Cozen Currents: The Sausage-making Process of the GOP’s Big, Beautiful Bill

“While the Trump administration continues to implement its executive agenda at a breakneck pace, congressional Republicans are literally forced to deal with consensus by committee to realize their legislative agenda.” — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

• Republicans’ legislative agenda is plodding along, as they seek to reach intra-party agreement on the fiscal contours of their reconciliation package.
• President Trump, new agency leadership, and congressional Republicans are laying the groundwork to provide the regulatory clarity the crypto industry has long sought.
• Once esoteric issues of corporate law have even fallen into the ever-expanding circle of partisanship, leading some notable firms to reincorporate in Texas from Delaware.

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Reconciling GOP’s Reconciliation Ambitions

Banking on Cuts. Following months of internal negotiations, the House GOP advanced a budget resolution detailing a blueprint for one, all-encompassing tax and spending-focused reconciliation bill out of the House Budget Committee.

• Looking at the toplines of the House GOP’s budget resolution, over 10 years, the framework requires at least $1.5 trillion in cuts to mandatory spending, outlines a ceiling of $4.5 trillion in the total allowable deficit impact of the tax cuts, outlines a ceiling of $200 billion in new mandatory spending on border security and a ceiling of $100 billion in new mandatory spending for defense, and calls for a $4 trillion increase of the debt limit. During the House Budget Committee’s mark-up of the resolution, an amendment was adopted that would require lawmakers to further reduce the ceiling on the tax cuts’ deficit impact if they cannot achieve at least $2 trillion in cuts to mandatory spending.
• Diving into the required spending cuts at a committee level, the majority would come from the House Energy and Commerce Committee which must find at least $880 billion in savings. While a portion of those can come from a repeal of remaining Inflation Reduction Act (IRA) spending or spectrum auction sales, the high level of required cuts will necessitate reforms to Medicaid. GOP lawmakers are already coalescing around the idea of adding work requirements to the program, which could generate more than $100 billion in savings, but other more significant reforms, such as lowering the higher federal matching rate for the Medicaid’s expanded Affordable Care Act population, are expected to be part of the negotiations as well.
• While House GOP lawmakers are eager to pass the budget resolution and begin work on the domestic policy package, the looming specter of cuts to social services programs like Medicaid is creating concern among moderates. House GOP leaders dramatically increased the level of required spending cuts from their original framework in response to demands from fiscal hawks. Now, some moderates are balking at the need to eliminate social services their constituents rely on. With all Democrats set to vote against the budget resolution when it comes to the floor next week, House GOP leadership can only afford to lose the support of one GOP lawmaker.

A Taxing Negotiation. While much higher than it was in 2017, the $4.5 trillion maximum allowable deficit impact for the tax cuts portion of the bill is lower than GOP tax writers had hoped it would be.

• As House Ways and Means Committee Chair Jason Smith (R-MO) himself has pointed out, a 10-year extension of the expiring Tax Cuts and Jobs Act (TCJA) provisions would cost roughly $4 trillion before interest. If combined with President Trump’s campaign trail tax promises, such as an increase of the cap on the state and local tax deduction, the elimination of federal taxes on tips, overtime, and Social Security payments, and a reduction in the corporate rate for domestic manufacturers, the Committee for a Responsible Federal budget estimates that the tax package could cost upwards of $5 trillion. In other words, the blueprint doesn’t create enough room for all of the GOP’s tax priorities.
• GOP tax writers are at odds over how to address the issue. One option being floated by Rep. Nicole Malliotakis (R-NY) is an eight-year extension of the TCJA, creating additional room for new tax policies. Other tax writers are pushing back, arguing that the TCJA must be made permanent, something Senate GOP leadership also believes. Those lawmakers acknowledge that doing so would require cuts to Trump’s campaign promises. Tax writers will also need to find offsetting revenue-raising changes to the tax code, as they did in 2017, with many of the IRA’s tax credits on the chopping block. Negotiations over other tax priorities, such as a full restoration of the up-front deduction for domestic research and development costs, could also be made more challenging by the low ceiling.

The Senate is in the House. A combination of limited faith in the House GOP’s ability to work quickly and a belief that the Trump administration immediately needs more money for border security is leading the Senate GOP to pursue an entirely separate budget resolution.

• On Wednesday of last week, the Senate Budget Committee marked up a budget resolution that calls for an additional $342 billion in mandatory spending over the next four years, to be offset by yet to be determined spending cuts. Specifically, the Senate’s budget resolution would provide $175 billion in new funding for border security and $150 billion in new funding for defense. An additional roughly $20 billion would go to the Coast Guard and a $6 billion cost would be added to account for an expected repeal of the IRA’s methane emissions fee on oil and gas producers.
• The Senate’s “skinny” budget resolution is a function of Senate Majority Leader John Thune’s (R-SD) preference for a two-step reconciliation process. Under the Senate’s plan, a second budget resolution outlining the tax cuts portion of the policy agenda would be advanced later in the year. Thune’s idea is supported by members of the administration concerned about border security, but opposed by House GOP leadership due to concerns that the party won’t be able to pass two separate reconciliation bills. GOP leadership will need to come to an agreement soon given that the two chambers must adopt the same budget resolution in order to move on to the policy drafting portion of the reconciliation process.

