CONGRESS IN TRANSITION | Financial Services Committee

The following email from Dana Chasin is posted here by permission. He called it "Update 315 — Rough Waters Ahead for Banks?"

The subject is the takeover of the  House Financial Services Committee by Rep. Maxine Waters (CA). The contrast between her and retiring Rep. Jeb Hensarling (R-TX) is one of the greatest in policy and style in the 116th Congress.

Clear Waters

Rep. Waters’ bedrock issues have long been housing, consumer protection, and big bank regulation. In the 115th Congress, Waters focused on protecting the Community Reinvestment Act, designed to prevent discriminatory credit practices, and guarantee fair housing protections.

Bills introduced by Waters during the Congress now ending (capping a six-year tenure as Ranking Member of HFSC) indicate her priorities:

• Public Housing Tenant Protection and Reinvestment Act of 2017 — H.R. 3160: The bill reforms the public housing demolition and disposition rules to require one-for-one replacement and tenant protections, and provides public housing agencies with additional resources and flexibility to preserve public housing.
• Comprehensive Consumer Credit Reporting Reform Act of 2017 — H.R. 3755: The bill enhances requirements on consumer reporting agencies, like Equifax, TransUnion, and Experian, to better ensure that the information on credit reports is accurate and complete.
• Megabank Accountability and Consequences Act — H.R.3937: The bill would give authority to federal banking regulators to break up banks that mistreat their customers.
• Consumers First Act —H.R.6972: The bill would reverse the harmful changes to the Consumer Financial Protection Bureau imposed by the Trump Administration and restore the agency’s supervisory and enforcement powers.
• Restoring Fair Housing Protections Eliminated by HUD Act of 2018 — H.R.6220: The bill would restore several fair housing protections that HUD Sec. Ben Carson eliminated.

Crossing the Party Bar

During her tenure as Ranking Member on the Committee, Rep. Waters supported bipartisan legislation, notably the third iteration of the JOBS and Investor Confidence Act. The bill includes provisions aimed at “decreasing the regulatory burden” for some financial institutions, as well as others that aim to increase protections for consumers.

In a similar vein, she partnered with Sen. Sherrod Brown on S. 1491, the Community Lender Regulatory Relief and Consumer Protection Act of 2015. The bill would give banks and credit unions with under $10 billion in assets relief from the Consumer Financial Protection Bureau’s (CFPB) “Qualified Mortgage” rule.

Appealing to Waters’ passion for housing reform, the measure would make permanent expired provisions that protect tenants from eviction when their landlord or property owner has entered foreclosure. When it comes to her bedrock issues, Waters may be more willing to compromise to ensure she reaches her legislative goals.

She has also reached across the aisle to work with Republicans to reauthorize the Export-Import Bank, and used her political savvy to get Republicans on board with a reauthorization of the National Flood Insurance Program. While she will look to make some strides in these areas as Financial Services Chair, she has expressed firm and progressive stances regarding systemic risk and oversight.

Mitigating Systemic Risk

Importantly, Rep. Waters at the helm of the HFSC means two things for systemic risk:

• the “tide” of deregulation of the financial sector is “at an end”
• regulators and agencies should be prepared to will have their feet held to the fire more often

Heading into the next Congress, a key item on Waters’ agenda will be monitoring systemic and other risks in big banks. The financial industry has enjoyed several months of continuous deregulatory activity under an HFSC headed by Rep. Hensarling and a Republican-controlled Congress. Under her leadership, the Committee will be limited in its ability to stall measures at the federal regulator level, but it will be able to increase oversight and change rhetoric to keep a check on agency overreach.

In the words of Waters, “as we saw in the last crisis, it is the average hard-working Americans that will suffer the consequences if Washington deregulates Wall Street megabanks again.”

Oversight

A robust oversight agenda will accompany the legislative priorities of the Committee under Waters. This agenda will likely focus on four distinct areas: firms, rulemaking, agencies, and the presidency.

On the firms, Waters has expressed indignation about the slap-on-the-wrist treatment of Wells Fargo in light of the improper and unfair foreclosures on its customers. Many were erroneously denied loan modifications to lower their mortgage payments.

A Democrat-controlled House cannot do much in the way of affirmative rulemaking, but it will no longer have to play defense against further attempts at deregulation. Much of Waters’ oversight in this area will be over agencies, ensuring that the Trump appointee-controlled CFPB, FSOC, and OFR are operating according to their original statutory purposes and with the resources they need. This will likely take the form of hearings, subpoenas, and investigations.

Waters has been steadfast in her position that investigation into the president’s alleged illegal financial dealings is on her agenda, but it’s not her top priority. In a Bloomberg interview earlier this month, Rep. Waters was clear that she would use her authority to get more information, using subpoenas if necessary, but was far more eager to discuss Wells Fargo and the CFPB.

Summing Up: An Able Veteran

Waters is a skilled and seasoned legislator. Her turn with the gavel at HFSC is very welcome news and signals the end of the tide of deregulation. It also signals an end to a period of free-reign for regulators (or should we say deregulators) dogmatically pursuing an agenda that puts Wall Street megabanks ahead of ordinary Americans. Her agenda will be limited by the Republican-controlled Senate, but it will set the tone and pave the way for future legislation that will curb the rollbacks of Dodd-Frank that have occurred in recent years.

THE HOUSE | Meanwhile, Back in Congress, These Bills Passed

L to R: Democrat Maxine Waters Ranking
Member, Financial Services Committee,
and Chairman Jeb Hensarling (GOP).

The following is from Dana Chasin, posted by permission. He calls it "Update 286: If at First You Do Succeed..."

On Monday, a package of financial regulatory measures (deregulatory in aggregate effect), cleared the House overwhelmingly.

These bills have joined other bills passed by the House among bills on the Senate’s post-recess floor time queue. JOBS 3.0 raises non-Dodd-Frank issues. It also also raises S. 2155 on a smaller scale, with something for everyone to loathe or love.

(Next Tuesday, July 24, Americans For Financial Reform sponsors:  “Regulating Wall Street - Ten Years Later.” Senators Sherrod Brown and Elizabeth Warren are among the participants.  To RSVP, click here.)

JOBS Act 3.0

This week, House Financial Services Chair Jeb Hensarling and Ranking Member Maxine Waters announced a bipartisan agreement on the terms of a broad regulatory rollback package.  (Hensarling interview is here: https://www.bloomberg.com/news/videos/2018-05-23/rep-hensarling-says-more-deregulation-by-midterms-is-very-realistic-video.)

The legislation, entitled S.488, the JOBS and Investor Confidence Act of 2018 (or Jobs Act 3.0), is the most comprehensive package of changes to federal securities laws to pass the House with broad and bipartisan support since Congress approved the JOBS Act of 2012.  [NB: in 2015, Congress enacted a much smaller set of tweaks to securities laws as part of broader transportation reauthorization legislation, which some have dubbed “JOBS Act 2.0”.]

S.488 is comprised of 32 previously introduced bills, the vast majority of which have cleared the House or the Financial Services Committee.

This third iteration of the JOBS Act has many of the hallmarks of the JOBS Act of 2012.  It combines a number of disparate and seemingly innocuous pieces of legislation that relax or moderate various existing regulatory requirements relating to U.S. capital markets, in particular, the issuance and sale of securities.

The House passed the package on a 406-4 vote on Tuesday with bipartisan support, including from Ranking Member Maxine Waters and Chairman Jeb Hensarling. It looks like the Senate will consider the bill during the summer.

Public-Private Market Paradox

The JOBS Act 3.0 package contains provisions that simultaneously seek to encourage growth in the public market, while cutting back on regulations in the private market.

The bills include:

H.R.79: The HALOS Act permits issuers of private securities that are exempt from SEC registration requirements pursuant to SEC Rule 506(b) to also be exempt from certain restrictions on the use of general solicitation in the advertising and sale of such securities, further weakening investor protections in a segment of the market that is growing rapidly but plagued by fraud.

Private securities markets are appropriate for certain types of issuers and investors, but they are inherently problematic, given that they are characterized by significant risk -- lack of liquidity, oversight and transparency.  The private nature of these markets also makes it difficult for investors other than large institutional investors or venture funds to obtain information about the security, or otherwise value the security.

H.R.5877: The Main Street Growth Act lays the statutory foundation for the establishment of one or more “venture exchanges.” The Act sets forth a process under which any national securities exchange registered with the SEC can “elect” to become a venture exchange, which is subject to different standards and rules than those that govern all other national securities exchanges in the United States.

The venture exchange provisions in S.488 build upon provisions enacted in Section 501 of S.2155 that dramatically changed the way securities can be recognized as “covered” and exempted from state review by virtue of being listed on a national securities exchange. Taken together, the two provisions will ensure that certain national exchanges in the U.S. will likely operate with significantly lower listing standards than those that currently apply to national exchanges.

H.R.6177: The Developing and Empowering our Aspiring Leaders (DEAL) Act requires the SEC to allow venture capital funds to invest in secondary market shares of venture capital companies instead of primary offerings, complementing the "venture exchange" piece of the larger bill by basically creating an ecosystem for trading shares in private venture companies.

This Act, together with the HALOS and Main Street Growth Acts, further blurs the distinction between public and private securities markets, expanding the “quasi-public” securities market that was the major legacy of the JOBS Act of 2012, and making it more likely that retail investors will soon be solicited and sold securities that are in many respects more speculative and risky than is currently permitted under the securities laws.

