Intro: Welcome to the EY DC Dynamics podcast series, where we discuss the latest legislative and regulatory insights covering tax and health care policy and what to expect in Washington.
Ray Beeman: This is DC Dynamics, a podcast about what’s coming up in US tax policy, with a look to the past as our guide. And I’m your host, Ray Beeman from Washington Council EY. The past is really our guide for this topic, the upcoming midterm elections. And that is because the same political scenarios always seem to resurface in Washington. Just as important as tax policy itself is the people making it, and especially which party is in power. And that is, of course, at stake on November 8th. The outcome will influence the lame duck session and chart the course for tax policy and any number of issues for 2023 and 2024. We’ve seen some pretty major tax provisions enacted in the current Democratic controlled Congress, especially in the Inflation Reduction Act. And we could see a substantial year in tax package addressing some outstanding items. Regaining control of the House continues to seem likely for Republicans, who only need a net gain of five seats to win control, which some political observers see as about a 70% chance of happening. The Senate is, as even Republican leader Mitch McConnell conceded, a jump ball with a Senate that could stay 5050 or, as Senator Joe Manchin predicted, moved to 5149 in favor of Democrats. And it could just as easily move to 5149 with Republicans in control. Nothing is ever predictable in Washington, and this election is especially unpredictable given the number of issues influencing voters and the number of toss up races. Joining me to help sort it all out are Adam Francis, who works with me here at Washington Council and was an aide to a former senior Ways and Means Republican, and Christy Kennedy, who is with EY’s Office of Public Policy and was an aide to a senior Democrat on the Senate Banking Committee. So Adam, we have consistently heard the odds are in favor of Republicans taking control of the House. And that sentiment is just getting stronger as the election approaches. What are we looking at here?
Adam: Thanks, Ray. As is often the case in Washington, it really comes down to the numbers. In the House, there are about 30 Democratic seats rated by the Cook Political Report as toss up or lean to likely to flip. And that’s compared to only about a dozen toss up or potential flip seats for Republicans. As you mentioned, they only need a net gain of five seats. So the numbers are clearly in Republicans’ favor.
The Presidents’ Party typically loses House seats in the first midterm of the presidency. We saw President Trump lost 40 House seats in 2018, and President Obama lost more than 60 in 2010. There are also seven Democratic seats being defended in districts that President Trump won in 2020 in this election cycle. And even just winning most of them would hand control of the House to Republicans. We are also seeing Republicans improve in the generic ballot with voters. So, an uphill climb for Democrats for sure.
Ray: All right. So, Christy, what issues are we seeing take prominence in this election?
Christy: Yeah Ray, you know, there are multiple issues, but really the economy is at the top of the list by a long shot as we head into this home stretch. We’ve seen other issues of great interest, including women’s health issues following the Supreme Court’s Dobbs decision that Democrats are highlighting, as well as social issues like crime. But Republicans will make this election all about the state of the economy and rising inflation, and, where helpful, attempt to tie Democratic candidates to President Biden. That has its perils, as the president’s approval rating has been below 40% in some recent polls.
Democrats, on the other hand, will tout their passage of legislation to address economic issues. And again, we’re hopeful, attempt to tie Republican candidates to President Trump, who, as Adam mentioned, won in some of the districts Democrats are trying to defend.
Ray: So, people often describe the House and Senate as just two different animals. You two would know as well as anyone. Are we seeing that play out in this election cycle?
Christy: Absolutely. The Senate races are really harder to generalize, and the fact that there are so few that are truly competitive really puts an outsized focus on them. There are only four races that are rated as toss ups, and of course, they’re very high profile. So the first in Nevada, Catherine Cortez Masto, is running close to even with Adam Laxalt, who comes from a prominent political family. Obviously, Nevada has a big tourism industry and can be really impacted by the economic health of the nation and the hit to the industry during the pandemic. On the other hand, Laxalt is being challenged on the abortion access issues after siding pretty strongly with the Dobbs decision. In Georgia you’ve got Reverend Warnock defending his seat because his previous election was for just the remainder of Republican Senator Johnny Isaksons’ term. Warnock is running against former NFL star Herschel Walker, and it’s probably among the highest profile of the Senate elections.
In Pennsylvania, you have Doctor Oz, the TV personality who has faced accusations of being out of touch with average citizens. And he’s running against John Fetterman, who has faced questions about his health. Doctor Oz has narrowed a gap between them in recent weeks.
In Wisconsin, Ron Johnson is actually pairing pretty well against Mandela Barnes. Senator Johnson is the only Senate Republican defending a seat in a state won by President Biden in 2020.
And then finally, not a toss-up, but the Senate race in Ohio between Representative Tim Ryan and Hillbilly Elegy author J.D. Vance, is attracting a lot of attention. Vance has had less money in the race and less exposure than Ryan, in a race that is close despite President Trump winning Ohio by eight percentage points in 2020.
Nevada and Ohio are actually the closest Senate races with just a two percentage point spread or less between the candidates.
Ray: Now, there obviously is no presidential election this year, but turnout in the midterms was up in 2018 and that will be key again this year in 2022. Some states have some big gubernatorial races that could draw voters to the polls. So how important is that, Adam?
