ARENT FOX
2014 ELECTION ANALYSIS
NOVEMBER 5, 2014
The quickest and most
obvious change when Sen.
McConnell takes over will
be the reappearance of
‘regular order.’ Bills will
move through committees
again, with Chairmen
assured that they will be
considered on the floor,
and that House-Senate
conferences to resolve
differences on particular
pieces of legislation will
occur. If nothing else, this
should increase feelings
of accomplishment
and thus cooperation
among Senators.
Sen. Robert Bennett
Senior Policy Advisor
Arent Fox LLP
ARENT FOX LLP LA / NY / SF / DC
The election has changed
the makeup of Congress
in a consequential way.
Divided government can
work if there is a real
desire by both sides to
get things done. Action
on Immigration, tax reform,
energy, infrastructure
investment is urgently
needed to put our country
back on track for more
growth and better jobs!
Sen. Byron Dorgan
Co-Chair, Government
Relations Practice
Arent Fox LLP
1 / 24
This election is a subtle
game changer. It shifts the
power of initiative in the
Senate to the Republicans,
but still forces them to
consult the minority to
get things done. It gives
House Republicans a
supermajority that allows
them to move legislation.
Most importantly,
responsibility is now in the
GOP court- they have to
advance real legislative
solutions or there will be a
voter backlash next time.
Rep. Philip S. English
Co-Chair, Government
Relations Practice
Arent Fox LLP
ARENT FOX
2014 ELECTION ANALYSIS
NOVEMBER 5, 2014
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Washington, DC
202.857.6247
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Co-Chair, Government Relations Practice
Washington, DC
202.857.6334
[email protected]
Amy J. Demske
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Washington, DC
202.857.6484
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Washington, DC
202.857.6031
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2014 ELECTION ANALYSIS
NOVEMBER 5, 2014
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2014 Election Overview
The 2014 midterm Congressional elections have resulted in a significant wave of victories
for the Republican Party that confers new majority status in the US Senate and expands
the majority in the US House of Representatives. A new two-year era of divided government
will begin on January 3, 2015 but there are reasons to believe that the election results
could lead to new opportunities for Congressional action in the coming months on
pressing issues.
As of this writing, there will be 52 Republicans at a minimum in the Senate, with a
Republican leading in Alaska, a Democrat leading in Virginia, and a runoff scheduled in
Louisiana on December 6. Three incumbent Democratic Senators are known to have lost:
Kay Hagan (NC), Mark Pryor (AR), and Mark Udall (CO). The House Republicans as of this
writing had 242 seats to the 174 declared Democratic winners, with 19 seats still unclear,
representing a net gain of 13 seats. The magic 218-seat majority firmly in hand, it appears
that the Republican Party will have its largest majority in the House since 1949.
According to exit polls, the economy was top of mind for voters, ranking above health care
and foreign policy. Great frustration with President Barack Obama and his Administration
appears to have been a significant motivator for many voters, but there is still a historically
low Congressional approval rating as well. One might wonder why such a low approval
rating did not displace more members of the House and Senate, but a key factor to the
electoral success of so many House incumbents (only 15 House Members have lost
their seats as of this writing) is that the electoral maps were drawn to favor incumbents
quite substantially after the last Census and reduced the level of true competition in many
districts. It is worth noting that the Democrats had to defend a number of Senate seats in
states that the President lost in 2012, adding to the difficulty of their position.
There are differing schools of thought on what the combined Republican majority will
mean in terms of a legislative agenda. After two years of wheel spinning, it is possible that
the anticipated Senate Majority Leader, Senator Mitch McConnell (R-KY), will manage
the Senate in a style reminiscent of previous leaders who prioritized legislating over
grandstanding. According to Arent Fox Senior Policy Adviser, former Senator Robert
Bennett (R-UT) (who, as a Senator, was a close counsel to Senator McConnell within the
Republican leadership), “The quickest and most obvious change when Senator McConnell
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2014 ELECTION ANALYSIS
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Legal Alert
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takes over will be the reappearance of ‘regular order.’ Bills will move through committees
again, with Chairmen assured that they will be considered on the floor, and that HouseSenate conferences to resolve differences on particular pieces of legislation will occur.
If nothing else, this should increase feelings of accomplishment and thus cooperation
among Senators.”
Senator McConnell nonetheless will have to contend with members of his own party,
such as Senator Ted Cruz (R-TX) and others, who either aspire to the Presidency or, for
other reasons, desire greater confrontation with the Obama Administration. There is pent
up demand among some of those Senate Republicans for aggressive oversight of the
Administration now that they will hold gavels and they can be counted upon to press for
legislation that is more hardline on immigration and that would repeal the Affordable Care
Act. In addition, Senate rules in recent years have necessitated a 60-vote supermajority to
move significant legislation because of the ability of any Senator to threaten a filibuster. The
likely Senate Minority Leader, Senator Harry Reid (D-NV), will have ample parliamentary
tools at his disposal to block initiatives that are objectionable to the Administration and
Congressional Democrats, but he might be pressed by some in his Caucus to find ways to
negotiate satisfactory compromises with Senate Republicans.
One factor for Senator McConnell to consider as he sets the agenda will be that, in 2016,
his party must defend 24 Senate seats, while the Democrats will have only 10 Senators up
for re-election. It is worth noting that several of those Senate Republicans will be up for reelection in states that President Obama won twice—Florida, Iowa, Ohio, Pennsylvania, and
Wisconsin—and two states Obama won once, North Carolina and Indiana.
In the House of Representatives, we expect Speaker John Boehner (R-OH) and recently
elected Majority Leader Representative Kevin McCarthy (R-CA) to continue in those roles
and to press committee chairmen to develop active legislative agendas that take advantage
of the fact that there is a Senate Republican majority. For some time, House and Senate
Republicans have been meeting behind the scenes to map out the first few months of a
joint majority status and we can expect coordination between the McConnell and BoehnerMcCarthy operations during the next few weeks so that they hit the ground running on key
agenda items.
***
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ARENT FOX
2014 ELECTION ANALYSIS
NOVEMBER 5, 2014
Legal Alert
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What the 2014 Election Will
Mean for the Federal Budget
The two most significant and pressing fiscal issues confronting the new Congress will
be the need to increase the federal debt limit again and contending with severe statutory
budget constraints that will force absolutely flat federal funding in Fiscal Year 2016 unless
another bipartisan budget deal is achieved.
Debt Ceiling
The brinksmanship associated with efforts to raise the statutory federal debt ceiling is a
possibility early in the new Congress, since a February 2014 law suspending the debt limit
will expire on March 15, 2015. Unlike an earlier episode that featured political acrimony and
fears of significant downgrades in the US Government’s credit rating, the 2014 legislation
moved fairly quickly in a split Congress. It is unclear how a Republican majority in both
the House and Senate would approach the debt ceiling, but in the past, such legislation
was used as a vehicle for other policy initiatives given its “must-pass” nature. The Treasury
Department may be able to use what it calls “extraordinary measures” to get past the
March 15 deadline, but those only last for a finite period, so some legislation will be
necessary in the first half of 2015.
Federal Appropriations
Organizations that depend on federal funding for part of their budgets have much to be
concerned about given the current federal spending picture. Unless a comprehensive
bipartisan budget deal is achieved next year, federal appropriations are destined to be
absolutely flat for the fiscal year that begins on October 1, 2015 (FY 2016). The problem
with a nominally flat federal budget is that costs continue to rise and thus agencies will
likely need to cut spending in some programs to offset increased costs associated with
other budget line items.
Setting the table for the FY 2016 budget debate is the Budget Control Act of 2011, which
set statutory caps on federal discretionary spending (appropriations) for a 10-year period
and provided for across-the-board sequestration of funds if the government looked to be
spending above those caps. After the initial 2011 law, Congress soon found ways to modify
the budget caps through the current fiscal year, which ends Sept. 30, 2015, by identifying
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offsetting budget savings. For example, the Ryan-Murray 2013 budget deal helped avoid
more than $60 billion in potential sequestration and set overall appropriations for FY 2014
and FY 2015 at just over $1 trillion. The budgetary wiggle room ends after the current
fiscal year, so if Congress does not act, the original Budget Control Act discretionary
spending caps will re-emerge for FY 2016 and defense spending will be limited to $523
billion next year and non-defense discretionary appropriations will be limited to $493
billion, which is essentially the expected FY 2015 spending rate. Favored programs such as
National Institutes of Health (NIH), highway/transit, economic development, and defense
procurement will need significant expressions of support from stakeholders in the private
sector in order to remain stable or see modest growth in the coming budget process.
A continued area of tension will be between defense spending interests and non-defense
interests, as the 2011 budget law calls for a higher proportion of budget reductions from
the defense spending category than non-defense. Given the continued escalation in the
Middle East and other problems facing the military, one can expect an ongoing tussle not
only on what the overall federal spending limit should be but also whether funds should be
shifted from non-defense to defense categories.
Entitlements
We expect the new Congress to include multiple competing proposals for entitlement
reform (which would provide far greater budget savings than tinkering with the annual
appropriations process). Medicare and Medicaid spending are particularly attractive to
budget hawks looking for ways to reduce the federal deficit and increases in the federal
debt. If the House and Senate are under Republican majorities, we expect a strong push
to use the annual budget process to achieve spending reductions in entitlement programs
(see discussion below).
One noteworthy development will be the likely ascension of Congressman Paul Ryan (RWI) to chairman of the House Ways and Means Committee, which oversees Medicare and
Social Security, among other programs. From his high profile perch as Budget Committee
Chairman, Congressman Ryan has unveiled a series of budget proposals that advocated
significant market-based reforms of the Medicare system in order to achieve substantial
long term budget savings.
Chairman Ryan has supported an approach described as “premium support” under which
seniors turning 65 after 2023 would have a choice of private plans as well as the traditional
Medicare fee-for-service program. Medicare would provide a premium support payment to
pay for or offset the cost of the plan chosen by each enrolled senior.
A Senate Republican Majority means that Orrin Hatch (R-UT) would chair the Finance
Committee and would be Chairman Ryan’s primary counterpart on entitlements. Sen.
Hatch has previously offered a series of Medicare and Medicaid reforms that drew in part
from bipartisan reform proposals. Accordingly, if there is a political will by the new majority
to engage in serious contemplation of entitlement program reforms, the two new chairmen
have a history of trying to address such issues.
Budget Reconciliation
The gridlock that has seized Congress in recent years relates especially to the cloture
rules in the Senate. If the minority has 41 votes, it can typically stymie the majority in the
Senate. That is a different circumstance than in the House, where there is no opportunity
for unlimited debate. Because of that, the issue of “budget reconciliation” will likely become
a major rallying point for forcing movement on legislationdue to the change of control in the
Senate. “Budget reconciliation” is a type of budget legislation that enjoys parliamentary
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protections that can render a filibuster meaningless and requires a simple majority vote to
be approved instead of a 60 vote supermajority. Congress has used budget reconciliation
procedures in the past to enact reform legislation affecting Medicare, Medicaid, food
stamps, unemployment benefits, welfare payments, and other programs in the “mandatory
spending” category. Note that a budget reconciliation bill can also be a vehicle for tax
reform, making the process attractive to some Republicans who favor a comprehensive
approach on fiscal policy. For example, Senator Orrin Hatch recently indicated that he
would favor using budget reconciliation for entitlement reforms and tax reform jointly.
While budget reconciliation may have a lower Congressional approval hurdle, at the end of
the day the President must still sign the bill for it to become law. The President could view
a budget bill of this nature as a chance to have more of a legislative legacy in his final two
years and could work with Congress on such reforms. Or, politics as usual may prevail and
veto threats will be the order of the day and the spending issues will again be deferred for a
new President and the Congress elected in 2016.
