From the 116th Congress to 2020

How will policy and regulatory changes affect your business?

Divided government: Democrats take control of the House

Prospects for major legislation weaken with a divided government ascending in January. But don’t equate a more complicated working environment on the Hill with a license to hit pause on policy. The wave of retirements and upsets in the midterm election will usher in a new crop of Congressional leaders who will seek to put their stamp on US policy ahead of 2020. They will be empowered to change up the pace of the Trump administration’s deregulatory momentum by applying the tools of oversight and investigations. They are also likely to take up social issues where demand for more forceful policy action is building. For example, by making use of committee power to begin structuring ways to respond to concerns over disinformation campaigns conducted over social media platforms.

Where bipartisan support is generally required to pass the House and Senate, the search for common ground may redirect policy. For example, Democrats will likely push for new spending on reskilling of trade-affected workers, and try to prevent the unwinding of Obama-era environmental protections and healthcare rules in US-Mexico-Canada (USMCA) trade legislation. Regardless of the outcome of the election, most US executives we surveyed in October expect changes in US trade, privacy, cybersecurity and tax policy or regulations over the next two years.[1] And if the federal government falters, there is every indication that US states and cities will continue to assert policy on priorities that cannot wait.

With another election under our belt where the influence of social media generated headlines, expect growing bipartisan attention on the impact of the use of technology on elections and other aspects of our daily lives.  More broadly, tensions over the reach of big tech are likely to persist as we head toward 2020.

The policy briefings collected here offer our perspectives on the prospects and impetus for regulatory change, even in this politically divided age, and how these dynamics could impact your business.

Midterms policy tracker chart

What's the impact on...

Strategy

  • The USMCA will likely be approved next year, averting the threat of new tariffs in North American markets. If there is no breakthrough in US-China talks set for later this month, expanding tariffs to cover all remaining Chinese imports to the US become a possibility. Now is the time to make “no regrets” scenario plans and review pricing, sourcing, hedging, cash planning and manufacturing footprint decisions.
  • Data privacy will be a marquee issue in 2019 as technology leaders, US states and consumer advocates press their case. Reaching consensus on comprehensive federal privacy legislation will be challenging.
  • New incoming House Democrats could play a pivotal role in providing votes needed to pass legislation on a range of tax issues. The House Ways and Means Committee is expected to be chaired by Rep. Richard Neal (D-MA), who has long focused on legislative efforts to promote retirement income security and ensure adequate dedicated funding for federal infrastructure programs.
  • Democratic success in the midterm elections likely means Republican lawmakers will not undertake a second attempt in the next two years to try to repeal and replace the ACA through a single piece of legislation. Yet the Trump administration likely will continue to utilize regulatory agencies in an attempt to transform Medicaid, roll back industry regulations, address drug pricing and streamline reviews of medical products.

Deals

More than who’s in office, companies’ growth strategies and access to capital should continue to drive M&A. But shifts in the economy and regulatory headwinds could present issues for some potential deals.

  • Companies in sectors such as retail and healthcare may need to reassess their targeting and due diligence for certain transactions in response to policies and concerns about the collection and use of personal data. 
  • Targeting and due diligence may also have to be re-evaluated in light of any escalation in tariff disputes or changes to sanctions policies.
  • Dealmakers need to watch out for areas where the two parties differ. In those situations, such as privacy, environment, wages, and healthcare, states may take positions. The higher risk of patchwork regulatory landscape can complicate transactions.
  • The Trump administration has increased scrutiny of foreign investments in America and encouraged US companies to invest more within their borders.

Workforce

Public scrutiny over wage and gender pay inequality is unlikely to abate, while the need grows for a more coherent policy approach to modernizing US workforce development.

  • To help answer questions about pay, there’s one comparatively simple approach you can take on this: adopt fair-pay principles. By fair-pay principles, we mean a set of policies to guide your compensation and total rewards package for workers.
  • Expect more intense scrutiny of H1-B applications and look ahead to what proposed changes may mean for your workforce plan.
  • With Democrats winning control of the House, much depends on the incoming chair of the House Committee on Education and the Workforce, who is likely to be Representative Bobby Scott (D-VA). His priorities include addressing inequity in education and making education more affordable.
  • Keep watch for a push for new tax credits in any infrastructure package, as part of a larger agenda to boost training and wage growth. Democrats may push this agenda in return for supporting the USMCA too, asking for new spending on reskilling of trade-affected workers.
  • A Republican-controlled Senate is more likely to support private sector and states’ efforts on workforce development than to enact any new policies at the federal level.

Risk

This is a time for strong internal controls, and their independent testing, to ensure compliance.

  • Companies will need to rethink their strategies related to domestic policy risk, given mounting public concern around such issues as digital privacy and workforce automation. Given their oversight role, Democrats may press for new rounds of hearings with social media leaders with a focus on the influence of foreign governments and cybersecurity.
  • Foreign actions extend reach into the US.  For example, consider the proposal by the European Commission in 2018 to impose a digital services tax on gross revenue.
  • States are also becoming an important battleground for policy, particularly in health. Some states will seek to fortify their state’s ACA exchanges. Democratic governors, especially those working with supportive state lawmakers, will likely take action to counter federal moves to weaken the ACA, while Republican governors may seek to embrace federal changes. All healthcare stakeholders are going to need to make sure they understand where cost growth is coming from.
  • Congress may seek to impose additional sanctions on Russia as well as target select Saudi Arabian officials with human rights-related sanctions.

What this means for...

Trade

Trade

The Trump administration has pursued bilateral negotiations with traditional allies in an effort to reset America’s economic relationships in North America, Europe and Asia. The USMCA pact could set a precedent for the administration’s negotiation strategy in future trade deals: a period of trade tension followed by concessions on terms somewhat more favorable to US interests. Reaching agreement on USMCA will likely strengthen the administration’s resolve to stay the course as it opens talks with the UK, EU and Japan. The same approach with China, however, is escalating geopolitical and economic risk.

What's at stake?
The effects of Trump’s trade policies could become more visible in 2019. The IMF has cut its global growth forecast by 0.2 percentage points to 3.7% in 2019, in part because of trade tariffs.  The IMF expects US and Chinese growth rates to decline more, by 0.4 percentage points each, to 2.5% and 6.2%, respectively. To cushion the impact of his trade policies, the President has extended $12 billion to farmers affected by China’s retaliatory tariffs on agricultural goods.

Administration officials have said the President’s endgame is to build a global coalition to pressure Beijing into abandoning policies viewed as violations of international trading norms by the US and several other nations. For its part, China has imposed retaliatory tariffs on the US and is making moves to deepen its economic ties with other countries, for example, by accelerating the Regional Comprehensive Economic Partnership (RCEP) with ASEAN.

There are prospects for a thaw in US-China relations later this month when Trump meets with Chinese President Xi Jinping at the G-20 summit in Buenos Aires. But if there is no breakthrough, expanding tariffs to cover all remaining Chinese imports to the US will become a possibility. A potential decoupling of the world’s two largest economies creates downward risks for businesses with global supply chains and dependencies on the vast US and Chinese domestic markets.

In contrast, the USMCA largely preserves a tariff-free North America. It does put in place new requirements for some sectors, particularly automobiles. Risks will shift to implementation as companies track and account for local content rules against a backdrop of increased customs enforcement.  A congressional vote on USMCA is more likely in 2019, as legislators wait for the US International Trade Commission (USITC) to complete its economic analysis of the new pact.

Companies must take immediate action to preserve operating margins and maintain regulatory compliance.

What to watch?
Democrats will increase their scrutiny of the USMCA in the House, but it is still likely to be approved next year. Some provisions – for example, requiring 75% of a car to be made in North America and 40% of automobile content to be built by workers earning an average wage of $16 an hour – appeal to many Democratic lawmakers. But there is room for confrontation between Democrats and Republicans. While most Republicans are expected to vote in favor of the USMCA, many Democrats are likely to demand new spending on reskilling of trade-affected workers, as well as try to prevent the unwinding of Obama-era environmental protections and healthcare rules.

President Trump’s top trade advisor Peter Navarro is seeking a fundamental shift in US engagement with China. While many Democrats quietly support this, they are critical of the administration’s unilateral approach. They could also be more vocal about maintaining close relations with the EU and resist the administration’s efforts to undermine the WTO. The US Treasury has not designated China a “currency manipulator” under the objective criteria used in its biannual reports to Congress, but any move in that direction could create room for additional sanctions against the Chinese government.

What should you do?
The Trump Administration will continue to seek out ways to secure concessions from China, such as stronger intellectual property protections and removal of technology transfer requirements. Companies must take immediate action to preserve operating margins and maintain regulatory compliance. Now is the time make “no regrets” scenario plans and review pricing, sourcing, hedging, cash planning and manufacturing footprint decisions.

At the same time, companies need to frame a broader strategic response to the new trade environment. What does it mean for corporate structures and manufacturing footprints and supply chain networks? In China, for instance, the business environment could become more challenging to American companies as a result of the trade war. Companies must balance higher costs resulting from tariffs with the necessity of maintaining presence as the price of admission into the Chinese domestic market.

Companies are already changing business strategy in response to technology advances and demographic shifts. New trade policies should be incorporated into these strategy shifts. For example, businesses must examine how to offset future tariff impact alongside other considerations like automation and proximity to customers. What do your customers want? Look through their perspective to find the answer, for example, sell at a higher price, modify the product, or shift your supply chain.  In a more protectionist world, US and Chinese companies will likely pursue different and parallel strategies in the growth markets of Asia, Africa and South America, including M&A opportunities.

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Midterm sanctions

Sanctions

The Trump administration has relied heavily on sanctions, both broad embargoes as well as narrowly-targeted ones, to achieve its foreign policy objectives. These interests range from securing the release of an American pastor detained in Turkey to applying maximum economic pressure on Iran in the interest of US national security.

Congress has also applied its own pressure on the administration. Last year, facing veto-proof majorities in both the House and the Senate, President Trump signed CAATSA into law, which requires that Congress review and approve any Presidential decision to lift certain existing Russia-related sanctions. In addition, Congress may seek to impose additional sanctions on Russia as well as target select Saudi Arabian officials with human rights-related sanctions.

What’s at stake?

In 2018, sanctions primarily targeted five nations: Iran, North Korea, Turkey, Venezuela and Russia. Even narrowly-targeted US sanctions can worsen the troubles of crisis-ridden economies, as in the case of Venezuela.  In addition, there are ramifications for the global economy.  This past summer, capital markets reacted adversely to the news of sanctions on two Turkish government officials. The Turkish lira dropped precipitously, prompting investors to reevaluate exposure to emerging markets more broadly.

President Trump has reinstated all sanctions on Iran that were removed as part of the 2015 nuclear deal. Global markets have been pricing in expectations of US sanctions on Iran’s oil exports that took effect this week. The timing coincides with strained US relations with another major oil supplier, Saudi Arabia, over the murder of a Washington Post journalist in its Istanbul consulate. If OPEC does not fill the gap created by reduced Iranian -- and Venezuelan -- oil supplies, there are concerns that oil prices would rise, triggering inflation and economic slowdown.  

Expect regulations and sanctions to evolve; this is a time for strong internal controls, and their independent testing, to ensure ongoing compliance.

What to watch?
Democrats could push for tougher sanctions on Russia and more forceful action against Saudi Arabia.  Additional action on Russia is possible through bills such as DASKA and DETER. A split Congress is more likely to impose targeted sanctions on select Saudi Arabian officials. Comprehensive sanctions against Saudi Arabia could be more challenging given many members of Congress and the Administration view the country as a partner in the broad Iran containment strategy. While immediately following the midterms, Democrats’ main focus may be on domestic issues, geopolitical events have the potential to thrust sanctions into the spotlight. As we get closer to the 2020 presidential election, Democratic Party front runners may also start taking more differentiated positions on sanctions as part of their foreign policy platforms.

What should you do?
The stakes are high for companies: violations can result in losing the ability to operate their business, financial penalties and reputational risk. Markets, too, can react disproportionately, as they did when largely symbolic were imposed on Turkey.

Companies must re-evaluate their global footprint by taking into account the complex array of US sanctions, customs compliance, and export controls regulations as well as evolving local watch-lists. Start by identifying your risk, including high-risk products and services. Scrutinize direct and indirect exposure to sanctions’ targets globally, and pay particular attention to supply chains and third-party relationships. Expect regulations and sanctions to evolve; this is a time for strong internal controls, and their independent testing, to ensure ongoing compliance. These controls include adopting a global policy standard, a screening procedure, and a centralized team that is responsible for implementing these measures throughout the organization. Simultaneously, develop breach reporting procedures to speed up company responses to incidents to help minimize  and protect the company brand.

Expect regulations and sanctions to evolve; this is a time for strong internal controls, and their independent testing, to ensure ongoing compliance.

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Midterm privacy

Privacy

The ground is shifting beneath Big Tech. California’s passage of the landmark California Consumer Privacy Act (CCPA) in late June is spurring action toward a single US framework for data privacy. Last month John Thune (R-SD), one of the highest-ranking Republican Senators, called on Congress to take the lead in legislating data privacy. Meanwhile, House Democratic Leader Nancy Pelosi (D-CA) charged a Silicon Valley representative with the task of crafting an Internet Bill of Rights, a set of principles to protect consumer privacy among other tech-related concerns. The message is clear: lawmakers and consumers will not settle for self-regulation by the industry. The new Congress will likely try to hammer out new rules on privacy, an area of potential bipartisan consensus.

What’s at stake?

Businesses with global supply chains and customers are adapting their data-management strategies to new data privacy laws across jurisdictions. Although US lawmakers are now actively seeking to boost privacy protections, agreement on an omnibus privacy legislation is still some ways off. To be sure, Republicans and Democrats broadly agree on the importance of setting privacy rules. But their scope -- for example, online only or extending to all customer data -- is still far from settled.

In both parties, there are legislators who favor letting states assert their privacy priorities. But others in Congress are paying closer attention to Big Tech’s need for a federal privacy law to harmonize or preempt divergent state laws.

Expect more states to deliberate on privacy measures in 2019; Democratic trifectas in Illinois and New York could accelerate this trend. A patchwork of state privacy laws across the US will create a compliance labyrinth. Even the CCPA’s final shape is unclear as challenges and amendments are likely between now and January 2020.

All of this is fueling urgency in the industry and in Congress to establish national guidelines. Apple CEO Tim Cook has set out his vision for a comprehensive federal privacy law. Others too are floating proposals to shape regulation centrally. Simultaneously, companies are racing to comply with not only domestic but also global privacy laws. According to a recent PwC Survey, only half of US businesses say they will be able to meet the California consumer privacy law deadline. Companies that are compliant with the EU’s General Data Protection Regulation (GDPR) privacy law, which became enforceable in May, could be ahead of the curve.

Companies must identify and address gaps relative to CCPA and GDPR requirements, establish privacy controls, and put in place a monitoring mechanism for ongoing compliance.

