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The 115th Congress convened this week, with Republicans holding a 241-194 majority in the House of Representatives and a 52-48 advantage in the Senate (there are two Independents, both of whom caucus with the Democrats). Once President-elect Donald Trump takes the oath of office on Jan. 20, Republicans will control the House, Senate and White House for the first time since 2006 and only the third time since the end of World War II.
That means the pressure will be on the new president and Congressional Republicans to make good on some of the many campaign-trail promises—and quickly.
Republicans have an exceedingly ambitious agenda for 2017, including repealing and replacing the Affordable Care Act; passing broad tax cuts as part of comprehensive tax reform; approving a major infrastructure spending package; and overhauling financial regulation. That’s just to name a few big-ticket items on the Republican to-do-list.
Here’s what to watch for from the new Congress over the first few months:
New faces on Capitol Hill
There are seven new Senators and 55 new Representatives in Washington, each trying to make names for themselves during their first terms. There will also be some notable leadership changes. Senator Charles Schumer, D-N.Y., becomes the Senate Minority Leader, replacing the retired Senator Harry Reid, D-Nev. Schumer will lead the opposition, with the goal of scuttling as much of the Republican agenda as possible. Senator Mike Crapo, R-Idaho, takes over as chairman of the Senate Banking Committee, which will be charged with rewriting the Dodd-Frank Act, the financial regulatory overhaul law put into place in 2010 in response to the 2008 financial crisis.
The first several weeks of the new Congress are likely to be dominated by confirmation hearings and votes on the president-elect’s choices for cabinet posts and other key positions. Democrats don’t have the votes to stop the nominations, but they can be expected to use the hearings to ask difficult questions of some of the more controversial nominees, including Senator Jeff Sessions, R-Ala., for Attorney General; Rep. Tom Price, R-Ga., for Secretary of Health and Human Services; and Oklahoma Attorney General Scott Pruitt for director of the Environmental Protection Agency. The only nominee that has drawn criticism from a handful of Senate Republicans is ExxonMobil CEO Rex Tillerson as Secretary of State, whose close ties to Russia have raised eyebrows. Barring unexpected revelations during the hearing process, expect all of Trump’s nominees to be confirmed, but it’s still likely to be a messy process.
Supreme Court battle
Trump will soon name his choice to fill the seat left vacant 11 months ago by the death of Justice Antonin Scalia. Democrats are furious that Republicans refused to grant President Barack Obama’s nominee, Judge Merrick Garland, so much as a hearing last year, and they will do all they can to make the confirmation process for Trump’s choice as difficult as possible.
For Democrats, however, it’s not Trump’s first Supreme Court nominee they are worried about—it’s the second, if there is one. Replacing Scalia with a like-minded Justice won’t really alter the ideological balance of the court. But all eyes will be on the possible retirements of Justices Ruth Bader Ginsburg, who will turn 84 in March, Anthony Kennedy (80) and Stephen Breyer (78), to see if Trump gets a chance to begin really reshaping the Court with a second appointment.
Affordable Care Act repeal
Republicans have promised to repeal and replace the Affordable Care Act, and they began that process on the first day of the new Congress. Senate Majority Leader Mitch McConnell, R-Ky., introduced a budget resolution that sets an aggressive timeline for repealing most or all of the health care reform law. Congressional Republicans have said they would like to have completed the repeal by the end of the first 100 days of the Trump presidency, in late April. Trump, however, recently set a much quicker timeline, asking Congress to have repeal legislation on his desk by Feb. 20.
The biggest hurdle is that Republicans have yet to unify around a replacement plan. And there is disagreement within the party about whether to repeal the law without having a replacement finalized. The concern is that, even with some type of transition rule for those currently getting health care through the Affordable Care Act, a repeal could result in as many as 20 million Americans losing health-care coverage, possibly sparking a political backlash.
Republican leaders are hoping to hammer out a plan in the next few weeks. Some have advocated for quick passage of the repeal, but then delaying the date at which it takes effect for a year or more, which would give lawmakers time to construct an alternative.
After the election in November, a huge spending package to shore up the nation’s infrastructure was seen as one of the few possibilities for bipartisan cooperation on Capitol Hill and a leading contender for the first big issue of the Trump administration. But interest has waned in recent weeks amid concerns about the effect of a large spending package on the federal deficit. Trump has recently wavered on whether such a package would include spending or mostly consist of tax incentives. While there is still interest among lawmakers in addressing the nation’s crumbling roads, bridges, airports and ports, the issue has at least temporarily moved to the back burner.
Investors eye tax reform
The issue of perhaps highest interest to investors and the markets is tax reform. House Republicans issued a “blueprint” for reform last year that is similar to proposals Trump outlined during the campaign, including slashing both individual and corporate tax rates, eliminating the estate tax and repealing the Alternative Minimum Tax. But the devil is in the details, most notably how to pay for tax cuts. Advocates will be out in force to defend every tax deduction and credit currently in the code. And the effect of tax cuts on the federal deficit will be a test for lawmakers, particularly conservatives in the House of Representatives, who have made reducing the deficit a cornerstone of their policy positions in recent years. We think the odds of significant tax reform in 2017 remain high, but it won’t be easy and it could take many months to complete.
“Budget reconciliation” is the key
While Republicans should have no problem passing their agenda through the House of Representatives, where the party enjoys a healthy majority, things will be much trickier in the Senate, where a 60-vote supermajority is needed to cut off a filibuster and really control the agenda. Expect Senate Republicans to make use of a complicated parliamentary procedure called “budget reconciliation” to bypass some of the opposition in the upper chamber. The process allows the majority to pass budget-related legislation with limited debate, limited amendments, no filibusters and just a simple majority vote. Expect the procedure to be used for the health care law repeal, tax reform and perhaps other initiatives.
Debt ceiling and budget deadlines loom
Slightly farther down the road for the new Congress are two deadlines in the spring. The debt ceiling, currently suspended, comes back on March 16. When the cap is reinstated, it is virtually certain to be over $20 trillion. The Treasury department, as it has in the past, will use budgeting tricks called “extraordinary measures” to avoid the U.S.’s first debt default, but such moves are a temporary stopgap. Congress will have to raise or suspend the debt ceiling by early summer, and doing so without roiling the markets will be tricky.
Another deadline looms at the end of April. Since the last Congress failed to approve a budget or the appropriations bills to fund government operations, it had to pass a series of temporary deals to keep the government open and avoid a shutdown. The current agreement runs through April 28. The new Congress will need to either pass an appropriations bill by then or approve another short-term extension.
Overall, it’s going to be a very busy beginning to the 115th Congress. Investors should keep a close eye on how these key market-affecting issues unfold.