Trump Transition's Homestretch
President-elect Trump has only a few Cabinet seats remaining to fill as the confirmation proceedings of those already chosen will kick into gear with the convening of the new Congress today. There are still several gaps in the president-elect's West Wing staff, but we expect a number of high-level appointments in that regard to be announced this week, which will likely demonstrate the complex maneuverings of the various political advisors orbiting Trump as they look to build implicit, and at times even explicit, alliances among themselves.
Cabinet Confirmation Process Gets Underway
While House Republicans get to work on dismantling Obama's legacy, the Senate will begin preparing to confirm Trump’s nominees this week. There are over one thousand nominees in any given administration who need to be confirmed by Congress. Lawmakers are hoping to get as many as five or six cabinet nominees through the process before Trump even enters office. Already, the Senate has tentatively scheduled confirmation hearing dates next week for Attorney General-designate Jeff Sessions, Department of Labor Secretary-designate Andrew Puzder, Defense Secretary-designate General James Mattis, USMC (ret.), CIA Director-designate Rep. Mike Pompeo (R-KS), and Department of Education Secretary-designate Betsy DeVos. Although Republicans do not need any Democratic votes to confirm Cabinet members, the hearings are expected to be contentious, as the nominees were not vetted extensively for potential scandals prior to being chosen, and incoming Senate Minority Leader Chuck Schumer (D-NY) has threatened to further slow the process with procedural roadblocks if the Cabinet nominees aren’t fully vetted by the FBI and Office of Government Ethics before the confirmation hearings ahead of time. But these will be small beans compared to the Supreme Court nominee, which is the confirmation that still requires a 60 vote threshold. If McConnell does not eliminate the filibuster for this position, Democrats will throw as many parliamentary delays into the process as possible—both because they will likely vehemently disagree with Trump’s nominee and because they are still angry that Republicans refused to confirm Merrick Garland.
GOP's 2017 Legislative Agenda: Sequencing And Timing
After holding both the House and Senate for the past two years under a Democratic administration, Republicans finally have an incoming president who will sign off on their agenda, and they have made it clear that they will take full advantage of the new world order. They plan to repeal Obamacare in the first 100 days, and we expect tax reform legislation to pass within the first year. And although it is not their top priority, congressional Republicans may pass some form of infrastructure funding legislation using money from tax reform, albeit substantially less robust than promised by Trump on the campaign trail. The GOP will also get to work at the outset overturning President Obama’s legacy of executive orders and regulations, with the conservative Freedom Caucus having already drawn up a list of over 200 items they would like to overturn.
Republican power in the new congress is vast, but not limitless. The Democratic minority will be able to play defense in the Senate, where 60 votes are still required to pass most legislation and confirm Supreme Court nominees. The Senate GOP will be able to use a process known as budget reconciliation to pass two bills this year that require only 50 votes—which they intend to use to repeal key elements of the Affordable Care Act (ACA) and pass comprehensive tax reform. There is also a reasonable chance that Senate Republicans will grow frustrated with Democratic delays and roadblocks, and will remove the filibuster entirely by invoking the so-called "nuclear option," meaning they will need only 50 votes to pass legislation. This will give them free reign to pass the legislation they want, but could make any legislation passed vulnerable to repeal if Democrats sweep the House, Senate, and White House in the future. Meanwhile, even as they attempt to pass their sweeping agenda, Republicans will be slowed by the regular business of governing, which includes confirming executive branch nominees, passing spending bills, raising the debt limit, and reauthorizing the basic programs that make the federal government function.
Based on what congressional Republicans and Trump have indicated are their top priorities, these are the key issues that we expect Congress to address in the coming year:
Repeal (And Replace?) Obamacare
Repealing Obamacare is the number one priority for both Congress and the administration in 2017. In order to bypass Democrats in the Senate, they will use the reconciliation process—both the House and the Senate must pass budget resolutions, instruct relevant committees to develop the substance of the legislation, and then pass the legislative package through both chambers. The budget resolution unveiled in the Senate yesterday instructed the relevant committees in both chambers to prepare their draft legislation by January 27th, at which point the House and Senate Budget Committees will prepare the overall legislative packages to repeal major elements of the Affordable Care Act.
