Directors are concerned that this change in Washington, D.C., will create uncertainty about how pending legislation in the lame duck session and by the 114th Congress will impact companies. Directors should be mindful of three areas in the coming weeks and months: (1) extension of certain tax provisions, (2) Dodd-Frank Act rulemaking, and (3) possible changes in the Affordable Care Act (ACA).
On November 4, Republicans won control of the US Senate, picking up eight seats for a majority of 53. Coupled with an increasing its majority by 12 seats in the US House of Representatives, Republicans will have control of both chambers when the new Congress convenes in January 2015. With three races in the House and one in the Senate still undecided, that majority could grow.
Directors should be thinking about how this change will affect the level of uncertainty about how pending legislation will impact companies. For one thing, certain expired tax provisions, including the research credit, 50% bonus depreciation, and section 179 small business expensing, could be taken up in the lame duck session this year before the 114th Congress convenes in January.
Beginning with the lame duck session already underway, directors should be mindful of three areas in the coming weeks and months: (1) extension of certain tax provisions, (2) Dodd-Frank Act rulemaking, and (3) possible changes in the Affordable Care Act (ACA).
“Congress is likely during the lame-duck session to approve a temporary retroactive extension of expired tax provisions,” said Pam Olson, leader of PwC’s Washington National Tax Services practice. “In addition, Republican campaign victories increase the prospects for certain broadly supported provisions like the research credit and small business expensing to be made permanent.”
Leading up to the lame duck session, both chambers had taken some action on legislation to address the expiring tax provisions. The Senate Finance Committee in April approved an $85 billion tax extenders bill that would extend temporarily nearly all expired or expiring tax provisions on a retroactive basis covering 2014 through 2015. In contrast, the House passed separate bills to extend permanently the research credit, bonus depreciation and small business expensing provisions.
“Anything that leads to uncertainty in the decision-making process is important,” said Gail Deegan, who sits on the boards of technology companies iRobot Corp. and EMC Corp. “And the fate of tax provisions is one of those uncertainties. The R&D tax credit is an item that affects both companies where I serve on the board.”
She cited the situation in 2012 when similar tax provisions were set to expire on December 31 only to be extended in January 2013. “It created a lot of uncertainty in decision-making then,” she said. “What it comes down to is that we need to know whether we as a country believe in the idea of a permanent R&D tax credit or stop holding it hostage.”
Directors may want to consider how management is evaluating the tax provisions that could potentially affect the company’s operations.
While SEC Chair Mary Jo White has made it clear in speeches that she plans to have her agency issue some of the final rules involving executive compensation (CEO/median pay ratio disclosure) and derivatives, it is expected that the new Congress will try to modify some of the existing Dodd-Frank rules and influence those that have yet to be written, such as the institution of compensation clawback policies. [For more information on these rules, read BoardroomDirect September 2014 (Issues in brief).]
However, since the Republicans don’t have a filibuster-proof Senate majority, and the President has the veto, Dan Ryan, PwC’s Financial Services Advisory leader, says don’t expect any fundamental changes to Dodd-Frank.
“With many Dodd-Frank rulemakings still pending or in the early stages of implementation, the occupant of the White House and his or her appointments to agencies matter more than changes in one house of Congress,” Ryan said.
Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance and a director on the boards of HealthSouth and Bob Evans Farms, agrees that significant changes related to Dodd-Frank rules are unlikely.
“I think regulatory actions by the SEC will get harder to do,” Elson said. “But I don’t think anything significant happens. It’s the President versus Congress. Whatever the President wants, Congress doesn’t and whatever Congress wants, the President doesn’t.”
Another issue that could affect SEC rulemaking is that under a Republican Congress, appropriations for the agency, as well as for the Commodity Futures Trading Commission, could be reduced. Rulemakings, examinations, and enforcement actions could potentially be slowed at those two agencies, according to Ryan. In fact, he expects outstanding derivatives rulemakings to continue to be delayed.
The SEC is still looking to finalize security-based swap rules that would:
Directors may want to be prepared for meeting the disclosure requirements called for in the proposed SEC rules on the CEO/median pay ratios and derivatives since those have been a priority for the agency this past year.
While any wholesale changes to the five-year-old ACA is unlikely given the Senate’s lack of a large enough majority to override any presidential veto, there are some provisions that may be modified.
PwC’s Health Research Institute made the following analysis of the election results regarding the ACA:
At the same time, the US Supreme Court agreed to hear arguments that challenge a provision in the ACA that authorizes payments to the poor and middle class to subsidize the cost of health insurance premiums.
“It [the ACA] remains a moving target, whether it’s decided in the courts or in Congress,” said Elson, who sits on a health-care company board. “
Directors may want to consider how management is evaluating the possible changes in ACA provisions and how those changes could potentially affect the company’s operations.
For more in-depth analysis of the midterm elections, directors may want to read the following PwC publications: