Welcome back. And here’s hoping you had a restful holiday, because Washington is starting the new year with a whole lot on its plate.
Looming early and large: The federal government runs out of money Jan. 19. Averting a shutdown will require Senate Majority Leader Mitch McConnell (R-Ky.) to strike a deal with newly empowered Senate Democrats, who with the seating of Alabama’s Doug Jones will chop the GOP’s majority to 51 votes. The negotiations look exceedingly difficult, considering the range of charged issues — including measures to stabilize health insurance markets; provide a long-term immigration fix to protect “dreamers;” address pension shortfalls for miners, food service workers and others; supply emergency funding for last year’s spate of natural disasters; and lift budget caps on Pentagon and domestic spending. (Given all that, Compass Point’s Isaac Boltansky pegs the odds of a mid-January shutdown at 60 percent.)
Talks on the immigration piece resume this week, per The Washington Post’s Jeff Stein, who reports that bipartisan congressional leaders head to the White House tomorrow to meet with budget director Mick Mulvaney and legislative affairs chief Marc Short:
“Congressional Democrats express openness to finding additional funding for border security but have ruled out funding the wall along the U.S.-Mexico border that Trump promised during his presidential campaign… Democrats are under intense pressure from Hispanic lawmakers and liberal activists to reject any government funding deal that does not resolve the DACA issue. Already, Democratic senators have helped pass multiple funding deals that did not include DACA protections, including one in December.”
Meanwhile, another avoidable fiscal showdown looms: Lawmakers probably have only until mid-March to raise the debt ceiling. The Treasury exceeded its borrowing authority last month and has been employing “extraordinary measures,” borrowing from other accounts, to ensure the government doesn’t default on its obligations. Also on the must-do list: finding a lasting solution to funding the Children’s Health Insurance Program, which covers 9 million, after Congress approved a three-month patch in December; and a measure reauthorizing warrantless surveillance of foreign intelligence targets.
But President Trump and the GOP are looking to stay on offense after closing the year with their improbably speedy rewrite of the tax code. That will mean different things to different Republicans, depending on where they sit. Trump appears anxious to tackle a pair of his populist campaign promises, with new pushes for infrastructure spending and a trade crackdown.
Trump has been teasing a major infrastructure proposal since the campaign, when he pledged to unleash $1 trillion of new spending on rebuilding the nation’s crumbling public works. The administration is expected to detail its vision in a 70-page plan this month, and the big question remains how it should be funded. “I want to do a trillion-dollar infrastructure bill, at least,” Trump told the New York Times last week, but it isn’t clear how much of that he will propose covering through direct spending. (Recall the administration last year called for matching $200 billion in federal outlays with four times that much in private investment, but Trump appeared to bail on the idea in the fall.)
The nuts and bolts of the proposal aside, finding bipartisan buy-in for any big new program looks like a long shot.
A year ago, Democrats sounded encouraging notes about working with Trump on such a plan. A political eternity has elapsed since, and now the party is eyeing the real possibility of riding a wave of anti-Trump animus back to power in the midterms. And the GOP probably will face divisions about how much infrastructure spending to put on the nation’s credit card after approving $1.5 trillion in deficit-financed tax cuts.
On trade, the president looks primed to make good on his threats to get tough on what he has called abusive trading practices by the Chinese — or to back off.
Forcing the question is a decision due by the end of the month on imposing tariffs or quotas on Chinese solar panels and washing machines. The Post’s David Lynch says: “Trump could also order new limits on Chinese investment in the United States or raise tariffs unilaterally — a likely violation of U.S. commitments to the World Trade Organization — pending the outcome of a broader investigation into Beijing’s alleged failure to protect foreign companies’ intellectual property rights, analysts say. And White House action is due on a separate Commerce Department probe triggered by worries about the national security impact of rising imports of Chinese steel and aluminum.”
Congressional Republicans have other priorities. McConnell signaled last month that he intends to give “early consideration” to a bank deregulation package that’s got wide backing from his party while splitting Democrats. House Speaker Paul D. Ryan (R-Wis.) has talked up his interest in cutting anti-poverty spending by putting new limits on who is eligible for food stamps and housing benefits.
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— Wages rise. WSJ’s Shayndi Raice and Eric Morath: “In U.S. cities with the tightest labor markets, workers are finding something that’s long been missing from the broader economic expansion: faster-growing paychecks. Workers in metro areas with the lowest unemployment are experiencing among the strongest wage growth in the country. The labor market in places like Minneapolis, Denver and Fort Myers, Fla., where unemployment rates stand near or even below 3%, has now tightened to a point where businesses are raising pay to attract employees, often from competitors. It’s an outcome entirely expected in economic theory, but one that’s been largely absent until now in the upturn that began more than eight years ago.”
