With the Trump inauguration just over 10 days away, attention has now shifted to what Trump will do the moment he steps foot in the White House, and as The Hill reported this morning, judging by his campaign promises, Donald Trump will be a busy man starting on his first day in the Oval Office: "Trump has pledged to take sweeping, unilateral actions on Jan. 20 to roll back President Obama’s policies and set the course for his administration. Many of Obama’s policies he can reverse with the simple stroke of a pen."
The Hill then lays out some of the key agenda items in terms of Immigration, Environment, Lobbying, Trade and Healthcare.
The reality, however, is a bit more nuanced than captured in the report, and has to take into consideration not only what Trump's intentions are, but how they would integrate with Congress, where simply structural limitations could put hurdles ahead of the Trump agenda.
So, for a more comprehensive preview of what Trump can - and can not do - both on day one, and for the rest of 2017, we present a recent analysis by Alec Phillips of Goldman Sachs (which, now that Trump has surrounded himself with Goldman alumni will be as critical when it comes to fiscal policy as Goldman was when it came to advising the Federal Reserve on monetary policy), which notes that the political agenda for 2017 is starting to take shape, with tax reform and Obamacare repeal seemingly at the top of the agenda.
Trump will be delighted to know that both items can be passed without Democratic support via the budget reconciliation process.
Obamacare repeal is first on the list. The Senate has already taken the first steps in the process, and the repeal legislation is expected to become law by February. However, Obamacare replacement legislation is apt to take much longer, particularly because it will require bipartisan support.
Tax reform process is expected to begin in earnest in late March or April in the House. The hotly debated “border adjustment” and limitations on interest deductibility in its proposal to be retained in the next version of the proposal. That said, while some limit on interest deductibility is likely to be enacted, there is only a 30% chance that the border adjustment proposal will be enacted this year according to Goldman.
The outlook for other issues is murkier. While infrastructure was discussed often during the campaign, there has been little congressional focus on it thus far, and it is possible that the program will be limited to package of tax incentives for public-private partnerships. Trade policy is also harder to predict. President-elect Trump will have authority to impose tariffs and has raised the possibility since the election. In the near-term, we expect the Trump Administration to focus on more targeted actions—antidumping duties and the like—but the threat of tariffs is not expected to recede, either.
It is also worth noting, that the policy focus so far has been on the areas of greatest agreement between congressional Republicans and the incoming administration, namely tax reform, regulatory relief, and Obamacare repeal. It is not yet clear what the political dynamic will look like when the agenda moves to areas where the Trump Administration’s views diverge from congressional Republicans. If President-elect Trump’s popularity continues to improve, he could bring many Republicans around to his position on key issues (Exhibit 1). If not, the President-elect could find it hard to pass some of his priorities in Congress.
Likewise, it is not yet clear how much congressional Democrats will work with the incoming administration and the Republican majority, nor is it clear whether Republicans will seek bipartisan support in areas where they might be able to pass legislation without it. There is reason to believe that bipartisan support will be possible on some issues, as several Democratic members of the Senate who face reelection in 2018 represent states that heavily supported Mr. Trump in the presidential election. That said, there are also a few Republicans who represent states he did not win (Exhibit 2).
Here a caveat: exogenous events often shape the agenda in unpredictable ways. Domestic or foreign economic developments could influence policy decisions, and geopolitical events could alter the current agenda. So while the preliminary assessment of what Trump's political agenda for the coming year may look like, events are likely to change the outlook.
Overall, how Goldman - both as a research provider and administration advisor - thinks about the policy agenda, is in three general categories.
- First, there are a number of issues that the incoming administration can address, at least partially, without congressional approval.
- Second, there are a number of major pieces of legislation that look likely to be enacted with only simple majorities in Congress, i.e., with only Republican support.
- The third group consists of issues that will require 60 votes in the Senate, and therefore bipartisan support.
So, without further ado, let's find out what Trump can and can not do in the coming weeks and months.
