Quick Hits - What it Means
As important legislation comes to fruition right before the end of the year, here are our latest updates on the tax reform bill and the third continuing resolution before we take a break for the holidays:
The GOP tax bill passed the House yesterday afternoon with a vote of 224-201, after a procedural issue with the Senate parliamentarian rules forced them to vote a second time. There was unanimous Democrat opposition, as well as 12 GOP members who also denied the bill. The bill passed through the Senate earlier that day, with a vote of 51-48. The President signed the bill into law earlier today during an informal ceremony in the Oval Office , marking the first major legislative victory for Republicans during this administration.
Highlights from the bill include a decline in the corporate tax rate from 35 percent to 21 percent. Republicans predict that the bill will increase hiring and lead to higher wages, as well as incentivize corporations to come back to the US and produce domestically. The total amount in tax cuts in 2018 as a result of the bill is projected to be $135 billion. The bill will also reduce estate taxes and eliminate part of the Affordable Care Act, which could signal an important milestone for the GOP looking to dismantle Obamacare.
With one day to spare, Congress managed to pass a third Continuing Resolution before the 22 December expiration that funds the government through 19 January. While the CR averted a shutdown, the discussion of agreed topline funding levels for FY18 remains unresolved.
When Congress returns from the Holiday recess, it is likely that a two-year agreement on topline appropriations for both fiscal years 18 and 19 will dominate the headlines. As has been the case in recent years, the matter of defense vs. non-defense spending levels will be the crux of the debate.
Of note, an $81B disaster relief package was not included in this funding extension.
We at Capitol Integration wish you a safe and joyous holiday! See you in the New Year!Read more
Republican and Democrat leadership appear committed to averting a government shutdown.
Despite our headline above, we’ve laid back on trying to interpret or predict the future in Congress over the past couple of weeks. The dynamics have been unusual to say the least, and it has taken some time for the fog of ideological battles to dissipate.
What’s Happening Now?
Since the last Quick Hit, Congress appears to have settled on a 2017 endgame that will lead to an FY18 Omnibus appropriations bill. Here’s the quick update of where we are:
- President Trump is expected to sign FY18 National Defense Authorization Act into law in the coming days; the bill was passed to the President from Congress 30 November. It authorizes defense funding at nearly $700B across base and OCO budgets.
- The House and Senate have each passed their versions of a tax bill. Far short of the “tax reform” many hoped for, it has the potential to be the most significant change to tax policy since 1986. The tax bill must complete conference by the end of calendar year 2017 in order to use the specialized voting mechanism that accompanies the reconciliation process – a 51-vote threshold vs. a 60-vote threshold.
- The Senate Appropriations Committee released its version of the FY18 defense appropriations bill the Wednesday before Thanksgiving. It marked to a number about $50B below what many had hoped for and what the House Appropriations Committee had marked to.
- The present Continuing Resolution will expire 8 December. Expect another short-term CR to fund the government through 22 December. This CR is intended to allow Congressional leadership to finally agree on a topline budget number for defense and domestic spending. The NDAA sets a solid target that “defense hawks” hope to reflect in appropriations ($700B). As mentioned above, the Senate is still short of that target today. This means there will be some negotiation about comparable increases on the domestic side of the budget. Expect some flash and bang in the headlines, but look for a compromise to emerge.
- Yet a third CR will then be agreed to fund the government from 23 December into mid-or-late January. This CR is intended to create negotiating space for the final tax bill, as well as some incorporation of immigration legislation (border wall, Dreamer Act, etc.) into a final Omnibus.
The potential exists for substantive Congressional victories on tax policy, budget and appropriations as we transition into calendar year 2018 and Fiscal year 2019 positioning.
What It Means
There is movement and a general sense of optimism that an omnibus appropriation will pass before the end of the year. It would not be without a few challenges along the way. Here’s the streamlined recap below:
- The President’s FY 2018 request for defense spending was $640B, well above theBudget Control Act (BCA) cap of $549B
- The FY18 Budget Resolution, agreed upon on 10/26/17, calls for $640B for defense along with $77B for Overseas Contingency Operation (OCO) funding. Recall the Budget Resolution is a non-binding document. It is not legislation; the President does not sign it. Think of it as bipartisan political guidance.
- The FY18 National Defense Authorization Act (NDAA) is in the final phase of conference between the House and Senate versions. The Senate version calls for $631B base defense and $60B for OCO. The House version calls for $640B base defense and $60B for OCO. Look for conference to complete this week.
- The Senate Appropriations Committee’s Defense Subcommittee has not released the FY18 Defense Appropriations Bill, the bill that actually spends. (SAC-D). The FY18 House version of the same bill calls for $584B in base defense and $74B for OCO.
- It is clear all defense bills released to date suggest the BCA cap ($549B) will once again be ignored. Recall that OCO is considered “off budget.” In recent years, OCO funding has funded items with little relevance to overseas contingencies. Look for Democrats to use these facts as leverage in vying for increases in non-defense categories of the eventual omnibus appropriation.
Tax Reform and the Impact on Appropriations
House Ways and Means Chairman Brady has been the most prominent spokesman for his committee’s version of the Tax bill.
The House GOP plan for a renewed tax code was released this past week, calling for $1.51 trillionadded to deficits over the next decade. Corporate rates and individual rates will see the most substantial cuts in the House version. Certain politically debated clauses, like mortgage interest and property taxes, were combined into a single, more vague provision that should produce $1.2 trillion windfall in the coming years. The provision calling for the elimination of state and local tax deductions was not well received by all, and will be a point of contention going forward that could stall progress.
The markup period for a Tax bill has historically been one week, but with the number of highly charged provisions that remain unresolved, the markup phase will likely go longer. The House hopes to pass the bill on to the Senate before the Thanksgiving recess.
President Trump has made clear he firmly believes a Tax bill can be completed before Christmas. The outcome of the markup phase of the Tax bill will directly impact the movement of an Omnibus appropriation.Read more
What’s the number?
A fundamental disconnect among categories of numbers is the crux of the current appropriations logjam for FY18 funding. Until these numbers are reconciled, a Continuing Resolution (CR) will fund FY18 – the current CR runs through December 8th.
- The President requested $640B for defense, $91B above the Budget Control Act (BCA) spending cap of $549B.
- The House Budget Committee has approved $622B for defense, and $87B for OCO. Passage of a Budget resolution in House took months to accomplish.
- The Senate Budget Committee has not approved a budget. The absence of Sen. Thad Cochran (due to health concerns) in today’s markup suggests passage in the Senate could be attempted later in the week. Every vote counts and Republicans have none to spare.
- In the absence of an agreed budget plan, House and Senate Authorizers marked their defense bill at $631B and $640B respectively, along with $60B in OCO spending, above the aforementioned BCA spending cap.
- House Defense Appropriators marked their bill at $584B for defense, along with $74B in OCO, also above the aforementioned BCA spending cap.
- Senate Defense Appropriators have not yet publicly marked their bill, citing the lack of an agreed budget.
- Republicans in particular had hoped that the repeal of the Affordable Care Act would have produced savings that would have paved the way for dramatic tax reform. We saw multiple efforts of ACA repeal fail through the summer.
- House and Senate Republicans view tax reform as a major legislative objective, as does President Trump.
What It Means…
The contours of ACA and tax savings must be generally agreed in the Senate before a budget agreement can be struck. Without a budget agreement, finalizing appropriations for FY18 remains in jeopardy.
On the current Congressional calendar, there are 27 legislative days remaining before the “traditional” December recess.
Under the protection of the previously passed continuing resolution that funds the government through December 9th, work towards a final NDAA moves to conference, and the 2018 appropriations process inches forward.
A joint House-Senate conference will begin this week to discuss and finalize details for the 2018 NDAA. All policy issues should be completed by the end of October, according to leading members of both the House and Senate Armed Services Committees. The Senate bill presently authorizes $640B base and $60B OCO; The House bill presently authorizes $621.5B base and $75 OCO. The final agreed number would be influenced by the outcome of the budget cap debate highlighted below.
The House pushed their version of the FY18 budget resolution through on Thursday, with highlights including major tax reform plans, an overhaul of the Medicare program and an increase in the Pentagon’s base budget.
The Senate approved their resolution on Thursday as well, with a 12-11 vote, and should move to the Senate floor on October 16th.
While a budget agreement does not carry the force of law, reaching agreement signals at least the potential for agreements later in the fall on similarly challenging issues: taxes, immigration, etc.
There has been ongoing chatter about repealing the budget caps set on domestic and defense spending by the 2011 Budget Control Act. HASC Chairman Mac Thornberry has been vocal about his willingness to increase domestic spending if it means an increase in defense spending. President Trump announced last week he stands by his support of a $700 billion defense budget, which exceeds the budget caps by over $100 billion.Read more
The headlines continue to suggest risk abounds. If you are selling to a government customer, you mitigate risk by remaining engaged. Despite what appears to be bad news at every turn, a nearly $700B defense authorization bill (NDAA) moved through the Senate last week. While an authorization doesn’t spend, as does an appropriation, the NDAA represents strong Congressional recognition of national security needs. Additionally, Congress moved a $15B disaster relief bill through both the House and Senate, and on to President Trump, in record time. When pressed, and when the ideological positions can be tempered, important things can get done.
- Health Care reform. The Senate is trying mightily to use the special status of an expiring reconciliation process to get ANY change to the Affordable Care Act (Obamacare) through a successful vote. Squeezing out any bill would allow that Senate version to proceed to conference with the previously passed House version of a Health Care bill. The resistance of Senators like McCain, Collins and Murkowski is largely rooted in the desire to have legislation of this magnitude move through “regular order” via committees, as opposed to moving through a deal with leadership. Odds of Graham-Cassidy passing with 51 votes before September 30th looks unlikely.
- Tax Relief package. Tax relief has been widely mentioned as the top priority for the Republican Party going into the 2018 midterm elections. The players striving to achieve consensus are known as “The Big Six”: Sen. Finance Chairman Hatch, Leader McConnell, Speaker Ryan, House Ways and Means Chairman Brady, Economic Council Director Gary Cohn, and Treasury Secretary Steven Mnuchin. The Senate appears to be striving to achieve a 1.5T tax cut. As with other issues, Republicans are attempting to align multiple inter-related issues to achieve consensus. The House Freedom Caucus leaders, Reps Jordan and Meadows, made clear in a WSJ op-ed this week that they have their own ideas of what a tax package must include.
- Continuing Resolution (CR). Yes, Fiscal Year 2018 begins on Sunday, October 1st. Congress has passed a CR that will run through December 9th. We are a long way from being done with the remaining appropriations process. As is typical, the House has outpaced the Senate on appropriations committee work. The Senate has yet to move any of the 12 appropriations bills to the floor. Look for a series of “mini-bus” appropriations through the fall. As much as we all dislike CR’s, they have been used to some degree in 36 of the past 40 years.
Thank you for your continued readership – we’ll keep an eye on things so you can stay focused on your business.Read more
After being out of office for a month, Congress returned to a significant drum of activity requiring attention in September. Time is critical for these upcoming decisions, as things both on and off the Hill are moving rapidly. See recent developments below.
- Natural disasters like Hurricane Harvey and Hurricane Irma are forcing legislators to pull their attention away from previous debates of tax reform and health care and focus on relief packages. The House and Senate passed a $15B emergency supplemental appropriation that included an increase in the debt ceiling effective until December 2017.
- Appropriations for FY18 have moved to the Senate floor. With less than a month until the start of FY18 on Oct. 1, look for a three-month or six-month CR to maintain funding at FY17 base levels. A CR is sure to include some “anomalies” or exceptions to the FY17 continuation – given the state of tension with North Korea, look for Missile Defense to receive a significant funding boost.
- The House passed its defense spending bill back in July, meaning the Senate’s equivalent is the only obstacle to a fully funded Department of Defense for FY18. Anticipate release of the Senate’s version of the Defense “mark” sometime later in September.
- The FY18 NDAA moves to the Senate floor. With Senator McCain back on the Hill, it will be crucial that the Senate passes their version quickly and moves forward to conference. As with defense appropriations, look for international tensions to influence decisions and provide supporting rationale for increases.
- This week, President Trump announced that his administration would be ending the Deferred Action for Childhood Arrivals program, or DACA, previously pioneered under Obama. He has given Congress a six-month window in which to engineer a replacement program before he begins cutting off the program’s benefits.
Stay tuned for a busy fall session of legislative activity. We watch it so you don’t have to!Read more
A busy July by any Congressional standard. Here’s a brief overview of recent legislation by the numbers:
- Completed House spending bills: 4
- Completed Senate spending bills: 0
- Total spending bills to be passed before October 1st: 12
Now take a closer look at the activity so far:
- The Senate had hoped to move its version of the NDAA to the floor immediately following Health Care debate; however, the wild ride of the Republican-led Health Care repeal effort threw a wrench in that plan. Chairman McCain had hoped to participate in an abridged NDAA floor debate. That didn’t happen and Chairman McCain has returned to Arizona for cancer treatment. It is unclear when the NDAA will move to the Senate floor.
- Congress hopes to move on to tax reform quickly in an effort to accomplish something this year. Frustrations boiled over on the Senate floor as Republicans acknowledged their only “win” this year has been the confirmation of Justice Gorsuch.
- The GOP timeline to produce a budget before the recess is shrinking. Current defense budget proposals far exceed the 2011 budget caps, as well as President Trump’s proposal. Differences among committees and chambers about what the topline can and should be continues to hamper real progress. OMB Director Mick Mulvaney is pushing back against the previously existing compromise of shifting funds into the OCO account, creating further standstill.
- Look for a likely Continuing Resolution to carry into at least late November, as opposed to traditional appropriating methods.
- The House passed defense appropriations for FY18 with a vote of 235-192, as part of a national security “minibus” that included Legislative Branch, Energy-Water, Defense and MilConVA. It is unlikely that this bill will pass in the Senate, and even more unlikely that it will move through without some sort of movement on the budget cap debate.
We’ll continue to track and report. Keep your great questions coming!Read more
FY18 Defense bills take important first steps
Recognizing that getting all appropriations bills completed before the October 1st start of the fiscal year, Congress appears to be positioning for a security “mini-bus” comprised of Defense, Homeland Security, VA/MILCON and Energy/Water.
VA/MILCON appropriations moved through committees almost without notice in June.
Last week, 3 of 4 defense committees/subcommittees approved their FY18 “mark” – their puts and takes on President Trump’s $603B budget request. Given the late arrival of the FY18 budget (late May), it was a bit of a surprise to see committee marks so quickly – attributable to a reduced hearing schedule and clear desire to keep the prospect of a long-term continuing resolution at bay.
Each committee has a slightly different approach; however, common themes include:
- Base + OCO approaching $700B
- Significant investment in readiness accounts
- Less investment in procurement than expected based on campaign message
- Hearing testimony suggests FY19 will be the “buildup” year for Trump
Topline numbers by committee
- Chairman Thornberry’s bill authorizes:
- Base $614B
- OCO $64.6B
- Chairman McCain’s bill authorizes:
- Base $632B
- OCO $60B
- Chairwoman Granger’s bill appropriates:
- Base $658B
- OCO $74B
Political forces continue to impinge on real legislative progress on appropriations and the President’s legislative agenda. Nine legislative workweeks remain until the new fiscal year (FY18). Some highlights and obstacles to consider (see bold for major areas in play):
What it Means
Despite the late arrival of the President’s FY 18 budget proposal, defense committees are attempting to press ahead with “posture” and “budget” hearings. DoD principals and service chiefs have been testifying regularly over the past few weeks and continue this week. Notably, HAC-D has forgone several traditional hearings. The HASC has scheduled their full committee markup 28 June, just before the July 4th recess. HASC is traditionally the first of the four defense committees to “mark” their bill.
Nearly two dozen budget or appropriations hearings are scheduled this coming week.
This past week was to have been “infrastructure” week, with coordinated messaging on the need for extensive investment in transportation. Messaging was completely eclipsed by the testimony of former FBI Chief James Comey.
This coming week, Attorney General Sessions will deliver equally captivating testimony sure to continue the distraction from required legislative business.
Senate Republicans appear to have established the end of June as an internal deadline to find a solution to their version of a fix to the Affordable Care Act. It appears less likely that health care overhaul will survive the political calendar.