US Fiscal: SOTU and the Debt Ceiling

Published on January 29, 2014

It was only with the Federal Open Market Committee statement out of the way this afternoon, that we started to think about the President’s State of the Union address last night. There were low expectations going into last night’s speech, and it can be safely said those expectations were met.

*** But we understand that Republicans, while as could be expected are dismissive of most of the more rhetorical flourishes, took the address as the opening to the negotiations over the debt ceiling as the single most important “must pass” bill looming on the near legislative agenda. But to a lesser probability, the profit repatriation scheme may also be drawn into the post-SOTU negotiations. ***

GOP to weigh Debt Ceiling Options

The President did reiterate his position that Congress must raise the debt ceiling without any negotiation to avoid the sure catastrophe of a default. But in also asking for a hike in the federal minimum wage and, by logical extension, funding increases in future years to cover new, higher minimum wage levels by federal contractors, he was in effect putting both on the table for negotiation in return for the “must pass” debt ceiling deal.

Democrats were delighted to see a lively President at the podium, brandishing his agenda. Republicans, especially those in the House GOP leadership, took the SOTU address as an opening bid.

At least that is the way many Republicans, including among the House GOP leadership, took the SOTU address. By chance, the House Republicans will be convening this coming weekend on the Eastern Shore of Maryland to plan out their year, and high on the list will be how they will respond to the President on the debt ceiling.

At this point, there is still so much more “flushing out” to happen in the weeks ahead by both parties, but the retreat should provide some guide to where the GOP House leadership in particular would like to steer this.

The short version is that they want to avoid another politically costly confrontation over the debt ceiling extension, and prefer instead to kick it into next year, when they might find it useful as leverage in having another go at tax and entitlement reforms — especially if they win the Senate in November.

That in turn, with details to come probably by the weekend, points to an “ask” on the debt ceiling that is relatively easy to be met, perhaps with language in the House debt ceiling bill that commits to some sort of time frame for that tax and entitlement reform push envisioned for next year.

Otherwise, at the top of their agenda will be new legislative alternatives to “replace” the Affordable Care Act. Been there, done that, and the President was effective in chastising the House for having voted some 40 times in the two previous years to repeal “ObamaCare” all to no end.

This year, though, it is the Democrats in the Senate up for reelection in 2014 who most desire new votes to prove to their voters that they “fixed” the ACA, which puts a bit of a different spin to yet another ACA drama if one unfolds in the election year.

Infrastructure and Profit Repat in Play?

The President also made a glancing reference to net new revenues that would be gained if corporate taxes are reformed to encourage profit repatriation that could, in turn, be used to finance new infrastructure spending.

One of the biggest unsatisfied hungers in Congress and in state capitals is infrastructure funding. Total government spending on infrastructure is down dramatically from the levels of the last three presidents, even with the inclusion of President Obama’s first year stimulus package of $825 billion (which, despite the marketing pitch, dispersed less than 5 percent of spending on infrastructure.

The transportation lobbies had been expecting the President to endorse a bill introduced last year by freshman Representative John Delaney (D-MD) which has earned a unique distinction in this low-activity Congress as it has 50 co-sponsors in the House, equally divided by the two parties, and a bipartisan companion bill in the Senate.

But instead of rejoicing that the President highlighted the need to fund more infrastructure, the remarks we picked up from both Democrats and Republicans on the transportation committees so far are mixed at best, mostly leaning towards disappointment.

The Delaney bill, or something derived from it, is a possible amendment to some yet-to-be-named must-pass piece of legislation later in the year. Earmarks are gone but not forgotten on Capitol Hill. Bipartisan majorities (not including the Speaker) are eager to find a new way to fund projects. The Tea Party and the “Not in My Backyard” lobbies will rebel but there is considerable private sector support for boosting spending to help boost GDP.

Couple that to the technology companies, with collective trillions in retained earnings abroad and seeking a low repatriation rate, and the Wall Street houses eager to sell new financing structures, and something could still come of the infrastructure spending ideas.

Under the long-gone days of “regular order,” these constituencies might just combine with the transportation lobbies to cajole Congress to drive this agenda item.

In any case, seriously heavy lobbying would no doubt be needed to boost the odds of anything happening on this front this year. Republicans are reluctant to cherry pick pieces of tax reform, preferring instead to make a push for a more broad-based tax and entitlement reform, perhaps in 2015.

But it cannot be ruled out as it has effectively been put in play, even as difficult as it is to see a divided Congress acting together to increase infrastructure funding without a far stronger commitment by the White House.

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