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The President can do some big things without Congress
The most important and most obvious area where the president has a fairly free hand is in foreign policy, which is beyond the scope of this article but is an area where the president has broad discretion. Beyond this, three other areas are likely to be a focus over the coming year:
Regulatory matters: The Trump Administration will have significant discretion in revising regulations promulgated during the Obama Administration, subject to a few general constraints: they must follow federal rulemaking procedures, which can often take over a year to finalize a regulation; they must remain within the bounds of the laws Congress has enacted—regulatory actions are generally about filling in the missing details in the laws that Congress has passed; and Obama Administration appointees might continue to serve at independent agencies or commissions after inauguration, as their terms do not follow the four-year presidential cycle. That said, we expect to see the Trump Administration attempt to modify some of the Obama Administration’s regulatory initiatives.
Trade: While Congress has the constitutional role to determine tariffs, over time it has delegated much of this authority to the president. As a result, the president has fairly broad authority to impose tariffs under US law, though not under international trade rules. First, under the Trade Act of 1974, the president may impose up to 15% tariffs for up to 150 days to address a balance of payments deficit, without any claim of unfair trade practices. Second, if a trading partner is seen to be engaging in unfair practices, the same law allows the U.S. Trade Representative (USTR), acting on behalf of the president, to modify tariff rates when it finds the trading partners are violating trade agreements or foreign trade policy “restricts United States commerce”. More generally, the Trading with the Enemy Act of 1917 was used by President Nixon to impose a temporary 10% tariff; along with the International Emergency Economic Powers Act of 1977, this would appear to give the Trump Administration the authority it would need to raise tariffs.
Additional trade restrictions are likely, in our view. CNN reported in December that the Trump transition team has considered a 5% or 10% tariff. However, in the near term, we expect that the Trump Administration will pursue more traditional trade remedies, such as additional antidumping and countervailing duties on particular categories of imports, new WTO complaints against trade practices, a determination that China has manipulated its currency, and an attempt at renegotiating the terms of the North American Free Trade Agreement (NAFTA). It also seems likely that the attention that President-elect Trump has put on individual companies decisions to locate production in the US might relieve the political pressure to follow through on his campaign rhetoric. That said, the effectiveness of this tactic may fade, and tariffs could once again come onto the table.
Immigration: The president enjoys substantial but not unlimited discretion on immigration policy, as President Obama demonstrated through his executive orders to establish a program of “deferred action” that would allow roughly 5.7 million unauthorized immigrants to receive a temporary exemption from deportation and permit work. While the initial phase of this program has been implemented, subsequent phases representing about 70% of total eligibility have been blocked in federal court. President-elect Trump emphasized the deportation of unauthorized immigrants during the campaign, but in his plan for his first 100 days, he has pledged to begin removing unauthorized immigrants with criminal records but has not specified plans for others. By contrast, the President-elect cannot build his proposed wall on the US-Mexico border without new funding. Congressional Republicans may include new appropriations for such a project in the next federal spending bill that needs to be enacted by April 28.
Beyond the specific authorities the president has, President-elect Trump seems likely to use the “bully pulpit” to bring about change through informal means, as other presidents have done before him. So far, public pressure has been put on companies to locate production in the US and to seek better pricing on government contracts, but we would expect other areas of focus as well.
Exhibit 3 lists the President’s “Contract with Voters”, which includes several items that can be accomplished through executive action but involves significant legislative activity as well.
