The 114th Congress formally convened yesterday. In what follows, Goldman Sachs presents its views on some of the central questions regarding the political and policy outlook for the coming year. In general, they continue to expect more substantive legislative activity to occur in 2015 than occurred in 2014, and in a few cases--trade agreements, a highway bill--these proposals could become law. Goldman expects most of the deadlines Congress faces over the coming year to result in only limited uncertainty, though the debt limit increase that will be necessary later in 2015 is the main potential exception.
1. How does the agenda for 2015 differ from 2014?
The legislative outlook for 2015 resembles the outlook for 2014 in many ways, but we expect more legislation to reach the President’s desk and, in a few cases, policy changes to actually become law. Like 2014, we expect debate on a number of broad reforms, particularly immigration policy and tax reform. However, immigration reform looks just as difficult as it did last year; major changes to tax policy are more likely but still a long shot. Congress also faces a number of deadlines this year, just as it did last year (a calendar of selected deadlines and events is shown in Exhibit 1). In many cases Congress will likely simply kick the can by temporarily extending these deadlines, though the prospects for enacting longer-term policy measures in some areas (e.g., Medicare physician payments or the highway bill) look slightly brighter in 2015 than they were in 2014. Finally, just as in 2014 policy changes through executive actions look likely to continue, with implementation of the President’s recently announced executive action on immigration likely by mid-year, additional changes likely to be announced in the run-up to the State of the Union Address later this month, and substantial regulations on carbon emissions, overtime pay, and higher education expected over the course of the year.
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In other ways, the political agenda has changed more significantly from last year. First, there is a fair chance that Congress could pass some form of “trade promotion authority” and legislation to ratify the Trans-Pacific Partnership trade agreement with Japan and other Pacific Rim countries. Second, narrow changes in other more controversial areas look more realistic than they have over the last few years, though major revisions still look unlikely. For example, substantive changes to the ACA and the Dodd-Frank Act were included in the omnibus spending bill enacted in December 2014, and at least one additional change to the ACA—repeal of the tax on medical devices—looks likely to pass early in 2015.
2. How will the shift to Republican control of Congress change the policy debate?
The source of political uncertainty is likely to shift from the House to the Senate and, in some cases, from Congress to the White House. Since Republicans took control of Congress in 2011, most major legislative agreements have followed a similar path: the House passes legislation with only Republican votes, the Senate passes compromise legislation with some support from both parties, and that Senate legislation then passes the House, often by a very narrow margin and often at the last minute. The wider margin of control in the House is likely to provide Republican leaders in that chamber a bit more flexibility in passing legislation with Republican votes without having to reach across the aisle for Democratic support as they have often had to do on major fiscal matters. With 54 seats in the Senate, Republican leaders will still need to compromise with Democrats on most issues to reach the 60 votes usually needed to pass most legislation. Nevertheless, Republicans will control the legislative calendar, which will lead to some legislation that the White House opposes reaching the President's desk. The upshot will be a greater focus on the Senate, and a greater focus on whether the President will sign or veto various measures.
3. What effect will lower energy prices have on policy?
Energy supply policies will probably get less attention, while energy taxation might get more, but changes on either front are likely to be modest. The sharp decline in oil prices looks likely to reduce some of the political pressure on lawmakers to address energy supply issues. The most immediate issue on that front is approval of the Keystone pipeline: over the next two to three weeks the Senate is likely to vote on, and will probably pass, legislation to approve construction of the pipeline from Canada to the US. The House is expected to take up the measure this month as well, potentially putting it on the President’s desk by month-end. However, public support for the project has dipped slightly—though a majority still favors it—and the Obama Administration may feel less pressure to approve the pipeline than it once did. The upshot is that while Congress looks more likely to pass a bill, the President looks less likely to sign it.
Lower prices could give a boost to other policy changes. First, cheaper gasoline undoubtedly raises the probability that the $0.18/gallon tax will be increased for the first time since 1993, though at this point the likelihood still appears to be fairly low. While some Republican lawmakers appear to be less opposed to this particular tax increase than most others, few have actually supported it. And while lower gasoline prices create additional room in households’ transportation budgets with which to absorb a tax increase, the $0.12/gallon increase that would be needed to bring federal highway-related revenues into line with federal highway spending would still amount to a tax increase of about $16 billion per year. Some proponents of a gas tax increase, like Sens. Corker (R-TN) and Murphy (D-CT), have proposed to offset the tax increase with tax cuts elsewhere, but in light of the political sensitivities around gasoline prices, this nuance may not make much of a difference in generating support for an increase. At this point, we don’t expect an increase in the federal gasoline tax to become law, but we do expect to hear much more about the issue ahead of May 2015, when the current extension of the highway program expires.
