Subject: Year-end Review: Fiscal Policy
From: Dana <[email-masked]>
To: Michael Pyle <[email-masked]>
Date: Fri, 1 Jan 2016 18:06:13 -0500

Mike & Co. --

For the first time in five years, Congress and the administration came to an agreement last month on the federal budget and the debt limit. They managed to do this without serious risk of a government shutdown or default.  In fact, with the government now funded through September 30, 2016, there's practically no chance of a shutdown until then.  

The budget deal also raised the defense and non-defense spending caps to avoid sequesters next month and in January 2017.  And it extends the debt limit through March 15, 2017, when Treasury starts running out of "extraordinary measures."  

Apparently, no one wants to miss time on the campaign trail wrangling over appropriations or threatening default. 

What happened?  Does this mean fiscal peace in our time?  Or is it a short-term time out from the budget battles of recent years?  See below a look at the year-end fiscal policy agreement, with a detailed review of the extenders package. 

For now, enjoy the ceasefire and happy New Year! 

Cheers,

Dana

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The omnibus spending bill enacted last month is tantamount to passage of all 12 appropriations for FY17 before that fiscal year starts next October 1.  That means the FY17 appropriation top lines will be set before the fiscal year starts for the first time since 1995 (FY96).  That's twenty years ago.  

There was no reason to expect this comity for most of 2015.  Budget making by regular order seemed out of the question as Senate Democrats vowed to filibuster every FY16 appropriations bill to hit the floor unless the GOP consented to restore domestic and military sequester cuts on a 50/50 basis -- and did so. 

The strategy worked, but for a reason few could have predicted.  The House Republican conference's demands on leadership became so untenable -- that is, so likely to produce the government shutdown that Speaker Boehner and Senate Majority Leader McConnell were desperate to avoid -- that Boehner finally made the House hardliners an offer they couldn't refuse: accept his resignation for the price of a continuing resolution (CR).  

Boehner's budget bargain became his successor's.  The new Speaker, Paul Ryan, convinced the conference to live with this bargain for the time being and live to fight another day.  In part to avoid making the Ryan House immediately as ungovernable as Boehner's had been, with the prospect of paralysis continuing into 2016, the conference adopted all of the Boehner CR's top line numbers in the omnibus.  

The two-year budget deal that increases discretionary spending by $80 billion over two years and extends the debt limit through 2017 met nearly every budget demand laid out this year by Democrats, who also remained united to prevent the GOP from attaching riders to the omnibus  to cut off funding for Planned Parenthood and several of President Obama’s top priorities, including Obamacare, as well as his new environmental rules and executive actions on immigration.

Other key riders that were rejected:

•  Campaign Finance -- Senate Majority Leader McConnell pushed for language loosening federal restrictions on fundraising by political parties, a move meant to give parties more equal standing with independent “super PACs” that have the ability to raise unlimited amounts of money from private donors following the Supreme Court’s Citizens United decision. But Democrats and conservative Republicans joined together to oppose any loosening of party fundraising, one of the key provisions of the 2002 McCain-Feingold campaign finance reform bill.  

What was included was a Republican rider preventing the IRS from cracking down on the political activities of 501 (c)(4) nonprofit groups, who are allowed to spend on the “promotion of social welfare” with much less disclosure than a campaign or political action committee.

•   Regulatory Reform -- Democrats rejected all riders that would repeal or scale back the 2010 Dodd-Frank Wall Street reform bill.  Republicans wanted particularly to block a proposed DOL rule that requires retirement investment advisers not to consider how much commission or what fees could be collected when advising clients.  That rider was not included in the deal, nor was a widely discussed proposal to reduce the number of banks subject to stricter financial regulations as “systemically important” institutions.

Nearly all of the policy riders included in the 2014 cromnibus were carried over in the 2015 spending bill.  One of special interest to HRC and New Yorkers in general:

•  9/11 Responders -- Congress voted in 2010 to create a new federal health program for police officers, firefighters, construction workers and others who worked at Ground Zero in the immediate aftermath of 9/11; hundreds are suffering from cancer, respiratory illnesses and other maladies.  The omnibus extended this health program until 2090 and adds another five years to a separate victims compensation fund, costing a total of $8 billion.

In addition to the FY 2016 budget, Congress also passed a more sweeping set of extensions of existing short-term tax breaks than most observers had expected. 

The large 10-year revenue loss estimate of this extenders bill -- over $650 billion -- reflects Congress’ decision to do at once what it would otherwise do in five to seven smaller chunks.  The costliest of the extenders:

•   Research & Development --  A top GOP and corporate priority, the research-and-development tax credit is made permanent for the first time since it was created in 1981 and expanded it so that some small companies that aren’t making profits can take the credit against payroll taxes.  Small businesses would be able to write off as much as $500,000 in capital costs instead of the $25,000 they could deduct if Congress didn’t act, and those levels would be indexed for inflation. Banks such as Citigroup and Morgan Stanley will get to continue deferring U.S. taxes on their foreign income.

•   Low-income Individual Breaks -- 
 Democrats, in turn, won permanent extensions of some of the president’s priorities—expanded tax credits for low-income and middle-class families that are scheduled to lapse at the end of 2017, after he has left office.  The child-tax credit, earned-income tax credit and a college-tuition credit will all get extended indefinitely at their current levels, although without the indexing to inflation some Democrats had sought. 

•  Permanent Extensions -- Among the largest of the extenders made permanents are the state and local sales tax deduction, charitable contributions, and basis adjustment of S corporation stock.  Others include:

•  Section 179 small business expensing up to $500,000 annually, phased out for property placed in service in excess of $2 million, indexed for inflation;
•  small businesses with gross receipts of $50 million or less, which may use the credit to offset their Alternative Minimum Tax Liability;
• 20 percent wage credit for active duty employees for employers of any size;
• 15-year straight line depreciation for restaurant and retail property improvements;
• 100 percent exclusion of small business stock held for five years, also eliminated from the AMT;
•  the Subpart F active financing exception;
•  the Child Tax Credit;
•  the American Opportunity Credit;
•  the Earned Income Tax Credit; and
•  the eduction for certain expenses of elementary and secondary school teachers.

•  Five-Year Extensions --  Each side also got five-year extensions of other key priorities.  Republicans won an extension of bonus depreciation, which lets all companies deduct more than usual in the year they buy a capital asset.  Other major five-year extensions:  

•  the bonus depreciation, 50% in 2015, 2016, and 2017, 40% in 2018, and 30% in 2019.  Unused AMT credits may be claimed in lieu of bonus depreciation. Qualifying property expanded to include certain improvements and certain trees, vines, and plants; 
•  the New Markets tax credit;
•  breaks for hiring people from disadvantaged groups and investing in struggling communities; and
•  credits for wind and solar energy, including a change that lets solar projects qualify once they begin construction, instead of when they begin producing energy (NB: both the wind and solar credits ultimately get phased out)
 
•  Two-Year Extensions --

• timber capital gains taxed at 23.8 percent;
• race horses as three -year property; and 
• the $1/gallon biodiesel credit
 
 Other major year-end tax policy changes: 

•  Cadillac Tax --  The 40 percent ACA Cadillac tax has been postponed until 2020 and is likely to be repealed before then.  It would have applied to the most expensive health insurance plans. But with skyrocketing health insurance costs, by 2018, almost half of all plans would have been hit.  Strong bipartisan majorities in both houses of Congress favored repeal, but President Obama saved it by agreeing to a two-year postponement.  
 
•   Medical Device Tax -- The 2.3 percent medical device tax will not apply to sales in 2016 and 2017 and it's likely to be repealed after that.  This is the same story as the Cadillac tax.  If the votes were there to postpone it, then they will be there to repeal it.   The only question is whether the next president will let that go without vetoing it.
 
•  International Tax Reform -- Though almost no one expects broad based tax reform (individual and corporate) until 2017, preliminary comprehensive tax reform talks between the White House and Congress occurred during the highway bill negotiation this fall.  But domestic and pass-through businesses would not allow tax breaks for U.S. multinationals to pass without getting a piece of that pie.  Any international tax reform would create winners and losers and the losers have enough clout today to bring it down.  
 
