Federal Look Ahead

December 22, 2016

By John Cahill

webres_120403_oneill_johncahill-0108With the Republican Party holding the presidency and both houses of Congress for the first time since 2006, many believe government will be in a post-gridlock frame of mind. There will surely be quick movement on some major initiatives. However, the Congressional majorities are slim and many bills will require Democratic votes.

It’s virtually certain that the first order of business in Congress will be to repeal and replace the Affordable Care Act (ACA). This was a central campaign theme for Republican candidates in 2016 and every year since the ACA was enacted. However, the ACA is enormously complex and it’s naïve to think that a single vote to repeal will return the health care system to a pre-ACA condition. Even within the majority, there are deep divisions on what the repeal vote will actually repeal. There’s similar disunity within industry. Some predict a repeal with delayed implementation, but that unreasonably assumes that the health care system will stay the course instead of shifting for the post-ACA world.

The entire health care sector has essentially reshaped its business model to account for ACA. The law expanded Medicaid and established individual mandates. Today more than 23 million Americans are insured because of the law, according to the Congressional Budget Office. There are now safeguards preventing insurance companies from denying people coverage over pre-existing conditions and young adults can continue to be insured on their parents’ plans until age 26. While the details of a repeal remain to be seen, the vote will set in motion a lengthy process to not eliminate, but replace the law’s most popular provisions. Replacing with even a scaled back version will still require difficult policy trade-offs and, most importantly, revenue – taxes that may no longer be in place after a repeal.

Tax reform is also likely to advance in the next Congress. Similar to the ACA repeal, details are unclear. One thing is certain and that is that tax reform will be a top agenda item for every member of the House Ways and Means Committee. Individual and corporate rates are likely to fall affecting every household and business as a result. Every step of the way, there will need to be concessions. The President-elect campaigned on a 15 percent corporate rate. Speaker Paul Ryan’s plan calls for a 20 percent rate. Both want to repatriate the $2.5 billion that corporations hold abroad. Historically, moves to lower rates require elimination of deductions. It’s also difficult to envision how such major cuts could be seen as revenue neutral to deficit hawks in both parties.

While the winter and spring will be dominated by a repeal of ACA and the beginnings of tax reform, shortly thereafter we expect Congress to focus on infrastructure. There is broad consensus that infrastructure improvements are vastly needed. However, with massive tax cuts proposed, finding new funding will be tricky. Surely there will be public-private partnerships, but it’s also possible that tax revenues gained through the repatriation of oversees money may be a source of revenue. There are also opportunities such as hypothetical “rebuild America” bonds, although investors need a decent return to make this asset attractive. For projects like airports, it’s conceivable that the new Congress could allow for more local latitude on funding sources like the Passenger Facility Charge (PFC) by letting individual airports to raise the current cap on PFCs, thereby permitting new airport bonds to be issued with proceeds going to improvements. What is straightforward is that the list of projects is long and investing in our infrastructure would have major economic impact on our country.

Gridlock will no longer be the norm, but everything will require compromise beginning with the White House and Congressional Republicans. Both parties in Congress will look for common ground. Republicans will have a two-vote margin in the Senate – and a smaller margin on key committees – and Speaker Paul Ryan still must contend with a very active and conservative party base. Several in both parties have a reputation for deal making and that’s one certainty we have as the 2018 midterms approach.

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