What to watch?
A split Congress will step up government oversight of privacy issues. Republicans who see an anti-conservative bias in Big Tech platforms could seek to address that concern as the condition for supporting federal privacy legislation. Senator Roger Wicker (R-MS), likely new chair of the Senate Commerce Committee, has already expressed the need for a unified US privacy framework in the wake of CCPA and GDPR.

Democrats will try to put their stamp on privacy by stressing the protection of consumer data as a paramount concern. Democrats who are expected to chair key committees in the House include: Rep. Frank Pallone (D-NJ) on the Energy and Commerce Committee, Rep. Jerry Nadler (D-NY) on the Judiciary Ccommittee (D-CA), and Rep. Maxine Waters (D-CA) on the financial services committee. Mistrust of Big Tech is now a bipartisan issue, but comprehensive legislation will require significant concessions on both sides.

What should you do?
Immediately, companies must identify and address gaps relative to CCPA and GDPR requirements, establish privacy controls, and put in place a monitoring mechanism for ongoing compliance.

Now is the time to engage lawmakers across global jurisdictions to try to harmonize rules and advocate for consistency. At the same time, to avoid a complex patchwork of regulations, companies must start working with a diverse set of stakeholders in states to collaborate on data privacy standards and legislation.  

Lawmakers are determined to catch up with the pace of change in the tech industry, and new technologies like facial recognition and micro-targeting will only add to their sense of urgency. CCPA and GDPR are already pushing organizations toward greater transparency about how data is collected, shared, and used data. To promote a flexible and resilient regulatory system companies should provide policymakers and public with insight on how they are setting and adhering to the highest standards that balance public good with objectives like innovation and market expansion.   

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Policy health

Health

The Democrats’ midterm wins likely will slow, but not stop, the Republicans’ pursuit of their healthcare agenda, which has focused on recasting the role of the federal government in the US health industry. Without overwhelming majorities that would grant veto and filibuster power, Democratic lawmakers will have little room to pursue their own agenda, which includes shoring up the Affordable Care Act (ACA), strengthening Medicare and Medicaid, expanding consumer protections and using the federal government to provide relief for consumers struggling with healthcare spending.

The Democratic success in the midterm elections likely means Republican lawmakers will not undertake a second attempt in the next two years to try to repeal and replace as much of the ACA as possible through a single piece of legislation. Yet President Donald Trump and his administration likely will continue to utilize regulatory agencies in an attempt to transform Medicaid, roll back industry regulations, address drug pricing and streamline reviews of medical products. All of these changes can be made without congressional input. Their efforts may be slowed, however, as Democratic lawmakers take control of key committees and wield oversight power.

Democrats will also control more gubernatorial seats after the midterms. Unlike Republican states, Democratic-run states are less likely to pursue Medicaid work requirement programs or embrace ACA-sidestepping health coverage. Instead, they are more likely to try to buttress the ACA, passing their own individual mandate penalties, formulating reinsurance programs to dampen ACA premium increases and funding advertising to encourage constituents to enroll for coverage. These states also are more likely to adopt legislation calling for greater transparency in drug price increases.

What's at stake?
Americans are increasingly accustomed to the benefits awarded by the ACA, especially protections involving pre-existing conditions. The Democratic victories signal a tilt, if only slight, back toward an expansion of benefits facilitated by the federal government and its resources, and away from a deregulated approach in which consumers have more health coverage choices but fewer protections.

Over the next two years, healthcare companies will likely see a higher premium placed on transparency, which will extend beyond prices for goods and services to corralling new coverage practices. Political changes in Washington, DC, will likely give Democrats more influence over the health policy agenda, but fundamental business issues of how to slow rising costs, create better consumer experiences and implement new technologies will likely remain perennial industry issues. In 2017, national health spending was projected to have grown 4.6 percent, reaching almost $3.5 trillion, according to an analysis by the CMS Office of the Actuary. By 2026, national health spending is projected to top $5.7 trillion.

After two years, the Trump administration’s approach to the health industry is relatively clear and predictable. Providers and payers can expect that more of their fates will rest with state lawmakers and regulators. Providers, especially in states that embrace administration policies, can expect the number of underinsured and uninsured patients to swell modestly. Providers also can likely expect the administration to continue to embrace value-based care models, including mandatory ones. Meanwhile, pharmaceutical and life sciences companies can expect the FDA’s review process to become more efficient and that the agency will likely continue to seek ways to work more closely with industry.

The ACA
In regaining power in Congress for the first time since 2014, Democrats say they will focus on about a dozen goals, including lowering prescription drug prices, supporting teachers, addressing corruption and money in politics, rethinking public and affordable housing and checking corporate monopolies. Democratic lawmakers also will try to strengthen the ACA. Healthcare providers stand to benefit from successful efforts to bolster individual and group markets, even as device and pharmaceutical manufacturers could find themselves more at risk for scrutiny as attempts to control rising healthcare costs focus increasingly on drug prices.

Still, lacking filibuster- and veto-proof majorities in both chambers, Democratic lawmakers will have a hard time gaining traction for their priorities without Republican votes. Some issues do enjoy bipartisan support, including addressing the opioid crisis with additional federal funding, facilitating medication-assisted treatment and allowing federal reimbursement to flow to more facilities.