***
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ARENT FOX
2014 ELECTION ANALYSIS
NOVEMBER 5, 2014
Legal Alert
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What the Election Means for
the Health Care Industry
Affordable Care Act
Unlike the 2012 presidential election, when health care reform became a central campaign
issue, the Affordable Care Act (ACA) faded into the background during the 2014 midterm
election. The botched rollout of the federal health exchange contributed to negative
headlines, which undoubtedly bled onto the campaign trail. However, national exit polling
on Election Day showed that 44 percent of voters listed the economy as the most important
issue facing our country, while only 25 percent listed health care.
With Republicans controlling both the US House and Senate, we expect that there will
be efforts by some members of the party to achieve a full repeal of the ACA. Prominent
members such as Sen. Ted Cruz (R-TX) already have called for Congress to send a repeal
bill to the President’s desk. Nonetheless, while countless repeal bills will be introduced
(and might move in committee), we believe that full repeal is off the table, and it is more
likely that the GOP will instead focus on incremental improvements such as rolling back
the employer mandate provision in the ACA. The requirement that employers provide health
insurance coverage to their full-time workers or pay a penalty takes effect in January, 2015.
The GOP answer would be to redefine the definition of full-time employment. Earlier this
year, President Barack Obama delayed the employer mandate for businesses with fewer
than 100 workers. This could be an opportunity for negotiations between the White House
and Congress.
The Department of Health and Human Services (HHS) hopes the 2015 ACA open
enrollment will go more smoothly than the first time around. The continued success and
growth of the health exchange private insurance market depends on whether health plans
can keep down premium increases for consumers.
Medicare Sustainable Growth Rate (“Doc Fix”)
Could this be the year that Congress repeals the Sustainable Growth Rate (SGR) formula
used to pay physicians under Medicare? Earlier this year, House Republicans announced
plans to bring physician payment reform to the floor but the budgetary offset, a 10 year
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delay of the individual mandate, didn’t have the support of the current Senate Democratic
leadership. A “doc fix” has been unachievable for almost 15 years, and each year the
temporary extensions to preserve physician payments gets more expensive. In the event
that the doc fix is not resolved in the lame duck session starting next week, the incoming
chairmen of the Ways and Means Committee, Rep. Paul Ryan (R-WI) and the Senate
Finance Committee, Sen. Orrin Hatch (R-UT), may well make this a high priority early next
year and chart a new course to eliminating this Medicare payment policy, ensuring that
payments to providers are tied to quality measures.
CHIP Reauthorization
Democratic leadership had hoped to reauthorize the Children’s Health Insurance Program
(CHIP) before Senator Jay Rockefeller (D-WV) retires at the end of this year. CHIP has
been a bipartisan success story, providing health coverage for approximately 8.4 million
low-income children and pregnant women. With the Republicans assuming the gavel,
reauthorization is going to have to wait. It is rare for Congress to act legislatively well
in advance of a statutory expiration and the CHIP program doesn’t expire until October
1, 2015. Approving CHIP legislation in this Congress would deprive the Republicans of
negotiating power during consideration of other high priority items on their agenda, such
as other health care policy initiatives related to the ACA and Medicare, not to mention tax
policy or other unrelated matters.
Medical Device Tax
Based upon the overwhelming number of House and Senate Republicans in favor of
repealing the device tax, it would appear that the elimination of the $30 billion ACA excise
tax on medical devices is easily achieved. However, the architect of the ACA still resides
in the White House and without a credible way to replace the $30 billion in tax collections,
Executive Branch approval seems unlikely. The majority of Democrats support repealing
the tax, but it’s unclear whether Congress will be able to identify an acceptable budgetary
offset. We expect this will be a high priority again in the next Congress.
Pathway to Cures
House Energy & Commerce Committee Chairman Fred Upton (R-MI) is leading the 21st
Century Cures initiative in search of ways to accelerate the pace of cures in America.
Upton and Representative Diane DeGette (D-CO) are traveling the country seeking to
identify legislative and regulatory solutions to improve the pathway for innovation in medical
care. Based upon conversations with committee staff, we expect momentum will build in
2015 for legislative action tied to more rapid pathways that both parties can support.
RAC Reform
Congress created the Recovery Audit Contractor (RAC) program to help the Centers for
Medicare and Medicaid Services (CMS) identify improper payments made to providers
by Medicare and Medicaid. When Congress expanded the program in 2010 the goal of
ferreting out fraud was paramount; since then there has been enormous growth in appeals
to RAC decisions to deny provider claims.
This summer the HHS Office of Medicare Hearings and Appeals (OMHA) revealed a
staggering 545% growth in RAC appeals over two years, which has made the 90-day
ALJ review requirement, established by Congress in 2010, untenable, and has pushed
adjudication time frames to 387 days as of June 30, 2014. Today, OMHA has over 800,000
pending appeals and receives a year’s worth of appeals every four to six weeks.
Congress has no intention of putting the brakes on RACs given the billions in improper
payments that they have identified and returned to the Medicare Trust Fund. Even so, many
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in Congress believe RAC contractors are out of control. During the current Congress,
notwithstanding numerous cosponsors, RAC reform legislation authored by Representative
Sam Graves (R-MO) and Senator Roy Blunt (R-MO) did not gain traction. It is unclear
whether the new Senate Republican majority is sufficiently large and dedicated enough
to move such legislation, since Blunt’s bill already had 16 bipartisan cosponsors and did
not make it high on a must-pass list of bills this year. It may be that immediate RAC reform
will depend more on Congressional and stakeholder pressure on CMS to develop and
implement critically needed policy and contractual changes.
Ryan White
Ryan White funding has remained relatively stable, despite a federal deficit reduction
environment. Continued bipartisan support remains strong with an understanding that the
HIV/AIDS epidemic is still an emergency with 50,000 new HIV infections each year. Current
funding for the Ryan White program does not meet ongoing need, and advocates will
continue to press for higher funding levels. Because Ryan White is domestic discretionary
spending, any attempt to make across-the-board cuts would jeopardize vital services.
Ryan White reauthorization expired in 2013, and advocates have been closely monitoring
the impact of the ACA in terms of increased Medicaid enrollment and implementation of
exchange marketplace enrollment, as Ryan White is payer of last resort. It will be critical to
supporters of the Ryan White law and the HIV/AIDS community to see how new chairmen
of the House and Senate Labor, HHS, Education Appropriations subcommittees will
develop their annual spending bills for FY2016.