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Crypto Spring Nears

A 180 at the White House. President Trump’s support for the crypto industry was one of the hallmarks of his presidential campaign, and now he is seeking to translate that into regulatory wins.

• The quickest way that Trump has made his presence felt is by changing the tone around crypto and digital assets from the White House and other senior members of the executive branch. While Trump has not delivered tangible policy wins yet, the groundwork for those reforms is being laid, with the president’s executive order setting out a roadmap for these changes last month.
• The Trump administration’s crypto policy work is expected to be coordinated by its crypto advisory council, headed by venture capitalist David Sacks, Trump’s AI and crypto czar. Bo Hines, the council’s executive director, is expected to run the day-to-day operations in DC, while Sacks is expected to spend parts of the year in San Francisco.

Reversing Course at the SEC and CFTC. The policy changes made at the regulatory agencies, particularly the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), will be a cornerstone of Trump’s changing attitude toward crypto.

• The SEC, under former Chair Gary Gensler, was seen as one of the industry’s key roadblocks. While Trump’s nominated chair, Paul Atkins, has yet to be confirmed, the agency’s Republican commissioners are already signaling greater support for the crypto industry. The most significant step from the agency for long-term change was creating a new crypto task force headed by crypto-friendly SEC Commissioner Hester Peirce, which will look at a range of questions facing the agency, including determining when tokens are securities.
• Trump’s nomination of Brian Quintenz to serve as the CFTC’s chair is among the most bullish moves made so far by the new administration for crypto. Quintenz previously was a CFTC commissioner before becoming the policy director for venture capital firm Andreessen Horowitz’s crypto group. Before Quintenz is confirmed, acting CFTC Chair Caroline Pham is moving the agency in a more industry-friendly direction, a shift likely to accelerate in the coming months.

Congress Looks for a Breakthrough. While expansive changes are possible through executive action alone, Congress remains the branch with the most power for creating lasting regulatory frameworks, and its unified GOP control has members optimistic about the chances of getting legislation done.

• Republican congressional leaders’ top priorities are bills to establish regulatory frameworks for stablecoins and market structure. Drafts of stablecoin bills have been introduced in both the House and Senate, and the market structure bill passed by the House last year provides a strong starting point for these discussions.
• The biggest challenges facing these optimists are getting enough Democrats on board in the Senate, a task that is likely easier on the stablecoin than the market structure bill. The bills are also competing for floor time with other measures and, in the Senate, confirmation processes. These two hurdles may slow Republicans’ ability to quickly pass these measures, potentially pushing them into the second half of this year or next, but members’ optimism about their chances to pass at least a stablecoin bill into law is not misplaced.

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Culture Wars Come to Corporate Law

Musing a Move. Several prominent firms are either considering or have already reincorporated out of the traditional state of Delaware to Texas.

• Almost 70 percent of Fortune 500 companies are incorporated in Delaware due to a combination of network effects, a unique court structure, and an established body of case law. This tide may be beginning to turn though. Tesla and Dropbox are recent additions to a list that also contains Toyota, Chevron, and Caterpillar in reincorporating in Texas.
• Elon Musk’s battle with Delaware’s courts have fully thrust once obscure corporate governance issues into the culture war spotlight. Most prominently, the Tesla CEO’s compensation package was rejected even following winning a shareholder vote. Add in a sudden about-face on the power that controlling shareholders have and the fact that judges have great discretion over which cases they personally hear and some corporations are now looking at the First State with hesitation.
• All signs indicate the slow migration will continue. Firms are looking to avidly anti-regulation, pro-business Texas as the primary alternative. Meta is the latest notable company reported to be considering the move, made easier by a decision earlier this month that controlling shareholders will not be liable for damages incurred by reincorporation elsewhere.

Following the Money. The same culture war calculus is also coming to investment decisions — both where firms decide to trade and how states’ pensions are managed.

• The NYSE announced plans to open a fully electronic equities exchange in Dallas last week, completing the reincorporation of NYSE Chicago to Texas. In the last month, TXSE Group separately revealed it had filed with the Securities and Exchange Commission to launch the Texas Stock Exchange, also in Dallas. This latter exchange has earned investments from major financial firms such as Charles Schwab, JPMorgan Chase, and BlackRock, partially drawn by a pitch against interference from a liberal agenda.

Similarly, a split is emerging on the use of environmental, social, and governance (ESG) factors in investing. Red states have launched investigations into firms’ use of the practice; some have also passed laws either prohibiting state funds from going to such firms or blocking the consideration of ESG for investment purposes entirely. Alternatively, blue states have approved their own measures increasing disclosure around climate risk and carbon emissions.

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