— No IPO avalanche in 2018. WSJ’s Maureen Farrell and Corrie Driebusch: “The market for U.S. initial public offerings bounced back in 2017, but many bankers and investors remained discouraged as top-tier companies remain on the sidelines. That is unlikely to change in 2018. The number of companies raising money in U.S. markets is expected to pick up, but many of the highest-valued, big-name private companies, including Airbnb Inc., Uber Technologies Inc. and WeWork Cos., are expected to hold off on going public for at least another year…
Although many behemoths are holding off, some notable names will test the market in 2018. Music-streaming company Spotify AB is one of the most well-known firms expected to go public—but it is unlikely to raise any money when it debuts on the New York Stock Exchange. Spotify is seeking to go public in March or April through a so-called direct listing in which it wouldn’t raise funds or use underwriters to sell the stock, according to people familiar with the process… Meanwhile, Dropbox Inc., which was valued at $10 billion when it last raised capital in 2014, is preparing for a listing that could come in either March or April and is expected to value the company roughly around or possible above its latest round of private financing”
MONEY ON THE HILL
— Blue-state Dems plot to block. NYT’s Ben Casselman: “Democrats in high-cost, high-tax states are plotting ways to do what their states’ representatives in Congress could not: blunt the impact of the newly passed Republican tax overhaul. Governors and legislative leaders in New York, California and other states are considering legal challenges to elements of the law that they say unfairly single out parts of the country. They are looking at ways of raising revenue that aren’t penalized by the new law. And they are considering changing their state tax codes to allow residents to take advantage of other federal tax breaks — in effect, restoring deductions that the tax law scaled back. One proposal would replace state income taxes, which are no longer fully deductible under the new law, with payroll taxes on employers, which are deductible. Another idea would be to allow residents to replace their state income tax payments with tax-deductible charitable contributions to their state governments.”
— Goldman’s $5 billion tax hit. WSJ’s Liz Hoffman: “Goldman Sachs Group Inc. will take a $5 billion earnings charge related to the recent tax overhaul, a one-time jolt expected to be followed by a longer-term windfall from lower rates. Companies from Wall Street to the heartland are wrestling with the immediate implications of the most sweeping changes to the nation’s tax code in three decades. Goldman’s announcement on Friday, which sets up its first quarterly loss in six years, also hints of broader turbulence coming to U.S. corporate earnings in the new year.
Under one estimate, companies in the S&P 500 index could be forced to take tax-related earnings charges of $235 billion—about 1% of their combined market value. The charge will swing Goldman to a quarterly loss and wipe out much of its full-year profit. But the firm, like its brethren on Wall Street and across much of corporate America, will be a winner in the long run as it enjoys the lowest U.S. corporate tax rate in eight decades and gets new flexibility in how it funds itself, invests in the business and returns capital to shareholders.”
Goldman gives early stock awards to 300. CNN Money: “In a race against looming changes to the tax code, Goldman Sachs handed out millions of dollars worth of stock awards to hundreds employees. The move will save the firm an estimated $140 million on its tax bill next year, a source familiar with the matter told CNNMoney. According to public filings posted Friday, 10 Goldman executives — including CEO Lloyd Blankfein and much of the company’s C-Suite — were given stock awards worth a combined $94.8 million on Thursday. But the those stocks weren’t supposed to be delivered until January.”
— Gig workers benefit, conditionally. NYT’s Noam Scheiber. “The new tax law is likely to accelerate a hotly disputed trend in the American economy by rewarding workers who sever formal relationships with their employers and become contractors… That’s because a provision in the tax law allows sole proprietors — along with owners of partnerships or other so-called pass-through entities — to deduct 20 percent of their revenue from their taxable income. The tax savings, which could be around $15,000 per year for many affluent couples, may prove enticing to workers…
But it could lead to an erosion of the protections that have long been a cornerstone of full-time work. Formal employment, after all, provides more than just income. Unlike independent contractors, employees have access to unemployment insurance if they lose their jobs and workers’ compensation if they are injured at work. They are protected by workplace anti-discrimination laws and have a federally backed right to form a union.”
— Tax lobbyists hit pay dirt. Politico’s Theodoric Meyer: “Rather than streamlining the tax code, Republicans have made it more complicated by jamming through a new series of temporary tax breaks for everything from craft brewers to citrus growers. Lobbyists expect these breaks, known as tax extenders, to generate paydays for years. Adding to their workload: Republicans rammed their bill through Congress so quickly that it’s almost certain to require follow-up legislation to fix the mistakes and miscalculations still being discovered, according to interviews with half a dozen tax lobbyists.”
— IRS guidance confuses. Bloomberg’s Erik Wasson and Lynnley Browning: “New guidance from the Internal Revenue Service that limits taxpayers’ ability to deduct prepaid property levies on their 2017 tax returns is causing confusion nationwide as people rush to pay in advance without knowing whether they’re wasting their time and money. The IRS said Wednesday that taxpayers can deduct prepaid state and local property taxes for 2018 on 2017 returns only if the taxes were assessed before 2018. The brief guidance — which doesn’t define the term “assessed” — had local tax officials scratching their heads. Some see the issue as an early signal of far wider confusion that’s coming soon — the predictable result of passing a bill that rewrites the tax code just two weeks before many of the changes take hold.”
