* The next several weeks are likely to be relatively eventful in Washington. While the votes are close, we expect the House to pass Trade Promotion Authority (TPA) this month, which should increase the likelihood that negotiators conclude talks on the Trans-Pacific Partnership (TPP).
* The Supreme Court looks more likely to rule in favor of the Obama Administration in its decision on the Affordable Care Act, expected later this month, but the issue is likely to dominate the political agenda if the court rules against the current subsidy program.
* A debate on bank and mortgage regulation in the Senate also looks possible, though at this point we believe major changes face an uphill climb.
* Congress looks likely to miss another opportunity to enact a long-term infrastructure program, and will probably enact a temporary extension instead. This may also close the window of opportunity for tax reform until after the 2016 presidential election, since using repatriation-related corporate tax revenue to pay for highway spending had bipartisan support and was seen as a potential driver of reform. While highway legislation may not carry tax reform this year, it does look increasingly likely to carry an extension of the Export-Import Bank charter, which expires June 30.
1. Trade Promotion Authority looks likely to pass this month
After a failed first attempt and some uncertainty about potential amendments, the Senate finally passed legislation to reinstate Trade Promotion Authority (TPA), also known as “fast track,” which is generally viewed as critical to implementing the Trans-Pacific Partnership (TPP) currently being negotiated. From here, the remaining obstacle is the vote in the House of Representatives, which has always appeared to be a higher hurdle than the Senate.
The House looks likely to vote on TPA at some point in the next three weeks. In our view, it is more likely that the House will pass TPA than defeat it, though the outcome is harder than usual to predict because support and opposition do not fall cleanly along party lines. In particular, the Obama Administration is counting mainly on Republicans to pass TPA in the House, but at least a few dozen of the 245 House Republicans look likely to vote against it, leaving the bill short of the 217 votes needed to pass. To make this up, at least 10 Democrats and potentially as many as 20 would need to support the measure. This seems to be roughly where Democratic support is as the moment, but the situation could clearly still change. That said, TPA has an institutional advantage: Republican congressional leaders, who support TPA, can time the vote for when support appears to be sufficient and can make multiple attempts if necessary.
Negotiations on the Trans-Pacific Partnership appear to be in the final stages. It seems likely that the most of the outstanding issues could be settled reasonably soon after TPA is enacted, since some trading partners may be waiting for TPA passage before presenting their final offers. Once negotiations are concluded, it could take another few months for the agreement to be released and formally signed. TPA imposes some deadlines to expedite congressional consideration, but also imposes some waiting periods that could prolong some of the earlier steps in the process. In all, it is likely to take at least four months, and potentially a few months longer, from the time negotiations conclude until Congress can begin considering the agreement, meaning Congress is unlikely to begin considering the TPP agreement, even if it is finalized soon, until late 2015 at earliest.
2. The Supreme Court should rule on ACA subsidies in the next few weeks
The court is expected to rule soon--probably between June 22 and June 29--on the challenge to the Obama Administration's implementation of insurance subsidies under the ACA. The plaintiffs in the case contend that because the law states that only insurance purchased on an exchange "established by the state" is eligible for subsidies, enrollees in the 34 states with federally run exchanges should not be subsidized. The outcome is far from clear, though questioning during the oral arguments in March suggested that at least five of the justices were more inclined to rule in favor of the administration, albeit for different reasons. Those arguments seemed to boil the case down to two questions: whether the current law is ambiguous, and whether denying subsidies to states that have not established their own insurance exchanges amounts to unconstitutional coercion of states by the federal government. If the court finds the law ambiguous, it seems likely to rule in favor of the administration. If the court finds that denying subsidies as a means of forcing states into action is unconstitutional, this would also likely preserve the status quo. The administration’s implementation of the law would be overturned only, it seems, if the court found that the law was clear and that only insurance purchased on exchanges "established by the state" (rather than the federal government) is eligible for the subsidies.
In the event of a ruling against the administration, subsidies would probably be eliminated by August unless the court explicitly granted a grace period for Congress and/or the states to respond (for example, Justice Alito raised the possibility of delaying the effect of the court's decision until year end). This would put political pressure on Congress to act, with little time to do so. Congressional Republicans have floated a few proposals to replace the subsidies, but face two potential obstacles. First, the leading proposals would eliminate the individual and employer mandates, which the White House would be likely to reject. Second, some Republicans object to replacing the subsidies if they are struck down, raising the possibility that intra-party divisions could lead to a stalemate. Ultimately, if the court rejects the administration's implementation of the subsidies, there is a high probability that Congress would reinstate some form of financial assistance, but the process would create significant uncertainty and would probably involve changes to the health law beyond simply reversing the effect of the court's decision.
3. Senate banking legislation faces a tough road ahead
In May the Senate Banking Committee passed wide-ranging legislation that would make changes to mortgage and bank regulation and some organizational changes at the Fed. Specifically, among other changes, the bill would (1) loosen mortgage lending standards by providing banks with a "safe harbor" from qualified mortgage rules for loans that they originate and hold entirely in their own portfolio, along with other criteria; (2) increase the threshold for financial institutions to be automatically designated as "systemically important" by the Financial Stability Oversight Council (FSOC) from $50 billion to $500 billion in assets (FSOC would still retain the ability to designate institutions below that level); (3) require the president to nominate and the Senate to confirm the President of the New York Fed, and (4) prohibit the Treasury from disposing of the preferred stock it holds in Fannie Mae and Freddie Mac without congressional approval.
However, the bill faces an uphill battle in getting through the Senate. Democrats on the Banking Committee unanimously opposed the legislation, and it is unlikely to have sufficient support to pass in its current form. There is a possibility that Senate Banking Committee Chairman Shelby will be able to negotiate a slimmer package of reforms that might win some Democratic support, but most of the important provisions noted above would be unlikely to make the cut, in our view. The upshot is that the Senate seems unlikely to pass the bill that came out of committee, and if the Senate does ultimately pass a bill it would probably necessitate dropping most of the provisions of greatest interest to market participants.
4. Transportation infrastructure spending looks likely to be punted…
Congress has failed to pass a long-term transportation infrastructure spending program for several years, and another temporary patch ahead of the July 31 expiration of spending authority looks likely. The highway program currently spends more than it takes in via the gasoline tax, so Congress will need to plug this hole (estimated at $11 billion through year end) by transferring funds from the Treasury and using a package of spending cuts and/or tax increases to cover cost of doing so. The duration of the next extension is uncertain, but given the funding constraints, we would expect the upcoming patch to last only through year-end.
5. …closing the window of opportunity for tax reform…
The next extension of the highway spending bill probably marks the end of the road for tax reform until after the 2016 election. Some lawmakers in both parties have held out hope for an agreement that combines a long-term (i.e., six-year) infrastructure plan with corporate tax reform, using revenues from taxing repatriated foreign earnings to fill the highway program's funding gap and potentially to boost spending. However, tax reform has failed to get off the ground this year, and even Senate Finance Committee Chairman Orrin Hatch (R-UT) conceded recently that Congress is "not even near doing tax reform at this point." While we expect to see some additional activity on the issue--House Ways and Means Committee member Charles Boustany (R-LA) is expected to introduce an international corporate tax reform bill in the next several weeks and working groups in the Senate are expected to report shortly on potential areas of agreement-- the lack of progress thus far and the short time left before other political distractions take over suggest that the political opening that tax reform seemed to have early this year has just about closed.
6. …but creating an opening for reauthorization of the Export-Import Bank
While the transportation bill looks unlikely to become a vehicle for tax reform, it has emerged as a potential vehicle for renewing the charter of the Export-Import Bank. Senate Majority Leader McConnell has promised to allow a vote on Ex-Im renewal this month, as part of a political agreement that allowed Trade Promotion Authority to move forward. Ex-Im supporters are likely to seek to combine renewal of the bank's charter with some other must-pass legislation; the most obvious is the highway bill. If this occurs, it would increase the probability that the Ex-Im charter will be extended, at least temporarily. That said, since the highway program's authority does not expire until July 31, such a strategy would also raise the probability that authority for the Ex-Im Bank to make new export credit loans and guarantees would expire at least temporarily.