Congress Returns: will it be good for business?
The United States Congress returns after its summer recess and has a long list of important unfinished business. The nuclear deal with Iran, a visit from the Pope, and avoiding another government shutdown are all on the docket. In this article, we’ll review the top 4 items that will most likely have an impact on the economy and business. To remind everyone, this is a split government with legislative branch controlled by Republicans (Boehner and McConnell) and the executive branch controlled by a Democrat (Obama). This means to get work accomplished, cooperation and common ground must be found between these two competing groups. As well, the recent resignation by US Speaker of the House, John Boehner, will complicate making legislation and distract members of the House as they seek a new leader.
Perennially, it appears that Congress fails to act in a timely manner to pass 50 tax provisions impacting businesses. According to the Congressional Research Service, these provisions or tax extenders range from the research and experimentation (R&D) tax credit, enhanced expensing for small businesses, the renewable energy production tax credit (PTC), the new markets tax credit (NMTC), the work opportunity tax credit (WOTC), the deduction for state and local sales taxes, the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy-efficient commercial buildings. In 2014, Congress waited until mid-December to pass these provisions retroactive to January 2014. This behavior creates uncertainty for businesses and makes capital expenditure planning difficult. To highlight the situation, a group of 2,000 organizations sent a letter to members of Congress asking them to “act immediately on a seamless, multi-year or permanent extension of the expired and expiring tax provisions, including appropriate enhancements. These tax provisions are critically important to U.S. jobs and the broader economy.” The letter further states why: “Failure to extend these provisions is a tax increase. It will inject instability and uncertainty into the economy and weaken confidence in the employment marketplace. Acting promptly on this matter will provide important predictability necessary for economic growth.” The takeaway is that a wide range of businesses are asking Congress for certainty over these tax provisions or there will be a tax increase, less jobs created, and a slower economy.
Since Congress has not passed the needed 12 spending bills for fiscal year 2016, the US government can’t fund itself and therefore will be forced to shut down on October 1. If this were to occur, it would cause federal agencies to begin to furlough workers, stop paying military personnel, and suspend Social Security payments. None of these is likely, and therefore, the potential for a large impact to the economy and US businesses is small. Yet, the risk is very high that spending remains at current levels via passage of what is called a CR or a continuing resolution. The level of spending is set by the automatic budget cuts, called sequestration, set in 2011 and signed by President Obama. A short-term CR lasting until December to fund the US government is the most likely outcome. This translates into no increase in defense spending and no increase in discretionary non-defense spending on key public services like healthcare and health research or science, environment and energy. Also, it means no additional federal government spending and therefore no additional, short-term boost to the economy or boost to sales for companies connected to federal spending.
Spending on infrastructure, like roads and bridges, impacts a wide range of businesses involved in construction from engineering firms to concrete/asphalt producers. For over a decade, both the House and the Senate have struggled to create a long-term highway funding bill. This year is no different as Congress passed a 3-month highway spending bill in the summer that runs out on October 29th. The US Department of Transportation updated its Highway Trust Fund ticker to say that this extension of funding will allow the fund to cover payments to states for transportation projects until the end of Q3 2016. While this is good news, the announcement could also take some of the time pressure off Congress to act and diminish the potential for a long-term deal prior to the 2016 election. This means it’s unlikely a larger, longer term funding deal for not only highways, but also critical infrastructure spending on bridges and tunnels will not be enacted. Clearly, this negatively impacts businesses involved. As a reminder, the Highway Trust Fund is currently the source of more than half of all highway and bridge capital investments made annually by state governments according the US Chamber of Commerce.
The debt ceiling is a legislative limit on the amount of national debt that can be issued by the US Treasury and acts as a limit on how much the federal government can borrow. The current ceiling is set at $18.1 trillion. The US government must borrow money to pay for the goods and services it purchases because spending exceeds tax receipts. This is commonly known as the budget deficit. As a percentage of GDP, this deficit has been falling since 2009, and 2015 will be the lowest percentage deficit since President Obama took office. The chart below shows the narrowing of the deficit and the Congressional Budget Office (CBO) projections into the future.
The problem is that while the budget deficit is decreasing, the debt to pay for this deficit continues to rise. As well, the cost of the debt, or net interest, continues to rise and takes tax receipts away from other spending. In a letter to Congress on September 11, US Treasury Secretary Jack Lew states, “On July 29, I wrote to inform you that the extraordinary measures we have been employing to preserve borrowing capacity would not be exhausted before late October, and that they likely would last for at least a brief additional period of time. That continues to be our view, based upon our best and most recent information.” Many analysts believe the US Treasury can keep the US government operating until December. In 2011, Congress and President Obama couldn’t agree on budgets, deficits and debt, resulting in tremendous upheaval in the financial markets and a downgrade of US Treasury securities by S&P. While this is not a likely outcome, speculation over how the debt ceiling situation will play out will generate market uncertainty and cause some companies to withhold spending plans should there be a protracted fight. The impact is for less spending, less growth and less investment.
Wrapping this up, it will be a hectic fall for Congress as they attempt to clean up the legislative agenda on tax extenders, spending bills, the highway trust fund and raising the debt ceiling. Complicating these efforts will be debates on the Iranian nuclear pact, reauthorizing the Export-Import Bank, and defunding Planned Parenthood. Also, in September, there are visits planned for the Pope and Chinese President Xi Jinping. Stating the obvious, it will be a challenge for Congress to complete many of these important bills, and it’s likely they will create high levels of uncertainty for businesses and the markets. Key takeaway: expect uncertainty to rise as Congress confronts a chaotic calendar to pass critical bills.
Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice.