Please read this article written by Andrew Friedman of The Washington Update LLC
In my legislative update early this year, I noted that ongoing acrimony between Congressional Republicans and the Obama White House likely precludes agreement on any broad new legislative initiatives this year. Instead, Congress and the White House are likely to reach agreement only in the face of “forcing events” – deadlines that compel action to ward off a draconian result.
As it turns out, Congress appears to be arranging for all of the major deadlines to occur around a single date – September 30. This schedule sets up a massive negotiation for September, when Congress returns from summer recess. Investors should be aware that this negotiation is likely to lead to market volatility and some new tax changes.
I discuss the upcoming imbroglio in more detail below. But first, two quick announcements:
- The Affordable Care Act is affecting retiree medical costs in a number of ways, most of them adverse. A new white paper on the site, Preparing for Rising Medical Costs in Retirement, discusses how retirees and near retirees can develop an estimate of their likely retirement medical costs and a plan to help defray those expenses. Subscribers can access the paper here.
- My colleague Jeff Bush recently launched a new way for you to keep with what he and I are reading each day. You can now follow us on Facebook to see our daily must read articles: https://lnkd.in/eJAdh88 . This is our way of keeping you abreast of the latest happenings out of Washington, happenings that can affect your investments and your business.
Now back to the legislative outlook. By or around September 30, Washington must reach agreement on:
- Raising the debt ceiling: Congressional borrowing authority ended on March 15, 2015. Current estimates suggest the government will run out of money and need to borrow by around early October. Failure to raise the debt limit by that time would impinge on the government’s ability to pay interest on debt outstanding, leading to default on U.S. debt.
- Highway funding: Funding for summer infrastructure work (road and bridge repair) runs out on May 31. All indications are that Congress will pass a short term “patch”, funding construction through September 30. After that date, Congress will need to find a permanent source for highway funding.
- Government funding: The federal government’s fiscal year ends on September 30. By that date Congress must appropriate money to run the government next year. Otherwise the federal government will shut down on October 1.
- Tax extenders: Congress wants to extend a popular group of tax provisions that expired at the end of last year. Paul Ryan, the chairman of the House Ways and Means (tax writing) committee, said he wants to take up the extenders during the funding discussions in September.
Longtime readers will remember that Washington reached a similar September 30 impasse two years ago, causing the government to shut down for sixteen days beginning October 1, 2013. In that instance, with the debt limit deadline approaching, Congress and the White House agreed on a plan to reopen the government and raise the debt ceiling. That plan included caps on future spending on defense and domestic programs.
As in 2013, reaching consensus on these knotty budget issues will be challenging. With U.S. military involvement expanding, both parties agree that next year’s defense budget must be higher than the spending caps set in the wake of the 2013 budget impasse. The President, though, insists that any increase in defense spending be matched with a corresponding increase in spending on domestic programs. Republicans not only oppose additional spending on domestic programs, they are looking to further cut those expenditures.
For investors, the September 30 deadline is important for two reasons. First, as the deadline to raise the debt ceiling gets closer and Congress and the Administration (likely) continue to bicker, the markets often turn volatile. I have long said that a market decline over concern about Congress’ impending failure to act is a buying opportunity. Congress will act – likely at the last minute – at which point the market will recover. It is incumbent on investors and financial advisors to keep these “forcing event” dates in mind as investment opportunities.
Second, meeting these deadlines requires funding for new government initiatives, such as additional defense spending and funding long-term highway construction. Congress typically does not like to spend money unless it raises taxes (or cuts spending elsewhere) to defray the additional cost. Congress thus searches for “loophole closers”– provisions in the tax code that arguably provide unduly favorable benefits. (An example of a loophole closer that keeps arising – but has never been enacted – is to curtail the use of “stretch” IRAs and 401(k)s.) Thus, as September approaches, investors would be wise to consider how Congress intends to fund additional expenditures.
One way to fund these new initiatives could be corporate tax reform. As if addressing these deadlines was not enough, Chairman Ryan hopes to have a corporate tax reform plan ready by the end of the summer. (It appears that reforming individual taxes is now recognized as too difficult politically.) If Congress and the White House can agree on corporate reform (possible but difficult), then the funds from a deemed (Democrats) or optional (Republicans) one-time repatriation of foreign earnings could be used to fund the permanent highway bill. Otherwise, Congress will have to find revenue raisers to pay for highway funding and extenders; Ryan says using repatriation funding without tax reform is a no go.
Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.
Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.