Nevertheless, an international tax proposal with a 20 percent top rate is being prepared for 2016 by House Ways and Means Chair Kevin Brady: 

“How we run in 2016, how we lay this foundation is critical to how we finish this effort. ... The answer isn’t in more Treasury rules, or in pointing fingers, or hand-wringing. ... I am convinced that we have to be at 20 percent or below to keep us competitive for the longer run. ... Doing that in a way that does encourage them to bring those profits back is a challenge.  It is definitely achievable. And right now, again — because of the [OECD’s base erosion and profit-shifting project’s influence] around the world — there is an urgency to determine if we allow ourselves to become isolated in our tax code where innovation companies simply can’t justify doing their [research and development] and manufacturing here in the U.S. If that continues, we are going to lose [a] tax base that is important to the country.”  

Lastly, a couple of tax policy loose-ends:

•  the Internet Tax Moratorium expires October 1, 2016.  There's little doubt it will be extended.  The only question is whether it will go by itself or with a sales tax bill.
 
• an Online Sales Tax is under consideration for next year.  Just before the Senate adjourned for the year, a permanent Internet Tax Moratorium was added to the Trade Facilitation and Trade Enforcement Act (aka Customs bill) conference report.  Assistant Senate Minority Leader Durbin is confident that his point of order will strike that from the conference report and hopefully force Senate passage of the Marketplace Fairness Act, S.698, which would establish uniform sales and use taxation of Internet sales.  

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Recent Updates:  

Year-End Review: Fiscal Policy (Jan. 1)  
Year-End Review: Financial Regs. (Dec. 29)  
Omnibus Review (Dec. 15)
Omnibus Situation  (Dec. 14)
FY 2016 Omnibus Talks (Dec. 10)
Customs Bill  (Dec. 8)
Tax Extender Negotiations  (Dec. 6) 
Brown on HFT  (Dec. 4)
Shelby 2.0 Update  (Dec. 3)
HTF Conference Report  (Dec. 3)
FY 2016 -- Policy Riders  (Nov. 30)
Dodd-Frank and the CR  (Nov. 13)
FRB Interest Rate Policy  (Nov. 9)
Ryan and Tax Reform (Nov. 4)
HTF/Pay-fors  (Nov. 3)
FRB System Risk Rule  (Nov. 2)
Ex-Im Reauthorization  (Oct. 30)
Tax Extenders  (Oct. 30)
Boehner Budget Deal (Oct. 27)
Ex-Im Reauthorization  (Oct. 26) 
Debt and Debt Limit  (Oct. 22)
SEC Nominations  (Oct. 20)
TPP/Currency Manipulation  (Oct. 15)
Ex-Im Update  (Oct.  9)
Fed Dividend  (Oct. 7)
Debt/Extraordinary Measures  (Oct. 6)
Jobs Report (Oct. 2)
Fiduciary Rule  (Oct. 1)
FY2016 Budget/CR  (Sept. 29)
Trade/TPP  (Sept. 25)
GSE Reform  (Sept. 25)
Carried Interest  (Sept. 23)
Bush Tax Cuts  (Sept. 15)
Puerto Rico  (Jul. 23)
Shelby 2.0  (June 24) 

