Matthew A. Foss, CRPC®
UBS Financial Services Inc.
Smith Wealth Management Group
801 Laurel Oak Drive
Naples, FL 34108-2764
Information is valuable. Perspective is invaluable. We bring you the news of what happened in Washington this past week and what we expect will happen in the coming week. Let’s talk about what it all may mean for you and your long-term investment strategy.
This week: The Senate passed a number of nominations and a seven-year reauthorization of the Terrorism Risk Insurance Act. It began debate on legislation to reverse the recent Supreme Court decision on the Hobby Lobby case but did not advance the bill. The House passed a measure to permanently ban taxes on Internet access, a Fiscal Year 2015 funding bill for various federal agencies, a bill to replenish the Highway Trust Fund (HTF) until May 2015, and a tax package that benefits charities (see below).
Next week: The House will address education legislation and possibly take up a bill addressing the immigration crisis at the Southwest border. The Senate is expected to debate legislation to fund the HTF.
Financial Services Issues
Dodd-Frank Turns Four. Next Monday marks the fourth anniversary of the signing of Dodd-Frank into law. So, where are we with regard to the law? The 848-page bill triggered 398 separate rulemaking requirements across a handful of federal agencies. To date, 96 of those rulemaking requirements (just over 24%) still have not generated any proposals. Just over half of the rules – 208 – have been finalized, while 94 others have been proposed in some form but not yet finalized.
Changes to Dodd-Frank? The political landscape for potential revisions to Dodd-Frank has largely remained the same since the law came into effect. Most Republicans did not support the law and still oppose most of its provisions. Most Democrats, and particularly President Obama, supported the bill and do not want to see any changes to it at this time. With this standoff and the President’s veto pen, there is no realistic chance the law will be changed until at least early 2016, if then. What about minor revisions to clarify the law or address unintended consequences? This is where we will see limited action in the upcoming months. In particular, one proposed change to the law would clarify the lack of applicability of new capital standards for banks to insurance companies (the “Collins Amendment”). This measure has passed the Senate and will likely pass the House soon. Other provisions that could advance would clarify the scope and transparency at the newly-created Office of Financial Research (within the Treasury Department) and the Financial Stability Oversight Council’s designation of Systemically-Important Financial Institutions. Democrats have resisted these latter two efforts in the past but seem to be showing some openness now. The only changes made to Dodd-Frank in the current environment will be these smaller and targeted measures that do not materially affect the broader law.
Operation Choke Point. Congress has spent considerable time over the last couple of weeks scrutinizing “Operation Choke Point,” an ongoing initiative involving the U.S. Department of Justice and various bank regulators to address banking services to certain businesses. The businesses in question have reputational challenges—they include payday lenders, adult entertainment shops, gun shops, check cashing services, telemarketers and others. These businesses are legal but are considered higher risks. The federal initiative targets the banking services provided to these businesses. Many in Congress believe the businesses have been targeted because the federal investigators do not approve of their products. The congressional oversight is designed to send a message that these businesses are legal and should not be denied legitimate banking services. Expect the scrutiny to continue and escalate if legitimate business practices are threatened.
Other Policy Issues in Play
Funding Tussle. Lawmakers spent much time this week on important issues that cannot be resolved because they cannot determine a way to pay for them. Consider improvements to veterans care ($35 billion per year), measures to address the ongoing immigration wave at the Southwest border (almost $4 billion), and new funds to prevent a halt in ongoing highway and road projects ($10 billion), among others. Both Democrats and Republicans agree these initiatives should advance, but they disagree on how or whether to pay for them. Through tax increases or spending cuts? We have said this repeatedly before, but it bears saying again as this dynamic is the primary obstacle to compromise on many issues in play in Congress. Important issues and needs will continue to accumulate as the two parties cannot get beyond this dynamic.
Corporations Leaving the U.S. While the Pfizer-AstraZeneca deal fizzled, several other companies are examining the benefits of a corporate inversion where a U.S. company merges with another company and moves its headquarters to a foreign tax jurisdiction with a lower corporate tax rate. Inversions have been in the news on a daily basis over the past few weeks as companies, including AbbVie and Medtronic, announced plans to invert and others, like Walgreens, are contemplating such a move. The Obama administration capitalized on this publicity and sent a letter Congress this week urging action to stop these inversions. This letter does not move the needle on congressional action, however. To combat the trend of inversions, the Senate is likely to vote this month on the “Bring Jobs Home Act” introduced by Senator Debbie Stabenow (D-MI) that offers a new tax credit to companies that bring jobs back to America. This is not a new idea—the Senate voted on a version of this bill in July before the last election. This year’s bill is cosponsored by multiple Senators who are in tough re-election campaigns. While noise on inversion is growing, this effort won’t go beyond campaign fodder.
Charitable Deductions. This week, the House passed a tax package with multiple provisions aimed to benefit charities. The bill will make the popular IRA charitable rollover provision permanent and change current tax law to allow charitable contributions made by any individual after close of the taxable year, but before the tax return due date, to be treated as made in such taxable year. The bill also includes a provision to incentivize restaurants, grocery stores, farmers, and other businesses to contribute excess inventory to locals banks by permanently extending the food inventory donations tax provisions that expired at the end of last year. Also included is a proposal to enhance the deduction for donations of land conservation easements so land owners can get a meaningful deduction for permanently retiring development rights to their property and preserve natural resources. Politics and posturing should give way for these provisions to become law at the end of the year for at least two years and possibly longer.
Battle for the Middle Class. While Senate Democrats and President Obama have been pushing for measures to advance the middle class, such as an increase in the minimum wage, enactment of equal pay laws and an extension of unemployment insurance, among others, Senate Republicans will unveil alternatives they believe would benefit many of the same people. Their proposals, which will be unwrapped next week, include a measure to allow more working parents to claim deduction for in-home businesses, a bill to allow workers to claim compensatory time off in lieu of overtime pay and a change to Obamacare to raise the threshold for mandated health care coverage to “full-time” workers from 30 hours to 40 hours. This blatant appeal to middle class voters will continue to be played out in the Senate until November, and while none of the above measures will pass, the parties hope the messaging works to their advantage in this year’s elections.
White House vs Congress on Iran. President Obama will likely extend negotiations with Iran over its nuclear program, but it is noteworthy how skeptical Congress is over the potential success of the negotiations. A bipartisan majority in the House and a large bipartisan group in the Senate are united in pushing much stronger sanctions against Iran than the President is comfortable with. Depending on the terms of how the negotiations will proceed after its six-month “timeout” on July 20, pressure will build in both the House and Senate to circumvent the President and enact stronger sanctions. The Senate could act on such a measure next week, though it would likely be beat back. Most Democrats will want to vote in a way that gives the President more negotiating flexibility, but the issue will generate significant noise over the next few weeks.