In JPM's initial market comment this morning, reacting to the news of Comey firing, the bank said that "as far as the market is concerned, Comey’s dismissal saps Trump’s political capital and weakens relations w/Congress at the time when he is trying to move an ambitious pro-growth agenda through the Senate and House." What JPM was referring to was the potential of substantial incremental delays now facing Trump's parallel reforms, healthcare on one hand and tax reform on the other.
Now, as Axios points out, this concern is starting to materialize when the Senate HELP Committee called off a health care markup this morning after Senate Minority Leader Chuck Schumer asked all Democrats to be in the Senate chamber at 9:30 a.m. to protest President Trump's firing of FBI Director James Comey.
The committee said it will reschedule the meeting, where senators were set to approve a bill to reauthorize the user fees that help fund the Food and Drug Administration.
This is likely the first of many procedural delays, which will almost certainly delay the Senate's process on Obamacare Repeal by weeks if not months.
Meanwhile, in a new report released overnight, Goldman's D.C. analyst Alec Phillips remained modestly more sanguine, and laid out his latest timeline of Fiscal Signposts on the Way to Tax Reform, stating that while the pending health legislation is likely to delay progress on other aspects of fiscal policy, we nevertheless expect several developments over the coming weeks and months.
Here are the highlights from the note:
- In the near term, the White House budget proposal on or around May 22 and a draft budget resolution from House Republicans in early June are likely to include specific dollar amounts for proposed tax cuts. The White House tax cut figure is likely to be large, the House’s is likely to be small, and we expect the Senate to end up somewhere in the middle.
- Since the final figure included in the budget resolution will serve as a limit on the size of the tax cut, it should receive substantial attention in financial markets when released.
- The upcoming budget discussions may also shed some light on the approach that Republican leaders expect to take ahead of the next debt limit increase, which we expect to be necessary by early October, and funding for fiscal year 2018, which must be passed by September 30 to avoid a partial federal shutdown.
And the details:
Fiscal Signposts on the Way to Tax Reform
For most of this year, we have assigned a fairly high probability to the enactment of tax legislation—most likely a tax cut rather than comprehensive reform—by early 2018. However, following last week's vote in the House on the AHCA, we downgraded our view somewhat, in light of the challenges that congressional Republicans will have in reaching a consensus on health legislation that can satisfy centrists in the Senate and conservatives in the House and the likely delays that could cause. While we still think a tax cut is more likely than not, it is a closer call than it was a few weeks ago and it is likely to take until 2018; enactment by the end of this year now looks quite unlikely, in our view.
Until the Senate passes its health bill, congressional Republicans will be unable to make much progress on other fiscal aspects of the agenda, because the health bill is being considered under the “reconciliation” process in the Senate. The benefit of using this budget-related process is that it allows the bill to pass with only a simple majority in both chambers, i.e., no Democratic support would be needed. The drawback of using this process is that the next steps on fiscal policy cannot be taken until the health bill has at least passed the Senate. Specifically, Congress cannot yet finalize the fiscal year 2018 budget resolution, which would usually have occurred by now, because doing so would remove the protection from filibuster that the health bill has under the previous year’s budget reconciliation process.
Exhibit 1: The Health Debate Drags On
Source: Goldman Sachs Global Investment Research
Since the 2018 budget resolution lays the procedural groundwork for next year’s spending bills as well as tax reform legislation, Congress will have a difficult time moving forward on fiscal issues until the health bill has passed (or is put aside because no agreement can be reached), as shown in Exhibit 1. However, even though the next steps in the budget process cannot be finalized until action on the health bill is complete, we still expect some near term activity that could inform expectations of the type of tax legislation that Congress might ultimately pursue. Over the next several months, there are four substantial budget-related milestones:
- The release of the President's Budget (May 22): So far this year, the administration has not published much detail regarding its fiscal plans beyond a spending plan for the coming year, which was outlined in the “skinny budget” released in March, and the tax principles released two weeks ago. The budget proposal that the White House is expected to submit to Congress on May 22 should provide the most comprehensive view to date of the fiscal path that the Administration envisions. Of interest will be how much the White House plans to rely on optimistic growth assumptions to offset the cost of its proposals. For example, an assumed long-run real growth rate of 3% versus the CBO baseline projection of around 1.8% over the next ten years would boost receipts by roughly $4 trillion over that period, or roughly the cost of the tax plan that the White House outlined two weeks ago. We note that while the White House can rely on optimistic growth assumptions to offset most of the fiscal effect of the tax proposal, Congress must rely on independent economic projections from the Congressional Budget Office (CBO), and estimates of the growth effect of tax legislation from the Joint Committee on Taxation (JCT). Therefore, while the White House can claim that a “massive tax cut” is also revenue-neutral, congressional Republicans will need to decide to do one or the other.
