Today marks the beginning of the last week of the 2016 presidential election cycle. About 26 million people have already voted through early voting. As we have seen over the last 18 months, policy positions and personal character issues have both played an important role in persuading voters who they should support when they cast their votes.

Candidates up and down the ballot are now making their closing arguments, and there will be a flurry of new headlines and other activity as campaigns focus on their “get out the vote” operations.

As our last three alerts (Part I, Part II, and Part III) have noted, the presidential and congressional elections, regardless of their outcomes, will result in significant changes. Both of these will have serious repercussions for the policymaking agenda, which will affect industries in the United States and abroad.

As we prepare for next week’s election, allow us to delve into several key policy areas whose paths will be materially impacted by the outcome of the election: the financial services agenda, the chances of comprehensive tax reform, and the likely agenda for the upcoming lame duck congressional session.

Please join us for a webinar on November 10 as we break down the presidential and congressional election results and offer our analysis on what it means for you and your industry.

The Future of Financial Services Policymaking

While financial services is not the primary agenda item for either campaign, the populist rhetoric on the campaign trail can be expected to translate into an active financial services policymaking agenda. Both candidates and their parties’ platforms have expressed interest, through statements or policy proposals, in acting on housing policy, retail banking sales policies, systemic risk posed by large institutions, and the role of technology in financial markets.

The new administration will bring a change in leadership among financial services policymakers and regulatory agencies, affecting the regulation of financial services companies, financial markets, and financial products. Over the next few months, we expect to see new appointments to the Treasury Department, National Economic Council, Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

When the 115th Congress begins its work, there is one other certainty: the Senate Banking Committee will be under new leadership. The current chairman, Senator Richard Shelby (R-AL), faces a term-limit restriction and will relinquish his gavel at the conclusion of the current Congress. If Republicans retain control of the Senate, we expect Senator Mike Crapo (R-ID) to assume the chairmanship. If Democrats have a majority of the seats, it is likely that Senator Sherrod Brown (D-OH) will lead the panel.

We are watching to see how a possible Chairman Brown might navigate a financial services agenda, with he and other members of the progressive wing (including Banking Committee member Senator Elizabeth Warren (D-MA)) seeking a more aggressive stance towards the industry. Senator Crapo, Senator Brown’s counterpart on the Republican side, has shown a willingness to reach across the aisle, including his work with then-Chairman Tim Johnson (D-SD) on government-sponsored enterprises reform legislation, referred to frequently as the Johnson-Crapo proposal. Additionally, should former Senator Evan Bayh (D-IN) win his bid to rejoin the Senate, he may seek to return to the Senate Banking Committee, on which he previously served. We are watching to see how his election and committee assignments play out.

At both the SEC and the CFTC there remain two open Commissioner seats pending Senate confirmation of the nominees. These seats could be filled during the lame duck session of Congress. If the Senate does not take up these nominations, the next president may choose to nominate his or her own candidates. Recent media reports indicate that current SEC Chair Mary Jo White will remain at the SEC until her successor is nominated and confirmed, while CFTC Chairman Timothy Massad’s term runs through April 2017. If that is the case, and if the Senate does not act on the current SEC or CFTC commissioner nominations, the next president might have the chance to put forth three or more candidates to fill those seats in each agency.

Prospects for Legislative Tax Reform

Despite widespread interest in diving into comprehensive tax reform next year, whether and how it happens will depend on the results of the election. A new president and potential change of control in at least one house of Congress means the tax reform discussions could look very different under various configurations of Congress and the White House. But, there is general agreement – on both sides of the aisle – that the tax code needs to be reviewed and revised.

House Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) have indicated that tax reform will be a top priority, presuming the House remains under Republican control. As part of Speaker Ryan’s broader 2016 policy agenda, House Republicans released their tax reform blueprint in June, which sets forth the approach the House GOP intends to take on tax reform. (Click here for prior coverage.) This blueprint includes lowering the corporate tax rate to 20% and the rate on pass-through business income to 25%. Investments would be entitled to 100% expensing, but interest expense would be limited. Individual rates would be reduced to three tax brackets of 12%, 25%, and 33% with a 50% deduction for investment income. Many corporate and individual tax preferences would be eliminated.

The Ways and Means Committee is tasked with drafting legislative text to implement this blueprint to begin the tax reform debate in the House. While there has been speculation that there could be challenges to Republican House leaders from inside their caucus, we expect that Chairman Brady and the Ways and Means Committee will continue to deliberate on tax reform measures.

A change in control in the Senate will bring a shift in approach to tax reform. It could set the stage for a political scenario reminiscent of the last serious tax reform debate in 1986: one party occupying the White House and the Senate and the other party with a House majority.