Graduate Medical Education (GME)
In addition to resolving Medicare payment issues, physicians want Congress to address
the mounting funding shortfall for training our nation’s doctors. The release of an Institute
of Medicine (IOM) report this summer called for wholesale changes in the way Medicare
graduate medical education (GME) money is distributed and accounted for. Most notably,
IOM recommends that Congress shift Medicare teaching dollars away from teaching
hospitals and into community-based training sites. It is unclear whether Congress will wade
into the medical education debate in the upcoming session before floating its own longterm solutions for getting the program back on course.
Disproportionate Share Hospitals (DSH)
The Affordable Care Act assumed more Americans would receive health coverage which
would significantly decrease the need for disproportionate share hospital (DSH) payments
for safety net hospitals treating Medicaid and uninsured patients. The ACA called for deep
cuts to Medicaid DSH starting in FY 2014, but last year Congress repealed DSH cuts
for FYs 2014 and 2015 which means that Medicaid DSH will be reduced by $35 billion
between FYs 2017 and 2024. Public hospitals have argued that passage of the ACA does
not mitigate the need for charity care payments; in fact, the Congressional Budget Office
projects that at least 31 million Americans will remain uninsured. We predict Congress
will face tremendous pressure from Governors – especially those that haven’t expanded
Medicaid to rollback future Medicaid DSH cuts.
***
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2014 ELECTION ANALYSIS
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What the Election Means for
Trade Policy
The election of a Republican Senate will have many policy consequences. But in the area of
international trade, a bicameral Republican Congress is likely to result in cooperation with
the Obama Administration as part of a broad international economic agenda.
In the new Congress, both the Senate and the House have substantial pro-trade majorities
that are likely to support many of the Obama Administration’s current trade initiatives.
Whereas divisions within the Administration’s coalition in the outgoing Congress have
slowed progress on the trade negotiations, a Republican majority is likely to be a reliable
partner on trade policy.
This year, the Obama Administration sought Trade Promotion Authority (TPA) to facilitate
the negotiation of a series of ambitious trade agreements. These agreements could
enhance the United States’ role in setting high standards for the global trading system.
This effort suffered a setback when the US Senate resisted the call for a renewal of TPA.
As a result some feel the trade representatives negotiating for the US where seen as doing
so without the benefit of a formal structure protecting the product of their effort. TPA
formalizes the process by which US negotiators consult Congress, and ultimately bring a
detailed agreement back to the legislative branch for formal approval.
As one result of the election, the renewal of TPA is expected to be passed in the near
term. The likely TPA proposal will closely resemble current H.R. 3830, “The Bipartisan
Congressional Trade Priorities Act.” This compromise contains specific limitations on
negotiating authority necessary to attract broad support in Congress, and also increases
the transparency of the negotiating process.
This legislation will set the stage for as many as three major new trade agreements that are
currently under negotiation and, if implemented, would deepen US trade engagements and
increase US leverage in the global trading systems.
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Transpacific Partnership
The first of these is the Transpacific Partnership (TPP). This negotiation is currently at a
critical juncture. The TPP is an evolving regional trade agreement that could incorporate
a major part of the Pacific Rim in what the Obama Administration has described as a
“21st century trade agreement.” Close to completion, the agreement would go far beyond
traditional bilateral trade pacts focused on tariff adjustments. The TPP aspires to much
deeper integration, incorporating nuances such as supply chain management, state owned
enterprises (SOE), regulatory cooperation, and novel digital trade issues. It is controversial
in sectors such as agriculture, textiles, and apparel, and it strongly promotes intellectual
property rights and opened government procurement processes.
Although the TPP negotiation is incomplete and faces many challenges, prospects are
positive that it will be completed and approved by congress early next year.
Transatlantic Trade and Investment Partnership
Another current trade negotiation is the Transatlantic Trade and Investment Partnership
(TTIP), a bilateral pact with the European Union. Like TPP it aspires to economic integration
far deeper than traditional FTA’s. TTIP is a high standard, comprehensive agreement
aligned to eliminate barriers to trade and investments in goods, services, agriculture, and
government procurement. Its function would be to promote regulatory cooperation, and
promote labored environmental standards, strengthen intellectual property rights, and
regulate data flows and supply chain management. At this time, negotiations are yielding
indeterminate results, and appear to be slowed by political issues.
A final agreement under negotiation is the Trade in Services Agreement (TISA), a
multilateral pact intended to allow service providers to compete on a non-national basis.
Recently launched, this agreement would promote transparency and the predictability of
regulatory policies in a regime more effective than the WTO.
Although the prospects for the new trade agreements are uncertain until completion, their
prospects in congress have been substantially enhanced by a Republican Senate majority.
Other prospective trade legislation includes:
•
Miscellaneous Tariff Bill (MTB) has currently passed in the House but hostage to
anti-earmark sensibilities by a Senate faction. This bill will certainly be passed, or
promptly reinitiated in the new Congress.
•
The US Export-Import Bank is likely to be reauthorized, although with continuing
political angst in the House GOP.
•
The Generalized System of Preferences (GSP) is a trade program for emerging
economies and is likely to be swiftly reauthorized.
•
The African Growth and Opportunity Act (AGOA), the cornerstone of US-Africa
Trade Policy, will receive strong support for reauthorization in the new Congress.
Action is less likely under a GOP Congress on Trade Adjustment Assistance (TAA), which
may be further delayed and possibly reduced.
•
Trade Legislation specific to the US-China trade frictions is somewhat less likely,
although discontent about intellectual property violations and current currency
manipulation will continue to bubble up on occasions.
***
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What the Election Means for
Tax Policy
The new Congress can be expected to bring a new commitment to moving significant tax
legislation, in part because a closer political alignment between Republican majorities on
the two tax writing committees and because of the new leadership on both committees.
