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Congressional Update
This week: The House passed several bills to block various regulations recently put into effect by former President Obama (more below). The Senate approved Steve Mnuchin to serve as Treasury Secretary, David Shulkin to serve as Secretary of Veterans Affairs, Linda McMahon to serve as Administrator of the Small Business Administration, Congressman Mick Mulvaney (R-SC) to serve as Director of the Office of Management and Budget and Scott Pruitt to serve as Administrator of the Environmental Protection Agency (EPA)
Next Week: Both the House and Senate will be out of session until February 27
Taxes on Imports? Most current discussions on tax reform legislation are focused on “border adjustability,” which is essentially a tax on imports. Since this proposed tax offsets a planned reduction in corporate tax rates by raising an estimated $1 trillion in revenue, border adjustability is a main component of House Republicans’ current plan to reform the tax code. This concept has many detractors, most notably retailers, and faces an uphill climb to become law. The concept has recently lost support from various Republican Senators, leaving the inclusion of border adjustability in a final tax reform bill in doubt. Also, several retail company CEOs met with President Trump this week and outlined their opposition to such a tax. It seems that the more this proposed tax is examined, the more it is opposed. While this import tax is on life support, it could be revived if President Trump includes it in the tax plan he will release in the coming weeks. Conversely, border adjustability may have a final nail in its coffin if it is not included in that plan.
Small Business and Tax Reform. Many questions have arisen about how small businesses will be treated if tax reform legislation is enacted. For starters, Republicans do not want to leave small businesses at a tax disadvantage to corporations. While the current plan is to reduce the top individual income tax rate to 33% and the corporate rate to 20%, there is recognition among most lawmakers that this gap will have to be narrowed (most small businesses pay at the individual tax rate). One leading option is to have a top tax rate of 25% on the distributive share of “active business income” of an individual owner, with the proviso that owners take a “reasonable compensation” in order to avoid the creation of a loophole. Additionally, small businesses will likely get relief from other provisions, notably the limitation on interest deductibility. At this time, there is no clarity on how these provisions will apply to entities like REITs and MLPs. The bottom line is that Republicans intend to reduce the tax rate on small and large businesses in a way that will be impactful and not favoring the latter.
Obamacare Replacement Moving Slowly. Both the House and Senate held hearings this week on alternatives to Obamacare. There is still no single plan that congressional Republicans are rallying around, which makes the repeal and replacement of Obamacare more challenging. It is certain that Obamacare will be repealed next month, but replacing it will be much more difficult. Despite the lack of solid support behind any comprehensive Republican alternative, a variety of individual proposals seem to be coming together as the nucleus of the likely replacement package. These proposals include an expansion of health savings accounts, a tax credit for lower-income individuals to purchase health insurance, removal of barriers that prevent the sales of health insurance across state borders and block granting of Medicaid funds to states. The challenge Republicans will have is from voters who want the impossible: less expensive health insurance, lower deductibles and more policy benefits and protections. This expectation plagued Obamacare and could plague any Republican replacement bill.
Legal Reforms on the Agenda. With Republicans in charge in Washington, it was only a matter of time before legal reform legislation became a priority. The House Judiciary Committee has already acted on various legal reform issues and continued this week by passing legislation to reform the class action system. Among other provisions, the bill prevents people from being forced into class actions with uninjured individuals, reduces incentives to bring frivolous class-action lawsuits and requires payment to injured victims before attorneys. Republicans will try to advance other legal reforms later this year, including some possibly being attached to the Obamacare replacement package. The House will easily pass these measures, but their prospects in the Senate are murkier since they will run into a Democratic filibuster.
U.S. Sanctions on Russia. One big takeaway from the Michael Flynn fiasco is that President Trump will very likely back away from any big decisions on Russian sanctions in the foreseeable future. A decision to ease sanctions in wake of investigations into Flynn’s activities doesn’t seem plausible, and such action would cause most lawmakers to howl in protest. A strong bipartisan majority in Congress would immediately pass legislation reinstating the sanctions and create more headaches for the President. In fact, the President has some work to do in convincing Congress not to unilaterally impose additional sanctions on Russia, specifically on various energy sector projects. It seems best for all the parties involved to cool down and let these decisions await another day, which will happen.
Both the mining and financial disclosure bills are the tip of a GOP push to undo a slate of regulations instituted in the closing days of the Obama administration.
Portman, Shaheen Introduce Energy Efficiency Legislation...Again. Senators Rob Portman (R-OH) and Jeanne Shaheen (D-NH) this week introduced the Energy Savings and Industrial Competitiveness Act, which contains energy efficiency policy reforms. Last year’s bill, received broad bipartisan support and passed the Senate last year by a vote of 85-12. It has also been endorsed by a wide range of advocacy groups because it creates jobs, saves consumers money, and reduces emissions. A study by the American Council for an Energy-Efficient Economy (ACEEE) estimates that Portman-Shaheen will create more than 190,000 jobs, save consumers $16.2 billion a year, and cut CO2 emissions and other air pollutants by the equivalent of taking 22 million cars off the road – all by 2030. The bill uses a variety of low-cost tools to help energy users become more efficient while making the country’s largest energy user – the federal government – reduce its energy use through the use of energy-efficient technology. The bill incentivizes the use of efficiency technologies that are commercially available today, can be widely deployed across the country, and pay for themselves through energy savings, but the outcome of this bill is just as uncertain as in the past.
