President Trump and Republicans in Congress have an ambitious agenda, including changes to health care, personal and corporate taxes, and spending on infrastructure and defense—changes that, if enacted, could move the needle for investors. But because they lack a filibuster-proof 60-seat majority in the Senate, Republicans are reliant on a special process called “budget reconciliation”, which is immune to filibuster, to pass most of their agenda absent Democratic support. Budget reconciliation, however, has a number of restrictions and drawbacks that could severely limit what the U.S. Congress is able to accomplish in the rest of this year. Here are a few points for investors to consider, as the year progresses:
1) Budget reconciliation bills are restricted to measures that directly affect revenues, spending, and debt. Under the so-called Byrd Rule, no other policy provisions can be included. That presents a big problem on health care, where Republicans can use reconciliation to gut the financial provisions of Obamacare, but can’t replace it with anything attractive—or even functional—through a budget bill alone.
Contrary to oft-repeated rumors, a reconciliation bill may add to the budget deficit.
2) Contrary to oft-repeated rumors, a reconciliation bill may add to the budget deficit. The Bush tax cuts in 2000, for instance, were passed using reconciliation. When the Democrats gained control of Congress in 2006, they passed a new rule barring reconciliation from adding to the deficit, but both the House and Senate have since rescinded it. What remains in place, however, is an older rule preventing a reconciliation bill from adding to the deficit beyond the years covered by its budget resolution. That’s why the Bush tax cuts could only be temporary, and had to be later extended. That might not be a problem for relatively modest changes in tax rates, meant to stimulate the economy; it may be another if you’re planning on altering the basic structure of the tax code. The last major tax overhaul, in 1986, was permanent—but only because it was bipartisan and revenue-neutral. This one probably won’t be, which could raise a lot of issues.
In other words, until they pass—or abandon—health care, they’re facing a big legislative logjam that makes it hard to make much serious progress on the tax front.
3) Congress can only pass a maximum of three reconciliation bills for each budget year: one each dealing with revenues, spending, and the debt ceiling—though any bill dealing with both revenues and spending (like the “repeal and replace” of Obamacare) counts as two bills. Luckily for Republicans, they didn’t pass a 2017 budget last year, so by passing a 2017 and 2018 budget this year, they can get two bites of the apple. Their plan was to pass a 2017 budget resolution that made a provision for changes to health care (which they did), then a 2018 budget resolution that makes a provision for tax cuts and reform. The problem is that their health care bill has only just made it to the Senate, where it faces further delays and major changes, assuming it can pass at all. Meanwhile, Congress can’t adopt a 2018 resolution to start work on taxes, because doing so would erase the 2017 resolution. In other words, until they pass—or abandon—health care, they’re facing a big legislative logjam that makes it hard to make much serious progress on the tax front.
Of course, most of these rules are ones Congress has created, and could change if it wished to. Congress could scrap the Byrd Rule, pass an extra-long budget resolution, or even get rid of the Senate filibuster. The Trump White House tentatively floated the last idea, which several Senators immediately shot down. So, it’s likely these rules will continue to operate, in some form, and could place real constraints on the Republican majority’s ability to deliver on goals which, from a distance, might seem a lot easier to achieve.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Chovanec. No part of Mr. Chovanec’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed.
