After the holiday presents are opened, the tasty delights experienced and the New Year heralded, a "new" Washington will emerge to manage the America's challenges. This new Washington will be unilaterally controlled by one party for the first time in years, and expectations for action will be great. With serious policy differences within the governing party, it will be as challenging as ever to manage the desires of a public who largely voted for change without specifics.
Congress Passes Short-Term Government Funding
With just hours to spare before the deadline, Congress avoided a government shutdown by passing a short-term continuing resolution (CR) on Dec. 9. The CR maintains the FY17 spending cap of $1.07 trillion and keeps the federal government funded through April 28, 2017. Congress must pass another budget deal - either a full-year CR or final spending bills - to keep the government operating until Sept. 30, the end of the 2017 fiscal year. Congress will face another important funding deadline next spring: increasing the federal debt ceiling.
Reg Relief Will Be Impacted By Personnel as Much as, If Not More Than, Legislation
With a smaller Republican majority in the Senate in the 115th Congress, fundamental statutory changes to the Dodd-Frank Act are unlikely to get the 60 votes necessary to clear that body's filibuster hurdle. In addition, the banking industry faces a regulatory/statutory framework that divides the industry based on size, which can make it more challenging to reach the broad industry consensus necessary for major regulatory relief legislation. Finally, in Congress, the strong support for community banks is mirrored by antipathy for very large banks.
While financial regulatory relief legislation will be front and center in congressional debates, the incoming Trump Administration will be able to make a number of regulatory agency leadership changes. Since the Dodd-Frank legislation gave significant discretion to regulators, these personnel changes may result in a dramatic change in the direction of regulation.
The key regulatory positions that are either currently vacant, or will be in the near future, are:
- Federal Reserve Vice-Chairman for Bank Supervision and Regulation (vacant)
- Chair of the SEC (the incumbent has announced her resignation)
- Comptroller of the Currency (March 2017)
- Chairman of the CFTC (April 2017)
- Chairman of the FDIC (November 2017)
- Director CFPB (January 2018)
- Director FHFA (January 2019)
Congressional Budget Office (CBO) Publishes List of Revenue Raisers
On Dec. 8, the CBO released "Options for Reducing the Deficit," a regular CBO publication known by some in D.C. as "the menu." Many of the proposals are nonstarters politically, but of interest nonetheless. As the new administration takes shape and begins serious negotiations with the congressional Republican leadership on a shared governing approach, policy players will have a greater sense of how deficit concerns will drive policy. The greater the focus on deficit reduction, the greater interest there will be in some of the CBO's suggestions. Below are some "menu" items of interest. The revenue estimates over 10 years, as developed and compiled by the Joint Committee on Taxation, are provided in parentheses.
- Convert the Mortgage Interest Deduction to a 15 percent Tax Credit ($105 billion) - This option would gradually convert the tax deduction for mortgage interest to a 15 percent nonrefundable tax credit. The maximum amount of mortgage debt that could be included in the credit calculation would be $500,000, and the credit could be applied only to interest on debt incurred to buy, build or improve a first home. (Other types of loans, such as home equity lines of credit and mortgages for second homes would be excluded.)
- Curtail the Deduction for Charitable Giving ($229 billion) - Curtail the deduction for charitable donations while still preserving a tax incentive for donating. Only contributions in excess of 2 percent of adjusted gross income (AGI) would be deductible for taxpayers who itemize.
- Limit the Deduction for State and Local Taxes ($955 billion) - Cap the deductibility of state and local tax payments at 2 percent of AGI.
- Repeal the Low-Income Housing Tax Credit ($34 billion) - Repeal the low-income housing tax credit starting in 2017, although taxpayers could continue to claim credits granted before 2017 until their eligibility expires.
- Impose a Fee on Large Financial Institutions ($103 billion) - A fee on large institutions may enjoy some popularity as it has appeared in one form or another in President Obama's budgets and earlier versions of House Republican tax bills. Under this option, an annual fee would be imposed on bank holding companies with $50 billion or more in total assets and nonbank financial companies designated for enhanced supervision. The annual fee would be 0.15 percent of a firm's covered liabilities, defined primarily as total liabilities less deposits insured by the FDIC.
- Impose a Tax on Financial Transactions ($707 billion) - Impose a tax on the purchase of most securities and on transactions involving derivatives.
FHFA Issues Final Rule on Fannie Mae and Freddie Mac Duty to Serve Underserved Markets
On Dec. 13, the FHFA issued a final rule to implement the Duty to Serve provisions mandated by Congress. The statute requires Fannie Mae and Freddie Mac (the Enterprises) to serve three specified underserved markets - manufactured housing, affordable housing preservation and rural housing - by improving the distribution and availability of mortgage financing in a safe and sound manner for residential properties that serve very low-, low- and moderate-income families in these markets.