- The draft FY2018 Budget Resolution (June): This is where decisions on the appropriate size of the tax cut must be made. As noted above, the budget resolution for fiscal year 2018 cannot be finished until health legislation has passed. However, the congressional budget committees in the House and Senate can start the process without interfering with the health legislation. In the House, the Budget Committee is expected to consider its fiscal year 2018 budget resolution within the next several weeks, most likely by June. The Senate Budget Committee is likely to follow with its own budget resolution, but the timing on that side of the Capitol is less clear. These draft budget resolutions are likely to include “reconciliation instructions” that direct the relevant committees—in this case, the House Ways and Means Committee and Senate Finance Committee—to pass legislation reducing revenues by a given amount. This should be of great interest to market participants because the amount of revenue reduction called for in the final version of the 2018 budget resolution will represent a limit on how large a tax cut Congress can pass under the reconciliation process. While we expect the final version of the budget resolution to include an instruction to reduce revenues, the initial draft out of the House committee is more likely to include only a small net tax cut, in our view, given House Republican leaders’ continued insistence on revenue-neutral tax reform. Note that while the budget resolution is likely to include a dollar amount for the net tax cut over ten years, budget resolutions do not include policy detail, which only comes later as part of the tax legislation itself.
- Fiscal year end (September 30): Fiscal year 2018 starts on October 1 and represents a deadline in two respects. First, because the pending health legislation is being considered under the fiscal year 2017 budget process, it is likely to lose its procedural protection in the Senate if it has not passed by then. This represents a backstop of sorts against the possibility that the health bill will take up even more time than already looks likely. Second, spending authority expires after September 30, and Congress will need to extend that authority to avoid a partial shutdown of the federal government. Reaching an agreement on a new package of spending bills by the deadline is likely to be more difficult than it was ahead of the last deadline on April 28; while the recent extension simply funded the remainder of the fiscal year that started before President Trump was elected, the White House and congressional Republicans will be under greater political pressure to enact more of their priorities—funding the border wall or shifting funding from nondefense to defense spending—in the first full fiscal year under the new administration.
- Debt limit (early October): The upcoming debt limit debate looks likely to roughly coincide with the start of the coming fiscal year. It is not yet clear what approach congressional Republicans will take to increase the debt limit, but they have three potential options. First, they could use the budget reconciliation process and rely on only Republican votes. While this is technically possible, there is little reason to expect the near-unanimous Republican support in the House that would be needed to make the strategy work. Second, Republican leaders could couple a debt limit increase with other gestures of fiscal responsibility, like spending cuts. However, any substantial package of spending cuts could lose more support among centrist Republicans than it gains among conservatives. A third possibility would be to simply put a “clean” debt limit increase up for a vote and pass it close to the deadline with a combination of Republican and Democratic votes. This seems the most likely outcome, but it seems unlikely to occur until shortly before the deadline and probably not until other options have been exhausted. There is also a clear possibility that congressional Democrats will seek some type of concession in return for their support, which would further complicate matters.
In summary, over the course of the next several weeks we expect to receive fresh signals on the potential magnitude of tax legislation from the White House, which is likely to propose a large net reduction, and also from House Republicans, who are likely to endorse a minimal net tax cut. The final decision won’t be made until after the health legislation has been passed or put aside, which will probably take another few months. The next several weeks might also provide additional clues as to how congressional Republicans will approach the coming debt limit deadline. While there is little chance that final decisions will be made on any of these issues in the near term, the release of new details is likely to continue to shape expectations about policy outcomes later this year and into 2018.