In the Senate, legislation often needs 60 votes to overcome procedural obstacles the minority party can create. However, there are three notable exceptions, all of which look likely to come into play over the next few months
Presidential nominations: With the exception of Supreme Court justices, it takes 51 votes to confirm presidential nominees in the Senate. This has not always been the case; it has traditionally taken a supermajority of 60 votes to confirm all presidential nominations, but Senate Democrats changed the rules in 2013 to require only 51 votes for all nominations except Supreme Court justices. This is likely to help expedite the confirmation process, but the timing of confirmations will depend mainly on how controversial certain nominees are. For reference, since the Carter Administration, the majority of cabinet nominations were approved within a few days of inauguration. This is possible because most nominations are announced informally before the president-elect takes office, allowing the relevant committees time to review the potential nominees and to hold confirmation hearings (the Senate will hold hearings on several nominees the week of January 9; see Exhibit 4). However, from time to time nominations encounter problems, and can take significantly longer. At the start of the Obama Administration, four cabinet-level appointments took longer than one month to confirm, in some cases because the original nominees withdrew from the process after problems. In light of the need to confirm not just cabinet appointments but hundreds of nominees at lower levels, the Senate is likely to spend a good deal of its time over the next few months on confirmations.
Reversal of certain regulatory actions: The Congressional Review Act (CRA) allows Congress to overturn recently issued regulations by passing a resolution in the House and Senate with protections similar to the reconciliation process, i.e., limited debate and a simple majority vote in the Senate. This process has rarely been used, because it still requires presidential approval, and presidents are unlikely to sign a resolution overturning one of their own regulatory initiatives. The exception to this is at the start of the new administration, where a new president has the opportunity to enact legislation overturning some of the prior administration’s most recent regulations. Timing is important: the CRA applies only to regulations finalized within 60 legislative days of the end of the last session of Congress, which the Congressional Research Service (CRS) estimates covers regulations issued after June 13, 2016. For such regulations, Congress will have a limited period in 2017 to overturn Obama Administration regulations using this expedited procedure; the exact date depends on a number of procedural issues, but Congress would probably have until sometime in June 2017 to take advantage of this process. We would expect to see regulations identified fairly quickly in the House, with passage of legislation to overturn several regulations in late January and February. In the Senate, where each resolution of disapproval would still be subject to up to 10 hours of debate, the process would proceed more slowly and would compete for time with more pressing matters, such as presidential nominations, budget legislation, Obamacare repeal, and tax reform. The particular regulations that might come under review are not entirely clear, but we expect an initial focus over the next few weeks on energy and environmental-related regulations, particularly those issued by the Environmental Protection Agency (EPA).
Fiscal legislation: The “budget reconciliation” process allows the majority party to instruct various committees to pass legislation to achieve certain fiscal targets, for example to reduce the deficit by a certain amount over the next ten years. These instructions, along with spending and revenue targets, are included in the annual budget resolution that Congress is supposed to pass by April of each year. Legislation passed pursuant to these instructions enjoys procedural protections in the House and Senate; most importantly, it is immune to filibuster in the Senate and thus needs only 51 votes to pass. The budget resolution can provide instructions to pass as many as three reconciliation bills, one dealing with tax or revenue changes, one dealing with spending changes, and one dealing with the debt limit. This year, tax reform is likely to be addressed through reconciliation, as are changes to the Affordable Care Act (“Obamacare”). It is possible that congressional leaders might also consider using this process to address infrastructure funding, certain entitlement program reforms, or the debt limit increase that appear to be necessary by Q3.
Repeal of the Affordable Care Act: Congressional Republicans plan to approach the replacement of Obamacare in two steps, with repeal coming first and legislation to replace the program considered much later—possibly this year, but possibly not until 2018. Regarding the first step, congressional Republicans will use the 2017 budget process to instruct the committees that oversee the program to pass "reconciliation" legislation that repeals most of the major fiscal aspects of the law, i.e., the subsidies for plans sold on exchanges, the expansion of the Medicaid program, and the new taxes used to pay for these subsidies, including the mandate to enroll in health insurance and the penalties for those who do not. Two sets of policies look likely to remain intact: first, the prohibition on limitations on coverage of pre-existing health conditions and the related limitation on premium variation based on health and demographic factors and, second, the reductions in annual increases in Medicare payments to health care providers, which produced substantial budgetary savings used to offset part of the cost of new subsidies (Exhibit 6).
