Everything that passed (and didn’t) this year in Maryland’s General Assembly

The following legislative speed read comes by way of Dentons50 partner Manis, Canning–editorThe 2018 General Assembly Session came to a close at midnight on April 9. A total of 3,127 pieces of legislation were introduced – 1,269 originating in the Senate, 1,832 originating in the House, and 26 Joint Resolutions.  Of this number, the General Assembly passed 890 pieces of legislation.

Legislators focused on a number of important matters ranging from balancing the fiscal year 2019 budget, the impacts of federal tax reform, funding for K-12 education and school safety, expanding medical cannabis licenses, prescription drug pricing, and initiatives to prevent gun violence to name a few.

Again this session, a number of bills were passed and presented to the Governor at the end of March to provide sufficient time for the General Assembly to override any potential vetoes. Of the bills presented, the Governor vetoed two billswhich were overridden by the General Assembly, let several take effect without his signature, and signed others. Legislation referred to as the “Rape Survivor Family Protection Act” had broad support and was passed and signed by the Governor in mid-February.

With the early presentment of bills, two bill signings were held prior to the end of session on February 13 and April 5. The traditional bill signing was held the day after session ended on April 10.  Three additional bill signings will be held.

Below is a summary of some of the major issues and final outcomes from the 2018 General Assembly Session. A more detailed overview of significant legislation that passed or failed can be found in the Department of Legislative Services 90 Day Report.

Fiscal Year 2019 Budget

The fiscal year 2019 budget as enacted by the General Assembly (Senate Bill 185) totals $44.6 billion, a 2.3% increase from fiscal year 2018. The general fund budget, the portion supported by tax related revenues such as the income tax, sales tax, and state lottery, accounts for 40.1% of the total budget or $17.9 billion. The general fund budget is subject to volatility as its revenue sources are directly affected by the economy. The term structural deficit or shortfall often refers to the gap between general fund expenditures and general fund revenues.  Prior to the beginning of the 2018 session, a general fund shortfall of $298 million was projected.  Senate Bill 187 – the Budget Reconciliation and Financing Act of 2018 accompanied the budget to address the structural deficit and fund certain budget priorities.

Federal tax changes enacted at the end of December 2017 resulted in additional general fund revenue of almost $550 million. However, legislation passed to credit $200 million of this additional income tax revenue to a special fund to be used in the future to implement recommendations of the Commission on Innovation and Excellence in Education (Kirwan Commission) and additional legislation passed to provide limited tax relief to those who would be affected by the recent federal tax law changes.

The budget as enacted by the General Assembly leaves a $106.9 million general fund balance at the end of fiscal year 2019 and preserves $882.5 million in the State’s Rainy Day fund. State support for public education and libraries is approximately $6.6 billion and total state aid for primary and secondary education will increase by approximately $170.6 million. In addition to the $200 million being set aside to implement future recommendations of the Kirwan Commission, the General Assembly restricted $11.4 million to implement preliminary recommendations of the Commission and provided a total of $40.6 million in operating and capital funds to improve safety and security in Maryland’s public schools. Other legislative funding initiatives included providing an additional $33.6 million in aid for local governments, and $57.4 million for providers of health care services to vulnerable populations.  Additional information on the fiscal year 2019 budget as enacted by the General Assembly can be found in the Budget and State Aid section of the Department of Legislative Services (DLS) 90 Day Report.

Individual and Corporate Income tax

State Income Tax Modifications Resulting From Federal Tax Changes

As mentioned above, legislation passed to provide limited tax relief to those who would be affected by the recent federal tax law changes. Senate Bill 318/House Bill 570 will increase the standard deduction for State income tax purposes beginning in tax year 2018 and then index the standard deduction based on the annual change in the cost of living beginning in tax year 2019.  Senate Bill 184/House Bill 365, both bills passed, clarify the number of personal exemptions a taxpayer can deduct for State income tax purposes.

Single Sales Factor Apportionment

After being proposed a few years ago by a Commission examining Maryland’s business climate and tax structure, Senate Bill 1090/House Bill 1794 passed to phase-in a single e sales factor formula to be used to calculate  a corporation’s corporate income tax. This will be phased-in over a five-year time frame beginning in tax year 2018. By tax year 2022, all corporations, with limited exceptions, must allocate to the State the part of the corporation’s Maryland modified income derived from or attributed to being carried on in the State using an apportionment formula in which Maryland modified income is multiplied by 100% of the sales factor.  Under current law, unless engaged primarily in manufacturing activities, corporations must use a three factor formula that incorporates property, payroll, and a double-weighted sales factor.

