budget rules that Republican leaders plan to use to fast-track their bill past Democratic objections, the tax bill’s revenue cost must stay under $1.5 trillion, and it can’t add to the long-term deficit.

‘Work to Do’

The legislation is likely to change on the Senate floor to address Republican members’ concerns. Senator Ron Johnson (R-WI) has come out against the package as is, complaining that it unacceptably disadvantages pass-through entities relative to corporations. During the Finance panel’s markup of the plan, Senate Majority Whip John Cornyn (R-TX) said Republicans “still have quite a bit of work to do” to ensure pass-throughs are properly addressed in the legislation.

Senators Bob Corker (R-TN), Jeff Flake (R-AZ), and James Lankford (R-OK) have said they do not want tax cuts to add to the deficit. Senator Rand Paul (R-KY) has demanded no middle class tax hikes for “every American,” a high bar the plan doesn’t meet, according to many recent independent analyses.

The proposal would lead to a 13 percent tax hike on Americans making between $20,000 and $30,000 per year by 2021, according to a study released Thursday, November 16 by the Joint Committee on Taxation (JCT). After that year, that income group would continue to see a tax increase — rising to a 25 percent hike by 2027, JCT said.

Senators Susan Collins (R-ME) and Lisa Murkowski (R-AK) have said it is a mistake to include repeal of the ACA individual mandate in the tax bill, fearing that would disrupt the health-care system.

How Senate GOP leaders will bridge those concerns remains a mystery. The GOP’s narrow vote margin in the chamber scuttled efforts to repeal ACA earlier this year. But the tax effort represents the party’s last best chance to go home for Christmas with a major legislative achievement during President Donald Trump’s first year in office.

Senator John McCain (R-AZ) — who was opposed to the so-called skinny repeal of ACA that scrapped the individual mandate back in July — applauded the Senate Finance Committee for completing its tax legislation markup. Senator McCain has pushed for a regular-order process for a tax bill with bipartisanship.

“I am pleased that the Finance Committee has followed the regular order by holding numerous hearings and spending four days debating the bill and considering amendments in committee,” Senator McCain stated Friday, November 17.

State Tax Break

Even if the GOP can get 50 Republican senators on board, it also has to get 218 representatives to support the final plan. As it stands, the House bill has key differences from the Senate version.

One major sticking point will be individuals’ state and local tax deductions — the Senate bill ends them entirely, while the House bill allows as much as $10,000 in deductible property taxes. The House version’s compromise was critical to winning the votes of lawmakers in high-tax districts such as Representatives Tom MacArthur (R-NJ), Barbara Comstock (R-VA), Tom Reed (R-NY), and Ryan Costello (R-PA).

The Senate has no Republicans who represent the states most dependent on SALT — New York, New Jersey, California, and Illinois — and its tax writers are relying on fully repealing the tax break to raise revenue to comply with Senate rules. But that could mean jeopardizing the legislation when it returns to the House. Representatives Comstock and Costello — who are top Democratic targets in the 2018 elections — both described their “yes” votes on Thursday, November 16 as intended to advance the process, and wouldn’t commit to backing the final bill.

“We’re going to continue to work on it,” Representative Comstock said. “Legislation is a process. It always is.”

 

White House Seeks Disaster Aid, With a Hitch: Spending Offsets

The Trump Administration asked Congress today to provide another $44 billion in emergency aid for areas hit by hurricanes this year and joined some conservatives in suggesting spending cuts to offset some of the cost.

The White House Office of Management and Budget (OMB) request disappointed some lawmakers who wanted a more substantial disaster-relief bill in December. Puerto Rico called for $94 billion and Texas sought $61 billion.

The request includes:

  • $25.2 billion for the Federal Emergency Management Agency and the Small Business Administration.
  • $1 billion for agriculture assistance.
  • $1.2 billion for an education recovery fund.
  • $4.6 billion to repair federal property.
  • $12 billion for Community Development Block Grants.

The request also called on lawmakers to offset at least some of the bill’s cost by cutting spending, suggesting “cancellation of unobligated balances that are no longer needed for the purposes for which they were appropriated, as well as for projects and activities that are not as high of a priority as responding to this year’s hurricanes in a fiscally responsible manner.”