> On Dec 29, 2015, at 5:40 PM, Dana <[email-masked]> wrote:
> 
> Mike & Co.  --
> 
> After the GOP captured the Senate in the midterm elections, the main question in the financial regulatory world as 2015 began was whether Congress would rollback key parts of Dodd-Frank Act (DFA) as the GOP-controlled House had been voting to do over the previous four years.  
> 
> How did the two sides fare?  What issues were at play?  What have we learned and what can be expected in 2016?  
> 
> These questions are answered below as the Shelby bill is considered both as standalone legislation and as a rider on the omnibus appropriations bill, and the other major financial regulatory legislation of 2015 is reviewed. 
> 
> (NB:  some of you may have received a draft version of the below yesterday; you can disregard that draft.)
> 
> Best,
> 
> Dana 
> 
> -------------
> 
> In the tug-of-war between the financial industry and supporters of Dodd-Frank, the gains and losses were marginal on both sides in 2015.  Once again, the struggle resulted in another stand off between the industry's efforts to ease the regulatory burden of DFA and advocates' bid to expand its protections for workers, investors and increase resources for regulators.  Republicans blame leading Democrats in Congress and in the administration.  Financial reformers who spent all year trying to block regulatory rollbacks are crediting them.   
> 
> The financial industry urged Congress to soften several DFA regulations and sought to do this first through Senate Banking Chair Richard Shelby's bill entitled The Financial Regulatory Improvement Act of 2015.  The bill, more than 200 pages and consisting of eight wide titles, addresses wide-ranging areas of reform from changes to a key DFA threshold for enhanced prudential standards to the CFPB's qualified mortgage rule. 
> 
> Sen. Sherrod Brown, the top Democrat on Senate Banking, said Shelby's bill went too far:  "Democrats are ready, willing, and able to work with Republicans to get community banks and credit unions the regulatory relief they need right now... Rather than focusing on issues that enjoy broad bipartisan support, this draft bill is a sprawling industry wish list of Dodd-Frank rollbacks.  This sweeping proposal holds Main Street financial institutions hostage to a partisan effort to dismantle Dodd-Frank's consumer protections and sensible rules for the large banks and nonbanks that played central roles in the financial crisis."
> 
> The main provisions of the Shelby bill:
> 
> •   Community Bank Reg. Relief --  Comprising 25 different measures loosening regulations on the country's smallest banks: relief from privacy disclosure requirements; permission for privately insured credit unions to become members of the Federal Home Loan Bank system; an exemption for banks under $10 billion in assets from the Volcker Rule; and a requirement that the National Credit Union Administration hold public hearings and receive comment on its budget.  
> 
> The opening title also included several provisions criticized by Democrats, such as a change to the CFPB's QM rule allowing all loans held in portfolio to be eligible for the rule's safe harbor provisions -- a controversial measure altering how certain "points and fees" are calculated under the QM rule, it removes language regarding affiliated title companies that spurred much of the earlier criticism.  It further makes changes banning certain types of loans, such as "no-doc" loans that helped spur the financial crisis.
> 
> •   SIFI Threshold -- The bill would have multiplied the DFA threshold mandating tougher capital and oversight on banks by ten times to over $500 billion in consolidated assets, though regulators would have the discretion to examine any banks over $50 billion to be considered systemic.  The Fed Board could make a recommendation to the FSOC to consider a particular bank holding company, though the FSOC would have the ability to launch its own evaluation as well.  The FSOC would be able to vote to change the list of criteria over time, and the $500 billion threshold would also be indexed for GDP growth. Shelby was willing to narrow the $50-$500 billion window for deregulation he had first proposed.  Democratic aides involved in the discussions said Shelby was willing to go as low as $250 billion.  Democrats weren't willing to go above $200 billion. 
> 
> •   FSOC Process for Non-Banks --  This title would have codified changes to the FSOC process for designating nonbanks as systemically important, to provide additional transparency to the process.  Some in Congress have criticized FSOC's designation process as being too opaque.  The FSOC would be required to give detailed explanations for why regulators are considering a designation; provide opportunities for companies to meet with council representatives; analyze a company's remedial plan for removing a SIFI designation and allow for revisions; and offer an explanation if the council moves forward with a formal designation.  Regulators would also be required to hold a hearing for designated companies at least once every five years and would have to vote to renew the decision to designate.
> 
> •   Fed Governance Reforms --  The bill would have made several changes to the Federal Reserve System.  It would require the head of the New York Fed to be nominated by the White House and confirmed by the Senate.  It would also direct the formation of an independent commission to evaluate the structure of the Fed system, including looking at the number and structure of the Fed's 12 districts.  The Fed would be required to publish a study every two years on its regulation and oversight of non-banks, a provision that would sunset after 10 years.  The GAO would be required to publish a study looking at the agency's regulation of systemically important institutions, with an eye toward issues around regulatory capture.  
> 
> •  Swaps/Emerging Growth Firms  --  This title addressed several measures related to SEC registration and regulation.  Most notably, it would remove indemnification requirements on swap data so that it can be shared with foreign regulators more easily and would establish a "grace period" for emerging growth companies working toward an initial public offering.
> 
> •   Mortgage Finance System --  The bill included several provisions related to the mortgage finance system, including Fannie Mae and Freddie Mac.  It would prohibit Congress from using guarantee fees to offset unrelated government spending and would ban the sale of Treasury-owned preferred stock in the government-sponsored enterprises without the approval of Congress.  It would also direct the FHFA to provide Congress with updates on the establishment of a common securitization platform and would transition the platform to a non-profit available to approved issuers beyond Fannie and Freddie.  Finally, it would mandate that the GSEs' risk-sharing levels be at least 150 percent of the previous year's level, with at least half of the total as front-end risk sharing.
> 
> With such a wide variety of significant proposals, the Shelby bill was an overloaded canoe.  Senate Banking reported it out favorably in May, but only on a 12-10 party-line vote, not sufficient to be certain to clear the 60-vote filibuster hurdle to passage in the Senate.  
> 
> Over the months that followed, members and staff met frequently to discuss which elements of the bill had bipartisan support Shelby's participation in these meetings was occasional at best and the discussions never really became negotiations.  
> 
> Committee Republicans Crapo, Moran and Corker did not negotiate in place of Shelby, but they tried to find common ground with a few receptive Democrats on the Banking Committee, including Sens. Warner, Donnelly, Heitkamp, and Tester. 
> 
> By the end of September, the group came up with a rough framework that covered areas where the Democrats appeared willing to move closer to some of Shelby's proposals.  The Democrats were able to find some common ground with Republicans on key areas including easing regulations for community banks, creating a new carve-out for regional banks in Dodd-Frank and making changes to the way the FSOC polices big financial firms outside the banking sector. 
> 
> The ideas were presented separately to Shelby and Senate Banking Committee ranking member Sherrod Brown.  Brown, who had floated an alternative to the Shelby bill consisting only of the Shelby bill's title on supervisory relief for community banks, was not negotiating alongside the moderate Senate Democrats but his staff was kept in the loop.
> 
> In early November, Brown arranged a meeting between all the banking committee Democrats so the four who had been working with Republicans could update the rest on the discussions.  One Some members showed interest and others showed strong opposition.  
> 
> Then on November 10, Sen. Warren gave a speech on the Senate floor warning her colleagues against going down the same road that led to a controversial Dodd-Frank rollback to weaken restrictions on derivatives trading from being tucked into last year’s spending bill.  She called out Democrats who “want to get something done around here for a change... If there's anyone in this chamber, Republican or Democrat, who thinks they can slip goodies for Wall Street into these bills without a fight, they are very wrong," she said, referring to must-pass legislation including the upcoming appropriations bill.  In addition to the pushback from Warren and other outside groups, the compromise effort faced public and private opposition from Treasury.
> 
> Warren and reform advocates were mindful that they lost a round last December in the Cromnibus bill, when JPMorgan Chase and Citigroup lobbyists secured a change to Dodd-Frank rules on complex financial instruments known as swaps. 
> 
> Back in July, Shelby, a senior member of the Appropriations Committee, had his bill attached as a rider on the Financial Services FY 2016 appropriations bill.  But he got almost nothing in the final spending agreement.   After months of laying the groundwork, banks and their allies in Congress missed their big shot at moving a wide-ranging legislative agenda in a must-pass spending bill this year before the 2016 election cycle heats up.  
