US: Political Headwinds, Fiscal Tailwinds

Published on November 14, 2014

Explosive leaks and rumors of the White House weighing an executive order on immigration are stirring up renewed partisan passions on Capitol Hill, putting the leadership abilities of the Republican congressional leaders to an immediate testing. ​

The risks in a return to partisan rancor, likely splits within the GOP or possible renewed Tea Party threats for another government funding shutdown or a debt ceiling showdown, are real, but we think a shutdown remains a tail risk for now. In particular, the only real “must pass” legislation during the current lame duck session underway is to pass an extension of the current Continuing Resolution beyond its December 11 deadline and to pass all or most of the various tax breaks or tax extenders before they expire at year-end.

*** We think extending the CR or passing some of the FY 2015 appropriations bills and avoiding a shutdown is very likely. We understand the CR/minibus is likely to be written to ensure a longer end-date, probably through the end of September next year, thus avoiding any linkage to a debt ceiling increase next year, while its final dollar amount will be as much as $100 billion above the $1,018 trillion top line under the Murray-Ryan Budget agreement two years ago, which will add to the fiscal tailwind we expect to US growth next year. ***

*** Whether the 55 tax breaks will be “extended” beyond a year-end expiration offers as much leverage as the CR for the House GOP, and many Republican conservatives want to cherry pick to delete those supported by Democrats while extending those they favor. But the GOP conservatives lack a coherent, unified position and their numbers are still too small to be effective. Their demands in the House version of the tax extenders, however, may lend to the pressure on Senate Democrats to accept some form of defunding language on an immigration Executive Order. ***

*** Pending the details of that executive order, the GOP leadership is likely to counter the President’s immigration gambit by one or a mix of the options being weighed, led by adding the defunding language to the CR, with hearings through next year, and/or by pressing ahead with legal challenges to the power of the presidency on executive orders, and putting a hold on the confirmation of Attorney General nominee Loretta Lynch. ***

The politics on the Hill are going to get complicated fast, in other words, but for now it is wildly overstating the potential repercussions to conclude it will derail passage of the CR or the outcomes to the budget process next year.

No Leadership Change, but Diminished Powers

For all the losses accumulated on both the Senate and House sides by the Democrats in last week’s mid-term elections drubbing, it may be a bit of a surprise the Democrats voted to make no changes in the top leadership slots. But shifts in the power of the Senate leadership may mark an important change in the tone of the Senate deliberations going forward.

The headline grabber is that facing no declared opponent, Senator Harry Reid was re-elected as leader of the Senate Democrats, though of course as Minority, not Majority Leader when the 114th Congress convenes January 3 next year. Next week, Nancy Pelosi will be elected House Minority Leader, also unopposed.

What stood out in the near four hour closed door Senate leadership session yesterday were calls to delay the vote to allow for more time to assess the lessons in the electoral losses that were shot down by voice vote, and that at least six Democratic Senators voted no to Reid’s re-election — Senators Heidi Heitkamp (D-ND), Tim Kaine (D-VA), Mary Landrieu (D-LA), Joe Manchin (D-WV), Claire McCaskill (D-Mo.), and Mark Warner (D-VA) — who pretty much comprise the core of the Democratic centrists who may take the lead is helping to shape more bi-partisan legislation next year.

The “no” votes may indicate that some Democratic Senate centrists intend to distance themselves from Reid.

In addition, in the lobbying over the previous few days to keep his position as leader, Reid promised in one on one meetings that he would broaden the participation in the weekly Tuesday leadership meetings, and to revamp the weekly policy lunches to allow for Democrats outside the leadership circle to shape the party’s position and messaging on specific issues likely to reach the Senate floor.

And next year as Minority Leader, Reid will also have far less procedural clout to deny fellow Democrats the right to offer amendments or debate, which should translate into a freer flow of votes on the floor, assuming that new Majority Leader McConnell follows through on his promise to a return to the more deliberative Senate.