Adam: Well, Ray, the main point that I make on the Senate is that the dynamics are different in every state. In some states, there are gubernatorial races at the top of the ticket, but an incumbent governor isn’t the whole story. Look at Ohio and New Hampshire, for example. Both states have popular Republican incumbent governors running for reelection, and they’re both up big, with Sununu and New Hampshire pulling ahead in the high teens, and DeWine in Ohio, a former senator himself, in most polls up by over 20 points. But Hassan is ahead in New Hampshire, and the Ohio Senate race is a toss-up despite, as Christy mentioned, former President Trump winning there decisively in 2020. Senator Pason benefited from Governor Sununu opting not to enter the Senate race, and she instead faces Don Bolduc, who, having questioned the validity of the 2020 presidential election until recently, is less mainstream. Sununu is one of a handful of Republican governors who opted to stay out of Senate races. He is also part of a political legacy in the state as the son of former Governor John Sununu, who was a household name nationally as the chief of staff to the first President Bush, and brother of former Senator John Sununu.
Pennsylvania has opened gubernatorial and Senate seats, with a Democrat ahead in the governor’s race and the Senate race a toss-up. New Hampshire voters are perhaps more culturally prone to ticket splitting, so the governors’ race is not as impactful on the Senate in New Hampshire, whereas maybe Ohio Republicans are more likely to vote the slate and ultimately push Vance over the top.
Ray: So last time around, after Election Day 2020, control of the Senate wasn’t known until the Georgia runoff elections for the two Senate seats on January 5, 2021, which secured control for the Democrats. Could that happen again?
Adam: It could. Georgia is tight across the board with an incumbent Republican governor, and Democrats have developed a very strong ground game in the state. And in the Senate race, there is a third-party candidate opening up the possibility that neither Warnock nor Walker get above 50% in the general election, which would set up a December 6th runoff and leave control of the Senate unknown until then.
Ray: Now, obviously there’s a lot of uncertainty around the elections and what effect they will have on the remainder of 2022, in terms of a lame duck session, to take care of unfinished business for the current Congress, which at the very least includes an extension of government funding beyond December 16th and into 2023. Questions include how much spending Republicans are willing to support in the lame duck. And on the tax side at least, how forcefully will Democrats push to have the child tax credit addressed as part of any tax deal that addresses business provisions. Christy, how do you see the lame duck session shaping up?
Christy: Well, we know there will be a government funding bill with at least some add-ons, and disaster relief for Florida is probably toward the top of that list. Senate Appropriations Chairman Leahy and Ranking Member Shelby are both retiring after long Senate careers. So there’s a fair amount of pressure to do a proper omnibus lasting through the remainder of the fiscal year, rather than just another CR into 2023.
As you mentioned, expiring tax provisions are typically taken up at the end of the calendar year. Many provisions were extended in the IRA, including the outstanding slate of energy provisions. But several will need to be renewed or risk expiring. From the Tax Cuts and Jobs Act, there is the Section 174 five-year amortization for R&D expenditures, and the Section 163J, 30% of adjusted taxable income limitation on the deduction of interest expense calculation without depreciation and amortization. Both of which took hold this year. And bonus depreciation, which begins phasing down after next year.
Ray: Right. And we’ve also seen candidates like Blake Masters, the Republican challenger to Senator Mark Kelly in Arizona, suggest that he will use a government shutdown to try to force President Biden to shut the southern border. And Republican Representative Chip Roy of Texas has called for using a government shutdown to defund priorities Republicans don’t agree with and force the Senate and President Biden to accept House authored spending legislation. Adam, what is the tax landscape in 2023 if we do have divided government?
Adam: Well, Ray, Republican Leader McCarthy has said unwinding the Inflation Reduction Acts’ $80 billion increase in IRS enforcement funding would be the first bill on tap if Republicans are in control of the House next year. There could also be some attention on opposition to the Corporate Alternative Minimum Tax and labor standards for energy tax provisions included in the IRA.
Republicans are also expected to put up bills addressing permanency of the Tax Cuts and Jobs Act provisions for individuals and passthroughs that are expiring in 2025, which is a priority for the party.
The three members vying for the Ways and Means Chairmanship in the next Congress, if control of the House flips to Republicans, Representatives Vern Buchanan of Florida, Jason Smith of Missouri, and Adrian Smith of Nebraska, have all made TCJA permanency a priority. Accelerating that debate could also put political pressure on President Biden to sign a permanency bill or be portrayed as supporting tax increases in the 2024 election.
Some Democratic votes would be needed, even if Republicans win control of the Senate, because 60 votes would be needed unless they use budget reconciliation, which is possible if one party controls both chambers of Congress, but not the White House. We haven’t seen that in over 20 years but recall that Republicans in control of Congress sent welfare reform reconciliation bills to President Clinton in the 90s.
Ray: So Republicans are looking to accelerate that fiscal cliff debate three years ahead of the TCJA expirations. Who knows what can happen so early in the debate. But as that deadline approaches, the so-called political force of attraction means that we expect the cliff will get even bigger to include various corporate tax issues that have not achieved political consensus, such as international tax, the corporate tax rate, and now the corporate AMT. Speaking of 2024, there’s been some attention recently on the tough re-election map facing Democrats.
Christy: Yeah, that’s right Ray. There are 21 Democrats up for re-election, along with two independents who caucus with Democrats, compared to only ten Republican seats up in 2024. There are some that could be very competitive for Democrats, including Kyrsten Sinema in Arizona, Jon Tester in Montana and Tammy Baldwin in Wisconsin.
Ray: Alright. And even though 2024 seems far away, the campaigning will begin on November 9th. So a lot of political intrigue leading up to November 8th, probably some ups and downs in Congress. And then we will do it all over again in two years. And we will also have a presidential election to talk about.
Now one programming note, we are planning to do another DC Dynamics podcast episode after the elections to talk about how things actually turned out. I think we’ll know the House election outcome pretty quickly. The Senate maybe not. But anyway, many thanks to my terrific EY colleagues, Adam Francis and Christy Kennedy for joining me today. And that’s all for now. Until next time, I’m Ray Beeman, and this has been DC Dynamics.
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