H.R.1645: The Fostering Innovation Act ostensibly aims to encourage IPO formation by doubling the time that low-revenue emerging growth companies (EGCs) are exempt from key financial reporting controls. However, the Act is predicted to affect less than 2 percent of publicly traded companies and is therefore unlikely to have a discernible effect on increasing the amount of IPOs. Crucially, the bill gives special treatment to EGCs, opening the door for other issuers to demand the same and potentially precipitating a “special treatment” race to the bottom. The long-term effect of lowering the bar for a few is that the bar gets lowered for all.

A Work in Progress

H.R.1585: The Fair Investment Opportunities for Professional Experts Act sets in statute the definition of an “accredited investor” and codifies the current thresholds for annual income and net worth. The bill would create new qualitative pathways for individuals to become accredited and attempts to address the $1 million asset threshold that was originally set by rule in 1982 by indexing it to inflation every five years. However, even with the inflation adjustments, the bill would see retirees with no experience or sophistication in investment matters qualifying as “accredited investors” by virtue of their retirement savings, or wealth realized from an event such as an inheritance or the sale of a primary residence. This bill could be amended to rectify these important issues in the Senate, but in its current form, it is an example of the unbalanced nature of some of the bills in the JOBS 3.0 package.

Where most bills in the package relate to capital markets access, two pertain to the systemic risk pillars of stress testing and resolution planning.

H.R.4566: The Alleviating Stress Test Burdens to Help Investors Act exempts nonbank financial institutions from DFA company-run stress-testing requirements.

H.R.4292: The Financial Institution Living Will Improvement Act requires banks to submit resolution plans every two years instead of annually. These measures mimic what regulators may already decide with newfound discretion under S.2155.

Improvements to JOBS Act 3.0

JOBS Act 3.0 is modest compared to its predecessors, but underwent significant changes during its crafting. Therefore, in some cases, the bills that have been incorporated in the package are different than the previous iterations. The package has been welcomed by some institutions, such as the Council of Institutional Investors, for its provisions that address insider trading and multiclass share structure disclosure.

Unfortunately, the speed with which the package is and has been moving has made it difficult for those on and off the Hill to properly evaluate its benefits and risks. With so many moving parts, JOBS Act 3.0 needs time to be fleshed out and examined more thoroughly before concrete suggestions can be made. This is likely post-August recess.

Political Developments/State-of-Play

S.488 now moves to the Senate. With the legislative schedule packed with nominations, appropriations bills, and the Farm bill,  Senate Majority Leader McConnell announced that “Senators will continue their ongoing bipartisan discussions as we work towards a vote in the coming months.”

Other Senators have indicated the negotiations and busy schedule could push the floor debate for at least three to four weeks.  Look for the package to reach the Senate floor after the summer recess, perhaps attached to a funding or appropriations bill, or as standalone legislation.

TAX BILL | Latest on House-Senate Conference

The following is from Dana Chasin in Washington, reposted by permission. (I am in Washington this week as well.) This is his Update 235 on Washington legislation.

This afternoon at the White House, President Trump made one last pitch for the Tax Cuts and Jobs Act.  

Up on the Hill, conferees met to continue trying resolve differences between the House and Senate bills.  

Even as the process is well underway, the conferees know that Americans have picked up on the fact that their promised tax cuts are turning out to be rebates that dwindle over ten years through a series of sunsets. 

When will the initial tax cuts sunset?  Who then gets the tax hikes that follow?  How much does the middle class get in relief, averaged annually over the life of the law?  How many middle class taxpayers are looking a tax hike?

Rebate and Switch

This afternoon, Republican tax negotiators from the House and Senate met to hash out differences in the GOP effort at sweeping reformation of the nation’s tax code.  Unsurprisingly, the meeting was conducted behind closed doors. Republicans point to an ambitious timetable for keeping negotiations out of the public eye, but just as important is the tax bill’s overwhelming unpopularity.

Republicans made grand promises in their sales pitch to the middle class. Americans were told the average middle class family of four earning $59,000 per year would see a tax cut of $1,182 – more than $11,000 over ten years. Even today, President Trump repeated the claim that corporate rate reductions will generate $4,000 in new annual income per household. Simply put, the public is not buying it. As negotiations have worn on and details of the bill have emerged, public support for the bill has plummeted.

The bill would send trillions of dollars to the country’s largest corporations and wealthiest income earners. As of now, the nation’s top income earners would see their individual tax rate fall from 39.6 percent to 37 percent. Corporate taxes are slashed more severely, falling from 35 to 21 percent. Those in the middle and working classes would see their taxes increase. 

As a result, the Republican tax plan is now less popular than the tax hikes passed under Presidents Clinton and H.W. Bush. That the GOP has managed to make tax cuts less popular than tax hikes is signal.  The majority of Americans sees this Republican chicanery as a massive reverse transfer payment financed on the back of the middle class and generations to follow. 