— Rise in home values to slow. The Post’s Kathy Orton and Aaron Gregg: “The steady increase in housing prices in many of the nation’s priciest markets, including the Washington region, is expected to slow in coming years, analysts say, as the Republican tax law begins to reshape a major part of the U.S. economy… Economists and housing experts broadly agree the changes will slow price increases in expensive housing markets — though nobody expects housing values to decline, given the overall strength of the economy and the fact that there are relatively few houses for sale in top markets.”
— Caterpillar’s Swiss profits. WSJ’s Andrew Tangel and Michael Rapoport: “More than a decade before federal agents arrived at Caterpillar Inc. CAT -0.53% in March with search warrants, an anonymous employee claimed in a letter to its chief executive that something was wrong about how the heavy-machinery maker used a subsidiary in Switzerland to shrink its tax bill… Two CEOs and at least four investigations later, Caterpillar faces a potential tax bill of $2 billion from the IRS, which is challenging the amounts paid on profits from parts sales made through the Swiss unit, called Caterpillar SARL. The raids in March, led by the Commerce Department, were a sign of an intensifying criminal investigation into the company’s taxes and exports. No civil or criminal charges have been filed against Caterpillar or anyone at the company. A company spokeswoman says it “believes its tax position is right” and is “in the process of responding to the government’s concerns.”
— Anger but no action against Equifax. Politico’s Martin Matishak: “The massive Equifax data breach, which compromised the identities of more than 145 million Americans, prompted a telling response from Congress: It did nothing. Some industry leaders and lawmakers thought September’s revelation of the massive intrusion — which took place months after the credit reporting agency failed to act on a warning from the Homeland Security Department — might be the long-envisioned incident that prompted Congress to finally fix the country’s confusing and ineffectual data security laws. Instead, the aftermath of the breach played out like a familiar script: white-hot, bipartisan outrage, followed by hearings and a flurry of proposals that went nowhere. As is often the case, Congress gradually shifted to other priorities — this time the most sweeping tax code overhaul in a generation, and another mad scramble to fund the federal government.”
— The Trump effect on business. NYT’s Binyamin Appelbaum and Jim Tankersley: “A wave of optimism has swept over American business leaders, and it is beginning to translate into the sort of investment in new plants, equipment and factory upgrades that bolsters economic growth, spurs job creation — and may finally raise wages significantly. While business leaders are eager for the tax cuts that take effect this year, the newfound confidence was initially inspired by the Trump administration’s regulatory pullback, not so much because deregulation is saving companies money but because the administration has instilled a faith in business executives that new regulations are not coming.”
— Trump’s shrinking government. The Post’s Lisa Rein and Andrew Ba Tran: “Nearly a year into his takeover of Washington, President Trump has made a significant down payment on his campaign pledge to shrink the federal bureaucracy, a shift long sought by conservatives that could eventually bring the workforce down to levels not seen in decades. By the end of September, all Cabinet departments except Homeland Security, Veterans Affairs and Interior had fewer permanent staff than when Trump took office in January — with most shedding many hundreds of employees, according to an analysis of federal personnel data by The Washington Post.
The diminishing federal footprint comes after Trump promised in last year’s campaign to “cut so much your head will spin,” and it reverses a boost in hiring under President Barack Obama. The falloff has been driven by an exodus of civil servants, a diminished corps of political appointees and an effective hiring freeze. Even though Congress did not pass a new budget in his first year, the drastic spending cuts Trump laid out in the spring — which would slash more than 30 percent of funding at some agencies — also has triggered a spending slowdown, according to officials at multiple departments.”
— A new worry: The South China Sea. The Post’s Emily Rauhala: “Having added thousands of acres to the Spratly Islands in recent years, China is now building out bases there. Once operational, these outposts will enable the Chinese military to better patrol the South China Sea, potentially changing the regional balance of power. It is both a territorial dispute and a test of regional influence, with an increasingly assertive China often appearing to set the terms. Though Chinese reclamation and building predate Trump, many expected the Republican president to push back more forcefully than the previous administration… But experts see few signs the issue is a White House priority.”
The Heritage Foundation holds a book discussion on “Crashback: The Power Clash Between the U.S. and China in the Pacific” on Thursday.
The American Enterprise Institute holds a discussion on “Reconnecting Health Care Policy with Economics: Finding and Fixing Distortive Incentives” on Thursday.
The National Economists Club holds a luncheon discussion on “The Return of Trillion Dollar Deficits” on Thursday.
Brookings Institution holds an event titled “Should the Fed stick with the 2 percent inflation target or rethink it?” on Jan. 8.
The American Enterprise Institute holds an event on “New thinking about poverty and economic mobility” on Jan. 18.
From The Post’s Tom Toles:
See President Trump’s New Year’s Eve party at Mar-a-Lago:
Watch Wolf Blitzer “sing” the words t the biggest 2017 hits: