Congress Passes Major Bipartisan Budget Legislation
On Friday, February 9, Congress passed a major budget bill that establishes spending parameters through September 30, 2019, and raises the borrowing limit through March 1, 2019. The bill — reached through a bipartisan agreement by Senate Majority Leader Mitch McConnell (R-Kentucky) and Senate Minority Leader Chuck Schumer (D-New York) — passed by comfortable margins (71-28 in the Senate, and 240-186 in the House) before being signed into law by President Trump.
The bill is notable for several reasons. First, it marks the third time since 2013 that Congress has postponed self-imposed spending caps that it established in the Budget Control Act of 2011. Those spending caps were an expression of the Tea Party movement that swept Republicans into Congress in 2010. The core of the agreement allows Congress to spend $300 billion over the caps through September 30, 2019 — $165 billion of which is dedicated to military spending. Second, it marks the first time that Washington has “busted the caps” under unified Republican control, and also the first time that the new spending is not fully offset by reductions elsewhere. Accordingly, in a sense this bill marks the death of the Tea Party movement (or at least the death of fiscal discipline as an issue among Congressional leaders); most Republicans voted for the bill, only two months after passing Trump’s tax-reform plan. Tax reform added at least $1 trillion to the debt, while this bill puts spending on pace to add at least another $1 trillion.
The 652-page bill contains at least three narrow provisions that may interest the German business community specifically:
* Germany’s major drug manufacturers (Bayer AG, EMD Serono, and Boehringer Ingelheim) will be impacted by a surprise provision that increases required statutory discounts in the Medicare Part D coverage gap (known as the “Donut Hole”) from 50 percent to 70 percent, beginning on Jan. 1, 2019. This will limit drug manufacturers’ revenue within the Donut Hole to 30 percent of the product’s list price — before also accounting for rebates that drugmakers negotiate with the health plans that administer the program. Because these rebates often exceed 30 percent of the list price, sales of many prescription drugs in the Donut Hole will generate revenue losses beginning in 2019, unless Congress modifies this provision. This change comes as a prelude to a raft of other proposals on drug pricing, expected in President Trump’s 2019 Budget Request to Congress to be released today.
* On the other hand, drug makers will view as positive news the repeal of the Independent Payment Advisory Board (IPAB) — enacted as part of the Affordable Care Act in 2010 and viewed as a threat to the pharmaceutical sector. The IPAB was a politically insulated expert panel with the power to make binding recommendations to cut payments in Medicare.
* Germany’s auto industry will note a one-year retroactive extension of a $4,000 tax credit for fuel cell vehicles. Because the tax credit is extended through December 31, 2017, it only impacts purchases that occurred in 2017. However, it could potentially be extended further or made permanent. The tax credit costs $4 million, meaning that it will be claimed by a small number of purchases (on the order of a few hundred).
Immigration / DACA
Notably, the budget bill passed without resolving the persistent challenges surrounding immigration. Senator McConnell is bringing an immigration process to the Senate floor next week, but it still remains unclear exactly which bill and amendments will be debated. Meanwhile, House Speaker Paul Ryan has made a verbal commitment to “bring a solution to the floor,” but is similarly vague on what such a solution will look like. Pressure is building in both chambers to allow votes on immigration bills, particularly from Democrats like House Minority Leader Nancy Pelosi (D-California), who delivered a record-setting 8-hour speech on the House floor on Wednesday urging action on DACA. If the Senate can pass an immigration bill (which will require bipartisan agreement from 60 Senators), there will be tremendous pressure on Ryan to act.
On one hand, any bill that clears the Senate on immigration will likely be able to pass the House. On the other hand, Ryan will likely refrain from bringing the bill to a vote if it’s not supported by at least half of the GOP Conference (241 members). Passing a bill with mostly Democratic votes and only a handful of Republicans would be a sign of failure, and could jeopardize his position as Speaker. A similar dynamic was at play in 2013, when the Senate passed a comprehensive immigration bill with 68 votes, supported by the president, and former Speaker John Boehner (R-Ohio) declined to bring it to the floor. Boehner in 2015 was forced from his position after bringing up a large budget bill that passed with mostly Democratic support.
U.S. Tax Reform Referenced in German Coalition Talks
On Wednesday, Feb. 7, the coalition government forming in Berlin published a 177-page governing document, indicating that the new German government plans to take initiative jointly with France, to spearhead a European response to “changes and challenges in the tax field — and in particular in response to the USA.” The governing document also singles out Google, Apple, Facebook, and Amazon by name, as companies that should be “fairly taxed.” In his public remarks after the coaltion agreement was reached, SPD leader Martin Schulz specifically pointed out the importance of preventing erosion of the tax base. This coalition paper, however, was not strong enough to placate German industry, which lamented the lack of a specific new strategy on tax. Meanwhile, earlier in the week, the European Central Bank in Frankfurt warned that U.S. tax reform “risks intensifying tax competition worldwide, entailing a possible erosion of tax bases in EU countries.”
2018 Midterm Outlook
The retirement wave among House Republicans is continuing, and emboldening Democrats as they hope to regain control of the House in the November midterm elections. In the last two weeks, three more prominent House Republicans have announced that they will not run again this fall: Rodney Frelinghuysen (New Jersey), Patrick Meehan (Pennsylvania), and Trey Gowdy (South Carolina) — making a total of at least 38 House Republicans (out of 241) who will retire by the end of 2018. Frelinghuysen and Gowdy are notable in particular, since they are committee chairmen with remaining years on their terms, meaning that they are walking away from positions of influence. CNN documents here how House Republicans are retiring “at a significantly faster rate than any other recent Congresses, suggesting Democrats could pick up seats in the 2018 midterm elections.” The seats vacated by both Meehan and Frelinghuysen will be competitive and hard fought. Another name that emerged this week as potentially being urged into retirement is Duncan Hunter (R-California).
Meanwhile, the issue of “gerrymandering” could also boost Democrats this fall. In general, the states redraw the boundaries of U.S. House districts every 10 years, after the census is performed — sometimes in a way to unduly maximize the advantage to one party. The last redrawing of the map occurred after the 2010 census was performed, leading to one of the most extreme examples — in Pennsylvania. The GOP-controlled Pennsylvania legislature drew the district lines in a way that generated 13 GOP and 5 Democratic House members, even though Pennsylvania is a “swing state” that often produces Democratic victories in statewide elections. The Pennsylvania Supreme Court invalidated the map on January 22, and last Monday, February 5, the U.S. Supreme Court decided not to intervene in the case. While it is not clear yet exactly how the map will be redrawn, the new map will rebalance the 13-5 split, thus giving Democrats more momentum in regaining control this fall. President Obama has made gerrymandering one of his principal post-presidency projects to date.
Upcoming Events
Monday, Feb. 12 — President’s 2019 Budget Request to Congress will be released; floor debate is expected to begin in the Senate on immigration.
Monday, March 5 — The deadline to file a DACA application as established by the Trump Administration; this deadline however, has been suspended by the courts until further notice (or Congressional intervention).
Tuesday, March 13 –– Special election in House seat vacated by Tim Murphy (R- Pennsylvania), which will be viewed as a key test of how well Democrats can compete in the November mid-term elections in a GOP-leaning district.
Friday, March 23 — Spending authority expires; Congress is expected to pass an “omnibus” spending agreement through September 30. This may be the last true leverage point for Democrats to force action on DACA for the year.