With Senator Orrin Hatch (R-UT) assuming the chairmanship of the Senate Finance
Committee, trading places with Senator Ron Wyden (D-OR), who will remain the ranking
member, the Committee will be led by experienced legislators with a gift for finding
common bipartisan ground in contentious policy areas. At the same time, the House
Ways & Means Committee will likely be chaired by Representative Paul Ryan (R-WI), a
leading GOP tax reformer. The two committees will be facing the challenge of identifying
tax positions that can generate support in both chambers, where common Republican
majorities belie critical differences.
In the wake of the election, both committees are expected to grope for common ground on
long delayed legislation to extend expiring tax provisions. These “extenders” are normally
reauthorized temporarily on a rolling basis, injecting great volatility in to the tax code.
The Senate Finance Committee has sought to continue this process, which recently
the House Ways & Means Committee has signaled a preference for, making certain tax
polices permanent (e.g., the R&D credit, Section 179 expensing for small business) while
permitting other less vital (or politically potent) provisions to end. As these two competing
positions are difficult to reconcile, there remains great uncertainly how the committees will
find common ground. The election’s conclusion will likely lead to a negotiated compromise –
possibly in the post-election lame duck session.
Tax Reform
Tax reform remains a central issue for both committees and the demand for a comprehensive
overhaul on both the individual and corporate tax codes remains compelling. Although
Republican majorities on the Ways & Means and Senate Finance Committees are likely to
find considerable common ground on how to approach an updated federal tax system, core
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differences with the Department of the Treasury mean that a window for real tax reform will
narrow as we get closer to the 2016 election. We can expect that the demand for tax reform –
coupled with political pressure on Republican Congressional majorities to define pro-growth
economic policies – will draw both committees towards tax reformers.
In the wake of the election, expect leaders of the House Ways & Means Committee
and Senate Finance Committee to launch tax reform projects, with some effort to make
them bipartisan. In Ways & Means, the tax reform initiative of Chairman Dave Camp has
strengthened institutional understanding of the issues and process. Similarity, earlier
bipartisan efforts by Senator Wyden to define common ground for tax reform (the WydenCoates proposal) has laid groundwork for cooperation of tax policy in the Senate. While the
Camp blueprint in the current Congress is unlikely to become the starting place for future
tax reform, other simplification proposals are available to launch discussions, including
passed legislation by Representative Ryan.
Tax reform deliberations will focus on achieving well established, if challenging, goals:
a simpler, more predictable, less burdensome revenue system that allows higher levels
of economic growth while preserving fairness. On the corporate side, reform will aspire
to a structure where lower rates have a simplified tax base, allowing greater competitive
positioning by domestic firms in global markets. Ultimately, the ambition to reform the
corporate tax regime is linked to revising the taxation of individuals through the treatment of
unincorporated pass-through entities taxed at individual rates.
In the effort to lower individual tax rates and simplify the tax base (while generating
comparable revenue and higher economic growth), predictable issues will be engaged and
tested, including the mortgage interest deduction; the charitable deduction; tax treatment
of retirement savings; higher education tax incentives; the taxation of investment income,
capital gains, and dividends; the deductibility of state and local taxes; the administration of
minimal tax.
Corporate Tax Reform
Corporate tax reform will require aligning the American tax system with global changes that
increasingly disadvantage domestic production. This will require adjusting for outdated
international tax rules and reassessing territorial tax regimes. Other issues, like cost
recovery systems and inventory accounting methods such as LIFO, will face extensive
review. Industry specific tax preference will face potential scrutiny and challenge.
The tax writing committees will also have the opportunity in the new Congress to
review and potentially challenge some of the core assumptions that have led past tax
reform efforts. Some established features of the current system invite revision as part
of a fundamental tax overhaul: revenue neutrality, imputed distributional effects, and
the possibility of dynamic analysis. A review of these standards can be achieved in the
upcoming Congress, and many prove essential to realizing fundamental reform.
More limiting tax initiatives may also become possible as the new Congress moves forward.
For example, the continuing problem of corporate territorial taxation may revive the demand
for a new time-limited opportunity for corporate tax payers to repatriate foreign earnings
back to the United States to incent domestic investment. Free standing initiatives to repeal
the Alternative Minimum Tax for offer expensing for capitol investments could be made part
of a larger growth initiative linked to economic policy emanating from Capitol Hill.
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What the 2014 Election Will
Mean for Energy Policy
The increase in the Republican majority in the House, combined with the Republican
victory in the Senate, will provide an interesting political environment for President Barack
Obama’s last two years in office. We are hopeful that common ground between the
President and the Congress can be found on a number of pending issues related to energy
and the environment.
In addition, the new Congress will be in a position to block at least some regulatory changes
through appropriations bill limitations. Some long simmering issues, such as the Keystone XL
Pipeline, will likely be worked out in compromise legislation in which each side must give in
order to get. The status quo of the past four years — a Republican House and a Democratic
Senate — has been firmly upended. Given limitations imposed by Senate rules requiring a
60-vote majority for most legislation, and the President’s ability to veto bills that strongly run
counter to Democratic ideology, most legislation must be compromise. But as opposed to the
prior four years, we do foresee legislation addressing some energy and environmental issues
passing both Houses of Congress and making it to the President’s desk.
“The new Congress will clearly embrace a decidedly pro-growth, prodevelopment approach to energy which will encourage increased
domestic production, especially in those sectors that require high levels
of capital investment. Natural gas will be a big winner, but so will other
energy producers that utilize new technologies.”
– Rep. Philip English
Environmental Regulatory Agenda
The hopes and dreams of environmental groups for an aggressive regulatory agenda
during President Obama’s final two years have suffered a big setback with the Republican
congressional midterm election majorities.
We think it is safe to say that some of the environmental regulatory agenda will move
forward, but not the most aggressive provisions. The existing regulatory pipeline is filled
with provisions with major potential impacts on oil and natural gas producers, refineries,
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and electric power producers. We expect that the new Congress will target a number of
these proposed regulatory provisions, including, among many others, the final regulations
by the Environmental Protection Agency (EPA) on the Clean Air Act’s New Source
Performance Standards (NSPS) for new power plants and refineries, and the regulations
on NSPS for existing power plants and refineries. Additional EPA regulatory actions likely
to be targeted include the Ozone National Ambient Air Quality Standards (NAAQS) and
others related to control of greenhouse gas emissions.
Keystone XL Pipeline
Another regulatory decision that has long been pending before the Administration is the
approval of the Keystone XL Pipeline bringing oil from Canadian oil sands to US refineries.
Disapproval of this Pipeline is one of the primary objectives of the environmental community,
and they cannot be expected to give the Administration a pass on this key issue. However,
we believe that Keystone XL is likely to be part of a larger legislative compromise that will
emerge from a more bipolar government. Approval of the Yucca Mountain nuclear storage
facility in Nevada is also likely to be high on the legislative agenda for the new Congress,
now that Senator Harry Reid (D-NV), a long-standing opponent of Yucca Mountain, will no
longer be Senate Majority Leader. However, this will be difficult to accomplish.
Hydraulic Fracturing
The greatest threat facing continued, rapid expansion of oil and natural gas production has
been the potential EPA federalization of regulation of hydraulic fracturing, which has always
been primarily regulated by state authorities. The EPA has seemed determined to assert
its regulatory authority, although the form and extent that will take remains undetermined at
this time. Further, the Department of the Interior (DOI) has been engaged in a regulatory
process on hydraulic fracturing on public lands that has caused significant opposition from
the oil and gas industry because of the concerns about many provisions, including conflict
with pertinent state regulations.
We expect that Congress will be especially active in limiting EPA and DOI regulation of
hydraulic fracturing. Leasing of oil, natural gas, and coal from onshore and offshore federal
lands is not likely to be expanded during the Administration’s final two years. However, we
do expect to see Congress pass legislation that will mandate an expansion of leasing both
on and offshore. These lands are under the control of the DIO, which has significantly
reduced new leasing, particularly under former Secretary Ken Salazar. New offshore oil
and gas revenue sharing provisions will be spearheaded by Senator Lisa Murkowski (R-AK),
the likely new Chairwoman of the Senate Energy & Natural Resources Committee, and will
possibly be included in any energy legislation passed.
Legislative Agenda
Over the past four years, we saw how a divided Congress functions — we have seen
many bills passed by the House of Representatives dying from inaction by the Senate.
Committee leadership changes in the new Congress may provide opportunities for moving
legislation that did not exist previously. The most significant change is the likely elevation of
Senator Murkowski to Chairwoman of the Senate Energy & Natural Resources Committee.
Senator Murkowski is keenly interested in obtaining offshore oil and gas revenue sharing
for Alaska, and she should be expected to actively push for this as part of any energy bill.
Further, Senator Murkowski has been the prime congressional advocate for eliminating
current restrictions on the export of crude oil. We would expect that she would work to
move such a bill early in the next Congress.
The Obama Administration can be expected to maintain its strong support for the
production of renewable energy on public, private, state, and Native American lands.
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However, the expiration of numerous renewable energy tax provisions at the end of 2014
place the expansion of renewable energy at risk. Some of these may be addressed in tax
extenders legislation in a lame duck session this year. Senator Ron Wyden (D-OR), current
Chairman of the Senate Finance Committee, will push for renewable energy tax extenders.
Likely incoming Senate Finance Committee Chairman Orrin Hatch (R-UT) will face
significant pressure to cut back on renewable energy tax provisions.
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What the 2014 Election Will
Mean for Technology and
Communications
Republican retention of the House and a takeover of the Senate may jump-start several
stalled legislative initiatives of interest to technology and communications companies.
But passing these initiatives will require bicameral and bipartisan cooperation, given the
Senate’s 60-vote threshold for most legislation, and President Obama’s veto power.
Patent Reform
In December 2013, the House of Representatives approved comprehensive patent
legislation, “The Innovation Act” (H.R. 3309), introduced by Judiciary Committee Chairman
Bob Goodlatte (R-VA) that was aimed at curbing so-called “patent trolls” threatening
lawsuits against business “end-users.” The Obama Administration supported the bill and it
passed 325-91.
However, the Senate companion bill, “The Patent Transparency and Improvements Act”
(S. 1720) introduced by Senate Committee on the Judiciary Chairman Pat Leahy (D-VT),
stalled in committee as small inventors, venture capital groups, leading innovative American
companies, research universities, intellectual property attorney associations, and trial
attorneys stepped up opposition to the legislation.
Given its support from portions of the business community and the Administration, patent
legislation will be a major issue in the next Congress, though enactment into law of a broad
bill is not certain. In October, President Obama reiterated Administration support for patent
legislation and last week, House Speaker John Boehner (R-OH) released a legislative plan
for the next Congress that included “combating abusive patent litigation.”
Senate Judiciary Ranking Member and incoming Chairman Chuck Grassley (R-IA) worked
with Senator Leahy on patent legislation during this Congress and likely will revive the bill
in the next Congress. Although trial attorney groups who opposed the Leahy legislation
will have less influence in a Republican-controlled Senate, it’s unclear whether the Senate
this year can move forward given the business community split. A narrower patent demand
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letter bill along the lines of legislation considered earlier this year in the House Energy and
Commerce Committee is one possible compromise.
A potential new factor is the United States Supreme Court’s recent Octane Fitness,
Nautilus and Alice v. CLS Bank rulings, along with other court decisions and changes in
Patent and Trademark Office dispute procedures, which may be deterring many lawsuits
against technology end-users — the principal impetus behind and the rationale for new
patent legislation.
Communications Act Update
In December 2013, House Energy & Commerce Committee Chairman Fred Upton (R-MI)
and Communications and Technology Subcommittee Chairman Greg Walden (R-OR)
launched a multi-year bipartisan committee to update the Communications Act of 1934
to bring US communications laws into the digital age. In June 2014, Senate Commerce
Ranking Member and incoming Chairman John Thune (R-SD) hinted that the Senate under
a Republican majority would work closely with its House counterparts.
During the new Congress, both House Energy & Commerce and Senate Commence will
ramp up work on updating the communications laws. Despite the widespread recognition
that the current laws need revision and bipartisan and bicameral interest in moving forward,
consensus breaks down on whether proposed changes will accelerate or harm innovation
and consumers.
Spectrum
The FCC continues to work on efforts to make more spectrum available, but its longawaited spectrum auction, a key component, is delayed because of broadcaster litigation.
Congress remains keenly interested in spectrum policy and will address the spectrum
shortage challenge both through oversight of the FCC and a possible Communications
Act rewrite or stand-alone legislation that could include shifting of some government-held
spectrum to the private sector.
Net Neutrality
Most Republicans oppose FCC net neutrality regulations and incoming Senate Commerce
Chairman Thune has long questioned the FCC’s legal authority to mandate net neutrality.
Because the President, most Senate Democrats, and some prominent US businesses
support the FCC, the likelihood of any anti-net neutrality legislative initiative becoming law
is low.
Congressional activity likely will be limited to questions during FCC oversight hearings and
congressional letter inquiries, especially if the FCC actions turn out to be not especially
burdensome for broadband providers traditionally opposed to net neutrality.
Online Privacy
Although online privacy is an increasing consumer concern, lawmakers of both parties, with
some notable exceptions, have been generally reluctant to push legislation curbing data
collection and have been receptive to industry arguments that marketplace solutions and
industry standard-setting are preferable alternatives.
In addition, Senate Commerce Chairman Jay Rockefeller (D-WV), a leading proponent of
online privacy legislation, is retiring at the end of this Congress. It’s unlikely that legislation
will become law in this area, and focus of activity will continue to be the Federal Trade
Commission (FTC).
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Satellite Television Reauthorization and A La Carte Television
When Congress returns for the lame duck session, it will address the expiring Satellite
Television Extension and Localism Act (STELA). The House passed its STELA
reauthorization earlier this year (H.R. 4572) and the Senate Commerce-approved bill is
awaiting floor action (S. 2799).
An earlier version of the Senate satellite television reauthorization bill included an “a la carte”
provision allowing consumers to choose which broadcast channels they want in their cable or
satellite television packages. The provision was dropped because of broadcaster opposition.
Newly elected House Republican Whip Steve Scalise (R-LA) is a strong proponent of a la
carte and has said that he expects the issue to resurface next Congress in the context of a
Communications Act update.
Cybersecurity
Senate Select Committee on Intelligence Chair Dianne Feinstein (D-CA) and retiring
Ranking Member Saxby Chambliss (R-GA) are working with their House counterparts on a
modest cybersecurity bill that could pass during the upcoming lame duck session. This bill
may not contain the information-sharing protections supported by the business community
but opposed by privacy advocates.
Internet Access Tax Moratorium
The Internet Access Tax Moratorium, first enacted in 2004, expires December 11, 2014. The
Marketplace Fairness Act (MFA), a bill that helps states and localities collect sales taxes on
online purchases by their consumers, has cleared the Senate but not the House (S. 743).
MFA proponents may try to attach their bill to the tax moratorium extension legislation.
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What the 2014 Election Will
Mean for Higher Education
The Higher Education Reauthorization (HEA) was last reauthorized in 2008 after five
years of temporary extensions by Congress. The federal law governing higher education
and federal financial aid programs for college students has been operating again under
temporary extensions since 2013. The 113th Congress began with high hopes of
reauthorizing HEA but, with just a lame-duck session between completion and adjournment,
it seems likely that the 114th Congress will be tasked with HEA reauthorization.
HEA Reauthorization
With Republicans reclaiming the Senate majority in yesterday’s elections, Senator Lamar
Alexander (R-TN) is presumed to be the next chair of the Senate Health, Education, Labor
& Pensions (HELP) Committee. Senator Alexander, a former college president, as well as
a former Secretary of Education, has had a longtime focus on simplification -- particularly
in regards to the federal student loan process. Alexander authored draft legislation with
Senator Michael Bennett (D-CO) shortening the lengthy Free Application for Federal
Student Aid (FAFSA) to a page, as well as combining two federal grant programs into one
Pell Grant program, reducing six different federal loan programs into three and streamlining
the current loan-repayment plans into two plans — one of which would be income
contingent. Senator Alexander’s proposal provides an alternative starting point to outgoing
Chairman Tom Harkin’s (D-IA) comprehensive HEA discussion draft, which was written
without any input from Republicans. It is likely that Senator Alexander will start with a “blank
page” on HEA reauthorization when he takes the gavel.
Chairman John Kline (R-MN) of the Education & the Workforce Committee released an
11-page guide outlining his reauthorization priorities — including a proposal to consolidate
all existing undergraduate federal student loans and grants. The Education & the Workforce
Committee hasn’t released legislative language. Chairman Kline is term-limited; however,
he has indicated his desire to keep the gavel of the Education & the Workforce Committee
and is likely to be successful in his request for a term limit waiver. Representative Virginia
Foxx (R-NC) is next in line if Kline is not successful and currently chairs the Subcommittee
on Higher Education & Workforce Training, which has been responsible for the three
narrowly focused HEA bills which have passed the House this Congress.
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Gainful Employment Regulations
On October 30, the Department of Education (DOE) released its long awaited “gainful
employment” standards for vocational programs at for-profit institutions and community
colleges. The overall structure bears similarities to previously-released draft regulations.
But according to the DOE, 16 percent of the 8,000 covered programs (which have a
total enrollment of one million students) would not pass under the proposed standards
(a majority of which are for-profit institutions) and another eight percent would fall into
a “warning zone.” Critics have pointed out that the DOE’s decision to drop a student
loan default rate standard from the final rules, leaving only metrics on graduates’ debtto-earnings ratios as factors on which the colleges can be judged and punished, greatly
weakens the final rule. This round of regulations is likely to be challenged in court by
for-profit institutions that successfully blocked past regulations and will certainly face
opposition from a Republican-controlled Congress who have a more favorable opinion of
for-profit institutions and a resistance to additional federal regulation.