> 
> Among the major financial provisions​ that didn’t make it into the spending package:
> 
> •   Fiduciary Duty --  Per DFA, the Labor Department finally put forth a fiduciary rule in April, the first update of the government’s retirement investment advice regulations in four decades.  The rule, which would take effect next year, requires brokers and financial advisers to act in the “best interest” of retirement savers—a higher standard than current regulations, which only require advice be “suitable.”  The new rule aims to eliminate the potential conflict of interests between people who offer investment advice and companies that sell financial products at a time when individuals are made responsible for building their own nest eggs through programs like IRAs and 401(k)s that have largely replaced traditional pension funds that guaranteed life-long benefits. The financial industry has said it would raise the compliance costs and drive many financial advisers out of business while making investment advice unaffordable for middle-class savers.  Efforts to delay that rule making were turned aside. 
> 
> •  Community Bank Lending Rules --  A number of regulatory changes sought by small, locally focused community lenders, such as an exemption from certain mortgage underwriting rules for mortgages held in a bank’s portfolio.  These were not adopted. 
> 
> •   CFPB Governance​ --  A provision to create a board, rather than a single director, to govern the Consumer Financial Protection Bureau, and subjecting the agency’s budget to annual appropriations did not survive. 
> 
> Some financial regulatory legislation did make the cut: 
> 
> •   Fed Dividend --  In a surprise, the banking community lost a sizable source of revenue -- the annual Fed dividend paid to member banks, totaling $25 billion.   The highway bill passed earlier this month took some of the money that banks receive in dividends from the Fed to help pay for fixing the U.S.’s deteriorating roads.   The highway bill passed earlier this month took some of the money that banks receive in dividends from the Federal Reserve to help pay for fixing the U.S.’s deteriorating roads.  Wall Street was furious over the precedent of having financial firms pay for infrastructure projects and lobbied to get a provision in the spending bill that would have given banks more flexibility to sell their shares in the Fed’s regional banks but the provision was rejected. 
> 
> •   USG's Stake in the GSEs --  A provision passed that prohibits Treasury from selling the government’s stake in mortgage-finance giants Fannie Mae and Freddie Mac until 2018 without future legislation.  The U.S. government bailed out Fannie and Freddie in 2008, and in return received warrants to acquire nearly 80 percent of the companies’ stock along with a new class of preferred shares.  Congress has tried​ unsuccessfully to pass legislation that would replace Fannie and Freddie with a new system, leading some of the companies’ proponents to push the Obama administration to take action on its own and sell the shares, now enjoined by this provision.  
> 
> An omnibus rider banning the SEC from requiring corporations to publicly disclose their political and lobbying expenditures managed to survive.  And negotiators included cybersecurity legislation designed to make it easier for the financial firms and others in the private sector to share threat information with the government.   
> 
> Five years after a crisis that shook the foundations of finance, Warren has public opinion on her side.  A Washington Post/ABC News published October finding that 72 percent of Democrats, 58 percent of Republicans, and 68 percent of independents want the next president to pursue tougher regulations on banks.
> 
> That public distrust has forced Wall Street — and financial services writ large — to make oblique arguments that don’t tackle head-on the unpopularity of the industry across the entire electorate. Republicans, trying to avoid an explicit alliance with Wall Street, regard their legislation as “reforms of the reforms” that Dodd-Frank made.
> 
> --------
> 
> Recent Updates:  
> 
> Year-End Review: Financial Regs. (Dec. 29)  
> Omnibus Review (Dec. 15)
> Omnibus Situation  (Dec. 14)
> FY 2016 Omnibus Talks (Dec. 10)
> Customs Bill  (Dec. 8)
> Tax Extender Negotiations  (Dec. 6) 
> Brown on HFT  (Dec. 4)
> Shelby 2.0 Update  (Dec. 3)
> HTF Conference Report  (Dec. 3)
> FY 2016 -- Policy Riders  (Nov. 30)
> Dodd-Frank and the CR  (Nov. 13)
> FRB Interest Rate Policy  (Nov. 9)
> Ryan and Tax Reform (Nov. 4)
> HTF/Pay-fors  (Nov. 3)
> FRB System Risk Rule  (Nov. 2)
> Ex-Im Reauthorization  (Oct. 30)
> Tax Extenders  (Oct. 30)
> Boehner Budget Deal (Oct. 27)
> Ex-Im Reauthorization  (Oct. 26) 
> Debt and Debt Limit  (Oct. 22)
> SEC Nominations  (Oct. 20)
> TPP/Currency Manipulation  (Oct. 15)
> Ex-Im Update  (Oct.  9)
> Fed Dividend  (Oct. 7)
> Debt/Extraordinary Measures  (Oct. 6)
> Jobs Report (Oct. 2)
> Fiduciary Rule  (Oct. 1)
> FY2016 Budget/CR  (Sept. 29)
> Trade/TPP  (Sept. 25)
> GSE Reform  (Sept. 25)
> Carried Interest  (Sept. 23)
> Bush Tax Cuts  (Sept. 15)
> 
> 
> 
>