Senator Charles Schumer (D-NY) has indicated tax reform will be a priority in a Democratic Senate. He has expressed specific support for a narrow package that would fund new infrastructure investments through a one-time repatriation tax. With a series of discussion drafts this year, current Senate Finance Ranking Member Ron Wyden (D-OR) has been laying the groundwork for tax reform if he becomes chairman next year. So far, Senator Wyden has released draft legislation for areas including cost recovery, derivatives, retirement, and middle-income housing. It can be anticipated that these drafts will be the starting point for tax reform discussions under his chairmanship, should the Senate flip.

On the other hand, current Senate Finance Committee Chairman Orrin Hatch (R-UT) has been actively working on a corporate integration legislative proposal, which could serve as a key element of any tax reform discussions if he remains chairman. In 2015, the Senate Finance Committee released detailed working group reports on various tax issues, and these reports are likely to be a source of additional recommendations for tax reform, especially if Senator Hatch remains chair. (For prior coverage of these reports, click here.)

At the presidential level, the tax proposals put forth by the candidates suggest very different priorities for tax reform. While Republican nominee Donald Trump has suggested proposals that are consistent with the House Republican blueprint, in the past, he also has expressed support for repealing deferral, the current tax regime under which multinational corporations’ income earned outside of the United States is not taxed until it is brought back to the United States. It is unclear if he still supports repeal, a position that puts him at odds with general Republican approaches to international tax reform.

Democratic nominee Hillary Clinton has released limited details on corporate tax proposals, but she has indicated that she would use business tax reform to raise revenue to fund new investment in infrastructure. She also has proposed some measures for small businesses such as immediate expensing of $1 million in new investments. On the individual side, she has called for raising revenue through increased taxes on the wealthy. For example, she advocated for a 4% “fair share” surtax on incomes over $5 million and imposing the so-called “Buffett Rule” that would establish a minimum tax rate for individuals.

As the preceding analysis demonstrates, while there is significant enthusiasm for tax reform on Capitol Hill, the shape of reform and even if, when, and how it happens depends heavily on next week’s election. There seems to be reason for optimism in 2017, though who is in charge in Congress and in the White House will significantly impact the details.

Looking Forward: the Lame Duck Congress

The 114th Congress faces a daunting list of issues to address before the end of the legislative session. This list would be substantial for an entire congressional session let alone a truncated period lasting less than two months. For that reason alone, we expect many of these issues to remain unresolved and left to the 115th Congress for resolution.

At the top of the list, legislators must address the funding of the government through the appropriations process to avoid a government shutdown. Additionally, there are numerous lawmakers focused on a range of other issues including: a pending Supreme Court nomination, the Trans-Pacific Partnership Trade Agreement, emergency aid for flood-stricken communities, assistance for Flint, Michigan, the National Defense Authorization Act, energy policy conference report, tax extenders, and foreign policy.

There are some similarities with recent lame duck sessions that may be useful guideposts:

  • In 2012, like this year, Congress convened after the election having failed to pass appropriations bills. At the end of the session, no regular appropriations bills were passed and the government was funded by a continuing resolution until March 2013. Congress did, however, pass the American Taxpayer Relief Act, which extended some of the Bush Administration’s expiring tax cuts.
  • In 2014, Congress passed a $1.1 trillion spending bill during the lame duck, which led to future debate among congressional Republicans about government spending. The Congress also renewed certain expiring tax breaks.

As we head into the 2016 lame duck, this Congress faces similar challenges as it relates to funding the federal government through fiscal year 2016. There will certainly be debate among legislators on whether to try and pass one comprehensive omnibus spending package or, to push through a series of “minibus” appropriations bills that each take up specific industries or issue areas, or to fund some agencies through appropriations legislation while leaving others to be funded through a continuing resolution.

While congressional leadership has sought to finalize a federal budget through regular legislative order, like in 2012, there remains the possibility that Congress will adopt a continuing resolution and leave these difficult questions to the 115th Congress. In such a case, that would introduce discussions about a “spending cliff” – early in the next administration, in March 2017. That debate might tee up resolution of tax and spending issues (as well as the politically difficult concept of raising the debt limit) for a new compromise that would have to be reached in order to avoid both a government shutdown and a default on the federal debt. There also is the possibility that all or parts of the appropriations bills will be extended to the end of the fiscal year.

Furthermore, the outcome of the November 8 election will affect the lame duck agenda. If Secretary Clinton is elected president, that may factor into the Republican-led Senate’s posture on certain votes, including the Supreme Court nomination of Judge Merrick Garland. This dynamic becomes even more protracted if Democrats take a majority of the Senate seats for the 115th Congress. If, however, Republicans maintain control of the Senate, then the Senate may be less inclined to confirm Judge Garland or approve any of the current administration’s remaining nominations. On the other hand, if Mr. Trump wins the election, Senate Republicans may decline to take up any of the Obama Administration’s initiatives, preferring instead to wait and work with President Trump in January, regardless of who controls the chamber.