Higher Education Tax Policy
In July, the House approved an overhaul of higher education tax breaks, which was the
result of the work done by the Ways & Means Committee’s members on recommendations
for fundamental tax reform. The Student and Family Tax Simplification Act, the culmination
of a working group led by Rep. Diane Black (R-TN) and Rep. Danny Davis (D-IL), makes
permanent the American Opportunity Tax Credit (AOTC), which is not set to expire until
2017. However, it would also eliminate and consolidate other various tuition tax benefits
drawing opposition from the higher ed community. The legislation passed the House largely
along party lines. Democrats and the White House opposed the bill in large part because
of the lack of an offset. A change in the Chairmanship at the Senate Finance Committee
will likely spur efforts to simplify and consolidate existing tax education credits in the name
of fundamental tax reform. Senator Orrin Hatch (R-UT) is the next in line to become the
Finance Committee chairman.
The tuition deduction, the individual retirement account (IRA) Charitable Rollover, and
the R&D tax credit all expired in 2013 and are likely to be considered in any lame-duck
tax package. Whether they will be extended or made permanent remains to be seen and
largely determined by who ultimately has control of the Senate and the appetite for an
extender package in the lame duck session.
Pell Grants
With the current continuing resolution set to expire on December 11, the first order of
business is an end of year omnibus appropriations bill or continuing resolution to finalize
the current fiscal year’s spending levels, including Pell Grants. The Senate has proposed a
$100 increase in the maximum Pell Grant for the 2015-16 school year, to a level of $5,830.
The House did not yet unveil its preferred spending level, leaving it to be worked out during
lame duck session negotiations. The potential impact on Pell Grants of a new Republican
majority is unknown, but it is worth noting that current Budget Chairman Paul Ryan (R-WI)
proposed an FY’15 budget resolution which would freeze the maximum Pell Grant award
at the current $5,730 for 10 years and would have changed the program substantively in
an effort to control future spending. Pell Grant funding had been protected from budget
sequestration, but such protection might not be available in future years. Accordingly, given
the likely flat funding in the next appropriations process, the possibility of flat funding for
Pell Grants or even some reductions in future years is a very real possibility.
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What the Election Means for
Anti-Poverty Programs
Anti-Poverty Programs
In the months leading up to Tuesday’s midterm elections, both Democrats and Republicans
paid considerable attention to federal anti-poverty programs. Not surprisingly, the parties
have contrasting views on how to lift low-income Americans out of poverty.
In March, on the 50th anniversary of President Lyndon Johnson’s War on Poverty, House
Budget Committee Chairman Paul Ryan released a critique of federal assistance programs.
Chairman Ryan followed up in July with a proposal that would overhaul the way federal
aid is delivered to the poor. Meanwhile, President Barack Obama and fellow Democrats
continued to champion traditional liberal goals, such as an increased minimum wage and a
continuation of emergency unemployment benefits.
Tuesday’s election results are sure to have an impact on how this debate plays out over the
next two years.
Ryan’s Anti-Poverty Plan
Most immediately, Tuesday’s Republican gains increase the likelihood that Congressman
Ryan’s anti-poverty proposal may pass the House. Although Ryan is currently the chair of
the House Budget Committee, it is widely expected that with the Republican victory in the
House, Ryan will be elected chair of the House Ways and Means Committee , which has
jurisdiction over many anti-poverty programs, such as Temporary Assistance for Needy
Families (TANF) and the earned income tax credit (EITC).
Ryan’s plan would consolidate up to 11 federal assistance programs into a single funding
stream that states could implement with considerable flexibility, subject to certain
guidelines and performance requirements. Democrats already have expressed concerns
about abandoning federal formulas in favor of block grants, as well as the deep cuts to antipoverty programs that both the plan and Ryan’s proposed budget would require. However,
some advocates have praised Ryan’s plan, which would assign every aid recipient a case
manager and tie aid to the recipient’s progress in meeting set benchmarks.
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With Congressman Ryan as the next chair of the House Ways and Means Committee ,
this debate is certain to take center stage in the new Congress. Of course, even assuming
passage in the House, the plan would still need approval in the Senate – a difficult task
because last night’s Republican gains failed to deliver the party a 60-vote, filibuster-proof
majority. And the President’s support of the proposal in its current form seems unlikely. The
question is whether Republicans and Democrats can come together to agree on a proposal
that does not compromise either party’s principles.
EITC: A Rare Point of Agreement
Despite their many differences on the subject of federal aid to the poor, there is at least one
policy that continues to draw the support of both Democrats and Republicans: the earned
income tax credit (EITC).
The EITC, a tax credit for low and moderate income working people that is designed to
reward increased work, has been a key component of anti-poverty proposals emerging
from both sides in recent months. In fact, Congressman Ryan’s anti-poverty proposal
and President Obama’s 2015 budget proposed similar expansions of the program. In the
coming weeks and months, expect the EITC to be an important topic of discussion as
Congress considers its response to poverty in America.
A Return to Sequestration?
Negotiations over anti-poverty programs will almost certainly be framed by the looming
threat of budget sequestration. As we enter the final fiscal year of the Bipartisan Budget
Act of 2013, which set top line discretionary spending levels for 2014 and 2015, lawmakers
will have to reach an agreement if they are to avoid deep cuts to many federal programs in
2016, including those that benefit the most vulnerable Americans.
While many mandatory programs currently are exempt from budget sequestration,
including Social Security, Medicaid, and SNAP (formerly known as the food stamp
program), discretionary programs could be subject to reduced funding. These cuts would
hit critical anti-poverty programs such as the Low-Income Home Energy Assistance
Program (LIHEAP), which helps low-income individuals pay their heating bills; the Head
Start program, which provides early education to low-income children; and the Job Corps
program, which provides education and training for at-risk youth.
In fact, in the current deficit reduction environment, these programs will likely be in danger
even if politicians are able to avoid sequestration in 2016. With Republicans controlling
both houses of Congress, discretionary anti-poverty programs – as well as mandatory
programs now exempt from sequestration – are likely to be on the negotiating table as
lawmakers seek to trim federal spending further.
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