To get an early start, the Senate will begin debate of its budget resolution. Consideration of the Senate budget resolution is a multi-day process that allows for extended debate and also a “vote-a-rama” during which members get to propose an unlimited number of amendments (as long as they are relevant to budget matters) for votes. Consequently, they are not expected to finish until next week.
The House Republican Conference will go first on moving the final legislative package through relevant committees, and will send that package to the Senate when it is complete. The Senate may make some changes to what the House passes, as they are likely to be more conservative about repealing the massive program.
We expect that the reconciliation measure will contain language that punts any substantive changes to the law for as long as three years, seeking to provide Republicans more time (and specifically until after the 2018 midterm elections) to form a replacement plan to fill in the gaps of the reconciliation bill and seek to pass it through regular order, i.e. subject to Democratic filibuster in the Senate. But there is still disagreement over how long to wait. Some Republicans want to move new legislation as fast as possible. Others believe time is needed to put together a replacement plan.
There is still a possibility that enough Senate Republicans object to repeal efforts without a replace plan, which could delay passing the budget resolution or other legislation. Key Senate healthcare leaders, such as Chair of the Committee on Health, Education, Labor, and Pensions Lamar Alexander (R-TN), are hesitant to endorse a strategy to repeal the law without simultaneously providing for a replacement plan. In order for these voices to win out, only three Senate Republicans need to vote (or threaten to vote) against the reconciliation measure, forcing the GOP to go back to the drawing board and coalesce around a replacement plan before attempting to repeal the law via reconciliation again. Congress would not repeal and replace Obamacare until around the late spring or early summer of 2017 in this scenario. However, our baseline expectation is for Republicans to successfully pass a "repeal and delay" measure in some form. The real question is whether enactment of the GOP's repeal measure triggers sufficiently adverse consequences in the insurance market this spring when 2018 plan bids are released that Republicans are forced to either negotiate with Senate Democrats on a replacement measure sooner than the statutory deadline put in place or trigger the nuclear option to change the Senate filibuster rule to force through a yet-to-be-determined GOP replacement plan.
Comprehensive Tax Reform
House Ways and Means Committee Chairman Kevin Brady (R-TX) has promised to release his first draft of tax reform legislation early this year. Republicans will then get to work finalizing their plans to add reconciliation instructions to a separate budget resolution for FY18 later this spring, allowing them once again to bypass the 60 vote minimum in the Senate, as they plan to do for repealing the ACA.
Although lawmakers like Brady—who have spent years salivating over the opportunity for tax reform—have promised to move the legislation quickly, we expect that the bill is unlikely to pass through both the House and the Senate until the fall. The legislation will work through the committee process before then, but will need to wait for the FY18 budget resolution to initiate the reconciliation process.
To that end, Brady led Republican leaders and members of the House Ways and Means Committee in a two-day retreat last month to discuss their priorities for tax and ACA reform. During the retreat, members expressed concern about using reconciliation to pass the tax reform legislation, as doing so would result in most, if not all, of the tax cuts expiring after ten years. Additionally, reconciliation requires that the legislation be budget neutral.
Although Brady has said that they are already "in the ballpark [of neutrality] with the blueprint," we are skeptical that the tax bill will be truly deficit-neutral, even using dynamic scoring, which allows the Congressional Budget Office (CBO) to consider macroeconomic impacts when determining the budgetary effect of legislation. Doing so would, at a minimum, require that the House GOP include its controversial border trade adjustment proposal that is estimated to raise $1.2 trillion to offset the proposed tax rate cuts. Although incoming White House Chief of Staff Reince Priebus threw the Trump administration's support behind the proposal in December, it has also gotten pushback from important constituents, including a group of 75 major corporations that wrote to Brady late last year with their concerns.
Consequently, at the December retreat, House Ways and Means members expressed an interest in pursuing comprehensive and permanent legislation. To do so, tax writers would either have to compromise with moderate Democrats to get to the 60 votes needed to pass the bill in the Senate, or (more likely in our view), they will give themselves more leeway by deciding to do away with the 60-vote filibuster requirement by invoking the "nuclear option."
Trump has promised a major infrastructure investment initiative, but any infrastructure spending will need to wait until Congress has generated some revenue through tax reform before it stands a chance of getting passed. As Senator John Thune (R-SD), chairman of the Senate Commerce Committee, recently remarked, "I don't know that just an infrastructure bill on its own, a stand alone, would probably go anywhere. But I think it'd have to be coupled with something that we view to be really advantageous in terms of growing and stimulating the economy."
And even if they achieve tax reform, Republicans in Congress have not expressed much enthusiasm for Trump’s $550 billion, ten-year plan. The Trump plan is predicated on providing tax credits to catalyze private investment, but the problem with this is that the House GOP's tax reform blueprint is premised on ending special interest credits and deductions—including net interest expense deductibility—to pay for it, not adding new ones. Additionally, infrastructure investment (in contrast to spending) requires a revenue-generating project, which could work with a toll road or an airport that produces user fees, but does not work with many highways, bridges, and other forms of infrastructure facing pressing repair needs that don't necessarily produce a revenue stream.
Once tax reform comes to the forefront of legislative action, we expect President-elect Trump's continued emphasis on transportation infrastructure investment in particular will likely soften congressional Republicans' resistance—but not enough to come close to even the $550 billion number posted on the Trump transition team's website. Rather, we do not expect the GOP-led Congress to dedicate more than half of that amount, at best, from the deemed repatriation of overseas corporate profits to meet infrastructure needs.
Finally, assuming that Congress does eventually approve funding of up to an additional $275 billion to upgrade the nation's public transportation infrastructure, the question will then be to what extent will funds be allocated to repairing existing structures and how much will be used to build new projects. The former tends to create quicker, but shorter-term employment. In terms of the spend rate though, the latter takes much longer for the money to actually be disbursed to the companies that would benefit.
Overturning Obama Regulations
The House GOP has promised to overturn as many of the Obama-era regulations as it possibly can in the 115th Congress. To that end, the conservative House Freedom Caucus reportedly has a list of over 200 regulations that it hopes to overturn, including the Food and Drug Administration’s tobacco rules and executive orders that require higher wages for federal contractors.
Congress’s most powerful tool for overturning Obama rules at the beginning of the Trump administration is the Congressional Review Act (CRA). It gives Congress 60 legislative days to pass a resolution to block regulations before they take effect. The 60-day period does not include days when the House or Senate are in recess, which they have been for much of the campaign season.
Consequently, the Congressional Research Service (CRS) estimates that any rule passed after June 2nd, 2016 is subject to a CRA resolution. Importantly, rules that are passed in the last 60 days of a congressional session are subject to a reset at the end of that session to give Congress enough time to consider them. Thus, Congress has another 60 legislative days this year to address all of the rules finalized after June 2nd of last year. Additionally, as long as Congress follows certain procedures, the resolution is not subject to filibuster in the Senate, meaning it requires only a simple majority vote to pass—making it impossible for Democrats to block. The CRA has been used by Republicans five times this past year, but has been vetoed each time by President Obama.
Rules under discussion to be overturned include the Department of Interior’s Methane And Waste Prevention Rule, the Environmental Protection Agency’s Standards To Cut Emissions From The Oil And Gas Sector, and the Federal Communication Commission’s Broadband Privacy Rule.
Additionally, this week, the House is expected to pass the Midnight Rules Relief Act, which would allow them to overturn all of President Obama’s regulations subject to the CRA with one vote, and the Regulations From the Executive in Need of Scrutiny (REINS) REINS Act, which would require congressional approval for all new “major” regulations, meaning regulations that cost more than $100 million. This week, the House is also expected to pass a resolution disapproving of the UN Security Council resolution condemning Israeli settlements on the West Bank, which President Obama let pass last month without objection.
These bills will still be unable to pass the Senate without 60 votes—meaning they are dead on arrival unless the Senate changes its longstanding filibuster rule.