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Financial Planning > Tax Planning > Tax Reform

Senate Shakeup Likely as Congress Up for Grabs

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While all eyes are on which presidential candidate will prevail in the upcoming general election, it’s important to note that both houses of Congress are up for grabs as well.

The Republicans are likely to retain control of the House, not only this fall but for the rest of the decade, says political analyst Andy Friedman of The Washington Update, in his latest white paper, Sizing Up the 2016 General Election.

Meanwhile, once Congress gets back to work after a five-week August recess (which starts Friday), lawmakers will focus on the budget deadline, as neither chamber of Congress has yet passed reconciled appropriations bills, says The Washington Update’s Jeff Bush.

If “the House cannot agree to stick with the negotiated top-line budget numbers or, as the fiscal conservatives want, a lower total federal government spend, negotiations will quickly lead to a continuing resolution,” or a short-term deal to keep the government running at current spending levels, he says.

Bush, however, wonders “what kind of CR” will be passed. “How long does the CR cover? Does it just go until December or until March?”

Adds Bush: “My gut tells me it [a CR] will be dealt with pretty quietly as neither party will want to look incompetent heading into the election. The thorn in the mix is the fiscal conservatives made promises to their constituents. At home campaigning, they will get an earful from their districts regarding holding firm on the lower spending.”

House control into the next decade could be a likely scenario as well, due to the “gerrymandering” that took place in 2010 when Republican-led legislatures redrew the lines of their states’ congressional districts to maximize the number of districts safe for Republicans, Friedman notes. Districts are redrawn every 10 years after the Census.

Democrats have a good chance to pick up seats in six states: Florida, New Hampshire, Illinois, Ohio, Pennsylvania and Wisconsin. Republicans have a more modest chance of countering with a pickup in Nevada. “Given these numbers, the possibility of a Democratic takeover of the Senate cannot be ignored,” Freidman writes.

Of the 34 Senate seats up for election this year, 24 are held by Republicans.

To regain a Senate majority in 2016, Democrats must pick up four seats if they hold the White House and five seats if the Republicans win the presidency. (Under the Constitution, the vice president breaks ties in the Senate. So the party in the White House controls the Senate in the case of a 50-50 split.)

Justin Schardin, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative and former senior policy advisor to Sen. Kent Conrad, told ThinkAdvisor in a Monday interview that Rep. Jeb Hensarling, R-Texas, will remain as chairman of the House Financial Services Committee if the House stays under GOP control, while Rep. Maxine Waters, D-Calif., ranking minority member on the committee, would take that seat if Democrats prevailed.

Hensarling has two years left to serve as chairman, while current chairman of the Senate Banking Committee, Sen. Richard Shelby, R-Ark., will not resume that position as his six-year term as chairman has expired, Schardin said. Ranking member Mike Crapo, R-Idaho, could likely fill Shelby’s seat.

But Schardin notes that another chairman candidate could be former Sen. Evan Bayh, who’s running again in Indiana. Bayh could “have seniority” on the Senate Banking Committee if he wins his previous seat.  

Hensarling will likely continue to push to see that, at the very least, “parts” of his Financial CHOICE Act, his plan to replace the Dodd-Frank Act, are passed “if Republicans sweep the election,” Schardin said.

Hensarling’s Financial Choice Act would have little chance under a Hillary Clinton presidency, as her stance has been that “Dodd-Frank worked pretty well, let’s build on it,” Schardin said.

But Clinton would likely face the same gridlock as President Barack Obama, as legislation must go through the GOP-controlled House.

Under a divided government, “little on the fiscal policy front” would likely to occur, notes Joe Lieber of Washington Analysis, “meaning that the market focus would continue to be on monetary policy.”

Should the parties decide to put past petty conflicts aside and work toward a fiscal policy compromise, “we could see a deal that allows for some significant tax changes (i.e. moving to a territorial system of taxation, repatriation, potential lower corporate rates in exchange for more infrastructure/highway funding, closing the carried interest and other loopholes, cracking down on inversions, and perhaps a minimum wage increase), though we only assign a one in three chance of this happening,” Lieber says.

Liber adds that the president and Congress will also face a debt limit extension in March.

“Under divided government, we could be looking at fireworks surrounding that deadline, though we believe the markets are unlikely to react much given their acceptance of previous last-minute reprieves,” Lieber opines. “Furthermore, the two-year budget agreement reached last year will expire, meaning that sequestration will come back into play.” 

As to a Donald Trump presidency, Lieber opines that “uncertainty” would be the most common theme “with his seemingly daily policy changes.” While Trump would push for repealing the Affordable Care Act, another of his top agenda items would be comprehensive tax reform. “It may take a year or more to complete, but the markets would be fixated on the issue through 2017.”

A likely scenario would be “a corporate rate cut from 35% to 20%-28%, a move to a territorial system, repatriation, a closing of loopholes, and, potentially, the creation of a patent box,” Lieber says. Individual tax reform may also be considered in the same bill. 

The just-released UBS Investor Watch poll found that the economy was respondents’ top election issue, with 84% of respondents calling it very or extremely important.

Of the 2,344 affluent and high-net-worth investors responding to the UBS poll from June 6 to 14, 79% said health care was of high importance, 78% said national security and 73% cited foreign policy.

— Check out Social Security Bill Would Raise Retirement Age, Slow COLAs on ThinkAdvisor.


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