Reid also put Senator Elizabeth Warren of Massachusetts in a new role handling messaging, which has some potential to cause friction rather than cohesion inside the Senate Democratic caucus. But for the centrist-oriented “dealmakers” on both sides of the aisle whom we expect to see assuming a larger role next year, winning the majority of all Senators to vote for a negotiated, bipartisan deal on an issue is a bit easier, not harder, if to some degree the wings of both parties net each other out, or end up isolating themselves.

Meanwhile, Kentucky Senator Mitch McConnell won unanimously as Reid’s replacement as Majority Leader. And on the House side, for all the Tea Party threats and temper tantrums aimed at Speaker John Boehner, an Ohio congressman for 23 years, he was unopposed and also easily re-elected by his fellow House Republicans. The full House will vote whether to re-elect Boehner for a return as House Speaker in early January.

Although there will be plenty of partisan positioning and sniping to fill the headlines in the coming weeks, the debate for the most part in the Republican circles will narrowly focus on whether Republicans in a lame duck Congress have effective leverage over a potential White House unilateral move on new immigration policy without a counter-threat of nuclear proportion — and the short answer is no, they don’t; until the GOP control both houses, it’s leverage  to demand capitulation is near zero.

And that, in turn, means managing hot potato issues like immigration inside two rather different GOP caucuses in the House and Senate chambers and while the GOP remains deeply divided over the issue will in the end see McConnell and Boehner delivering on their repeated assurances they will not allow a government shutdown.

A Minibus/CR with a Fiscal Tailwind

House and Senate appropriators have already been working for months to complete as many of the FY2015 spending bills as they can rather than rely on a blunt across the board CR to continue spending at the FY2014 levels. The House has already passed seven of the 12 spending bills, and has reported another four out of committee, while the Senate failed to pass any spending bills, though the Senate Appropriations Committee did at least move four spending bills before they stalled in the Majority Leader’s office.

An appropriations bill containing most or all of the individual spending bills is possible but not likely, meaning the most likely legislative vehicle to keep the federal government operations funded beyond December 11 will be a combination of a “minibus” of four or five spending bills with the rest bundled into another continuing resolution.

Congressional leaders of both parties (for now, at least) want the CR to be extended longer rather than shorter, probably through the end of the fiscal year next September 30, to deliver on their promise to avoid a shutdown.

We understand that to keep the Tea Party rebels away from derailing passage of the CR and to prevent a shorter end-date, to February or March, for instance, the Republican leadership is weighing to include the language in the CR that would preclude funding for any immigration executive action. And to ensure safe passage, there is some talk of writing the bill so that a vote against the longer dated CR would be a vote against funding to combat ISIS and Ebola.

So despite any headlines to the contrary in the weeks ahead, we think both McConnell and Boehner are determined to start the new year of their majority control on the Hill clear of political capital-consuming rearguard legislation by crisis battles. And the end of that two-year Ryan-Murray budget deal is also seen as the ideal moment to start with a “cleaner” GOP spending blueprint.

Another key legislative debate will be what to do with some 55 different tax breaks or exemptions that will expire at the end of this year unless extended through the end of 2015, which seems likely. Those tax extenders are worth some $87 billion in revenues and are tantamount to targeted tax cuts. There is also some $5.6 billion Congress is likely to appropriate outside the scope of the annual budget to fund the additional troops in Iraq, more additional billions to combat ISIS, as well another $6 billion for Ebola funding.

More to the point, none of the lost tax revenue or additional spending is likely to be offset with spending cuts elsewhere, and so will lift the total fiscal impact next year by around $100 billion and counting, on top of the higher baseline spending level of the appropriations package likely to be passed.

Some of the far-right lobbying groups such as the Koch Industries and a handful of very conservative think tanks – always keen to keep their fund raising coffers – are already lobbying to cherry pick some of the tax extenders to deny the tax breaks for industries favored by Democrats, such as wind and solar power subsidies.

To do so, however, with a Democratic Senate, would inevitably open a can of worms and open the door to days of debate, eating up precious time to clear the deck on the legislation the GOP favors. Everyone, Democrats and Republicans alike, do not want the lame duck to carry over into a long weekend or worse into the week after its “soft” start to the Christmas recess on December 12.

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