Macro/health care/fin svcs/energy update (reconciliation (tax/spending) legislation, debt limit)
Recent/upcoming developments… House and Senate Republicans are this week taking their initial steps towards enacting their reconciliation legislation, which enables them to enact changes on taxes, Medicaid, defense, and border security, among other issues on a partisan basis. The first step in this process is to pass a “budget resolution” that establishes the high-level parameters for how the bill impacts the deficit, which the Senate Budget Committee is doing today/tomorrow and the House Budget Committee intends to do by tomorrow (though this could slip). The Senate is pursuing a two bill strategy, in which they intend to first pass defense/border funding, and then address broader tax/spending issues in a second bill. The House budget resolution released today allows for a net $2.8-3.3t increase the deficit, which involves cutting taxes by $4-4.5t, increasing some spending by $300b, and reducing other spending by $1.5-2t. The more modest Senate resolution allows for $342b in spending increases, which will be entirely offset. The House and Senate will need to merge their two differing budget resolutions and pass a joint resolution prior considering the underlying reconciliation bill. The House resolution also calls for a $4b (~two year) debt limit increase.
* The budget resolution establishes deficit targets for individual committees, each of which is responsible for different programs. The House budget resolution calls for a minimum of $1.5t in deficit reduction from across different committees. The distribution of the implied cuts/increased revenue is fairly consistent with what we assumed would be the case, including the major contributors… $230b from Agriculture Committee, which is likely related SNAP (food stamps); $330b from Education and Workforce, which is likely related from student lending; $880b from Energy and Commerce (E&C), which is likely related to Medicaid, climate spending, and possibly spectrum auction revenue.) The bill caps the deficit increase for the Ways and Means (W&M) (i.e., tax writing) Committee at $4.5t. The resolution also says that if the bill doesn’t achieve $2t in deficit reduction (i.e., $500b more than the minimum required $1.5t), then the W&M cap is reduced by that amount.
* The Senate budget resolution calls for $175b in spending on border security, $150b on defense, and $17b for the Coast Guard. The House budget resolution allows for a $300b spending increase, which presumably reflects border and defense, divided equally.
* The House budget resolution does not appear to rely upon a “current policy baseline,” which would assume that extension of expiring tax cuts (i.e., TCJA) doesn’t increase the deficit, and therefore do not need to be offset in order to meet the bill’s deficit target. Instead, the House budget resolution uses a “current law baseline,” which means that any extension of TCJA will need to either be offset or the bill will need to allow for a sizable increase in the deficit. The latter appears to be the case. The Senate may take a different approach and use a current policy baseline, which key players such as Senate Finance Committee Chair Crapo (R-ID) have long favored. This remains an important issue because if a current policy baseline is used, the need for offsets will decline.
Our outlook… Conservatives have in recent days expressed some positive sentiment about the emerging House budget resolution, and the White House’s reported support for it is important to them, but they haven’t indicated they are fully on board yet. Some House moderates have expressed reluctance to materially impact Medicaid, so the significant implied cuts in that area will be a hurdle. Our expectation, with limited conviction (60% probability) is that the House Budget Committee will pass its resolution this week, which will be particularly notable because that can only happen with the support of conservatives. The Senate Budget Committee is also likely to pass its resolution this week. House leaders continue to feel strongly that they’re not going to be able to pass two reconciliation bills, and thus we continue to believe a single-bill strategy remains the most likely outcome. But, if the House Budget Committee fails to pass its resolution this week, there will be a shift in momentum towards the Senate’s two-bill strategy, and it will become more likely that after enacting a border/defense bill, Congress will ultimately only pass a modest tax/spending bill at the end of this year (i.e., very temporary TCJA extension, limited impact on IRA clean energy credits, limited spending cuts).
* A permanent extension of the expiring Tax Cuts and Jobs Act (TCJA) provisions has a $4.6t budget impact, in excess of the $4.5t allocated to the W&M Committee. In addition, the House is trying to also accommodate President Trump’s other proposed tax cuts (i.e., ending on Social Security ($1.3t), overtime pay ($2t), and tips ($300b), as well as reducing the tax rate for domestic producers to 15% ($200b)). In order to address all of these issues, the bill will need to either only extend TCJA temporarily (to which the administration and many Republicans are resistant), or only partially/temporarily cut the other taxes. This dynamic also puts pressure on how the W&M Committee addresses other issues under its jurisdiction – i.e., it increases the need to constrain/limit IRA clean energy credits (e.g., EVs, solar/wind), limits the degree to which enhanced ACA tax credits can be extended, and increases the need to achieve Medicare savings from site neutral payments.
* The House budget resolution implies that Medicaid cuts will need to be more aggressive than has been generally anticipated. In recent days, President Trump has expressed resistance to cutting Medicaid, and both Speaker Johnson (R-LA) as well as House Majority Leader Scalise (R-LA) have implied their approach would be limited to imposing work requirements and addressing waste, fraud, and abuse. But, even if the E&C Committee’s $880b allocation includes cuts to IRA clean energy spending ($50b) and spectrum auctions ($100b), and includes Medicaid work requirements ($109b), there is a $630b gap in how much would need to be cut from Medicaid, suggesting that cuts to enhanced FMAP, establishment of a FMAP floor, and possibly other provisions will be necessary.
* There has been continued speculation that revenue could be gained from including a GSE exit from conservatorship in the bill, though we’ve long felt this is unlikely to occur. While we’re still looking for more specific indications of how this issue will be addressed, the very modest $1b deficit reduction allocation for the Financial Services Committee (which has jurisdiction over the GSEs) suggests that this provision is not being contemplated for inclusion by the Budget Committee.
* The divergence between House and Senate approaches has pushed out the timeline for enactment that we’ve been expecting would be the case. At this stage, assuming the House and Senate Budget Committees pass their resolutions this week, March will be consumed by the House and Senate merging their approaches into a joint resolution, which implies consideration of the reconciliation legislation by the underlying committees will take place in Q2, passage in the full House and Senate taking place in Q3, followed by merger of the House and Senate bills and enactment in Q4.
* While the House has included a debt limit increase in its budget resolution, it doesn’t not appear the Senate is going to do so. The Senate has expressed sensitivity to including a debt limit increase in reconciliation, and leaders have implied that addressing it in a bipartisan manner is more feasible. We continue to believe that it’s more likely the debt limit is addressed on a bipartisan basis in March, as part of legislation to address FY25 appropriations through the remainder of the year. If that doesn’t occur and Republicans choose to address it on a partisan basis through reconciliation, there will be significantly more volatility surrounding it and it’s likely.
Watch for these developments… Reps. Roy (R-TX) and Norman (R-SC) are members of the conservative Freedom Caucus and are both on the Budget Committee, so they’ll need to make their views known by tomorrow’s vote. Roy in particular tends to set the tone for conservatives on fiscal matters. Their support or resistance will determine whether the House budget resolution passes or not this week. We are also watching for reaction to the House bill from key players in the Senate (e.g., Senate Finance Chair Crapo (R-ID), Health Education Labor and Pensions Chair Cassidy (R-LA)), as well as any sensitivities individual Republican Senators or Representatives express about aggressive cuts to Medicaid (which we expect to emerge), an extension of ACA enhanced subsidies, and various IRA clean energy provisions. Only a handful of objections will change the way the bill will have to address these provisions.