Democrats also will have a greater say in the federal budget. One priority for them will be to include more resources to shore up the ACA individual markets. This can take the form of restoring funding for programs that connect beneficiaries to ACA navigators or pushing for restoration of ACA cost-sharing reduction payments to insurers.

The administration has successfully reshaped parts of the ACA. On Jan. 1, the ACA individual mandate penalty will be reduced to $0 as a result of the Tax Cuts and Jobs Act of 2017. More than a dozen Republican attorneys general, several Republican governors and a handful of citizen plaintiffs are using the reduction of the penalty in a lawsuit filed this year, Texas v. USA, arguing that the reduction renders the ACA unconstitutional. CMS has withdrawn some federal funding support for ACA advertising and navigators and cut the enrollment period in half.

The administration also stopped reimbursing insurers for reducing cost-sharing for some low-income ACA customers, a requirement under the ACA. Several agencies have finalized rules allowing expanded sales of health plans that can sidestep some ACA consumer protections. There remains some bipartisan support for delays of some ACA-related taxes and fees, including excise taxes on high-cost employer-sponsored health plans, also known as the “Cadillac tax,” and on nonretail medical devices.

Federal Agencies
Democrats will gain more oversight authority, allowing them to hold hearings on the administration’s actions and subpoena agency leaders. These actions may hinder and slow the agencies’ work. Democrats likely will question CMS as it considers additional Section 1115 Medicaid work requirement waiver applications. Hearings could potentially run parallel to legal proceedings in Kentucky and Arkansas challenging the legality of the waivers.

Democratic control of Congress likely will have a modest impact on the FDA, as it enjoys broad bipartisan support on many issues. The most recent two legislative vehicles for passage of FDA reform, the FDA Reauthorization Act of 2017 and the 21st Century Cures Act of 2016, received votes from lawmakers of both parties.

Drugs
FDA approvals of new and generic drugs are at, or near, record levels, reflecting the agency’s efforts to address drug prices by improving competition, according to an analysis by HRI. Under President Trump, the agency has released fewer significant regulations than under President Barack Obama during the same time period, yet the agency has been prolific in issuing guidance documents and plans.

The White House is supporting disclosure of drug prices in direct-to-consumer advertising. And while CMS is still not directly negotiating drug prices in the Medicare program, they are introducing tools that provide more negotiating leverage for private plans. It rescinded the prohibition on “step therapy” in Medicare Advantage Part B and also released guidance in August that will allow indication-based formulary design in Part D starting in 2020. In the days before the election, the administration proposed a pilot program that would tie provider reimbursements for administering some Medicare Part B drugs to prices paid for those products overseas.

Bipartisan support for addressing the opioid crisis will increase patient access to abuse treatment facilities, including some mental health centers that have typically been prohibited from treatment. It may also leave opioid manufacturers and distributors facing steeper oversight around delivery and administration of their products.

The outcome of the midterm elections sets the stage for the continued battle over the role of the federal government in an industry that is integral to the lives of every American, and increasingly, to the health of millions around the globe.

What should you do?
Despite a divided federal government and diverging state healthcare policies, the next two years likely will be more predictable for the industry than the previous two. In the US health industry, opportunity lies in working to lower the number of uninsured patients, control nondiscretionary healthcare spending and improve health outcomes. Some progress has been made. Millions more Americans are insured compared to a decade ago. The industry is moving toward value-based care. Medical innovations continue to improve the lives of millions.

The outcome of the midterm elections sets the stage for the continued battle over the role of the federal government in an industry that is integral to the lives of every American, and increasingly, to the health of millions around the globe. In November, more Americans voted for change, but the next two years may be more of a seamless transition from the previous two.

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Policy Tax

Tax

The results of the 2018 midterm elections will have a significant impact on the direction of tax legislation over the next two years. It remains uncertain whether President Trump and a divided Congress can reach agreements on more significant tax legislation, given differences between the two parties on how much tax should be paid by upper-income individuals and many other tax issues. Still, there is the potential for divided government to reach agreement on select tax proposals, including technical corrections or other limited changes to the 2017 tax reform act.  

Before the new 116th Congress is sworn into office on January 3, 2019, the current Congress will return next week for the start of a ‘lame-duck’ session. Congress must act on legislation to fund several departments and agencies, including the Treasury Department and the IRS, beyond December 7, when the current  temporary spending measure expires. Congress also could act on a limited number of other issues, including consideration of ‘technical corrections’ to the 2017 tax reform act and proposals to extend certain expired tax provisions.

What's at stake?

The historic US tax reforms enacted in late 2017 contained key elements important for stronger economic growth, including individual tax cuts, a globally competitive corporate tax rate with incentives for capital investment, and a movement toward a territorial system of international taxation, accompanied by the unlocking of foreign cash with a mandatory deemed repatriation of unrepatriated foreign profits. The 2017 legislation provided a net $1.5 trillion tax cut over the 2018-2027 budget period.

Rising federal budget deficits may return as a factor in consideration of any significant tax legislation and other issues, including annual appropriation bills for defense and non-defense programs and proposals to address the long-term sustainability of federal programs such as Social Security, Medicare, and Medicaid. The federal government’s annual budget deficit was $779 billion, or 3.9% of GDP, at the end of FY 2018. The Congressional Budget Office (CBO) projects that the deficit for current FY 2019 will be approximately $1 trillion, or 4.6% of GDP. By FY 2028, the deficit is forecast to rise to $1.5 trillion, or 5.1% of GDP. The CBO budget forecasts are based on current law; e.g., they assume that 2017 tax reform individual tax cuts will sunset as scheduled at the end of 2025 and that the current spending caps are not exceeded as they have been for the past several years.

Meanwhile, the prospects for significant tax legislation, such as ‘tax reform 2.0’ proposals, in the new 116th Congress are expected to be limited as both parties seek to position themselves to compete in 2020 for control of the White House and Congress. Substantive changes to the 2017 tax reform act may be left to future Congresses and the winner of the 2020 presidential election.

The prospects for significant tax legislation, such as tax reform 2.0 proposals, in the new 116th Congress are expected to be limited. Still there is the potential for divided government to reach agreement on select tax proposals.

What to watch?
House Democratic Leader Nancy Pelosi (D-CA) is expected to return as Speaker of the House. While some Democratic House candidates indicated that they will not support Rep. Pelosi for speaker, currently no House Democrat has committed to run against her. Rep. Pelosi has indicated that House Democrats would reinstate a ‘pay-as-you-go-rule’ requiring that both new tax cuts and mandatory spending proposals be offset by increased revenues or spending reductions.

The House Ways and Means Committee is expected to be chaired in the next Congress by Rep. Richard Neal (D-MA), who was first elected to the House in 1988 and became the Ranking Democrat on the committee in 2017. Rep. Neal has long focused on legislative efforts to promote retirement income security and ensure adequate dedicated funding for federal infrastructure programs, which are issues within the jurisdiction of the Ways and Means Committee.

A critical factor in Democrats gaining a majority in the House was the ability of Democratic candidates to win suburban districts that have been traditionally held by Republicans. With Democrats in a narrow House majority, these new incoming House Democrats and ‘New Democratic Coalition’ members—House Democrats who describe themselves as ‘committed to ‘pro-economic growth, pro-innovation and and fiscally responsible policies’—could play a pivotal role in providing votes needed to pass legislation on a range of tax issues.

Federal budget deficits may return as a political issue
To address the overall sustainability of the 2017 tax reform act with its various sunset provisions, the next Congress could continue to consider possible technical corrections to the 2017 legislation, beyond those enacted by the current Congress during its lame-duck session. It also is possible that Congress could consider some changes to the 2017 act that go beyond a technical correction if there is bipartisan agreement as to the necessity of doing so.

Debate over the temporary suspension of the federal debt limit which will expire on March 1, 2019 could focus attention on projected budget deficits and both tax and spending policies.

Targeted tax relief
It seems doubtful that the next Congress and President Trump will reach an agreement on significant new tax cuts that are deficit-neutral, but policymakers in both parties may again set aside deficit concerns to enact targeted tax relief. House Democrats previously have supported expanding the earned income tax credit and providing additional tax incentives for retirement and education savings.

Digital services taxes
Proposals by the European Commission and European Union member countries, as well as other countries around the world, to impose digital services taxes will be the focus of continued bipartisan opposition from US policymakers. Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) recently sent a letter to EC and EU officials urging them to abandon proposals that are considered to be discriminatory against US companies and lead to double taxation. Treasury Secretary Steven Mnuchin also recently reaffirmed the Administration’s opposition to such proposals.

Retirement savings and IRS reform
House and Senate tax committee leaders have expressed an interest in addressing IRS reform legislation and retirement savings proposals during the lame-duck session if bipartisan agreements can be reached on certain pending proposals:

  • In April, the House passed 12 separate IRS reform measures, including a bill (H.R. 5444) that includes provisions to establish an independent IRS Appeals office and to modify IRS authority to issue designated summons. Finance Committee Chairman Hatch and Ranking Member Wyden have introduced a bipartisan IRS reform bill (S. 3246), which was followed by a bipartisan IRS reform bill (S. 3278) from Finance Committee members Rob Portman (R-OH) and Ben Cardin (D-MD).
  • In September, the House passed  a bill (H.R. 6757) to promote retirement savings and address issues related to certain employer-provided retirement savings programs, including multiemployer and pooled employer plans.  Senate Finance Committee Chairman Hatch and Ranking Member Wyden in March introduced similar legislation (S. 2526) to promote retirement savings and address multi-employer pension plan issues.  

Issues that remain unresolved during the lame-duck session would be left to the next Congress. Unenacted bills would have to be re-introduced, possibly with changes in language.  

What should you do?
The results of the 2018 midterm elections will have a significant impact on the direction of tax legislation over the next two years. The prospects for significant tax legislation, such as ‘tax reform 2.0’ proposals, in the new 116th Congress are expected to be limited as both parties seek to position themselves to compete in 2020 for control of the White House and Congress.  

Still, there is the potential for divided government to reach agreement on select tax proposals, including technical corrections or other limited changes to the 2017 tax reform act.  It remains uncertain whether President Trump and a divided Congress can reach agreements on more significant tax legislation, given differences between the two parties on how much tax should be paid by upper-income individuals and many other tax issues.

Stakeholders will want to be involved during the lame-duck session as the current Congress possibly considers select tax issues and House and Senate members begin to organize for the 116th Congress.

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Policy workforce

Workforce

For the first time since the Department of Labor began tracking job openings in 2000, there are more unfilled jobs in the US than job seekers. That gap is expected to continue to grow, due in part to the current workforce lacking the skills to succeed in the modern economy.

The challenge is especially acute in certain sectors. For example, US manufacturing is facing a significant challenge over the next decade. US tax and trade policy favors expansion in US parts production and materials sourcing. At the same time, manufacturers must plan for advanced manufacturing technologies and a growing number of eligible-age retirees—that group alone means being prepared to replace up to 20% of their company’s current workforce in the next five years, according to PwC benchmarks.

Meanwhile, debates on immigration are putting employers on watch for implications to their people and workforce plans. And trade negotiations may increasingly put a spotlight on trade-displaced workers across the economy.

What’s at stake?
There’s a dire need to modernize US workforce development and occupational skills training. The problem is raising concerns that the US could fall behind other countries on business growth, job creation and innovation. 

While the economy is steaming ahead, wages are not. Rising prices and inflation have all but erased Americans’ wage growth. And any significant wage increases have generally gone to higher-paid employees.

Public scrutiny over fair pay is increasing, too. A new SEC rule that took effect in 2018 requires publicly traded companies to disclose the ratio of CEO-to-employee pay, raising public calls from some for executive salary caps, equal pay for equal work, and minimum wage increases.

Public scrutiny over wage inequality is unlikely to abate. There’s one comparatively simple approach you can take on this: adopt fair-pay principles.

What to watch?
With Democrats winning control of the House, much depends on the incoming chair of the House Committee on Education and the Workforce, who is likely to be Representative Bobby Scott (D-VA). His priorities include addressing inequity in education and making education more affordable through expanded access to federal student loans, providing states with grants to help community college students graduate debt-free, and reigning in for-profit colleges.

Keep watch for a push for new tax credits in any infrastructure package from the party, as part of a larger agenda to boost training and wage growth, though no one proposal currently has the full support of the party. Democrats may push this agenda in return for supporting the new United States-Mexico-Canada Agreement, asking for new spending on reskilling of trade-affected workers.

A Republican-controlled Senate is more likely to support private sector and states’ efforts on workforce development than to enact any new policies at the federal level. At the state level, steps are already in place to change how states apply for federal support for state and local career and technical education (CTE). Expect states to submit four-year accountability plans for CTE spending by 2020, based on comprehensive needs assessments required by the new law.

Through executive order, the administration has established the National Council for the American Worker, a body tasked with developing a national strategy for training workers to keep up with the specific and evolving needs of companies.

Top advisors to the president have indicated they’re assessing employment-based visas, too, part of the administration’s efforts to champion merit-based immigration policies. Currently, the Department of Homeland Security (DHS) is working on revising a number of requirements for H1-B visas. These changes include potential restrictions on the number of years a person can hold an H1-B visa and requirements that employers pay appropriate wages to H1-B visa holders.

With a split Congress, any type of US immigration reform faces challenging odds, as does any change to the minimum wage at the federal level.

What should you do?
Public scrutiny over wage inequality is unlikely to abate. There’s one comparatively simple approach you can take on this: adopt fair-pay principles. By fair pay principles, we mean a set of policies to guide your compensation and total rewards package for workers. These may include paying employees a fair and liveable wage, offering equal pay for equal work regardless of race or gender, providing equal opportunity regardless of race or gender, and being transparent with employees and the public about compensation and benefits policies.  

Keep up with eligibility requirements for employment-based visas as part of your employee mobility program. Expect more intense scrutiny of H1-B visa applications and look ahead to what proposed changes may mean for your workforce plan.

On workforce development, watch states’ efforts to create apprenticeships and occupational training and look for opportunities to support or collaborate with those efforts. You can benefit from these expanded programs to draw new talent into company ranks and to help your existing workforce reskill and upskill.

If you’ve been planning to relocate operations, consider workforce planning in your location strategy. Any state’s workforce development record should align with your needs to access talent pools with the diversity, skills, and experiences you need to be successful. Other factors, like quality education and affordability, can create a positive employee experience and should also be part of your location strategy.

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Midterm financial services

Financial Services

The confetti has been swept up and the midterm election results are in. A “blue wave” of sorts has helped the Democrats take the House, while the Republicans have retained control in the Senate. But in the financial services industry, the changes—as dramatic as they may appear at first—may not be as significant as the changes the Trump administration has already set in motion.

Since January 2017, the administration has led a steady, incremental easing of financial services regulation. For example, Congress modified the post-crisis Dodd-Frank law this year by raising the threshold at which a bank is considered a systemically important financial institution (SIFI) from US$50 billion to $250 billion. The administration shook up the Consumer Financial Protection Bureau (CFPB), replacing its director, cutting its budget, and easing restrictions on payday lenders and other firms. In October, the Federal Reserve proposed revisions that include reduced liquidity rules for banks with assets between $100 billion and $250 billion.

What’s at stake?
The midterm elections will probably alter the tone more than the substance of how Congress approaches financial services regulation. The split Congress, and slim majorities in both chambers, likely mean gridlock will persist. The obstacles to legislative change are big. Even if Democrats had won both the House and Senate, they would still have faced the likelihood of presidential veto. For their part, Republicans have already achieved most of the politically feasible deregulation on their legislative priority list since the 2016 election. However, they still likely lack the votes necessary to achieve significant change, such as a further rollback of Dodd-Frank

We expect Republicans and Democrats in the coming months to focus on defining financial services policies that rally support leading up to the 2020 election. They will likely resort to “soft power” tools, including introducing “messaging” bills with symbolic value but little prospect of passage. Using the “bully pulpit,” they will seek to rally voters and donors during oversight hearings and in speeches to their colleagues and constituents. They will probably count on reliable, high-impact talking points such as the need to cut red tape or to strengthen consumer protection.

A few bipartisan achievements by Congress are possible. Republicans and Democrats may agree on safeguards to data privacy in finance and other sectors. Bills introduced in the current session reflect mounting public concern that personal data has become a weakly protected commodity. Lawmakers could also find common ground in updating the Community Reinvestment Act, a 1977 law aimed at spurring lending to low- and moderate-income neighborhoods.

In our view, federal agencies will be the main drivers of financial services policy. These include the Fed, CFPB, Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC). Aside from the CFPB, the agencies have leaders appointed by President Trump who have steadily reduced the regulatory burden on financial institutions. For example, the Financial Stability Oversight Council (FSOC) removed the designation of “systemically important” for nonbanks. It is unlikely to apply that designation again in the foreseeable future. The Fed and other regulators plan to clarify proposed changes to the Volcker Rule, which restricts how banks trade on their own accounts. They will also probably flex their authority by tightening protections against fraud and money laundering. 

Many agency leaders, as well as those not yet nominated, could remain in their posts well beyond 2020 even if President Trump is not reelected. For example, the president nominated six of the seven Fed Governors, and a full term is 14 years.

The midterm elections will probably alter the tone more than the substance of how Congress approaches financial services regulation.

What to watch for?
A few key personalities will leave the scene after this election, though many familiar faces will remain.

While on the campaign trail, House Democrats criticized the relaxation of financial regulation and pledged to shift the policy focus from Wall Street to Main Street. Yet, they confront challenging odds of passing signature legislation, in the face of a Republican-controlled Senate and presidential veto.

Instead, we expect that Democrats will use oversight hearings by the House Financial Services Committee as a platform for pushing a consumer-protection agenda. Maxine Waters (D-CA), slated to become the panel’s chairman, will likely seek to curb White House influence over the CFPB by calling on acting Director Mick Mulvaney to reverse budget cuts and step up supervision. We anticipate that Committee Democrats will focus on the responsibility of banks to their communities, with questions to Comptroller Joseph Otting, FDIC Chair Jelena McWilliams, and Fed Vice Chair for Supervision Randal Quarles about ongoing efforts to change the Community Reinvestment Act. Finally, the committee will probably call for testimony by executives at financial institutions that disregard consumer interests or fail to avert major data breaches.

Before the new Congress convenes in January, the current Senate may also try to pass the JOBS Act 3.0, which aims to curtail the rules and costs that impede start-ups and initial public offerings. The bill has already passed the House. By passing the bill quickly, the Senate would avoid reconciliation with a Democrat-led House that would reject major Republican changes to the bill.

On the Senate Banking Committee, there will be new faces on both sides of the aisle, including replacements for some prominent Democrats such as Heidi Heitkamp (D-ND) and Joe Donnelly (D-IN) who lost their bids for reelection.

What should you do?
Financial institutions should prepare for a massive churn in the congressional roll. More than 60 Representatives chose not to run for reelection. Add to that the candidates who defeated House and Senate incumbents, and more than 100 new lawmakers will take office in January. Many of them have never worked in federal government. During such a formative time, you should seize on the opportunity to describe your firm’s interests and create strong relationships.

You should also study the top issues in the districts of lawmakers who will lead the Senate Banking and House Financial Services committees. The leaders will, to a degree, tailor their agendas to the needs of their constituents. Keep those needs in mind when crafting how you will describe your firm’s interests to committee leadership.

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Contact us

David Sapin
Principal, Risk & Regulatory Leader, PwC US
Tel: +1 (202) 756 1737
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Ken Kuykendall
Tax Services Leader, PwC US
Tel: +1 (202) 346 5160
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Tom Snyder
Partner, Risk Assurance, Internal Audit, PwC US
Tel: +1 (646) 471 4068
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Sean Joyce
Cybersecurity and Privacy Leader, PwC US
Tel: +1 (703) 918 3528
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