Tuesday’s election results changed the outlook for some key tax and spending proposals. Here are 5 takeaways from the midterm vote:
1. The GOP’s “tax cuts 2.0” effort is dead. The Republican plan to make the individual tax cuts permanent is likely going nowhere in a Democratic-controlled House. More broadly, any large-scale changes to the tax code seem unlikely. “We expect no major tax legislation to become law under a divided Congress,” Goldman Sachs said in a note Wednesday.
2. But smaller changes may be in play. If President Trump and Democrats in Congress figure out a way to work together — and that’s a big if — there’s a chance that tax cuts aimed at working- and middle-class households could move forward. At his post-election press conference Wednesday, Trump said he was open to a bipartisan deal that involved a tradeoff between reducing taxes for some taxpayers and raising rates on others, presumably corporations and/or the wealthy. Other areas of potential cooperation include fixing glitches in the GOP tax law and extending expiring tax provisions, though much will depend on how high a price Democrats demand for playing along.
3. Spending will likely continue at higher levels. Congress passed a big increase in spending for fiscal years 2018 and 2019, and neither party has shown much interest in going back to the cap levels imposed by the Budget Control Act of 2011. For fiscal 2020, which begins in the fall of 2019, Democrats will likely fight any reduction in non-defense discretionary spending and Republicans will push to maintain current defense spending levels (despite Trump’s refence to a 5 percent cut). Gridlock usually means more of the same, so the current spending deal will serve as the most likely template for the next budget.
4. But a shutdown remains a possibility. Lawmakers face a December 7 deadline to keep some parts of the government open, and a fight over funding for Trump’s desired border wall with Mexico seems likely. The lame duck Congress may simply push the shutdown deadline a few weeks into 2019 with another continuing resolution, leaving it for the new Congress to resolve. Even if lawmakers can get avoid or get past that funding showdown, they’ll have to deal with the fiscal 2020 budget before long. “Under a divided Congress, there will be a substantial risk of shutdown at the next spending deadline in 2019, though whether it happens will depend on the political environment at that point,” Goldman said. The debt limit will also have to be raised in 2019, providing another potential battle. Goldman noted that the most difficult debt limit negotiations occurred in 2011 and 2013, when Congress was divided.
5. Voters sent messages with some state and local tax measures. Washington state voters appear to have rejected what would have been the first carbon tax in the country. Other state and local tax votes include Californians sticking with their gas tax and San Francisco residents approving a new tax on businesses to raise money for the homeless.
