Capitol Hill: Bridge Out Ahead

Published on June 30, 2017

There is perhaps no one more happy to see the Fourth of July break than Senate Majority Leader Mitch McConnell after the most recent stinging setback among Republicans on Capitol Hill to replace Obamacare with, well, just about anything that might garner the necessary GOP votes.

McConnell is vowing another go at a Senate Republican alternative to the Affordable Care Act soon after Congress returns from the recess July 10. The odds of success are slim, however, and any healthcare bill that clears the Senate faces low probabilities in passing once it goes back to the House.

*** More importantly, the longer the GOP struggles to pass any healthcare replacement of Obamacare, the longer the reconciliation instructions attached to the FY2017 budget resolution stay in place, further delaying any similar reconciliation to avoid a Senate filibuster on the intended tax reform. Indeed, the GOP’s legislative ambitions to move a stalled FY2018 budget, and the lack of movement or even a strategy to pass a bill to increase the federal debt ceiling is pointing to a major legislative train wreck in September. *** 

*** The risks that Congress will stumble into an “accident” triggering a government shutdown or worse, a failure to pass the debt ceiling before the first half of October are higher than the market is currently assuming. The factionalism and infighting among Republicans is threatening the abilities of the House and Senate leaderships to navigate passage of a CR by October 1 to keep the federal government open or to pass an increase in the debt limit before all extraordinary measures are exhausted. ***

A Shrinking Legislative Calendar

While the legislative calendar can be extended by Majority Leader McConnell and House Speaker Paul Ryan, it is for now more unlikely than not, which means there are approximately 27 working days on Capitol Hill left in July and September before the end of the FY2017 fiscal year.  

And that will not nearly be enough time to fix and pass every major piece of legislation on the Republican wish list, especially not when each one of the bills is either stuck in neutral or declining in support: amendments to the ACA as part of the current Reconciliation budget resolution, tax reform as part of the following Reconciliation budget resolution, 12 appropriations bills (or a Continuing Resolution), and an increase in the national debt limit.

Despite controlling both the Senate and House, the Republicans on Capitol Hill have almost no prospects for passing a joint budget resolution, which would set the total discretionary spending for the coming fiscal year and the top line amounts for each of the 12 spending bills. 

Senate Majority Leader McConnell has instructed Senate appropriators to draft what spending bills they can, based off the FY2017 budget numbers; in the House, a proposed budget deal to increase defense spending by $50 billion, offset by dollar for dollar cuts in non-defense or entitlement spending, is already teetering and ready to collapse.

There is likewise almost no chance any of the 12 spending bills could be debated, drafted and moved out of Committee to floor votes in both chambers before October 1. A Continuing Resolution to keep the federal government operating after the end of the fiscal year September 30 looks inevitable. But it will need to be passed with Democratic votes in the Senate — appropriation bills cannot be passed through reconciliation – and in the House by bridging the wide gulf between the Freedom Caucus, the defense hawks and the budget balance factions. 

It means the first two years of the Trump Administration will essentially be an extension of the Obama fiscal policy that was only marginally increased under the deal crafted by former House Speaker John Boehner from the curtailed spending levels imposed by the Republican-passed Budget Control Act of 2013 and the sequester. In other words, there is dimming prospects for the anticipated “Trump reflation” that drove the stock market to record highs. 

Debt Ceiling and Tax Reforms

There is a very low probability of debt ceiling legislation being passed before the August recess despite the pleas of Treasury Secretary Steven Mnuchin to do so in order to avoid heightened market volatility. Adding an amendment on a debt ceiling increase to a “must pass” bill in September has become more logistically difficult with no spending bills likely before September 30. 

That leaves a last minute CR as the most likely legislative vehicle. And almost by default, because the approach of an impending deadline is when maximum leverage is possible, there is every chance the debt ceiling increase will be pushed right to its brink.

What’s more, the absence of a common understanding of just when the “drop dead” debt ceiling deadline occurs encourages the kind of reckless dissent from the far right Republicans in the House who have previously threatened to derail previous debt ceiling increases in pursuit of high voltage issues like defunding Planned Parenthood. In previous years, congressional Republican leaders worked with a Democrat president to pull together bipartisan majorities in Congress, at the last minute, to keep the government running. No one should expect that pattern to repeat this year.

The Republican struggle to write a bill on tax cuts much less a broader tax reform, already difficult, is being made that much more difficult by the failure to pass the healthcare legislation. That is because a tax bill still needs a reconciliation vehicle to have any chance of passing without Democratic votes. 

Congress is only allowed to process one Reconciliation resolution at a time. As long as the health care efforts are tying up a FY2017 budget resolution with the reconciliation instruction, there can be no progress on a tax bill moving through the Senate under reconciliation instructions to protect a tax cut from a Senate filibuster. 

And for all the headlines and tweets, the Trump White House is likely to have as limited an influence on tax bills as on any of the other agenda-setting legislation on Capitol Hill. The White House meeting with the 52 GOP Senators earlier this week was a case in point: there were never any serious discussions of how to move the bill forward and it was clear the President had little sense of what was in the Senate bill. 

On the tax front, though, National Economic Council Chairman Gary Cohn and Treasury Secretary Steven Mnuchin should have more sway in representing the White House agenda on tax reform. We think there is still a chance, though shrinking, for at least tax cuts before year end, but they are far more likely than not to be smaller in scale than envisioned at the beginning of the year (see SGH 5/5/17, “US: From Here to Tax Reform”).

Democratic and GOP Moderates Leverage

If anything, the GOP stumbles on the Hill and the White House lack of discipline are shifting the leverage to Senate Minority Leader Chuck Schumer and even to House Minority Leader Nancy Pelosi. 

Senate Majority Leader McConnell is threatening at some point to go to Democratic Minority Leader Chuck Schumer to get a healthcare bill passed, but that in reality is essentially an acknowledgement the Republican efforts have collapsed since the Democrats would demand the start to an entirely new bill, or at minimum, the move to bi-partisanship would significantly boost the leverage for moderate Senate Republicans like Maine’s Susan Collins or Ohio’s Rob Portman. 

And that leverage going to either the Republican moderates or to some degree to Democrats applies even more so to the efforts to pass a CR or a debt ceiling increase. Majority Leader McConnell still needs to negotiate the top line for the FY2018 budget resolution that includes higher defense spending, but to get to 60 votes, he will need Schumer who in turn will demand matching levels of non-defense discretionary spending. That may be the only realistic prospect for any appropriation bills moving out of the Senate at a higher level of spending.

On that front, perhaps the most important turn of events on the Senate side in July will be when McConnell and Schumer begin their negotiations on the top line of the FY 2018 budget and how much more defense and non-defense discretionary spending it may include, as well as the options in crafting a debt ceiling increase. 

This will be the first fiscal crisis of the Trump presidency and it should not be presumed that Democrats will give their votes this year as they did during the eight years of the Obama presidency. We anticipate that the conditions requested by Senate Minority Leader Schumer and House Minority Leader Pelosi to pass a CR and a debt limit increase will include more domestic spending, less defense spending, and an abandonment of Republican bills on healthcare and taxes. 

They will certainly not get everything even close to their demands, but the leverage ceded to them by the Republican infighting will leave their mark. This is the box canyon into which the Trump White House is fast approaching.

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