Tax reform: Legislation to reform the individual and corporate income tax systems looks likely to be the most important item on the agenda in 2017, and we expect it to become law by Q3 or, if delayed, Q4. However, it is not yet entirely clear how tax reform will be considered. There are two general options. First, Republican leaders could attempt to consider one aspect of tax reform, such as corporate tax reform, outside of the reconciliation process. Corporate reform is more likely to win bipartisan support than individual reform, where distributional issues often lead to partisan differences. This would also make it easier to enact permanent corporate tax reform, which could be difficult under reconciliation since budget rules require that any provisions in reconciliation legislation must be budget-neutral after the first ten years. That said, passing corporate and individual reform together via the reconciliation process would also have advantages, as there is significant interaction between the two systems, and because it is unclear whether Democratic support for corporate tax reform would ultimately materialize. Ultimately, we expect congressional Republican leaders to initially seek Democratic support, but expect that tax reform will ultimately move through the reconciliation process with mostly Republican votes.
In our view, there are four major questions regarding the outcome of tax reform:
- Destination-based border-adjusted tax: We believe there is roughly a 30% probability that the House proposal regarding “border adjustment” will be enacted. This policy would deny the deduction for costs related to imported goods or services for US companies, and would exclude foreign revenue from US tax. That said, our expectation is that this policy will be included in the next iteration of the proposal, which we expect the House Ways and Means Committee to release some time before it votes on the legislation, which we expect around April. This is likely to lead market participants to ascribe a higher probability to passage this spring than is perceived today. Later in the year—probably by June—we expect the Senate to begin acting on tax reform, and believe there will be enough Republican uncertainty regarding the border-adjustment proposal that it will be dropped form the final version. That said, a 30% chance is not a zero probability; in light of strong support from House Republican leaders, it is conceivable that if President-elect Trump pushes strongly for the provision and various exemptions and transition rules are provided to affected industries, a watered-down version of the provision could become law.
- Interest deductibility and depreciation policy: In contrast to the destination-based tax, changes to interest deductibility and the depreciation of capital investment appears fairly likely, as lawmakers have debated such changes for years and incremental options are available. In our view, there are three basic options lawmakers will have to choose from. First, existing debt could be grandfathered and existing capex could continue to be depreciated on the existing schedules, with the denial of interest deductions and the full expensing of capital investment only applying to activity going forward. Second, since a grandfathering could be administratively complex, lawmakers might decide to phase out the old system and transition to the new system over several years (e.g. 10 years). Third, if such a change is seen as too radical, lawmakers might provide taxpayers a one-time choice of remaining under the current system (full interest deduction, partial depreciation deductions) or to move to the new system, similar to what President-elect Trump proposed during the campaign.
- Repatriation: We believe a tax on “deemed repatriation” is quite likely as part of any tax reform package that becomes law this year, with a rate of between 8% and 10% on repatriated cash and a lower rate on earnings that have been reinvested abroad.
- Tax rate: Our view continues to be that a statutory tax rate of around 25% appears most likely, as it is around the OECD average and would substantially reduce the tax disincentive to locate production in the US, but would still be attainable without the border-adjustment provision, which we expect to face political resistance.
Infrastructure: A new infrastructure program might also be dealt with through the reconciliation process, but this could depend on its details. Traditionally, reconciliation has been used to make changes to direct spending like Medicare, various income support programs, or credit programs, but has not been used to address areas such as highway spending. That said, the Trump Administration appears to be focused on a plan involving public-private partnerships and tax incentives, which suggests that some aspects of an infrastructure plan might be able to pass with only Republican support, potentially as part of tax reform.
Entitlement reform: Some Republicans, notably House Speaker Paul Ryan, have continued to express interest in reforming entitlement programs like Medicare. Our expectation is that this effort is unlikely to get very far, given an apparent lack of interest from President-elect Trump, who committed to preserve the current system during the election campaign, and the slim margin in the Senate, where some Republicans are likely to have reservations.
Bipartisan support will still be necessary in several areas
Most legislation will still require 60 votes in the Senate, and therefore bipartisan support. In some cases, this might be attainable as some Senate Democrats might be interested in incremental changes in some areas. That said, legislation requiring bipartisan support is more uncertain and is apt to take longer to enact. In many cases, this is likely to mean that political debate on these issues will occur in 2017, but that final resolution might take until 2018 or beyond.
Obamacare replacement: Although repeal of many aspects of the Affordable Care Act (ACA) can be accomplished with only 51 votes in the Senate via the reconciliation process, the process for “replacing” the law is more complicated and the outlook for it is less clear. The primary complication is that it is likely to require regulatory changes in addition to fiscal items, and thus require 60 votes in the Senate—and therefore Democratic support. For this reason, the “repeal” and “replace” steps have been separated, with Republican leaders aiming for—but also needing—bipartisan support for the new program.
From a macro perspective, we would make three general observations: first, it appears unlikely that overall subsidy spending will decline significantly. President-elect Trump and congressional Republican leaders have indicated that they expect to maintain coverage for those who currently have it; even if they had not, it would be politically difficult to enact a replacement that was not estimated to do so. Second, the Medicare cuts are likely to be maintained, so ACA-related health disinflation (as measured by the health PCE price index) is likely to continue, though we expect health inflation more generally to gradually increase. Third, none of the changes look immediate. Our expectation is that the ACA taxes will be repealed effective January 1, 2017, including the mandate on employers to offer health insurance to their employees, but that repeal of the other aspects of the law would not take effect until January 1, 2019. One unresolved question is whether "repeal" legislation will repeal the individual mandate effective for 2017, which would be politically popular but could destabilize the existing program, or whether the mandate would remain in place until a new program is implemented.
Regardless, there is no ideal time from a Republican political perspective to implement a replacement program, in light of the fact that the transition would need to occur over two years, with enrollment in the new plans occurring in the year before the new coverage becomes active. With a midterm election in November 2018 and a presidential election in 2020, either the enrollment process or the first year of new coverage would occur during an election year.
Immigration reform: Immigration—particularly unauthorized immigration—was a key theme in the presidential campaign, but has not figured prominently in the preliminary public discussions of the congressional agenda. That said, it appears possible that Congress will appropriate additional funds for border security—i.e., additional physical barriers along the southern border—in the spending legislation we expect Congress to pass in April to keep the government operating past April 28, when the most recent extension expires. Beyond this, it is much less clear to us whether broader agreement on immigration reform is possible in light competing issues and the general political environment. While eventual legislative compromise might be possible at some point in the future, we do not expect the issue to move very far in 2017.
Regulatory reform: Apart from the near-term reversal of some Obama Administration regulations, we expect the regulatory agenda in Congress to take longer to evolve. President-elect Trump’s transition team has named the “dismantling” of Dodd-Frank as a priority, and the House and Senate committees that oversee financial regulation are likely to pursue legislation this year to seek modifications to the law. In the House, the Financial Services Committee looks likely to consider financial reform legislation fairly early this year, with a vote in the committee potentially as soon as late Q1, and a vote on the House floor over the summer. House Financial Services Committee Chairman Hensarling looks likely to introduce a heavily modified version of his CHOICE Act, which would provide regulatory relief in return for a more restrictive leverage ratio. In the Senate, the process seems likely to take longer—committee action might not occur until the second half of the year—since it is likely to take longer to develop a package that could gain the bipartisan support that would be necessary to reach the 60 votes needed for passage, and because the early part of the year could be consumed by the consideration of presidential nominations. The Senate legislation looks likely to focus on more incremental regulatory relief focused particularly on smaller institutions, similar to the legislation sponsored by the then-Chairman of the Banking Committee, Richard Shelby. Ultimately, we believe it is more likely than not that some type of financial regulatory legislation will be enacted into law, but it is likely to take until late 2017 or 2018 to pass.