The request for offsets aligns with conservatives who have said they will make a more significant push this time to include spending cuts in a disaster-relief package, House Freedom Caucus Chairman Mark Meadows (R-NC) said Thursday, November 16. Conservatives have called for a more austere approach to disaster aid packages as they shift their focus from immediate aid to long-term rebuilding.

Congress previously passed disaster-relief packages totaling $15.3 billion and $36.5 billion. Lawmakers are in recess for the Thanksgiving break, but could start work on a disaster relief bill sometime soon after returning Monday, November 27. Representative Meadows said lawmakers should be able to find “tens of billions, not single billions” in spending cuts in the next bill. “That’s a fraction of what we’re going to spend,” Representative Meadows said.

Representative Meadows and the Trump Administration may face some pushback. Democrats unanimously supported both previous bills, which did not include spending cuts. So did a majority of Republicans, including all 14 House Republicans from Florida and 19 of 25 from Texas.

In October, the House passed the $36.5 billion measure 353-69, with 164 Republicans and 189 Democrats in favor. In September, the House passed a $15.3 billion measure, which included a debt-ceiling hike, 316-90, with 133 Republicans and 183 Democrats voting in favor.

The House will review the Trump Administration’s new request and “help the victims get the resources they need to recover and rebuild,” Speaker Paul Ryan (R-WI) said in a statement.

Representative Mario Diaz-Balart (R-FL) said members from areas hit by hurricanes were hoping to get a substantial disaster relief package in December, before conservatives get “supplemental fatigue” and become less willing to appropriate funds for long-term rebuilding.

Budget Control Act

Congressional leaders have discussed a two-year increase in spending caps under the Budget Control Act (Public Law 112-25) to increase combined defense and non-defense spending by about $200 billion, according to a Democratic aide. That would increase defense spending by $54 billion in fiscal 2018.

Lawmakers have said they will have to finish work on tax legislation before striking a final agreement on top-line spending numbers. Otherwise, busting spending caps might make it tougher to negotiate revenue-cutting tax legislation. Senator Bob Corker (R-TN), who has threatened to oppose a tax measure if it adds too much to the debt, criticized talk of a $200 billion deal. “We’re $20 trillion in debt and it’s party like there’s no tomorrow time in Washington,” Senator Corker stated.

Senate Appropriations

The Senate Appropriations Committee is expected to release the text of its four remaining bills this week as senators try to move toward a year-end spending deal despite Republicans’ focus on tax legislation, Chairman Thad Cochran (R-MS) stated Thursday, November 16. The remaining bills include the Defense, Homeland Security, Financial Services and Interior-Environment appropriations bills.

Chairman Cochran also addressed the looming Friday, December 8 deadline to fund the government. Lawmakers have discussed a continuing resolution to extend that deadline to Friday, December 22, and Chairman Cochran said they “cannot afford to extend that continuing resolution into next year.”

House and Senate Defense Authorizers

Meanwhile, leaders of the Senate and House Armed Services panels called for $700 billion in national security spending for fiscal year 2018 as congressional negotiators mull a lower budget.

Chairmen of the Senate and House Armed Services Committees, Senator John McCain (R-AZ) and Representative Mac Thornberry (R-TX) respectively, jointly stated on Friday, November 17 that a lower amount is inadequate. They stated their support for a $700 billion budget – the same amount Congress approved earlier this week in the defense authorization bill, H.R.2810

“We expect that any budget agreement will reflect the hard work that Congress has just completed and the reality of today’s dangerous world,” they stated on Friday, November 17. “We must not only set the conditions to pass an appropriations bill at the FY18 NDAA level, we must also ensure the necessary growth in FY19.”

 

Health-Care Deal Could Give Democrats Leverage on Spending Bill

A proposal to pair a year-end spending deal with health-care subsidies is drawing conservative opposition, making it even more likely that Republican leaders would have to rely on Democrats to help pass such a package.

Senate Majority Whip John Cornyn (R-TX) has said a fiscal 2018 spending deal will likely include the bipartisan health-care plan developed by Senators Lamar Alexander (R-TN) and Patty Murray (D-WA).

Leaders hope to reach a deal on top-line spending figures soon after putting a tax bill on the president’s desk. The Alexander-Murray plan would provide funding for cost-sharing subsidies that President Trump cut off in October. It would also expand the use of catastrophic health plans, require the Health and Human Services Department to issue regulations on cross-state insurance agreements, and direct funding for outreach and enrollment activities.

Groups representing the most conservative House Republicans pushed back quickly.

Republican Study Committee Chairman Mark Walker (R-NC) said any health-care legislation tied to a spending deal would have to be more similar to a plan developed by Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways and Means Committee Chairman Kevin Brady (R-TX). Even that might turn off Republicans, though, he said.

The Brady-Hatch plan would create abortion-related conditions for making cost-sharing payments, roll back the individual mandate for health-care coverage, and increase the maximum contribution limit on health savings accounts. Senate Republicans are already aiming to repeal the individual mandate in a measure included in their tax legislation.

With the spending bill requiring 60 votes in the Senate, leaders will have to rely on at least some Democratic support. Alienating the Freedom Caucus, would mean House GOP leaders would also need Democrats to get a bill passed in that chamber.

Freedom Caucus Chairman Mark Meadows (R-NC) said he does not believe senators would insist on including Alexander-Murray in a spending deal, saying it would cause too many Republicans to oppose the package. The move is not a done deal: Senator Alexander said pairing the measures is up to congressional leaders, and House Appropriations Committee ranking member Nita Lowey (D-NY) said she had not heard it would be included.

While coupling Alexander-Murray with a spending bill would lose support among conservatives, it would be popular with more moderate lawmakers. Senator Susan Collins (R-ME) announced that she has not decided whether she will support the GOP’s tax legislation if it repeals the Affordable Care Act’s individual mandate, but “it would certainly help to have Alexander-Murray signed into law.”

 

In the Administration


U.S. Stands Fast on Cutting Trade Deficit in New Nafta Wish List

The Trump Administration reiterated its goal to reduce the trade deficit with its Nafta partners in revised negotiating objectives, while adding in proposals it made during talks that were opposed by Canada and Mexico.

The U.S. wants reciprocal market access for manufactured goods as part of its push to improve its trade balance with Canada and Mexico, the office of the U.S. Trade Representative (USTR) said Friday, November 17 in updating its objectives for negotiating the North American Free Trade Agreement. The government must keep Congress informed of its plans under a law that gives the administration the authority to negotiate trade deals.

The U.S. had a $63 billion trade deficit in goods and services with Mexico last year, and a $7.7 billion surplus with Canada, according to U.S. government figures. The parties are meeting through Tuesday, November 21 in Mexico City for the fifth round of talks, which began in August at the insistence of the Trump Administration.

The new version of U.S. objectives puts into ink several demands already reported to have been made in recent rounds. That includes provisions to seek what had been considered effectively a sunset clause — though the U.S. called it Friday, November 17 “a mechanism for ensuring that the parties assess the benefits of the agreement on a periodic basis” and did not specify any proposal for automatic termination — and to essentially make certain dispute panels non-binding.

The objectives reiterated the U.S. wants to eliminate chapter 19 of the agreement, which empowers bi-national panels of judges to review cases in which companies are accused of selling their products below fair value, or of receiving unfair subsidies.

Trade ‘Reciprocity’

The latest version also says the U.S. wants “reciprocity” in procurement with Canada and Mexico, essentially confirming a demand that would claw back access to the U.S. market.

It takes aim at Canadian dairy in particular, saying the U.S. wants to kill Canada’s tariffs on poultry, dairy and eggs, a measure that would effectively dismantle Canada’s system of supply management that would be fiercely opposed by the government.

It calls for the U.S. to keep “non-conforming” measures for long-haul trucking that could curtail Mexican access to the U.S., and includes several new demands on the chapter in investment and competition.

The objectives also insert language about increasing transparency in “import and export licensing procedures” and cracking down on “import and export monopolies” to prevent trade distortions, as top line goals for improving America’s goods trade-deficit.

USTR first published its negotiating goals on Monday, July 17 before official three-way talks began.

 

Trump Administration Nominations – Bureau of Reclamation Commissioner

Department of Interior

The Senate continued their efforts to confirm and review leadership nominations last week. This included the confirmation of Brenda Burman to be Commissioner of the Bureau of Reclamation under the Department of Interior. A veteran of the Bureau having served as the Deputy Commissioner for External and Intergovernmental Affairs and the Deputy Assistant Secretary from 2006 to 2008, Burman will now lead the Bureau as the first women Commissioner.

“I am deeply honored for the opportunity to lead this organization,” said Brenda Burman. “The employees of Reclamation are dedicated to working through the most difficult water issues and managing water in the West. I look forward to working with Secretary Zinke, the Administration, and our many partners, contractors, and customers to solve our most pressing water issues.”

Earlier this week, Senator Minority Whip, Dick Durbin (D-IL) agreed to remove holds on Interior nominations for Brenda Burman’s nomination as Commissioner of the Bureau of Reclamation and Joseph Balash’s nomination to be Assistant Secretary for Land and Minerals Management. This followed a meeting between the Senator, five other Senate Democrats and EPA Secretary Ryan Zinke regarding Secretary Zinke’s national recent monument designations.

Department of Homeland Security (DHS)

A group of 20 Democratic senators sent a letter to Homeland Security secretary nominee Kirstjen Nielsen this week that urged her to clarify her positions on two deportation relief programs, Deferred Action for Childhood Arrivals (DACA) and temporary protected status.

The Senate’s homeland security committee approved Nielsen’s nomination Tuesday, November 14. The White House aide and former DHS chief of staff will now face a vote before the full Senate.

The senators, led by Democratic Whip Dick Durbin (D-IL), pressed Nielsen to commit to supporting the bipartisan Dream Act, S. 1615.The bill is the preferred Democratic vehicle to deal with so-called DREAMers brought to the U.S. at a young age.

The senators also questioned how Nielsen would respond to pressure from the White House over decisions around temporary protected status.

The Washington Post reported last week that White House chief of staff John Kelly, to whom Nielsen is currently deputy, pushed acting DHS Secretary Elaine Duke to terminate the status for 86,000 Hondurans.

 

Trump Adds Five to List of Potential Supreme Court Picks

President Donald Trump added five judges to his list of possible U.S. Supreme Court nominees, including one who serves on a prominent federal appeals court in Washington and another whose religious views were a point of controversy when the president picked her for a different appeals court this year.

The additions of Judges Brett Kavanaugh and Amy Coney Barrett and three others bring President Trump’s list of prospective nominees to 25 as the White House prepares for a possible Supreme Court departure next year. The White House said in a statement the additions “were selected with input from respected conservative leaders.”

Kavanaugh, 52, is the most experienced member of the group and the only one over age 50. He is a former law clerk to Anthony Kennedy, the Supreme Court’s 81-year-old swing justice and a focus of retirement speculation. Trump’s first Supreme Court appointee, Justice Neil Gorsuch, also clerked for Kennedy.

A 2006 appointee of President George W. Bush to the U.S. Court of Appeals for the D.C. Circuit, Kavanaugh was a prominent omission when President Trump released his first lists of possible nominees during the presidential campaign.

Barrett, a former law professor at the University of Notre Dame, won confirmation to the Chicago-based 7th Circuit last month on a 55-43 vote, almost along party lines. During her Senate hearing, Democrats questioned the role her Catholic faith would play on the bench.

 

Private Activity Bonds Targeted

President Trump has compared landing at Los Angeles International and other U.S. airports to arriving in a third-world country. But a provision in the tax bill passed by the House of Representatives would eliminate a tool central to his $1 trillion pledge to upgrade airports and other public works.

The House measure would eliminate a form of tax-exempt debt called private-activity bonds. That would leave Los Angeles World Airports, which runs LAX, with the choice of scaling back projects in its $14 billion modernization plan or finding $500 million in new revenue because of higher borrowing costs, Chief Financial Officer Ryan Yakubik said in an interview.

“Certainly, it had been made clear that infrastructure was a great priority, and that finding ways to do that was important,” Yakubik said. “This doesn’t seem pointed in that direction.”

While the Trump Administration has called for expanding the use of the bonds to attract more private investment in U.S. infrastructure, the House tax bill passed on Thursday, November 16 would eliminate them after Sunday, December 31. Airport executives, state transportation officials and other advocates unsuccessfully lobbied lawmakers to remove the provision. It is not in the current Senate plan, and they are pushing to keep it out of any final bill.

Fewer Projects

Advocates say losing the tax exemption would mean airports, port authorities, state and local governments and other entities would complete fewer projects or face higher costs at a time the American Society of Civil Engineers has said the U.S. needs an additional $2 trillion for infrastructure by 2025. President Trump has promised to invest $1 trillion over 10 years.

“They just won’t be able to do these deals,” Toby Rittner, president and chief executive of the Council of Development Finance Agencies, stated. “At the end of the day, you just hope smart-minded people in the House and Senate see the ramifications of this.”

Private-activity bonds, or PABs, are issued by state and local governments and other public authorities to give private entities access to tax-exempt debt to increase their participation and lower costs for qualified projects. They are also used by hospitals, universities and other non-profit groups.

Without the tax exemption, borrowing costs for state and local governments would rise by as much as 35 percent, Ritter said in a Friday, November 3 letter to congressional leaders on behalf of more 200 cities, banks and other entities nationally and in 39 U.S. states and territories.

The impact would be especially felt at LAX and other U.S. airports, where PABs accounted for 60 percent of bonds issued for terminal renovations and other capital projects during the past decade, according to Airports Council International – North America. The group represents owners and operators of commercial airports in the U.S. and Canada.

Cancel or Delay

Airports have an estimated $100 billion in infrastructure needs by 2021, and financing that work without PABs could increase costs to the airport industry by $3.2 billion over the life of the bonds, according to a Monday, November 13 letter sent to Senate Finance Committee leaders by the Council and the American Association of Airport Executives. Some airports may have no choice but to cancel or delay projects, the groups said.

Voters in Kansas City approved a new $1 billion terminal on Nov. 7, and the elimination of PABs could throw the project’s future into question because of higher borrowing costs, Mayor Sly James said. Philadelphia International Airport would have to re-evaluate the sequence of about $377 million in planned projects, Chief Executive Chellie Cameron said in a statement. Denver International Airport would have to evaluate other financing options if the bonds were eliminated because it had expected to use them for about three-quarters of a planned $3.5 billion capital improvement program, Chief Financial Officer Gisela Shanahan said.

Borrowing Costs

Republican tax-writers said the federal government shouldn’t subsidize the borrowing costs of private businesses when their competitors must pay higher interest rates on debt. Eliminating the tax exemption also would increase federal revenue by $38.9 billion through 2027 to help pay for tax cuts, according to the Joint Committee on Taxation.

Still, there is a misperception about PABs because the bulk of the deals are for assets that the public uses, said Susan Monteverde, vice president for government relations at the American Association of Port Authorities. “We are building a transportation hub for trade, which everyone sees as a valuable public asset,” Monteverde said.

Advocates also were surprised by the provision because the Trump Administration had proposed expanding the bonds as a way to tap more private capital for the president’s infrastructure plan, which is expected after the tax overhaul. The White House has called for allocating $200 billion in federal funds to generate $800 billion in spending by states, localities and the private sector.

“Any objective assessment would conclude that terminating the use of PABs will make these levels of infrastructure investment much more difficult to achieve, if not impossible,” associations representing state transportation officials, construction companies and other contractors said in a Friday, November 3 letter to leaders of the House Ways and Means Committee.

More Expensive

Without the tax-exempt bonds, projects such as the $3 billion Interstate 66 project in Virginia, which includes new express lanes and relies on about $737 million of PABs, may not get off the ground or would be more expensive, said Aubrey Layne, the Virginia secretary of transportation.

“If they truly are serious about infrastructure, then this is not helping,” Layne said.

The Trump Administration “strongly” supported passage of the House bill and did not publicly object to the provision eliminating PABs. The White House said Trump is committed to generating $1 trillion in infrastructure investment.

“We are confident that when the debate on tax reform is complete, we will be well positioned to make American infrastructure once again the envy of the world,” White House spokeswoman Lindsay Walters said in a statement. Walters did not specifically address the potential elimination of the tax-free bonds as a financing source.