Washington Policy Analyst Ed Mills provides an update on the latest D.C. developments.
Reports emerging from the latest talks between the White House and key Republican senators point to potential corporate tax changes toward the lower end of expectations (24% to 25% range) – a reflection of the current negotiating position of Democratic lawmakers and a significant market positive as negotiations advance into the summer.
Although we continue to view bipartisan talks as a political exercise, President Biden offering a minimum corporate tax of 15% is a clear signal of moderating positions from the White House. Notably, the minimum corporate tax rate as outlined would only raise around $150 billion over 10 years, per Treasury’s latest revenue estimates. As such, we also view the latest development as a growing acceptance of around $1 trillion in deficit spending to advance Biden’s infrastructure priorities, which continue to trend in a partisan direction.
The White House and key Democrats view the week of June 7 as an initial soft deadline for bipartisan talks, though we view an agreement from the current round of talks as unattainable. There is growing political pressure on the White House from Democrats to end attempts at bipartisan negotiations and commit to a Democratic-led reconciliation bill. Clarity on this strategy would accelerate policy decisions around the scope of the package and tax increases, alleviating some of the significant market uncertainty of the last several months tied to tax provisions and deficit impact.
President Biden’s fiscal 2022 budget includes massive investments in federal health programs and reinforces support for a number of health initiatives, such as creating a public option, allowing Medicare to negotiate drug prices and establishing a $6.5 billion Advanced Research Projects Agency for Health (ARPA-H). However, the full budget in a president’s first year is usually less valuable, as we have already received the “skinny budget” that has the discretionary spending numbers.
Our takeaways from the budget proposal rise primarily from the agency documents of “Congressional Justification” (CJ) that come alongside the White House-released document. Some key items in CJ reports include:
An investment ban on Chinese companies was upheld and expanded via an Executive Order (EO) signed by President Biden on June 3. However, key changes to the Trump-era EO shift the power of future decisions from the Defense Department to Treasury and will not cover subsidiaries of banned companies unless they are specifically listed.
Starting August 2, 2021, 59 Chinese companies will be off limits to U.S. investors. This list has grown from 44 companies banned by President Trump in his last days in office. President Biden has expanded the scope of the EO to include surveillance technologies in addition to military-backed firms, stating they can be developed or used to “facilitate repressive or serious human rights abuse.” Our expectation is the surveillance ban will be difficult to implement but could have far-reaching consequences for Chinese technology firms.
While the press coverage of this EO is being viewed as a significant expansion, we view this as the president keeping his options open. This is a hawkish move, but he had political ability to rescind the Trump EO, and the Treasury move and subsidiary ruling blunt the EO’s impact.
The House Transportation Committee released the “INVEST in America Act” – a five-year surface transportation reauthorization bill – a starting point for Biden’s infrastructure agenda in the House. Although final figures and components are subject to adjustment as the bill works its way through Congress, it initially outlines infrastructure spending as below. The outline was quickly rejected by Republicans, a further sign that lawmakers are potentially preparing to move infrastructure investment in a Democratic-led package without Republican support.
President Biden’s defense budget broadly tracks with our expectation of transitioning away from legacy weapons systems toward next-generation technological competition, but bipartisan pressure on spending priorities may lead to revisions before Congress authorizes spending later this year. The defense budget decreases spending across each branch on traditional weapons programs while increasing research and development spending by more than 5% to $112 billion.
Notably, the budget confirms that the administration is seeking to roll around $40 billion historically set aside for the Department of Defense’s Overseas Contingency Operations (OCO) account into the general defense budget, which we expect the administration to message as a 20% decrease in overall defense spending – the range sought by progressive Democrats to be allocated toward domestic priorities.
We expect continued political pressure on funding allocated for resources in the Pacific region to keep the military threat from China in check, which could lead to additional federal defense spending above the 1.6% year-over-year increase as currently proposed.
Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.
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