What the Middle Class Actually Gets: Sunsets

Republicans included a number of short-term provisions in order to improve their bill’s distributional optics, but most of these concessions are written in disappearing ink.  While GOP lawmakers were sure to make corporate handouts permanent, many of the individual rate cuts and tax credits disappear by 2025. 

The increased medical expense deduction disappears after 2018. The expanded Child Tax Credit, which Sens. Rubio and Lee loudly pushed for, expires after 2024.  One of President Trump’s favorite provisions, the doubling of the standard deduction, also expires after 2024.

Bottom line: the average family will receive nowhere close to $11,820 in tax relief over the decade ($1,182 times ten).  What starts out as a $1,182 cut in year one transforms into a tax hike as deductions expire and individual rates reset.  By 2027, the wealthiest one percent of Americans will receive an average tax cut in excess of $27,000. That year, the bottom 60 percent of wage earners will face an average tax hike of $160.

In the end, an estimated 87 million families -- almost 40 percent of taxpayers -- will see their tax liability increase.  Per the Institute on Taxation and Economic Policy, 19 states would pay more overall in taxes. In 14 states, over 1 million taxpayers will face a tax hike.  

Indirect Hikes and Paygo Pain

To make matters worse, millions of Americans will see rising costs indirectly due to provisions in the tax bill unrelated to tax rates:

• The individual mandate penalty repeal alone is expected to increase premiums by 10 percent. This provision would also increase healthcare costs for the 13 million Americans who will lose health coverage as a result of mandate repeal.
• A new Chained-CPI measurement of inflation that would push filers into higher brackets more quickly.

And still worse; the deficit increase of $1.4 trillion has already initiated talks in GOP circles of automatic cuts to critical social programs -- including $25 billion in Medicare cuts in 2018 alone.  At first Republican leaders promised their cut bill would not trigger Paygo cuts, but they have recently changed their tune.  Sen. Rubio, Ways and Means Chairman Kevin Brady, and Speaker Paul Ryan have all linked tax cuts with welfare reform in recent weeks. 

Where provisions that help the middle class (the child tax credit, the doubled standard deduction, the rate cuts) are made temporary, provisions that hurt the middle class are made permanent.

Source: Tax Policy Center

Permanence for Corporations

The sunsetting of individual rate cuts and other middle class credits and deductions pave the way for permanent business tax cuts. The long-term winners are corporations were the long-term losers are the bottom 60 percent.  Wealthy Republican donors will appreciate the long-term 21 percent corporate rate, while middle and low-income Americans will see a little to no difference in disposable income and maybe substantial cuts to the government programs they count on.  

Next Steps 

Look for the Conference Committee to conclude its work blending the House and Senate versions of the bill by Friday.  The bill will then move to the Senate first for passage most likely on Monday in order to ensure compliance with Byrd Rule budgetary restrictions. The House is scheduled to take up the legislation the day after it passes the Senate. The GOP’s ultimate goal is to have the final bill on President Trump’s desk as early as December 20.

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TAX REFORM | GOP Working on House Bill for Friday

The following, with a few paragraphs lightly edited, is from an email sent to me by Dana Chasin, and is posted here by permission. Some commentators think a tax reform bill will be taken up in the fall and passed in 2018.

Whether to maintain or eliminate the business interest deduction is a point of dispute among the Secret Six Republican tax planners. The 2016 House Blueprint for Tax Reform proposed eliminating the deduction. Steve Mnuchin said he preferred that the deduction be maintained, pitting the Secretary against at least two of the Secret Six members – Paul Ryan and Kevin Brady.  

Eliminating the interest deduction for business could generate $1.2 trillion in gross (not net) revenue over ten years. The White House is opposing the provision, as are major national business groups.

Business Interest Deduction

Eliminating the deduction would unhinge a founding doctrine of American tax policy.   Since the enactment of the federal income tax in 1913, businesses have been able to deduct all interest expenses on borrowed capital. To compensate for the revenue loss, the federal government taxes lenders on interest receipts. 

The problem is that interest is often received in tax-preferred forms, such as retirement plans, often effectively escaping taxation. So eliminating the deduction is not calculated to accomplish any fiscally oriented policy objectives for the GOP.  

$Trillions at Stake

Ending the business interest deduction could generate around $1.2 trillion over ten years according to the conservative Tax Foundation.  Note that this is not a net figure -- the amount would not come close to offsetting the $2 trillion that would be lost from reducing individual income tax brackets to 12, 25, and 33 percent. 

The Democratic “Better Way”

Democrats could be persuaded to see a future for eliminating the deduction, provided it simplifies the tax code burden in a progressive fashion.  Given the current environment and the Republicans’ need, in some circles, to find revenue, it’s unlikely that the Republicans will see fit to suggest anything the Dems would consider equitable reform.  But since deficits don’t seem to matter, we’ll probably see this fall to the cutting room floor after some debate. 

The Ryan-Brady wing of the Secret Six has advocated for the elimination of the deduction since releasing the “Better Way” agenda.  They intend to make up for the hit to business by allowing for 100 percent expensing of business investment in the first year.  Allowing immediate expensing and denying interest deductions is a large step toward turning the corporate income tax into something more akin to a consumption tax. This would replace a system in which businesses depreciate assets over useful lives prescribed by law. Despite this, their plan is out of step with American businesses.

Business Opposition

The Businesses United for Interest and Loan Deductibility (BUILD) Coalition has informed both the Senate Finance and House Ways and Means that it opposes eliminating the deduction. The coalition, mostly farmers and small businesses, emphasizes the important role borrowing plays in fueling their operations. The deductibility of interest lowers the cost of such borrowing.

The coalition also takes issue with the second plank of the Ryan-Brady plan: 100 percent expensing of first-year business investment. The coalition argues full and immediate expensing is redundant, as small businesses are already able to expense annual expenditures. Overall, the coalition insists the policy would raise the cost of capital and reduce investment over the long run.

Additionally, interest deductibility is a key component of the business model of real estate developers, who would be expected to oppose such a change in the law.

Where the Six Stand

Steve Mnuchin’s business background ought to incline him to preserve the deduction.  During a Ways and Means Hearing earlier this year, Mnuchin testified: “On the business tax, my preference is to maintain interest deductibility, which is important for small- and medium-sized businesses."  He went on to say that eliminating this deduction, like others, remains on the table despite the controversy.  

With Steve Mnuchin, Paul Ryan, and Kevin Brady’s views on record, what is known regarding the remaining Secret Six members' approach to the deduction?

•  NEC Chair Gary Cohn: Cohn holds the same view as Mnuchin.  On May 9, they both met with Republican senators and expressed their desire to maintain interest deductibility. Their unity means Trump likely supports keeping the deduction. 

•  Sen. Orrin Hatch, Chair of Senate Finance:  Sen. Hatch’s stance on the issue is unclear.  He has stated in the past that the Congress may not reconsider the deductibility of interest expenses, but said he was open to re-evaluating the question. Early this month he said: "Some people think that would be a tremendous move in the right direction, on both sides . . . I can see it one way, and I can see it the other way, too. These are tough issues. There's nothing easy about tax reform."

•  Sen. Mitch McConnell, Majority Leader: McConnell’s stance on the issue is unclear. He hasn’t come out for or against the deduction. The most he’s said when referencing it is: “There are going to be critics of any way you try to provide revenues to buy down rates.” 

Friday and Beyond

House GOP tax writers are weighing middle ground options between the total elimination of the business interest deduction and its preservation.  An interest deduction may be kept for farmers and small businesses.  

House Ways and Means Tax Policy Subcommittee Chair Peter Roskam says he is "actively working" on how to define which small businesses and farmers would be allowed to keep their interest deductions while taking advantage of the expensing provisions in the tax reform bill that Ways and Means is working on. 

There is also the possibility of a “haircut” for interest deductions, say with 20 percent of net interest not allowed as a deduction.

It is not known if opposing or undecided members of the Secret Six will sign on to these approaches. If you’re anxious to know just where the Secret Six stands on this deduction and all the other important elements of tax policy, stay tuned – you will find out more on Friday (July 28) regarding the big recess reveal. ⧫

Dana Chasin is a fiscal and financial policy advisor who has worked in legislative and advocacy capacities in Washington and for investment banking and financial not-for-profit organizations in New York. Mr. Chasin was Legislative and Policy Liaison to Congress and the Obama administration at Americans for Financial Reform (AFR), a national coalition supporting comprehensive financial regulatory reform and as a member of the AFR Too Big to Fail Task Force. Previous to joining AFR, Mr. Chasin was Senior Advisor at OMB Watch, a non-profit, non-partisan think tank in Washington, researching and advising on federal fiscal policy. He previously served as Legislative Assistant for U.S. Senator Mark Dayton, covering judiciary, tax, budget, and banking issues. He spent six years as Vice President in the global Project Finance team at Société Générale, the international investment bank. Mr. Chasin has published op-ed articles in the Wall Street Journal, Newsweek, and the Christian Science Monitor. 

ECONOMIC HOTSPOTS | by Dana Chasin

The U.S. Economy at Risk as Washington Debates.

My friend Dana Chasin sent me a summary of economic issues before the Congress at the end of the first quarter of 2017. 

With his permission, I have re-posted it below.

The issues add up to some strong challenges that will not be easy for the GOP to address. 

Having struck out on replacing Obamacare, Trump is facing the likelihood that the First 100 Days may go by without a single significant piece of legislation.

Here is Dana's guest post. I have added only a number to identify each of his five sections:

1. Dodd-Frank Action

One of the subtlest but surprising developments of the year to date is the sense that Wall Street itself (the financial industry) is not as warm to the idea of repealing the law as Trump is.  Several major firms and the Wall Street Journal -- yes, even its masthead editorial page -- have signaled caution when it comes to the president’s actions on Dodd Frank. More and more investors believe that the administration is unlikely to deliver any significant jolt to the economy. 

As Trump vowed again this week to “do a number” on Dodd-Frank, it’s expected that the SEC, under Jay Clayton who will likely be confirmed, will soften enforcement and rules that the 2010 law put in place.  That is not to say that rolling back Obama-era regulations will be easy for the SEC.  Per the Journal:  “The SEC doesn’t have the authority to revoke Dodd-Frank, which is an act of Congress.” 

Given that the vast majority of rules and regulations from the Dodd-Frank Act have already been implemented, the best that the SEC can do is amend them or grant exemptions on a case by case basis.  If legal objections were motioned as a result of the SEC’s actions, it would slow down the already drawn-out process.

2. Tax Reform

It seems that the already difficult tax overhaul process just got a lot more complicated for Trump.  The GOP in Congress are having trouble agreeing on a bill that Democrats won’t filibuster.  This all started when two senior economic officials who served in the Obama administration, David Kamin and Brad Tester, published an article that found that the much talked about Border Adjustment Tax will not produce the kind of revenue the President has suggested. If their report is confirmed by, say, the CBO, then it would throw the whole tax agenda off because they would not be able to produce a bill that wouldn’t add to the debt.

The Trump administration is working hard to ensure a legislative success before the year is up.  There are a lot of opportunities and a lot of road blocks (think Blue Dog Democrats and the Freedom Caucus). Recently, the President’s legislative director met with moderate House Democrats to propose working with them on the tax reform plan. One of the Democratic lawmakers who attended the meeting said that the legislative director declared the border adjustment tax dead on arrival.  If that is the case, then Donald Trump’s protectionist campaign promises will be broken, a prospective trillion dollars in revenue will be lost, and tax reform, lacking a pay-for, will limp forward, or not.  

There have been rumors this week that the White House is considering a carbon tax and a value added tax to make up for the loss of revenue that will be induced by the massive tax cuts Republicans are aiming for, both on the income and corporate side.  If the carbon tax is in the bill, the Freedom Caucus had have reason to vote against it.  

The White House has flip-flopped on the VAT and carbon tax, saying that it was considering them at first and soon after disavowed them completely.  Given the collective lack of experience this administration has, their negotiation efforts are very transparent and their tactics are easy to dodge so far.

This flip-flop shows that the Freedom Caucus should have reason to be cautious of their trust in the House leadership to put forth a plan with their inputs taken into account. This is precisely why the plan is showing signs of ripping apart at the seams.  This and the BAT may get debated extensively over the next few months.  Don't be deceived: they are dead letters in Congress. 

3. Infrastructure

For some reason, the administration decided to pick tax reform as its next big ticket item after the health care debacle, opting for the more difficult and partisan route.  The president may once have had a shot at working with Democrats who have been asking for infrastructure investment for a long time, but it seems that Trump is ditching that train for now.

The president’s infrastructure plan might, accordingly, also be too ambitions.  With a goal of a trillion dollars, Trump aims to pass large tax subsidies to investors willing to pour money into infrastructure investment.  There are many reasons this plan is risky, one of which is that large firms will be getting nothing short of massive government handouts for investments they are probably going to make anyway. 

Last year, Congressman Delaney came up with a plan that could give the president a pass around Democratic obstruction.  His proposed infrastructure bill combines infrastructure investments, which Democrats have been eying for quite some time, and international tax reform, an issue that Republicans have been keen to tackle.  And here’s the catch: it has strong bipartisan support with 40 Democrat and 40 Republican cosponsors. 

By going with tax reform first and seeking more money than Obama's stimulus package, this administration’s legislative agenda and self imposed August deadline suggests remarkable legislative incompetence.  

4. Budget

Despite being able to check off submitting a statutorily required budget to Congress from his to-do list, Trump can hardly consider this any sort of accomplishment at this point.  As it was not even dead on arrival -- Congress will not consider or even hold hearings on it -- and grossly increased the deficit, there is nothing to see here as an accomplishment. 

5. What the GOP Might Do

The biggest obstacle to a sweeping tax reform is the Democrats in the Senate, who could easily filibuster a bill if it adds to the national debt. The reason for that is that tax legislation that adds to the debt cannot be passed by a simple majority vote as per the reconciliation process that passed the budget resolution earlier this year.  That said, there are still ways around the filibuster with a model similar to the Bush Tax Cuts which passed in 2001. 

Per the Washington Post:  “Republicans could avoid Democrats in the Senate altogether by putting forward a plan that would expire after 10 years, the approach they adopted when they reduced taxes under President George W.  Bush. They could also rely on a different set of estimates than those produced by the JCT if that agency's analysis is unfavorable to their plan.” 

The budget resolution passed earlier this year through a reconciliation process could give the GOP some leverage in the legislature. While it may miss on major reforms, the administration could push through several smaller tax reforms that could pave the way for the president’s infrastructure plan.  If Trump were serious about infrastructure, Republicans could look to Congressman Delaney’s plan and set a less ambitious goal than $1 trillion.

In regard to repealing Dodd-Frank, Republicans are having a much harder time than they had anticipated.  As noted, the intricate law has recently picked up an unlikely supporter base: Wall Street itself. The industries main newspaper has cautioned against repealing the law, and several key players have joined the Dodd-Frank chorus.  That won’t stop Republicans, however, from at least seeking to chip away at some parts of the law.  

This is just the beginning of what is going to be a drawn out process, with several wins and many losses.  The question is can the president pull a rabbit out of a hat and pass tax reform or will this administration be legislatively stillborn come August recess?  Money can buy many things and every administration  has a learning curve but it is already beginning run out of the one thing it keeps trying to buy: time.

Related Posts: Banking (Glass-Steagall) Act of 1933 . Dodd-Frank Act .
Hensarling's H2O Bill

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DRUG BIZ | Danger–FDA Deregulation Ahead (by D. Posnett)

(Ill. by Patrick George)

The FDA's ability to ensure safe drugs has been
curtailed in the name of reducing costs and getting
more drugs to market. Caveat emptor! 

The following Guest Post was sent to me as a draft letter to the editor by an MD friend, David Posnett. He describes a worrisome price that the GOP-controlled Congress has exacted to get funding restored to the NIH for medical research. I asked Dr. Posnett if I could post this today and he kindly gave his permission.

The 21st Century Cures Act passed Congress Dec. 7 and was signed into law Dec. 13 by President Obama. This is a huge bill with something in it for everyone, and lots to criticize. As a retired researcher who spent nearly 40 years of my life writing research grants mostly to the National Institutes of Health (NIH), I applaud the long-overdue increase in funding of the NIH. In fact funding had steadily decreased in an alarming fashion since sequestration in 2013—inflation-adjusted funding for the NIH fell 22 percent in 2013-15.

Now there is a chance to catch up on these losses, in part because of The 21st Century Cures Act. It is well documented that reduced federal funding leads to fewer grants, fewer new discoveries and a loss of talented scientists. I have seen this first hand. Research scientists and patient advocate groups welcome the prospect of more funding.

However, there is an ugly underbelly to the 21st Century Cures Act. Perhaps not so well appreciated is further erosion of the power of the FDA in keeping us safe from drugs that can be harmful, or that are just ineffectual.

Remember the Thalidomide Babies?

It took lots of courage for a young FDA scientist in 1960 to stand up to the powerful drug industry trying to promote a poorly researched drug named Thalidomide.  Frances Oldham Kelsey was the FDA scientist who kept Thalidomide off the U.S. market and blocked approval for 19 months, thus saving thousands of babies from being born with severe deformities in the US. In other countries, without a strong FDA, sales and marketing for pregnancy-associated nausea remained unchecked and tens of thousands of severely deformed babies were born resulting in untold suffering across the globe.

In the name of accelerating drug development the FDA’s authority and the lengthy process of FDA approval have been steadily been eroded over the last few decades and the 21st Century Cures Act could be a fatal blow, specially with a new government bent on deregulating. Lobbyists from the pharmaceutical and medical device industries, and allied patient advocacy organizations, are touting predicted miracle breakthroughs based on the law’s aim to weaken regulations and promote rapid drug development. 

Most egregious is the use of anecdotal clinical experience as evidence that drugs are safe and effective; allowing antibiotics on the market based on pre-clinical evidence, that is, laboratory or animal studies, with little testing in humans; weakening the already limited evidence needed to approve medical devices (for example a stent for a coronary artery), even allowing companies to farm out the certification of safety of modified devices to third parties, circumventing the FDA altogether.  Similar concerns have been voiced in several leading medical and science publications (New England Journal of Medicine, JAMA, Science and Nature).

"Giveaway" to the Drug Biz 

As stated by Michael Carome (Director, Health Research Group, at Public Citizen) in the LA Times, “If universal praise for a measure makes your B.S. detectors twitch, you’re on the right track. The 21st Century Cures Act is a huge deregulatory giveaway to the pharmaceutical and medical device industry, papered over by new funding for those research initiatives.” 

Nothing in this act addresses the main problem the public sees with the drug industry: unaffordable prices. Elizabeth Warren says: “When American voters say Congress is owned by big companies, this bill is exactly what they are talking about.”   

Consider Merck’s Vioxx, a painkiller and arthritis drug the FDA approved in 1999. Vioxx was pulled off the market in 2004 after it was shown to raise the risk of heart attacks. By then, according to research published in the Lancet (a premier British medical journal), 88,000 Americans had heart attacks from taking Vioxx, 38,000 of them fatal.

Personally, I will be a lot more reluctant to take a new medication that has not stood the test of time!  This position is what I would recommend to my patients.

David Posnett MD

Springs, East Hampton, N.Y.

JOBS | Which David Brooks Should We Listen To?

David Brooks tackles every problem with earnestness and when he figures out the answer he expresses his dismay, often enough that Congress doesn't get it or hasn't acted.

In his Op-Ed today, he is on to the low labor force participation rate, the "lowest in decades".

He has read another book and he is distraught at the options facing young people: "Millions are in part-time or low-wage jobs that don’t come close to fulfilling their capacities. Millions more are in dysfunctional or unhealthy workplaces, but they don’t feel they can leave."

Transcending his University of Chicago roots, he favors favors a crash program of infrastructure investment.

The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling...

He warns Congress that young people are watching.

[O]ver the past five years, the political class has done essentially nothing. That will fill future generations with astonishment and should fill the current generation with rage... 

It makes sense to me. Borrowing resources today is appropriate to pay for the infrastructure needs of the future, just so long as the projects themselves are worthwhile. This was President Obama's intent when he came into office in 2009, to use stimulus money to accelerate state and local "shovel-ready" projects.

But nearly two and a half years ago Brooks was distressed at our era of indebtedness. He was appalled that any generation would "borrow money from the future to spend on itself". His article pillories debt of all kinds - Federal, state, local, business, personal. The title of his Op-Ed piece is "The Debt Indulgence".

Mr. Brooks, you are a reasonable person and you are seriously trying to come up with answers to big problems. But if we borrow to create jobs for our young people, won't we just be indulging ourselves in more debt?

SYRIA | Statements from House and President

HASC Chairman McKeon.

Rep. Howard P. "Buck" McKeon (R-CA), Chairman of the House Armed Services Committee, gave his views on the President's request for authorization to use military force in Syria on CNN's New Day, yesterday, September 2, to Anchor Chris Cuomo:

Over the last couple of years the President has surged the troops in Afghanistan while he cut the military budget. He flew missions over Libya while he cut the military’s budget. He changed the strategy to focus on the Pacific, while he cut the military budget. Our military has had over a trillion dollars cut over the last couple of years and going forward. The Chairman of the Joint Chiefs and the Chiefs that serve with him have not had any kind of certainty in how they plan and what they look forward to from year to year over the last couple of years.

This Sequestration - the President needs to fix. This would be a great time to fix that. To show the military that while we are asking them to continue on with mission after mission after mission. Instead of cutting back, like [President Obama] told them the day before he announced this decision that they weren’t going to receive the pay next year that they have been planning on.

Instead of doing that kind of thing to our military, we ought to look out for them just as we are looking out for those people in Syria. ... We cannot keep asking the military to perform mission after mission with sequestration and military cuts hanging over their heads. We have to take care of our own people first. ... The world has not gotten safer and yet we are cutting a trillion dollars out of our military- asking them to do more with less.

House Speaker Boehner.

House Speaker John Boehner (R-Ohio) announced today (September 3) that he would support President Barack Obama's call for action in Syria, and urged his colleagues to do so as well.

I'm going to support the president's call for action. I believe my colleagues should support this call for action. We have enemies around the world that need to understand that we're not going to tolerate this type of behavior.

His spokesman, Michael Steel, added that the President should be making the case:

The Speaker offered his support for the president’s call to action, and encourages all Members of Congress to do the same. Now, it is the president’s responsibility to make his case to the American people and their elected representatives. 

House Majority Leader Eric Cantor (R-Ohio) said today (September 3) that he would support a resolution backing military action.

While the authorizing language will likely change, the underlying reality will not. America has a compelling national security interest to prevent and respond to the use of weapons of mass destruction, especially by a terrorist state such as Syria, and to prevent further instability in a region of vital interest to the United States.

House Minority Leader Nancy Pelosi also voiced support for military action in Syria.

President Obama did not draw the red line. Humanity drew it decades ago.

President Barack Obama said that he was confident that Congress would pass a resolution.

So long as we are accomplishing what needs to be accomplished, which is to send a clear message to Assad, to degrade his capabilities to use chemical weapons, not just now but also in the future, as long as the authorization allows us to do that, I'm confident that we're going to be able to come up with something that hits that mark.