Second, a repeal of the oil export ban looks likely to move up the agenda in 2015, as lawmakers face rising (though at a slower pace than previously expected) domestic crude production while consumers face lower prices at the pump and become less focused on energy issues. At this point the most likely outcome seems to be incremental loosening of the ban through approval of lightly processed oil condensates for export—rather than crude itself—but this will be an issue that bears watching.
4. How will lower deficits affect fiscal decision making?
Congress is likely to focus more on small changes to spending plans than on long-term fiscal reforms. Once the President has sent a budget proposal to Congress in February, Congressional Republicans will start work on their own budget proposals covering the next ten years. In addition to spending and revenue targets, these "budget resolutions" may also include instructions to various congressional committees to raise or cut spending or revenues. If Republican leaders choose to include these instructions in their budget blueprints, the so-called "reconciliation" legislation they produce would be immune to procedural obstacles and could pass both chambers of Congress with a simple majority, rather than the 60 votes usually required for passage in the Senate. In theory, this would allow Republicans to present the President with significant fiscal policy legislation on entitlement reform, tax reform, or the debt limit. However, House and Senate Republicans have yet to agree on a single approach and may have difficulty doing so, in light of the fact that House Republicans have typically passed budgets that target cuts to entitlement programs, which some senators are unlikely to want to vote for. With only 54 Republican votes in the Senate, there will be few Republican votes to spare and there is a clear possibility that the congressional budget process for targeting broader fiscal reforms will stop before it really even starts.
If so, this would leave Republican leaders to focus on more incremental changes, such as further changes to sequestration. The agreement to avert sequestration that then-House Budget Committee Chair Ryan (R-WI) and Senate Budget Committee Chair Murray (D-WA) reached in late 2013 lasts only through September 30, 2015. Unlike the onset of sequestration in 2013 that caused a reduction in absolute terms, the caps in 2016 would hold spending roughly flat in nominal terms, excluding emergency spending on overseas military operations. Both the White House and congressional Republicans propose defense spending above the caps, but disagree on how to offset the budgetary effects of doing so. With a rise in geopolitical tensions and less pressure to enact further broad deficit reduction measures, any additional savings that can be generated through incremental policy changes could be used to modestly increase defense spending from its projected level in 2016.
5. Will Congress be able to enact tax reform?
We continue to expect tax reform--particularly business tax reform--to become a more central focus of the political debate over the coming year though we see only a 25% chance that any type of reform is enacted into law in 2015. The disagreements are well known: how much to tax upper-income individuals, how to treat foreign corporate income, and which tax preferences should be eliminated. However, forward movement continues. Sen. Orrin Hatch, who will take over as Chairman of the tax-writing Senate Finance Committee in January, laid out some principles for tax reform in a report released December 11, and Rep. Paul Ryan, who will become House Ways and Means Chairman in January, recently indicated that he would be open to enacting tax reform only for business, after previously signaling that corporate and individual reforms would need to be considered together. President Obama has indicated that he expects informal discussions on reform to begin prior to the January 20 State of the Union Address, and it seems likely that some additional discussion of tax reform will be included in the budget the president submits to Congress in early February. That said, congressional Republicans have yet to agree on a unified approach on the issue, including whether any funds from reform can be diverted to infrastructure spending, as the President (and retiring Republican Ways and Means Chairman Dave Camp) have proposed.
6. Will Congress finally agree on immigration reform?
Immigration policy changes will take effect mid-year as a result of the President's executive actions on "deferred action" for unauthorized immigrants, but enactment of broader immigration reform legislation continues to look unlikely. The first test will come ahead of February 27, when funding expires for the Department of Homeland Security (DHS), which is charged with implementing most of the President's recently announced policy changes (the spending bill enacted last month funded all other agencies through September 30, 2015). Some congressional Republicans have proposed adding immigration-related legislation--increasing border security, for instance--to the upcoming spending bill. However, it is unclear whether such a bill would have sufficient support to pass in Congress, and it is even less likely to survive a presidential veto.
7. Will Congress make changes to the Affordable Care Act?
Changes to the Affordable Care Act (ACA) look likely, but they will probably be limited to policies that do not fundamentally change the program. The spending bill enacted in late 2014, for example, included a provision to restrict funding for one of the risk-sharing policies used to incentivize insurance companies to offer plans through the federal health exchanges. While a fairly minor change, it was nevertheless notable because so few substantive changes to the coverage provisions of the law had been made until then. Our expectation is that more changes will be enacted in 2015. The most likely is a repeal of the tax on medical equipment, which President Obama seems likely to agree to since it has little to do with the broader coverage expansion under the ACA and already enjoys a veto-proof level of support in the Senate. Legislation to apply the mandate on employers to provide health insurance only to employees who work 40 or more hours per week, rather than the 30 under current law, is also likely to come up for a vote in the House in the next few weeks as well, though there appears to be only limited support among congressional Democrats for such a change.
A harder to quantify risk is the possibility that the Supreme Court could invalidate some of the subsidies provided through the Affordable Care Act. The court has granted review of one of several cases (King. v. Burwell) challenging the legality of subsidies provided through federally-operated insurance exchanges. If the court rules in favor of the challengers to the law, enrollees in the 34 states that rely on federal exchanges would no longer be eligible for subsidies until states established their own exchanges. The Supreme Court’s prior ruling on the law in 2012 created a bifurcated system by allowing states to opt out of the Medicaid expansion, and a ruling against the current interpretation of the law could potentially have a similar effect on insurance subsidies through the exchanges. The court is expected to rule by June 2015. If the court restricts federal subsidies, some states may respond by establishing their own exchanges. However, some of the states that have opted out of the optional expansion of Medicaid under the law would probably also opt out of establishing their own exchanges. This prospect has led Congressional Republicans to begin work on their own proposal to replace the existing law in the event the court rules against the Administration.
8. Will international trade agreements be approved?
Trade Promotion Authority (TPA) and the Trans-Pacific Partnership (TPP) appear less likely to us to be enacted this year than public rhetoric would suggest. While it's a close call and finalization and passage of the TPP this year in Congress is still clearly possible, it also faces clear obstacles. First, while most congressional Republicans in principle support TPA--also known as "fast-track" authority, this allows Congress to approve but not modify trade agreements negotiated by the White House--the prospects for House passage are uncertain in light of sparse Democratic support and pockets of Republican opposition (to put the issue in perspective, Republicans barely managed to enact the last TPA law in 2002, and that involved granting additional power to a president from their own party). TPP still faces two important challenges as well. First, outstanding issues must still be settled, primarily the unresolved disagreements between the US and Japan related to the trade in autos and agriculture. Second, if the negotiations are not concluded in 1H 2015, a vote in Congress would probably not occur until September or later, when the upcoming 2016 presidential election season begins to make political compromises more difficult. That said, if the TPP negotiation itself can be concluded this year, implementation is likely to occur eventually (even if it is delayed until after the upcoming presidential election).
9. When will the debt limit hit and how disruptive will that debate be?
The debt limit is likely to become binding between August and October and, while we expect Congress to raise it, this deadline poses the greatest potential for disruption, in our view. Republican leaders in both chambers have signaled that they hope to avoid another series of fiscal showdowns like those that occurred in 2011 or 2013. In 2015, the only two significant fiscal deadlines that look likely to be relevant to broader financial markets are (1) expiration of federal spending authority at the end of FY2015 on September 30 and (2) the exhaustion of the bookkeeping maneuvers known as "extraordinary measures" that the Treasury will use to continue borrowing past March 16, when the debt limit is reinstated. It seems unlikely to us that another shutdown would occur in 2015, with memories of the 2013 shutdown still fairly fresh. Regarding the debt limit, the main risk in our view is not that Congress would intentionally block a debt limit increase, but rather that markets become uncertain about when and how the increase is enacted, in light of the changed composition of Congress and the possibility that congressional Republicans use a different process to raise the debt limit this time--the budget "reconciliation" process, for example--than they have in the past. That said, we expect the final outcome to be the same as the previous debates: spending authority will be extended, and the debt limit will be raised.
10. Will Congress enact legislation affecting Federal Reserve policy?
Legislation to "audit" Fed monetary policy decisions is likely to pass the House again in 2015, but enactment looks less likely. Last year, the House of Representatives passed by a vote of 333-92 legislation to repeal the prohibition on the Government Accountability Office (GAO) on auditing Federal Reserve monetary policy deliberations or transactions with foreign governments and central banks (GAO already has authority to audit other aspects of Fed activities). That bill would have required an audit of Fed monetary policy deliberations within 12 months of enactment, and would have made it possible for members of Congress to request additional audits in the future. The legislation passed in the previous Congress as well, but has never come up for a vote in the Senate, where it has tended to have less support: a majority of House members, mainly Republicans, were co-sponsors of the bill in the House, while only about 32 of 100 senators have their name on the legislation. While the bill would presumably win support from some additional senators, it is less clear whether it would have the support of 60 senators typically needed to pass, or 67 senators needed to overcome a presidential veto. That said, the issue looks likely to get a more thorough airing in 2015. Incoming Senate Majority Leader McConnell (R-KY) is a co-sponsor of Sen. Rand Paul's (R-KY) bill, and Senate Banking Committee Chairman Richard Shelby (R-AL), while not an official sponsor of the Paul bill has signaled support for greater Fed oversight. While there is a clear possibility that Fed audit legislation could reach the President's desk, it appears much less likely that Congress would enact the more involved legislation introduced last year that would require the Fed to explain to Congress its deviation from the Taylor rule after each meeting.
Source: Goldman Sachs
