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State of Play

Despite his early successes, subsequent setbacks and resulting low approval ratings have made the path ahead for President Joe Biden challenging to say
the least.

It’s hard to recall a similar scenario in Washington in which a president was at loggerheads not just with the opposition party, but also with the moderate and progressive wings of his own party. The situation is handicapping the president’s ability to enact a bold agenda as once envisioned. The continued infighting and lack of action on numerous campaign promises could drag down Democrats, worsening the environment going into a contentious November mid-term election.

Based on his public statements, it appears the president aims to pivot and govern closer to his centrist roots as a legislator and deploy a strategy to right the trajectory of his agenda—and ultimately his place in history.

The next few weeks will be critical to the Democrat’s strategy and fate, with limited time on the 2022 legislative clock. By the time late spring/summer hits, the legislative machinery will come to a grinding halt, with every movement on Capitol Hill and the White House scrutinized through the lens of the November mid-term elections.

 

Latest From the Hill

Earlier this month, Sen. Majority Leader Chuck Schumer (D-NY) failed in his attempt to pass voting-rights legislation and to change the Senate rules/filibuster. In the coming days he’ll have to make a decision whether to pursue a nascent bipartisan approach to the Electoral Count Act of 1887.

Schumer did not specify which rule changes the Senate would consider, but various options short of elimination are still under discussion. These include requiring a talking filibuster, creating a carve-out from the filibuster for voting rights legislation, or requiring 41 Senators to vote “no” to break a filibuster rather than 60 “yes” votes.

Another proposal would eliminate the 60-vote hurdle on the motion to proceed to legislation while retaining the filibuster for ending debate on the bill itself. Any changes to the filibuster rules would require a majority vote, i.e., 50 Democratic votes plus a tie-breaking vote from the vice president if all 50 Republicans oppose. Two key moderate Democratic Senators, Sens. Manchin (D-WV) and Kyrsten Sinema (D-AZ), maintain their opposition to any weakening of the filibuster, and their “no” votes render these changes dead on arrival.

In our view, it’s time to accept that this Congress is unlikely to make any changes to the filibuster rule requiring 60 votes to cut off debate and move legislation in the US Senate. We continue to believe most legislative measures going forward will need some Republican support, with the exception of a reconstructed BBB Act, which will need to be passed through the arcane reconciliation process.

With the voter-rights debate completed (though it will be back on the campaign trail this fall), the White House and Congress will turn to a number of measures that will further shape the 2022 political landscape:

 

US Federal Budget

Funding for the US government is currently operating under a continuing resolution (CR) based on 2021 outlays. There has yet to be an agreement between Democrats and Republicans on the topline numbers for defense and non-defense spending, making it increasingly difficult to pass a fiscal-year 2022 spending measure before the current CR expires on February 18.

 

Speculation on Capitol Hill is that the budget will not be released until sometime in March at the earliest.

 

The lack of an agreement on fiscal-year 2022 bills appears to be contributing to a delay in the release of President Biden’s fiscal-year 2023 budget proposal. Speculation on Capitol Hill is that the budget will not be released until sometime in March at the earliest. There is also speculation in Democrat circles that an additional supplemental COVID-19 measure will be considered/added to the government funding effort.

We think it’s important to note that, under control of both parties, Congress has only finished the regular budget process four times in the past 40 years (via regular passage of appropriation bills): in 1977, 1989, 1995, and 1997. There have been roughly 9-10 shutdowns over that same span: 1980, 1981, 1984, 1986, 1990, 1995-96, 2013, and 2018-19.

 

COVID-19 Relief

President Biden is expected to release a COVID-supplemental budget request with the goal of purchasing and distributing additional boosters, antiviral pills, home tests, and masks. Some progress has been made in an effort to provide funding relief to distressed industries, including restaurants, as talks with a handful of Republicans continue.

 

Build Back Better and Reconciliation

The future of the BBB is still up in the air. We believe that much of the month of February will be focused on the Biden administration, Congressional Democrats, and Manchin coming to an agreement on a reconciliation package that can win the backing of all other Senate Democrats. Reports speculate that Manchin will come to the table with specific changes to some of the social programs as well as climate provisions.

