With Friday’s passage of a government funding bill and a $680 billion tax break package, this week saw the end of an era in fiscal and monetary policy. Finished are the massive clashes between President Obama and congressional Republicans over government spending and taxation.
Gone, too, are the emergency monetary policy measures that the Federal Reserve implemented during the financial crisis. Those came to a close Wednesday, when the central bank announced that it would raise its interest rate target a quarter-point from zero, where it had been for all of Obama’s tenure.
In effect, this week saw the end of several of the economic storylines that have defined Obama’s presidency. Lawmakers and economists this week were already looking forward to 2017, when the next president and Congress will take office.
After showdowns over the Bush tax cuts in 2010, the debt ceiling in 2011 and 2013, and the so-called “fiscal cliff,” further skirmishes are not expected during Obama’s last year in office. Congress will have to authorize individual spending bills for fiscal 2017 before October 1. Leaders in both parties say they want to pass appropriations bills through regular order next year.
Stan Collender, a budget expert now at the public relations firm Qorvis, said that although the parties are still at war over fiscal issues, the process is likely to end in one big spending bill next year to get through November and the elections. With the presidential election looming, it’s likely that Congress will opt for a bill “that would basically take all the big fights off the table.”
As for taxes, Republicans are optimistic that the tax legislation passed by the Senate Friday will make it easier to pursue overall tax reform in 2016. “This bill serves as a path forward to pro-growth tax reform,” Kevin Brady, the Republican chairman of the House Ways and Means Committee, said during the debate over the bill’s passage Thursday.
Brady cited the time his committee would save with the legislation, which ends the annual process of re-upping temporary tax breaks known as “extenders” by making many of them permanent.
By making those temporary tax breaks permanent, Congress also made the math of tax reform easier. Because of the permanent breaks, the federal revenue baseline will be lower, meaning that a Republican majority seeking revenue-neutral tax reform would have to eliminate fewer tax breaks and tax preferences to lower tax rates.
Republicans touting the bill as a step forward for tax reform are “are right on point,” Americans for Tax Reform policy director Ryan Ellis told the Washington Examiner. “If revenue-neutral tax reform used to mean raising (for instance) 18.2 percent of GDP, and now it means raising 17.9 percent of GDP, doing revenue neutral tax reform is easier,” he wrote.
Before 2017, some lawmakers may try to work on legislation aimed at one of the most urgent problems with the tax code, namely the incentives that many U.S. businesses have to move their companies overseas. Because of the allure of accessing earnings held overseas with paying U.S. taxes and the possibility of paying lower taxes on international income, many U.S. companies have sought to move their headquarters into low-tax countries through so-called “inversions.”
Speaking at a Capitol press conference Friday, Sen. Chuck Schumer, D-N.Y., said he wanted to work with House Speaker Paul Ryan on legislation in 2016. The two have previously worked on legislation that would end the current unusual U.S. practice of taxing companies on all their overseas income and instead move toward a “territorial” system that only taxed domestic profits. “I am optimistic about international tax reform,” he said.
Just hours later, however, Senate Majority Leader Mitch McConnell dismissed the idea that tax legislation of that consequence would pass in 2016, with Obama still in the White House.
“I would be shocked if the president had an epiphany and decided to join with us and do comprehensive,” McConnell said, referring to tax reform that would lower rates for all people, which Obama opposes. “And I say it must be comprehensive, not just territorial.”
Outside analysts have low expectations for any major tax or spending legislation in 2016.
“With an agreement on [fiscal 2017] spending caps already in place, the range of outcomes appears fairly narrow,” wrote Goldman Sachs economist Alec Phillips in a note sent out Thursday night. “Likewise, assuming the tax bill becomes law, we would not expect Congress to enact major tax legislation until 2017.”
