The Republicans' victory in taking over the House on Tuesday means that they will do their best to reform health care and loosen the reins of regulation—particularly regarding the implementation of the Dodd-Frank Act. But Democrats maintained control in the Senate, which will make it difficult for anything to get done, resulting in congressional gridlock.
The GOP picked up 60 seats in the House, giving them a 239-185 majority with 11 races still undecided as of Wednesday. In the Senate, the Republicans gained six seats with three races undecided, not enough to wrest control from the Democrats, who hold a 51-46 majority.
Washington observers anticipate tension between Rep. John Boehner, R-Ohio, who will likely replace Nancy Pelosi, D-Calif., as the next Speaker of the House, and Senate Majority Leader Harry Reid, D-Nev., who managed to hold onto his seat in a tight victory over Republican Sharron Angle.
Joe Lieber, senior policy analyst for Washington Analysis, gave his post-election predictions on a conference call on Wednesday. He said he sees no real “material deficit reduction” changes coming from the Republicans, as that would require cutting entitlement programs like Social Security, Medicare, and Medicaid. Cutting the deficit, which was Republicans’ and the Tea Party’s rallying point, also means making moves on the “revenue side,” Lieber said, and “Republicans are not going to do much on the revenue side.”
As for the Bush tax cuts, which will be “front and center” for the financial markets and for Congress when it returns on Nov. 15, extending the tax cuts does not look likely during the lame-duck session. Rather, Lieber said, “the odds favor extending the Bush tax cuts in the first quarter” of next year. The bottom line on the Bush tax cuts: capital gains and dividends will be somewhere between 15% and 20%, Lieber said, which “will be positive news for the market.” All of the middle class tax cuts, he said, will be extended, and all of the “upper income tax rates could go up to 39.6%; but it’s our opinion that the starting threshold will be $500,000 for those tax rates to go into effect, as opposed to $250,000.”
On the financial services front, Sam Leamann, senior financial analyst at Washington Analysis, said on the same conference call that the House Financial Services Committee, which will now likely be chaired by Spencer Bachus, R-Ala., will hold a series of hearings on the Dodd-Frank Act and will “pressure the Fed, the Securities and Exchange Commission (SEC) and FDIC to go easy in terms of interpreting the Dodd-Frank Act,” which, on the margin, “could be a plus for banks.”
Dan Barry, managing director of government relations and public policy for the Financial Planning Association (FPA), said in a separate interview with AdvisorOne that he doesn’t see the GOP-controlled Congress affecting the SEC’s rulemaking “in any substantial way.” He said Congress will likely not “interfere” with the SEC’s rulemaking authority under Dodd-Frank.
Leamann with Washington Analysis went on to say expect a technical corrections bill next year, which could be a vehicle that’s used to make “modest” changes to Dodd-Frank. The bill, he said, could prove positive for banks, and “provide more clarity on proprietary trading.” But look for Republicans to attempt to “dilute the power” of the Consumer Financial Protection Bureau’s (CFPB) current one director status by proposing “a five-member board.”
As for housing finance reform, Republicans on the House Financial Services Committee introduced a bill this year that would phase out Fannie Mae and Freddie Mac over five to seven years. Leamann says Republicans “will push this bill through the House next year,” but the Senate will not agree to it and instead favor the Treasury Department’s approach to dealing with Fannie and Freddie, which is expected out in January. Ultimately, he said, no resolution on this issue will occur next year, only gridlock.
Life insurance companies will also not face the $13 billion tax increase that President Obama imposed on them last February, Leamann said. Obama “can forget about that.”
As for healthcare, Beth Mantz Steindecker, senior healthcare analyst at Washington Analysis, said that “not surprisingly, a GOP House will propose and pass measures to repeal healthcare reform.” But she said, “We expect any bill that would materially gut the Democrats’ landmark legislation is unlikely to muster sufficient Senate support or get past an Obama veto.”