President Biden’s State of the Union will be delivered on March 1, 2022. This, in our view, is the Democrat’s current deadline for the social-spending measure. We think the measure will include some of the contours of the $2 trillion BBB passed by the House—again with the cooperation of Manchin and likely Sinema as well.

 

We’re not convinced that the talk of breaking BBB into smaller chunks and passing them separately has legs.

 

Given that the Democrats can only use the reconciliation process one time per fiscal year, we’re not convinced that the talk of breaking BBB into smaller chunks and passing them separately has legs given our jaded views on the current partisan environment.

Instead, we believe a pared-back BBB (the House passed a massive $2.2 trillion version in November, which stalled in the Senate) will focus on fewer priorities over a 10-year span. A few possibilities: 

  • Climate Provisions — about $550 billion
  • ACA Subsidies and additional healthcare provisions — about $500 billion
  • Universal Pre-K and, potentially, additional child and elder care — about $250-300 billion

 

Tax Policy

Offsets to pay for BBB will likely align with those outlined in 2021, but again, this depends on the final price tag. What to watch in this space: Manchin’s comments on the Trump tax cuts of 2017 and State and Local Tax (SALT) caps. Northeast Democrats in the House have pledged “No SALT, No Deal” and won’t provide votes for the bill until the $10,000 cap is expanded.

Unless you happen to be in the top 700 US taxpayers and qualify for the billionaires tax (even that prospect is slim), we don’t foresee changes to capital gains or personal income-tax rates. 

 

Child Tax Credit

The Child Tax Credit (CTC) expansion from March’s $1.9 trillion American Rescue Plan expired on December 31, 2021. Approximately $70-75 billion in lump-sum payments remains to be disbursed in the first quarter of 2022 as the approximately 40 million taxpayers who qualify file their tax returns.

We currently don’t see the CTC expansion being a component of the BBB, and while there is some Republican support for a standalone measure, any final legislation will likely need to address income thresholds and work requirements, to name a few. 

 

US Innovation and Competition Act of 2021

(USICA): The $250 billion measure (with $52 billion slated for the semiconductor industry) aimed squarely at competing with China passed the Senate last summer and is waiting on action in the House before advancing to a conference between the two bodies to resolve the differences.

 

Federal Reserve Appointments

President Biden’s announcement of three additional board appointments will potentially chart a new course for the Federal Reserve. Sen. Banking Committee Chairman Sherrod Brown (D-OH) has pegged early February to begin confirmation hearings for nominees Sarah Bloom Raskin, Lisa Cook, and Philip Jefferson. Don’t expect a smooth confirmation process.

 

Midterm Mania

With just under 10 months until the midterm elections, Washington’s political and chattering classes are already consumed by the reverberations. History favors the Republicans in the 2022 midterm, as the party of the newly elected President has lost an average of 26 House seats in midterm elections since 1946. Redistricting, presidential approval (or disapproval)—and now record sums of money—are all Republican tailwinds for a takeover of the House and portend a toss-up for control of the Senate despite Republicans having to defend more turf than Democrats.

From taxation to spending, budget to pandemic oversight, implications for President Biden and the Democrat agenda hang in the balance. It’s certain the president will seek to press his agenda through regulatory agencies. Examples of reforms already being pursued include the Securities and Exchange Commission evaluating enhanced environmental, social, and governance disclosures, rewriting proxy advisor rules, and money-market fund reforms; and the Department of Labor’s work on private-equity investments within 410(k) plans and other defined-contribution plans. We’ll continue to highlight developments in this area given their importance to the financial-services industry.

Meanwhile, the Republican party has its sights set on recapturing the White House in 2024.

 

Talk to your financial professional to make sure your portfolio is prepared for whatever happens in Washington D.C. 

 

The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds. Hedgeye Potomac Research is not an affiliate or subsidiary of Hartford Funds.

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About The Author
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Senior Policy Analyst, Hedgeye Potomac Research

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