The new Congress has been in session for about 3 weeks. Much has been made by the press and pundits about the divisions in the new Majority Republican Party. Friction between House and Senate, unhappy conservative House members with their Leadership are portrayed as impairing Republicans from functioning. While there are differences, some public squabbling, it is mostly about nothing.
Republicans share a common philosophy and goals--less government, less regulation, fiscal restraint, tax reform, perceived government over reach, and job creation. There is also almost universal opposition to anything the Administration proposes. This commonality, while there can be differences in scope and detail, means Republicans are well positioned to pursue their agenda. How much success there will be is to be determined.
Indeed, the first three weeks under Republican control have proceeded smoothly and as intended. The House has rapidly moved legislation on Keystone XL pipeline, defunding executive orders on illegal immigrants, curtailing the Affordable Health care Act, and opposing various regulations. In the Senate, Mitch McConnell (R-KY) has moved to change the tone in the Senate by allowing an open amendment process on consideration of the Keystone XL pipeline.
Tax reform is a major topic in Washington and subject to a wide array of speculation. While there is general agreement the tax code needs a major overall, is a drag on the economy and is extraordinary complicated there is no consensus on either the scope of such “reform” or an approach.
Up until last week, the Administration had not provided any real impetus or push for tax reform other than recycling old principals and proposals. The President, however, meekly proposed during his State of the Union address raising the capital gains rate on top income earners and changing the income tax the treatment of assets held at death among other things.
The centerpiece of the President's tax raising proposal is an increase in the capital gains rate on couples making more than $500,000 per year to 28 percent. The top capital gains rate has already been raised from 15 percent to 23.8 percent during Obama's presidency. Obama also wants to close what the administration is calling the "trust fund loophole," a change that has nothing to do with trusts but would require some estates to pay capital gains taxes upon death. It is notable the Administration did not mention corporate tax rates or corporate tax reform, an area of possible cooperation with Hill Republicans.
The President’s approach has been widely scoffed and deemed a political act. Some believe it deals a blow to cooperation on tax reform and the real movement will have to come from Congress. The Administration proposes to use the increased tax revenue for additional spending programs, a nonstarter in this Congress.
In the Senate, Finance Chairman Orrin Hatch (R-Utah) denounced the Obama proposals and has formed separate working groups on individuals, businesses, savings and investment, international issues, and community development and infrastructure to help his committee outline a plan. Each group is to create a report to be delivered by the end of May. This is similar to the approach taken last year by then House Ways and Means Chairman Dave Camp. (R-MI)
The working groups are headed by:
- Individual: Sens. Chuck Grassley (R-Iowa), Mike Enzi (R-Wyo.) and Debbie Stabenow (D-Mich.),
- Business: Sens. John Thune (R-SD) and Ben Cardin (D-MD)
- Saving: Sens. Mike Crapo (R-ID) and Sherrod Brown (D-OH)
- International: Sens. Rob Portman (R-OH) and Chuck Schumer (D-NY)
- Infrastructure: Sens. Dean Heller (R-NV) and Michael Bennet (D-CO.)
Over on the House side, the Ways and Means Committee put out a press release prior to the State of the Union also dismissing the Obama approach. It is not clear which direction Mr. Ryan will take his Committee. He is open to wide revisions but is skeptical on its success. The rhetoric and proposals in the State of the Union are unlikely to add to his confidence.
Given the fact Republicans in Congress intend to push ahead, the unknown factor is the attitude and actions of the Administration. On the surface, there is little comity between the President and Republicans on the Hill and it is not likely to change. The window to jointly accomplish anything meaningful is short, perhaps into the fall. After that, Presidential and Congressional election politics will dominate. In addition, Mr. Obama loses more and more clout as the end his term get closer.
The overriding objective of the Administration appears to be political in almost all cases in spite of the mid-term losses. In recent weeks, Mr. Obama seems to announce another program of the day. The suggestions are not backed up with funding, and even if they were, Republicans are in no mood to accommodate the proposals. The State of the Union Address was a good example of the political divide and attitudes. Looks like more of the same.