Many Big Decisions For Congress Are Approaching
With Labor Day in the rear-view mirror, Congress will be returning to Washington and they have a very full agenda that includes Budget Reconciliation, infrastructure, government funding and the debt ceiling.
Next week the headlines are likely to fall on the House Ways and Means Committee where they will start to work on the tax provisions in the Budget Reconciliation Bill. The White House and progressive Democrats have put some very significant issues on the table. Two that are the least controversial among Democrats are increasing the corporate tax and the top bracket of the personal income tax. More controversial are proposals to increase the capital gains tax and the step-up provision in the federal estate tax.
There are a handful of moderate Democrats who have expressed reservations on the capital gains increase, and with the narrow margins in both the House and Senate, a small group of moderates will have significant sway. While some Democrats want to eliminate the favorable treatment of long-term capital gains; others would like to increase the rate from the current 20% to 25 or 29%. In the 50/50 Senate it will only take one Democratic Senator to prevent a large increase in capital gains.
With respect to the step-up provision Democratic Senators with a significant agriculture sector in their state have already expressed their displeasure with the idea. These Senators point out that family farms couldn’t be handed down from one generation to the next without the step-up provision. There is already talk of an agriculture exemption.
Speaker Pelosi only has a four-seat majority, meaning she can only lose 3 votes; the group of 10 moderates who fought for a vote on the Senate bipartisan infrastructure bill are likely to object to any Reconciliation Bill that approaches $3.5T, making the Reconciliation process a test of Pelosi’s leadership.
Speaker Pelosi will also need to address the issue of House consideration of the bipartisan infrastructure bill. Before the Labor Day break, she agreed to have a vote no later than September 27; but as progressive Democrats have vowed to oppose the bill before they see action on the $3.5T Reconciliation Bill the Speaker will have tough choices to make. Hard to see Democrats blocking one of President Biden’s top achievements, especially as his poll number drop.
Perhaps the issue with the biggest potential market impact is funding the government for FY 2022 and dealing with the debt ceiling. As we have seen before failure of Congress to provide government funding prior to October 1 can lead to a government shutdown. Republicans have vowed to vote against the government funding bill.
This past week, Treasury Secretary Yellen informed Congress that the debt ceiling is likely to be reached in October; hence Congress must act in order to prevent a US Government default. Currently Congressional Democrats are developing a strategy where they will put the debt ceiling and government funding into one bill and dare Republicans to oppose it. It is not clear what the plan B is.
Bottom line: lots of risk for markets in coming weeks.
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