In the wake of Hurricane Harvey’s devastation to large swathes of Houston and eastern Texas, political developments are moving quickly in Washington even before Congress returns on Tuesday.
*** The Republican Capitol Hill leadership is moving towards a legislative plan to combine authorization bills for an initial emergency funding for Houston relief with a suspension of the ceiling for federal debt until after the mid-term elections in November 2018. The plan could be unveiled as soon as the “Big Four” meeting at the White House on Tuesday between President Trump and Senate Majority Mitch McConnell, Minority Leader Chuck Schumer, House Speaker Paul Ryan, and House Democratic Minority Leader Nancy Pelosi, or even sooner to grab media attention. ***
*** If the plan holds together, the combined authorization bills would likely pass with large majorities and, in theory, could be rapidly brought to floor votes as soon as the end of next week, though the following week is more likely. Democratic support would, in effect, neutralize the objections of the House Freedom Caucus, already objecting to the leaks about the plan and who are demanding spending cuts be tied to the debt ceiling suspension, while the Houston relief should silence the objections of the large Texas GOP delegation. ***
*** We would caution, however, that the expected near term rapid progress on the debt ceiling will not ease the still difficult path to the Republican-promised tax cuts, or indeed passing a Continuing Resolution to avoid a government shutdown October 1 or for that matter, again on a second go in probably December. We still believe if there are to be tax cuts this year, they are likely to be only in corporate taxes with a new tax rate of around 25% (see SGH 6/30/17, “Capitol Hill: Bridge Out Ahead). ***
The Legislative Sequencing
While much of the current focus is on the plan to link the authorizations of the federal aid to the Houston area and the suspension of the debt ceiling as quickly as possible, it is fast shaping up as only the first of a four-step legislative sequence the Republican leadership may soon settle on as their base case path to push through the must-pass bills of September and to clearing the way for a much-sought tax cut of some size before the end of the year.
• First up would be the debt ceiling and the authorization for the initial Houston relief, which could come up for a vote as soon as the end of next week or more probably early the following week. The House Freedom Caucus is already objecting, but Democratic support for the combined bill all but neutralizes their resistance, while the desire to fund federal aid to the Houston area is all but quelling the objections of the large conservative Texan GOP delegation;
• Following that would be the negotiations to pass a Continuing Resolution. A CR is a spending bill and therefore requires 60 votes, meaning Senate Majority Leader McConnell will need at least eight and probably a dozen Democratic votes for the Senate floor vote. So the question is not really whether there will be deep spending cuts as the HFC or the Trump White House are demanding, but how much in the way of non-defense discretionary spending will the Democrats require in return for their votes? Likewise, Democratic pressure is likely to keep the extension of the CR to 60 days or into December, rather than 90 days as many Republicans are pushing for to keep it clear of the tax fight;
• Before the tax bill ever sees light of day, the GOP must first push a FY2018 Budget Resolution. Both Majority Leader McConnell and Speaker Ryan are understood to be keen to get the short term CR passed before the budget resolution, thus putting its vote into October. Two points are crucial: first, there can be no tax cuts at all without first passing the budget resolution with its essential reconciliation instructions, and; second, while it would only require 51 votes in the Senate, the divisions within the GOP are such that Majority Leader McConnell will likely need Democratic votes. In other words, the Democrats will again hold leverage over the final drafting of the resolution, which could, for instance, include a provision the tax bill be written to “current law” rather than “current policy,” which would limit the size of any budget-neutral tax cuts down the road. “Current policy” would direct CBO to presume that certain tax provisions will be continued, if those policies have been extended by further Acts of Congress in the recent past (and not presumed to end upon the expiration of a “current law”). What may appear to be a mere partisan spat over semantics, is a fight over half a billion dollars in CBO scoring ;
• And finally, sometime beginning in late October or November, the House Ways and Means Committee will unveil its long-promised tax legislation that, under the current, very aggressive timeline, would make an unusually rapid advance to floor votes by late November, but probably go into the Christmas break to year-end in a high stakes repeat of the fiscal cliff vote of 2013.
In other words, there is likely to be near term good news in the debt ceiling risk taken off the table, but the most likely outcome of the political dynamics unfolding through September will be pushing the truly big legislative battles over a full year FY2018 appropriations and above all, tax cuts, into that always unpredictable political horse-trading period between Thanksgiving through Christmas and the end of the calendar year.
Houston and Debt Drop Dead Date
We understand there has also been a serious look into a “big bang” package of using the must-pass Houston relief bill to muscle in the votes to pass the full year FY2018 Continuing Resolution in order to avoid a shutdown of the federal government on October 1.
But on that front, our sense is that the Capitol Hill leadership is deeming it too heavy a political lift to whip the votes from the various competing constituencies, which would in turn risk slowing passage of the Houston and debt ceiling authorizations.
Helping to make the case to combine the Houston relief with the debt ceiling is going to be the argument that will be weighed at the White House on Tuesday that whatever funding is made immediately available for Houston will run down Treasury’s cash on hand — and at a time when Treasury’s initial estimates of tax receipts due on September 15 are already being lowered.
That is effectively bringing the estimated first half of October “drop dead” date to suspend or increase the debt ceiling into September. In that sense, the Houston relief and the debt ceiling are now linked in timing, as well as in proposed legislation.