Administration Update
A Second Controversial Obama Era Regulation Falls. President Trump on Thursday signed legislation ending a key Obama administration coal mining rule. The bill removes the Office of Surface Mining's Stream Protection Rule, a regulation to protect waterways from coal mining waste that officials finalized in December. The legislation is the second Trump has signed into law ending an Obama-era environmental regulation. On Tuesday, he signed a Congressional Review Act (CRA) resolution undoing a financial disclosure requirement for energy companies. Both the mining and financial disclosure bills are the tip of a GOP push to undo a slate of regulations instituted in the closing days of the Obama administration. The House has passed several CRA resolutions, and the Senate has so far sent three of them to President Trump for his signature. The Stream Protection Rule rule is among the most controversial environment regulations the former administration put together. The coal mining industry said it would be costly to implement and lead to job losses across the sector, which is already suffering from a market-driven downturn in demand for its product. Environmentalists supported the administration rule, saying it would protect waterways from pollution and preserve public health.
Nominations. Five more cabinet or cabinet-level nominees were approved by the Senate this week. However, the Senate will have to wait until the end of February to resume the confirmation process since members will be on recess next week. With the withdrawal of Andy Puzder (more below) to serve as Labor Department Secretary this week, Democrats finally had success in derailing a nominee they strongly opposed. Keep in mind that once the cabinet and cabinet-level nominees are confirmed, there are hundreds of nominations at the next level that will also require Senate confirmation. This will keep the Senate occupied on personnel matters for the foreseeable future and significantly slow down the Republicans’ policy priorities of regulatory reform, Obamacare repeal and replacement and tax reform legislation in that chamber.
Trump’s Announces Second Pick For Secretary of Labor. President Donald Trump announced his second nominee for Secretary of Labor, R. Alexander Acosta. Acosta, 48, replaces Andrew Puzder, a fast-food company executive and frequent media commentator who withdrew his name Wednesday amid controversy over his personal life and business background. Trump announced his choice of Acosta, a former National Labor Relations Board member and the first Hispanic he has chosen for his cabinet, at a news conference Thursday. Trump said Acosta, a law school dean and former head of the Justice Department’s civil-rights division, will be "a tremendous secretary of labor," and noted the Senate has already confirmed him for three positions in the past. Acosta is almost certain to be confirmed, with comparison being made to other Trump nominees like James Mattis and John Kelly that drew significant bipartisan support. Labor groups that helped lead the opposition to Puzder were measured in their initial reactions to his replacement. "Unlike Andy Puzder, Alexander Acosta’s nomination deserves serious consideration," AFL-CIO President Richard Trumka said in a statement. "In one day, we’ve gone from a fast-food CEO who routinely violates labor law to a public servant with experience enforcing it."
Industry Update
Michigan Orders Flint Hospital To Address Legionella Risks. Michigan this week ordered a Flint hospital to immediately comply with federal recommendations that were issued due to its association with a deadly Legionnaires’ disease outbreak, saying the hospital’s water system is unsanitary and a possible source of illness. The order, which was issued by the state Department of Health and Human Services, said McLaren Flint has insufficiently demonstrated compliance with recommendations made by the Centers for Disease Control and Prevention in the fall. The state cited a report from December 2014 in which a company that tested McLaren’s water said it seemed that the municipal water was not contributing to the hospital’s Legionella bacteria issues and the issues instead were “likely internal to the hospital system.” The state said it will appoint a monitor, conduct independent water testing and force the hospital to cooperate with all requests for information. Michigan has allocated $253 million toward resolving the emergency. Criminal charges have been brought against 13 current or former government officials, including two emergency managers who were appointed by Snyder to run the city. The Republican governor is asking the GOP-led Legislature for nearly $49 million for the next budget year for more filter cartridges, continued health and other services, and to bolster a reserve fund for future needs such as lead pipe replacements.
The larger the dam, the harder it is to break from those rule curves, but those rule curves are increasingly out of whack with modern precipitation patterns and usage.
A Lesson From Oroville...Water Strategies Will Have to Change. This week the country turned its attention to California’s Oroville Dam as it threatened to break. Neglect of infrastructure has played a clear and primary role – with homes being evacuated because of signs that the dam's emergency spillway is failing to safely carry even a portion of the overflow it's licensed to handle. Environmental groups warned in 2005 that the dam's emergency spillway needed reinforcement, for example. Operational procedures at dams are also due for an update in the face of climate change, experts say. Dam managers are constrained in their flexibility to adjust to changing realities posed by a warming world. The managers follow so-called "rule curves" set by the US Army Corps of Engineers that indicate when to draw down or fill up reservoirs, which take into account flood control, water supply, and endangered species requirements. In many cases, the rule curves are a result of negotiations between water districts and communities that rely on dams to provide their many services. The larger the dam, the harder it is to break from those rule curves, but those rule curves are increasingly out of whack with modern precipitation patterns and usage. Oroville Dam, the tallest in the US at 770 feet, is mainly used for water supply in southern California.
Minnesota Efficiency Push Could Spawn 15,000 Direct Jobs by 2030. A new report by the BlueGreen Alliance estimates a push to reduce energy use by 20% in some Minnesota buildings could create up to 15,000 direct jobs by 2030, with two-thirds of those jobs blue collar. The efficiency projects would be completed in so-called MUSH sector: municipal buildings, universities, schools and hospitals. The alliance, a group which focuses on both the environment and labor and economic issues, said in addition to employment gains, the increased efficiency would avoid using more than 36,000 GWh and save consumers $3.1 billion. In 2015, a report by the Minnesota Commerce Department concluded the state's Conservation Improvement Program was generating at least $4 in benefits for every dollar spent, as well as producing $5.9 billion in new economic output and