Washington Bulletin 12/18

December 19, 2017
Washington Update

On Capitol Hill

Tax Reform Keeps Rolling

House and Senate Republicans are days away from passing a bill to overhaul the tax code, a policy area that has been the number one priority for GOP leaders and President Donald Trump for months.

“It’s done,” House Ways and Means Committee Chairman Kevin Brady (R-TX) said after hosting the conference committee members in his office to sign the final bill.

Republicans released the final bill (H.R. 1) and a joint explanatory statement Friday, December 15, which outlined a 21 percent corporate rate cut effective next year, a 20 percent deduction for pass-through entities, and an increased standard deduction with a new rate structure topping out at 37 percent for individuals.

Both chambers are slated to vote on the conference committee report early this week. The bill has some vocal GOP opponents in the House, although not enough to sink it. In the Senate—where the margin is slimmer—two key holdouts, Senators Marco Rubio (R-FL) and Bob Corker (R-TN.), both said they will back the legislation.

Senator Corker was the only Republican to vote “no” when the bill was on the Senate floor. Senator Rubio said in recent days that he would oppose the bill if lawmakers did not expand the child tax credit. The final version of the plan would allow $1,400 of the $2,000 tax credit to be refundable.

The bill will cost $1.46 trillion, according to an estimate from the Congressional Budget Office and the Joint Committee on Taxation. Lawmakers increased repatriation rates, lowered the threshold to which the top individual income rate applied, and placed additional restrictions on claiming the pass-through deduction that helped cover some of the last-minute changes that increased the cost of the bill.

Limited Amendments

The conference committee report cannot be amended, except for provisions that violate the budget reconciliation requirements, known as the Byrd Rule. Aspects of the bill that don’t relate to federal revenue or spending, or add to the deficit after a decade, would violate the rule and would be cut from the report.

The tax writers have found some issues, including a provision to repeal the Johnson Amendment, that have been cut from the bill. The Johnson Amendment prevents tax-exempt religious organizations from engaging in political activity.

Senate Finance Committee ranking member Ron Wyden (D-OR) said Democrats prevented the repeal of the Johnson Amendment. Democrats have been critical of the fast-track process Republicans have used to push the bill through Congress.

Infrastructure Investment

The conference report on the tax bill retains the tax-exempt status of private activity bonds(PABs), securing a critical financing mechanism for infrastructure investment.

Private activity bonds lost their tax-exempt status in the House version of the bill, but retained them in the Senate bill. The bonds offer tax-exempt interest for projects such as airports, highways, and waterway facilities. Tax-exempt interest makes borrowing less costly for state and local governments and airport authorities, among other qualifying entities.

The administration’s fiscal year 2018 budget proposal called for $200 billion in direct federal spending on infrastructure to leverage $800 billion in state, local, and private investment. The White House called for the cap on private activity bonds to be lifted in the same budget document that set forth its early thinking on a $1 trillion infrastructure plan.

The Department of Transportation has a $15 billion cap on the tax-exempt bonds it is allowed to issue on behalf of private entities.

Thirty-nine House Republicans joined to call on their party leaders in a letter, to retain the bonds’ status and Senator John Thune (R-SD), a tax bill conference committee member and chairman of the Senate Commerce, Science, and Transportation Committee, had hinted that PABs would survive the conference with their tax benefit.

New Fiscal Year 2018 Funding Legislation Required by December 22nd

On Wednesday, December 13, the House Appropriations Committee introduced legislation to extend the current continuing resolution (CR) to fund the government through January 19, 2018.  The measure would also fully fund national defense programs for all of FY2018. This is accomplished using the House passed Defense Appropriations Bill, which is more than $70 billion above the sequester caps, but also includes emergency supplemental funding for increased missile defense.  In total, the legislation provides almost $664 billion for national defense spending.

The measure would extend funding for most federal agencies at the reduced fiscal 2017 spending levels to keep spending in line with the fiscal 2018 caps under the Budget Control Act. The most recent CR runs through Friday, December 22.

The Budget Control Act uses sequestration to enforce the spending caps, requiring across-the-board cuts by the programs covered by the defense and nondefense caps to keep spending within the limits. The joint resolution would extend the anomalies and program extensions from those laws, such as the National Flood Insurance Program.

The CR portion of the measure would also prevent any sequestration from taking place in fiscal 2018 for security programs that would be funded by the attached Defense spending measure.

Sequestration reports for any nonsecurity programs would be delayed by 10 days for the Congressional Budget Office and 15 days for the Office of Management and Budget.

Defense Appropriations

The Defense Department would receive $584.2 billion in base discretionary funding for fiscal 2018 and $75.1 billion in Overseas Contingency Operations (OCO), according to a cost estimate table from the Congressional Budget Office.

The measure would also provide an additional $4.49 billion in emergency funding requested by the president for “missile defense and defeat enhancements” primarily targeting North Korea. That amount was also included in the Senate Appropriations Committee’s draft fiscal 2018 defense funding measure.

Within the measure’s OCO funding, $1.18 billion would be used for Operation Freedom’s Sentinel, the department’s campaign in Afghanistan, to support the president’s request for a troop surge.

The directives in the committee report on the Defense appropriations measure approved by House appropriators would apply to the continuing resolution for the purposes of determining allocations for base funding and OCO, with the exception of the provisions for emergency missile defense spending.

The bill wouldn’t provide funding for nuclear weapons programs at the Energy Department and wouldn’t completely fund military construction projects. Those programs are funded under different appropriations measures.

The House Rules Committee is scheduled to meet Tuesday, December 19, to set the terms of floor debate on the measure. A simple majority would be required to pass the measure.

Anomalies

The measure also includes additional anomalies. It would provide funding at an annualized rate of $11.7 million for the Indian Health Service within the Health and Human Services Department(HHS). It would also allow funds to be apportioned to the department to continue operating the Refugee and Entrant Assistance Program. HHS could also apportion funds from the Public Health and Social Services Emergency Fund to prepare for or address an influenza pandemic.

Concerns Over Cost Offsets

The House bill would offset the costs of extending CHIP for five years and funding several other public health programs, such as the National Health Service Corps, by reducing the grace period for individuals buying health coverage on the Affordable Health Care market who do not pay their premiums from three months to 30 days. It also would find offsets stemming from changes to Medicaid third-party liability and from excluding lottery winners from receiving Medicaid. The Senate is unlikely to agree to the measure with the attached defense spending measure. The Senate will probably strip that language and return the measure to the House for further action.

House Speaker Paul Ryan Dismisses Speculation of Exit as He Lays Out 2018 Agenda

House Speaker Paul Ryan(R- WI) dismissed speculation about his possible retirement and laid out an ambitious vision for what Republicans in Congress should accomplish next year to advance conservative goals once a massive package of tax cuts is put into law.

Republicans will use their second year of controlling the House, Senate and White House to overhaul government social programs, criminal justice, technical education and health care, Ryan of Wisconsin said Thursday.

President Donald Trump has promised that welfare reform and infrastructure are next up, and expect to see a lot of details about those plans probably by his state of the union speech. Kevin Hassett who serves on the White House Council of Economic Advisers, said last week, “if the growth rate keeps up at the same pace since President Trump took office, the U.S. will have so much more revenue and the “deficit problems” will be weakened by that growth.

Speaker Ryan set out his plans as he also faced questions about whether he’ll be driving the Republican agenda after 2018.

With congressional elections next November, 2018 will be a crucial year for Republicans after their tax overhaul — now heading toward final passage — was the only major legislative accomplishment during the first 11 months of Trump’s presidency. Gains by Democrats in recent statewide elections, most recently Alabama’s U.S. Senate contest on Tuesday, December 11, pose a threat to Republicans retaining full control of Congress beyond next year.

He described government assistance, mostly for low-income people, as “a poverty trap” that discourages work and keeps millions of Americans from living up to their full potential.

Reducing government spending on what he describes as entitlement programs has long been a goal for Ryan, and he said getting more people into the work force is going to be “the new economic challenge for America.”

Mandatory spending — that is, funds that are not appropriated by Congress — on programs like Social Security, Medicare and Medicaid represents more than half of U.S. government outlays. Although the tax plans passed by the House and Senate are projected to add roughly $1 trillion to federal deficits over the next decade, Ryan said the way to bridge yearly budget shortfalls is overhauling these programs and spurring greater economic growth by cutting regulations and taxes.

Moving the agenda through the Senate will be a challenge. Republicans will have 51 seats in the 100-member chamber next year and under Senate rules most legislation needs 60 votes to advance. Democrats would likely resist cuts to entitlement programs. However, just as with the tax bill, Republicans could enact entitlement cuts with just 50 Senate votes if they use the budget process.

 

In the Administration

Does Net Neutrality’s Repeal Create Regulatory Crack or a Chasm?

The Federal Communication Commission’s decision to scrap net-neutrality rules does not necessarily mean the internet will not be regulated.

Whether the oversight void left by the FCC’s action is a small crevice or a giant canyon depends on what role other agencies play, as well as decisions by courts and policymakers.

Here are some ways it may play out:

Trade One Acronym for Another

Federal Communications Commission Chairman Ajit Pai, a Republican appointed by President Donald Trump, has said the Federal Trade Commission (FTC) can monitor for anti-competitive practices. Critics, including one of the FTC’s own commissioners, Democratic appointee Terrell McSweeny, say those agencies don’t have expertise and act only after abuses occur, rather than setting rules that guide behavior.

The FTC’s ability to do so may hinge on its winning a court fight with AT&T Mobility LLC over the carrier’s alleged failure to tell customers who signed up for unlimited data that it would throttle that flow after a pre-set volume.

The AT&T broadband unit last year convinced a three-judge panel of a west coast appeals court that the FTC’s oversight power is blocked. The reasoning was that parent company AT&T Inc. still provides conventional landline telephone service, making it a common carrier — something the trade commission is barred from regulating. An 11-judge panel is weighing whether the earlier ruling was a mistake.

States Rush to the Rescue

Pai’s plan expressly bars individual states from becoming internet service provider cops on the theory that national providers should be governed by uniform federal regulations, not a patchwork of local requirements. However, the line between where federal authority ends and a state’s power to protect its citizens begins may need to be drawn by the courts.

Judges Get the Last Word

State attorneys general from New York, Pennsylvania and Washington threatened lawsuits immediately after the FCC’s vote aimed at undoing the agency’s repeal.

Washington Attorney General Bob Ferguson said he’ll mount a challenge based on the Administrative Procedures Act, a law designed to prevent an incoming administration from overturning its predecessor’s acts without showing a need or change in circumstance. New York State Attorney General Eric Schneiderman also announced plans to sue, as did Free Press, an activist group that helped organized the opposition to the FCC’s party-line vote.

But the lawsuits face an uphill battle because courts generally defer to the expertise of federal agencies.

Calling on Congress

Senator Edward J. Markey (D-MA) said he would mount a two-pronged attack to preserve the rules. Besides supporting legal action, he and other lawmakers said they would introduce a resolution under the Congressional Review Act that allows Congress to overturn some actions of regulatory agencies.

Congress could write a law to overrule the FCC’s action, and Republicans and broadband providers have asked it to step in. Democrats have resisted, legislation proposed so far.

Deregulation Push

President Donald Trump championed his effort to slash government rules as “the most far-reaching regulatory reform in history.”

Early in his administration, President Trump ordered that two existing regulations be repealed for any new one put on the books. President Trump said his administration had beat the goal, with 22 deregulatory actions for each new regulation. The administration had in its first 11 months canceled or delayed 1,500 planned regulatory actions, he said.

The administration counted in its earlier report as canceled hundreds of pending regulations that had been effectively shelved before President Trump took office. Others listed as withdrawn are actually still being developed by federal agencies. Still more were moot because the actions sought in a pending rule were already in effect.

Environmental Protection Agency Time Timetable

The regulatory agenda revealed that the Environmental Protection Agency’s (EPA) timetable for updating its standards on lead in drinking water have been pushed back yet again. The agency now expects to unveil a draft version of these new standards in August, rather than next month as it had previously planned. It plans on finalizing these new standards in February 2020.

This effort to strengthen standards on lead, a toxic heavy metal that can cause irreversible harm in children, has been in the works at the agency for years but has suffered setback after setback. Agency officials, as well as leaders at the country’s more than 50,000 water utilities, have struggled to find a solution to the corroding lead piping that is still in wide use across the country.

If the agency sticks to its current timetable, the new lead regulations will go into effect almost exactly five years after the EPA first learned that lead levels in tap water at homes in Flint, Michigan, had become dangerously high.

Water Pollution

The EPA and the Army Corps of Engineers are in the midst of a multi-step process of rescinding and rewriting a rule defining the geographic reach of the Clean Water Act. The agencies have pushed back their initial schedule for the update. A proposed version is slated for May, instead of March, with a final rule in June 2019.

This rule rewrite is being followed by multiple industries that have to seek Clean Water Act permits to discharge pollution or dredge and fill wetlands and other waters to build homes, roads and erect power lines.

Waters and wetlands that fall under Clean Water Act jurisdiction are protected from pollution by various regulatory regimes, including federal permits, oil spill prevention requirements, and state water quality certifications.

 

President Listening to NAFTA Concerns

Republican lawmakers are becoming increasingly vocal in seeking to steer the Trump administration away from exiting the North American Free Trade Agreement.

Senators who met with President Donald Trump recently during a weekly policy lunch relayed examples of U.S. companies losing contracts to foreign competitors from Brazil and Argentina because of NAFTA uncertainty. Vice President Mike Pence attended another Senate lunch and heard similar news.

President Trump has repeatedly threatened to pull the U.S. out of NAFTA, which he blames for the loss of U.S. manufacturing jobs. Talks on modernizing the decades-old pact have deadlocked on a series of U.S. proposals that aim to “rebalance” the agreement, including a U.S. proposal to require 50 percent of an automobile’s components to come from the U.S. to qualify for NAFTA benefits.

Negotiators did not work on the controversial proposals during last week’s December meetings in Washington, but they are expected to be front and center at the next NAFTA round in late January in 23-28,2018 in Montreal.

Supporters Speak Up

Senator Jeff Flake (R-AZ), warned his Senate colleagues in a floor speech that pulling the U.S. out of NAFTA could erase the gains the U.S. economy has made over the last year. Senator Flake also said that a U.S. without NAFTA would be one “crippled by subsidies” since withdrawal from the agreement would add to the demands of farmers “for increased farm subsidies at a time when Congress simply cannot afford that.”

In addition, Republican governors met Thursday, December, 14 with Vice President Pence, U.S. Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross, and Agriculture Secretary Sonny Perdue to voice concerns on the NAFTA talks..

In other developments, Canada’s Foreign Affairs Minister Chrystia Freeland announced she will welcome U.S. Secretary of State Rex Tillerson to Ottawa on Tuesday, December 19. Secretary Tillerson’s visit will give the two officials an opportunity to discuss Canada-U.S. cooperation on bilateral, regional, and global issues.

In Ottawa, Tillerson will also meet with the Cabinet Committee on Canada-U.S. Relations to discuss the two countries’ security, trade, and economic relationship