Now that election results are clear, here’s what we can expect in the next Congress:
- The impact of the 2022 midterm elections will be felt primarily in US fiscal policy, as the US House of Representatives – narrowly under Republican control – will seek to restrain federal spending though budget negotiations with the Biden White House and a Senate under Democrat control.
- Divided government will not result in a complete legislative deadlock over the next two years. It is likely, however, that only legislation on a few limited subjects – and with strong bipartisan support – will make it to the President’s desk.
- With few opportunities to pass their legislative priorities – and limited ability to impact federal agency action – House Republicans will turn to congressional investigations of the Biden Administration as well as certain corporate practices, such as the role of ESG in investing and large tech platforms’ speech moderation policies.
- Notwithstanding a divided Congress, the Biden Administration’s regulatory agenda will remain largely unaffected and federal agencies will move to finalize rulemakings initiated during the President’s first two years in office.
In this Legal Update, Andrew Olmem, Jonathan Becker, and Warren Payne discuss the impacts of the US 2022 midterm elections on US economic policy, congressional investigations, and federal regulatory agencies.
Budget Negotiations and Debt Ceiling Brinksmanship
Both parties over the past few years have passed significant pieces of legislation using the budget reconciliation process, a parliamentary procedure that overrides the Senate’s filibuster rules for certain tax and spending bills. Reconciliation allows passage of legislation by simple majority vote. Republicans passed the Tax Cut and Jobs Act in 2017 via reconciliation (when they controlled both the House and Senate), and in the current Congress, Democrats relied on reconciliation to pass the American Rescue Plan in 2021 and the Inflation Reduction Act earlier this year.
In a divided Congress, reconciliation will be off the table, which is why we will likely not see any significant tax or spending/stimulus bills. Congress and the White House will still need to negotiate a new budget agreement at some point next year. It is expected that House Republicans will seek to reduce federal spending, while Congressional Democrats and the Biden White House work to protect the spending priorities they enacted over the last two years. If not addressed during the upcoming lame duck session, Congress will also need to pass legislation to increase the federal debt limit, which the Treasury Department expects to reach around the fourth quarter of 2023.
If Congress fails to increase the debt limit in the upcoming lame duck session, some Congressional Republicans will, in 2023, likely use consideration of the debt limit as a means to secure concessions from President Biden on federal spending. This approach was adopted in 2011 when negotiations between House Republicans and the Obama White House stalemated and the US narrowly avoided defaulting on some of its debt.
Even if Congress avoids the brinksmanship of 2011, we can expect House Republicans, Senate Democrats, and the Biden White House to engage in intense negotiations next year over the federal budget and debt limit. This could very well disrupt financial markets and will need to be watched carefully.
It is also important to note that Congress is a very reactive institution. Unexpected economic or national security events can have great impact on legislation a Congress ultimately passes. With the US economy potentially in recession next year, it is possible that the legislative priorities of Congress (as well as the White House) could shift toward combating an economic downturn.
It is always hard for a divided Congress to pass legislation; and the upcoming 118th Congress will be no different. However, divided government has been the norm and historically has not prevented Congress from moving bipartisan bills that can secure votes needed for passage. While the upcoming Congress will likely be less active than the one preceding it, there will still be a few areas of agreement where we can expect bipartisan consensus and passed legislation.
- Crypto Regulation: In light of recent developments in digital asset markets, the upcoming Congress may well look to regulate digital assets. Patrick McHenry, likely the next Chair of the House Financial Services Committee (HFSC), has said he would like to pass legislation establishing a regulatory regime for digital assets. Earlier in 2022, he worked with current HFSC Chair, Maxine Waters, and the Biden Treasury Department to produce draft legislation to do just that. In addition, the Chair and Ranking Member of the Senate Agriculture Committee, Senators Debbie Stabenow and John Boozman, introduced the Digital Commodity Consumer Protection Act. That legislation would grant the Commodity Futures Trading Commission authority over digital asset spot markets. These bills could serve as the basis for new bipartisan legislation in the 118th Congress.
- China: The 118th Congress may also find agreement on ways to counter the increasing economic and military challenge to the US from China. This issue generates strong bipartisan consensus. The current Congress is already considering legislation to establish an outward bound investment review process (referred to as outward-bound CFIUS) for certain investments in China, or joint venture investments with Chinese companies.
- Reauthorizations and “Must-Pass” Bills: Congress will also need to consider reauthorizing several programs set to expire in 2023. The Farm Bill and the Federal Aviation Administration (FAA) Reauthorization Act are among the big-ticket reauthorizations Congress will need to address in 2023. With only a small number of legislative vehicles moving their way through Congress next year, we will likely see many members use these two bills as a way to push legislative goals. For example, we could see the Farm Bill, which reauthorizes certain Commodities Futures Trading Commission (CFTC) programs, include some provisions to regulate crypto markets. Likewise, the FAA reauthorization bill may include provisions to curb the use of Chinese-made drones in the US. Congress will also likely pass a National Defense Authorization Act (NDAA) – always a “must-pass” bill – in late 2023. And finally, if not addressed in the upcoming lame duck session, Congress will likely devote some of 2023 to a series of tax and trade provisions that expire this year.
- Tax and Trade Extenders: There are a number of lapsed tax and trade policies some of which are viewed as more partisan than others. There will be some effort to restore these lapsed provisions in the lame duck session. If that is not accomplished, Congress will face pressure to address them early in 2023. On the tax side, these include lapsed R&D provisions, taxpayer unfriendly changes to interest limitation and expensing provisions, and the lapsed expanded child tax credit. On the trade side, these include the lapsed Miscellaneous Tariff Bill program, the Generalized System of Preferences, and the Trade Adjustment Assistance program.
Because Democrats will retain control of the US Senate, House Republicans will have limited opportunities to promote their agenda through legislation. As a result, they are preparing to employ congressional investigations as an alternative way to advance their policy goals. These investigations will focus on oversight of the Biden Administration, which could include investigations into alleged politicization of the Department of Justice and spending authorized by the Build Back Better Act and Inflation Reduction Act, among other things. House Republicans have also signaled a willingness to investigate certain industries and corporate practices. In particular, they may shine a congressional spotlight on financial services firms that employ ESG investing to determine whether these policies unfairly target the US energy sector, violate US antitrust laws, or adversely impact investors and consumers. House Republicans may also seek to investigate the large tech platforms regarding their content moderation policies and alleged viewpoint discrimination. Additionally, China-related business activities that trigger national security or humanitarian concerns could well be the subject of congressional inquiry.
With a White House and Senate controlled by Democrats, it will be hard for House Republicans to influence federal agency action and rulemaking though legislation. This is not to say that House Republicans will have no role overseeing the federal agencies. House Republicans can, of course, use their committee gavels to hold hearings on policies of concern and call agency officials to testify on administrative actions. This interaction can influence regulatory decisions but it will likely not interfere with the Biden Administration’s efforts to finalize most of its regulatory proposals before the 2024 election, including the SEC’s climate-risk disclosure rule, federal banking agencies bank merger guidelines, and FTC and DOJ merger guidelines, among others.