Firearms/Gun Violence

Recent mass shootings at schools and concert venues, and gun violence against oneself or others, led to the introduction and passage of the several bills below to prohibit access to rapid fire trigger activators (bump stocks) and limit access to firearms under certain circumstances.

Bump Stocks

Senate Bill 707/House Bill 888 prohibits a person (1) from transporting a device defined as a “rapid fire trigger activator” into the State or (2) manufacturing, possessing, selling, offering to sell, transferring, purchasing, or receiving a rapid fire trigger activator. A bump stock device was used in the mass shooting in Las Vegas where a gunman opened fire into a crowd during a concert.

Domestic Violence – Transfer/Surrender of Firearm

House Bill 1646 establishes a process by which an individual convicted or who pleads guilty of a crime involving domestic violence must transfer his or her firearms to law enforcement or a federally licensed firearms dealer. The bill requires the State’s Attorney to provide notice relating to prohibitions on possession of a firearm to a defendant, defendant’s counsel, and the court if the defendant is charged with a disqualifying crime and the facts support a finding that the crime was domestically related. On conviction or a plea of guilty, a court must order the defendant to transfer, either personally or through a representative, all regulated firearms, rifles, and shotguns as specified in the bill. The transfer must occur within two business days after conviction and written proof of the transfer is to be provided to the individual or representative. The court is authorized to issue a search warrant if there is probable cause to believe the individual did not surrender all firearms, rifles, or shotguns.

Extreme Risk Protective Order

House Bill 1302 establishes a process by which certain medical professionals, law enforcement, and family or household members may seek an interim, temporary, or final court order to prevent a respondent from possessing or purchasing a firearm or ammunition for a limited time frame if the respondent is found to be in danger of causing personal injury to himself or others.   A petition for an extreme risk protective order can be filed with the District Court, or a District Court Commissioner if the Court is closed. The bill also establishes a process for the surrender of the firearms and ammunition and a process for the return.        

Business and Regulatory Issues

Breweries and Alcohol Regulation

In response to legislation that passed during the 2017 session (Ch. 813, Acts of 2017) making changes to laws regulating Class 5 breweries, several bills were introduced to either expand or limit the privileges of breweries in the state. Ch. 813, which applies to small craft breweries and a Guinness brewery that recently opened in Baltimore County, (1) increased the number of barrels a brewery may sell for on-premises consumption; (2) authorized a brewery to contract to brew and bottle beer with and on behalf of other classes of breweries; and (3) changed the hours of operation for sales and serving privileges of an on-site consumption permit.

Legislation introduced this session, all of which failed, would have modified these changes. House Bill 1052 would have partially repealed the bill from last year to just apply to the Guinness brewery. House Bill 518, the Reform on Tap Act of 2018, the product of a workgroup led by the State Comptroller, would have significantly expanded the production limits, onsite sale and sampling, and distribution for any type of brewery. Other bills, Senate Bill 839/House Bill 1015 would have removed limits on the number barrels for a brewery that obtained a limited wholesaler’s license; and several other bills (Senate Bill 1044/House Bill 1176Senate Bill 1017/House Bill 1148Senate Bill 609, and Senate Bill 406) would have expanded Class 5 brewery privileges related to the onsite sampling and sale of beer.

However, legislation did passHouse Bill 1316, to establish a 21-member Task Force to Study State Alcohol Regulation. The Task Force, whose report with findings and recommendations is due to the General Assembly by December 1, 2018, is charged with examining whether the Comptroller’s Office is the most appropriate agency to ensure the safety and welfare of Maryland residents, or whether those tasks should be assigned to another State agency or to one created specifically to carry out those tasks.

Internet Privacy and Net Neutrality

In response to Congress approving and the President signing a resolution nullifying Federal Communications Commission rules on internet privacy and net neutrality, House Bill 1654 was introduced to establish requirements at the State level.  This bill, which did not pass, would have established privacy requirements for (1) the use, disclosure, sale, or provision of consumer data; (2) the protection of consumer data; and (3) enforcement provisions by the Consumer Protection Division in the Office of the Attorney General. The bill also would have prohibited the use of state funds to procure services from an ISP that engaged in certain activities.

Medical Cannabis Licensing

Following the failure of legislation during the 2017 General Assembly session and increasing support from the Legislative Black Caucus, legislation was again introduced this session to enhance diversity in the medical cannabis industry.  House Bill 2, which passed, (1) requires outreach to encourage industry participation by small, minority, and women owned businesses; (2) the promulgation of regulations based on a recent disparity study; (3) raises the cap on the number of licensed growers up to 22, subject to certain reductions; (4) requires the issuance of licenses to two growers that were initially ranked, but not awarded; (5) establishes a cap of up to 28 processors, subject to certain reductions; (6) establishes a compassionate care fund to provide free or discounted medical cannabis to individuals enrolled in Medicaid or the Veterans Administration Health Care System; and (7) makes changes to the membership of the Natalie M. LaPrade Medical Cannabis Commission.

Paid Sick and Safe Leave

During the 2017 session, the General Assembly passed, House Bill 1, Maryland Healthy Working Families Act, to require an employer with 15 or more employees to have a sick and safe leave policy under which an employee earns at least 1 hour of paid sick and safe leave, at the same rate as the employee normally earns, for every 30 hours an employee works. An employer with 14 or fewer employees must have a sick and safe leave policy that provides an employee with at least unpaid sick and safe leave based on the same conditions. The Governor vetoed this bill and the General Assembly overrode the veto during the 2018 session. The bill became law in February 2018.

To assist small businesses with providing paid sick and safe leave as specified in the bill, the General Assembly passed Senate Bill 134 to provide a refundable credit against the State income tax for a small business that employs 14 or fewer employees.  The tax credit applies to an employee who earns 250% or less of the annual federal poverty guidelines for a single person household.

Drug Cost Review Commission

Legislation to address concerns with the cost of prescription drugs was introduced again this session. As introduced, Senate Bill 1023/House Bill 1194 would have (1) established a Commission to review prescription drug costs and value with the goal of setting price controls for the drug supply system; (2) mandated a 30-day advance price notification of wholesale acquisition cost (WAC) for branded, generic sole, source off-patent drugs in certain circumstances; and (3) required the disclosure of pricing information.  As amended by the House, the bill established a Drug Cost Commission to determine how to make prescription drugs more affordable after reviewing, evaluating, and assessing the pharmaceutical distribution and payment system, among other requirements.  Although the bill was heard and voted favorable in the Senate Finance Committee on the last day of the session, the bill was not reported out of Committee and failed on Sine Die.

Health Insurance

Affordable Care Act and Market Stabilization

In response to concerns that the repeal of the federal mandate for health coverage under the Affordable Care Act (ACA) would cause premium rates to increase significantly, result in healthier individuals discontinuing benefits, and jeopardize the viability of the individual market, several bills were introduced and passed to stabilize the market. This was a bi-partisan effort and all bills have already been signed into law by the Governor.

Senate Bill 1267/House Bill 1795 (Chs. 7 and 6, Acts of 2018) requires the Maryland Health Benefit Exchange, in consultation with the Insurance Commissioner, to submit a State Innovation Waiver application for a Federal Section 1332 waiver to establish a program for reinsurance and seek federal pass-through funding. The program authorized under this bill must provide reinsurance to carriers that offer individual health benefit plans and meet the requirements of the waiver. The program must also mitigate the effects of high-risk individuals on the rates in the individual market.

Senate Bill 387/House Bill 1782 (Chs. 38 and 37, Acts of 2018), a companion bill, identifies revenue streams to fund the reinsurance program authorized under SB1267/HB1795, upon receipt of the 1332 waiver. This bill establishes a 2.75% state health insurance provider fee assessment on health insurers, including nonprofit health service plans, health maintenance organizations, managed care organizations, and others  for calendar year 2019. This fee is in place of the fee that would have been assessed under the ACA, but was temporarily suspended for that year due to federal action. This bill also establishes limitations for association health plans, as well as short term limited duration insurance.

More specifics on each of these bills can be found by clicking on links above or in the Health and Human Services section of the DLS 90 Day Report.

Education

A broad range of legislation passed affecting funding levels for K-12 education and education policy.  An overview of all education policy and funding initiatives, including State Aid to Public Schools, Nonpublic Schools, and school construction, is summarized in the Education Section of DLS 90 Day Report.  A summary of several education policy and funding initiatives that passed are listed below.

Constitutional Amendment to Supplement State Funding for Education

Senate Bill 1122 proposes a constitutional amendment to be placed on the ballot for the 2018 general election to require after a four-year phase-in period, 100% of the gaming revenues dedicated to public education be used as supplemental funding.  If approved, general fund expenditures for education will increase by $125 million in fiscal 2020 and increase to $522 million in fiscal 2023.

Commission on Innovation and Excellence in Education (Kirwan Commission)

House Bill 1415 extends the deadline of the Commission and implements and mandates funding for several preliminary policy recommendations.  Policy initiatives include: (1) a comprehensive teacher recruitment and outreach program; (2) the Maryland Early Literacy Initiative; (3) the Learning in Extended Academic Programs (LEAP) grant program; (4) Public School Opportunities Enhancement Program; (5) the Teaching Fellows for Maryland scholarship program; and (6) the Career and Technology Education (CTE) Innovation grant program.

21st Century School Facilities Commission

House Bill 1783, as introduced, made several comprehensive changes to the school construction process as proposed by the 21st Century School Facilities Commission.  As amended and passed by the General Assembly, among other changes, the bill expands the membership and changes the name of the Interagency Commission (Committee) on School Construction (IAC) and transfers the authority to grant final approval for school construction projects from the Board of Public Works (composed of the Governor, Comptroller, and Treasurer) to the IAC.  This transfer of authority led the Governor to veto the bill, but the General Assembly overrode the veto during the 2018 session and the bill became law.

Healthy School Facility Fund

In response to a lack of heat and closures of Baltimore City schools due to extremely cold weather, Senate Bill 611 was introduced to establish the Healthy School Facility Fund within the IAC to provide grants for facility improvements. Priority for awarding is given to schools based on the severity of issues including air conditioning, heating, mold remediation, temperature regulation, plumbing, and windows. The Governor is required to appropriate $30 million to the fund in fiscal 2020 and 2021 and no jurisdiction may receive more than $15 million in a fiscal year.

Maryland Safe to Learn Act of 2018

Following recent school shootings in Maryland and other parts of the country, several pieces of legislation were introduced that took a comprehensive approach to ensuring Maryland’s schools are safe. These bills ranged from requiring threat assessment teams and school resource officers (SRO) located at all schools, to enhancing the security of school buildings and providing school safety drills. All of these bills were consolidated into one piece of legislation, Senate Bill 1265 – Maryland Safe to Learn Act of 2018. This bill, among other requirements  (1) establishes a School Safety Subcabinet; (2) requires the Maryland Center for School Safety to develop training, gather data, and review and comment on school safety plans; (3) requires school safety evaluations of all  public schools; (4) requires school resource officers to complete a specialized training; and (5) requires local school systems, working with local law enforcement, to identify which public schools have an SRO and for those schools without, the adequate law enforcement coverage that is provided to the school. This requirement applies to high schools for the 2018-2019 school year and to all public schools for the 2019-2020 school year. A total of $40.6 million is being provided in the fiscal 2019 budget to provide grants to local school systems and law enforcement agencies. Of this amount, $2.5 million will be used to staff the Maryland Center for School Safety. Beginning in fiscal 2020, the bill mandates $10 million in annual grants to assist with providing SRO/ law enforcement coverage.

A more detailed overview of the legislation listed above and other legislation that passed or failed during the 2018 General Assembly session can be found in the Department of Legislative Services 90 Day Report.

With Crossover Day behind it, Ga. Capitol enters final leg of legislative season

Governor Nathan Deal signed on Thursday a headline-grabbing proposal that would slash state income taxes while deep-sixing a lucrative tax exemption for homegrown Delta Air Lines.

The governor’s signature capped a tumultuous week at the Capitol, which dove headlong into a cultural debate on the Second Amendment after Delta discontinued a special discount program for NRA members in the days that followed a Florida school shooting.

The tax cut bill, which would reduce the state’s top income tax rate to 5.75 percent in fiscal year 2018 and then to 5.5 percent the year after, initially included the fuel exemption, but Senate leadership deleted the plank in a rebuke to Delta.

Deal has signaled he will still pursue a vehicle to secure the tax break for the airline, which ranks as the state’s single largest employer with some 33,000 workers across Georgia.

Elsewhere in the capitol …

With Thursday’s Crossover Day hangover behind it, the General Assembly enters now the final quarter of its 40-day legislative season staring down the imperative to address transit reform before the clock ticks to zero at the month’s end.

Both chambers advanced similar proposals that would mark the largest expansion of public transportation in Atlanta in more than four decades, allowing metro Atlanta’s 13 sprawling counties to raise hundreds of millions in sales taxes for new transit projects and creating a new regional transit governing agency to succeed MARTA. The House and Senate must now negotiate the differences in the two.

The House passed last week what’s been dubbed the “Netflix bill,” because it included a new tax on content streaming services, to encourage broadband deployment and access in rural communities. Despite the nickname, the tax on services like Netflix were dropped before passage.

Promises made, questions left unanswered by GOP tax plan

The Trump administration and Congressional Republican leaderships this week released their “Unified Framework for Fixing our Broken Tax Cod,” a nine-page manifesto birthed from months of closed-door meetings on tax reform by the so-called Big Six: Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady, and Senate Finance Committee Chairman Orrin Hatch.

The goal of the framework is to move the tax reform process forward, in particular to build support for a budget resolution that will permit the House and Senate to pass tax reform legislation by a simple majority vote.

With that goal in mind, the framework answers several important questions regarding tax reform, but it leaves far more either unanswered or with too brief or too vague of a description to evaluate.  Because it is an advocacy piece, the framework is light on details.  And, when it has details, they generally focus on the good news (i.e., taxpayer-favorable provisions that are being added or expanded) rather than the bad news (i.e., provisions being eliminated or reduced).   Further, in many cases, the framework uses guarded language or caveats when discussing politically sensitive areas.  For example, the framework “aims” to consolidate the tax rates for individuals, “envisions” changing inflation adjustments and repealing provisions to make the tax code simpler, and “contemplates” preventing wealthy individuals from avoiding the top personal tax rate.  Areas that are still unsettled or where further work is required are left to the Ways and Means Committee and Finance Committee (the “committees”) to work through and resolve.

What the Framework Says

Rates

Individuals

The framework “aims” to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%, although it warns ominously that “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” The framework also calls for use of a more accurate (i.e., less taxpayer-favorable) measure of inflation for purposes of indexing the tax brackets and other tax parameters.

Businesses

For corporations, the framework would reduce the top tax rate to 20%. It notes that “the committees also may consider methods to reduce the double taxation of corporate earnings,” leaving open the possibility of a corporate integration proposal.

For pass-through entities, the framework would “limit the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%.” Nonetheless, the framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate. ”

Deductions, Exclusions and Exemptions

Individuals

The framework would:

  • combine the existing standard deduction and the personal exemptions for taxpayer and spouse and increase it to $24,000 for married taxpayers filing jointly and $12,000 for single filers;
  • convert existing personal exemptions for dependents into an enhanced child tax credit or a non-refundable $500 credit for non-child dependents;
  • eliminate “most” itemized deductions, but “retain tax incentives for home mortgage interest and charitable contributions, and
  • retain “tax benefits that encourage work, higher education and retirement security,” although the committees are encouraged to simplify them “to improve their efficiency and effectiveness.”

Punted to the committees:

  • “work on additional measures to meaningfully reduce the tax burden on the middle-class;”
  • repeal of many of the “numerous” exemptions, deductions and credits for individuals that “riddle the tax code” in order to “make the system simpler and fairer;” and
  • the appropriate treatment of interest paid by non-corporate taxpayers.

Businesses

The framework:

  • would provide immediate expensing, for at least a five-year period, for all depreciable assets– other than structures–acquired after September 27, 2017.
  • states that the deduction for net interest expense incurred by C corporations will be partially limited.
  • specifically calls for the repeal of the section 199 manufacturing deduction, and states that “numerous other special exclusions and deductions will be repealed or restricted.” There are two explicit exceptions–the R&D tax credit and the low-income housing tax credit–although “the committees may decide to retain some other business credits to the extent budgetary limitations allow.”
  • would “modernize” the tax rules affecting specific industries “to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”

Repealed

The framework would repeal:

  • The individual alternative minimum tax (“AMT”);
  • the corporate AMT (or at least “aim to”); and
  • the estate tax and generation-skipping transfer tax.

International Tax Reform

The framework:

  • Calls for adoption of a new “territorial” tax system with a 100% exemption for dividends from foreign companies in which the US parent owns 10% or more of the shares. However, this dividend exemption comes at price: “to prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.”
  • Would impose a “deemed repatriation” tax on US multinationals with offshore earnings. Different rates would apply to earnings held in liquid and illiquid form, although neither the rates nor the period over which the payments must be made is specified.
  • States that the committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.

What the Framework Doesn’t Address

  • Effective dates (other than for expensing)
  • Phase-ins and transition rules
  • How the international tax rules would apply to individuals
  • How it plans to comply with the budget rules

Next Steps

The House and Senate have to agree on a budget resolution that provides for a tax reform package in line with the framework. Once that is agreed to, the Ways and Means Committee and Finance Committee can proceed to marking up tax reform legislation and filling in the blanks.

As Congress returns: Tax reform

Although the Trump administration and the Republican leaders in Congress desperately want to pivot to tax reform, the volume of actual “must do” legislation that must be considered in September will inevitably siphon time and attention from tax reform efforts.

Further, despite an August communications offensive on the tax reform issue, neither Congress nor the Administration have provided details fleshing out the principles and concepts on which they supposedly agree. Given that the countdown clock for enacting tax legislation before the 2018 election season begins in earnest is already ticking, if Congress and the administration want to enact tax legislation with only Republican votes, they will be increasingly pulled in the direction of tax cuts and temporary provisions rather than comprehensive tax reform and permanent changes.

A must-pass Fall for Congress

To say Congress has a full plate as it returned to work this week doesn’t do the plate justice.

The August recess was, at best, tempestuous, as divisions between President Donald Trump, his party and, in particular, his party’s leaders were laid bare in his Twitter feed.

Hurricane Harvey’s historic devastation, and cost to clean up and rebuild, is just now coming into focus. And as members of Congress were packing their bags to return to Washington, the president gave them six months to address another highly emotional issue: his planned phase-out of DACA, which protects immigrants who were brought into the United States as children.

And while the GOP’s Affordable Care Act repeal-and-replace efforts were stymied in June, the Senate HELP Committee picks up the ball and will begin hearings on stabilizing the Obamacare markets—while the president threatens to withhold market stabilization payments.

On the foreign policy front, North Korea’s nuclear missile program has prompted a powerful response from Secretary of Defense Jim Mattis, who in blunt language warned Kim Jong-un of total annihilation. Meanwhile, Venezuela teeters on the brink; ISIS, though facing setbacks, continues to fight; and, breaking with his campaign rhetoric, the president has decided to send more troops into Afghanistan.

Congress faces a list of must-pass bills. Here, Dentons’ Public Policy and Regulation Practice dives deep into the marquee issues awaiting the attention of Congress and the administration:

Border Adjustment Dropped from GOP Tax Plan

Bowing to the demands of major retailers, whose claims were buoyed by conservative activists like import-reliant Koch brothers, the White House and Republican Congressional leadership officially confirmed late last week in a joint statement what had long been rumored: a border adjustment tax will not be used as a pay-for in the tax reform program Republicans hope to pursue this fall.

In the joint statement, the so-called “Big 6” (Speaker Paul Ryan (R-WI), Chairman Kevin Brady (R-TX), Finance Committee Chairman Orrin Hatch (R-UT), Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn) stated: “While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.” In an interview yesterday, Chairman Brady said that he still thinks border adjustment is the best solution for keeping jobs in America, but that “… in order for us unify, it was important to set it aside for now.”

As the border adjustment tax proposal was estimated to raise between $1 trillion and $1.2 trillion in revenue that could be used to lower tax rates, law makers will have to identify alternative revenue sources if they wish to lower tax rates without increasing the deficit. Apart from abandoning a border adjustment tax, the joint statement did not address such key issues as the level at which tax rates should be set, whether businesses would continue to be able to deduct their interest expenses and how best to incentivize US companies from moving their operations overseas. Instead, the joint statement simply pledged Republican support for the principles of reducing rates, simplifying the tax code and using the tax system to improve economic growth.

The joint statement reveals that the parties’ expectation is for ” … legislation to move through the committees this fall, followed by consideration on the House and Senate floors.” While the joint statement authors express the hope that Congressional Democrats will join them in this effort, and suggest some openness to pursuing tax reform on a bipartisan basis unlike the just-failed Republican effort to repeal Obamacare, it should be noted that Republicans once again plan to use the reconciliation process in their pursuit of tax reform – a process that can have the effect of reducing the need for bipartisan cooperation. Moreover, given the very contentious course of dealing in recent years in the Ways & Means Committee and the Finance Committee, it does not yet seem that a foundation has been laid for bipartisan cooperation on tax reform issues.

Congress seeks elusive consensus before summer recess

Barring cancellation of a portion or all of the scheduled summer recess—an event not currently expected despite the requests of several Republican senators and House members, as well as conservative media personalities—the House, when it returns for legislative business on July 11, will be in session for only 13 days before leaving on July 28, not to return till September 5. The Senate returns a day earlier, on July 10, and is scheduled to be in session for 15 days before also leaving for summer recess on July 28 and returning on September 5.

Below is an overview of some of the matters that may receive Congressional consideration before the end of July and our assessment of their current prospects.

Health care reform legislation

Senate GOP leadership decided on June 27 to delay consideration of the Better Care Reconciliation Act (BCRA), their proposed legislation to repeal and replace Obamacare. After several GOP senators stated their opposition to the BCRA draft, Senate Majority Leader Mitch McConnell (R-KY) was short of the votes he needed to bring the bill to the Senate floor. He has now spent his 4th of July holiday on the very challenging task of threading the needle and making changes to the BCRA that can win the votes of 50 Republican Senators to bring such health care legislation to the Senate floor and pass it.

To do so, Leader McConnell must address the concerns of conservative Republican Senators who say that the current version of the BCRA does not repeal and replace enough of the Affordable Care Act. At the same time, Leader McConnell also must be responsive to those moderate Republican Senators who say, among other things, that the cuts to Medicaid under the bill ($772 billion) are far too severe.   In addition, the CBO score that the bill would result in an estimated 22 million additional uninsured persons by 2026 is an attention-grabbing headline that has stoked public opposition to the bill.

Leader McConnell wants to bring a revised repeal-and-replace bill to the floor as soon as possible after the July 4th recess   The Congressional Budget Office is currently reviewing legislative language sent by Leader McConnell and will score the fiscal impact of these potential changes to the BCRA bill. The Senate parliamentarian will also have to consider whether these proposed changes can properly be raised in a reconciliation bill. These factors are likely to push any roll call on a revised BCRA bill to the last half of July, either during the weeks of July 17 or July 24, rather than immediately after the July 4 recess.

It currently seems as if any overture that Leader McConnell makes to either the conservative or more moderate wings of his Conference in an effort to win votes for the bill threatens the willingness of the other wing to support it. The key open question is whether Leader McConnell, an extremely skilled legislative tactician and veteran horse trader, can craft a compromise that will attract enough votes from both conservative and moderate Republican Senators to get to 50 votes.

The passage, or the abandonment, of Affordable Care Act (ACA) repeal-and-replace legislation, and when these events occur, is likely to have an enormous impact on the timing, the terms, and the likelihood of success for many key elements of the Republican legislative agenda. If the status of ACA repeal-and-replace legislation is not resolved until the final week in July, it surely will delay consideration of many of the subjects that Congressional Republicans hoped to consider before leaving at the end of July for their summer recess.

FY18 budget resolution

Because adoption of a fiscal year 2018 budget resolution will vitiate the reconciliation process of the FY17 budget resolution under which ACA repeal-and-replace legislation currently is being considered, the House will not adopt an FY18 budget resolution until it is definitively determined whether ACA repeal-and-replace legislation can be enacted through use of the reconciliation process.

House Budget Committee Chair Diane Black (R-TN) has been unable to finalize a budget because conservatives are demanding huge cuts to mandatory programs, such as food stamps. No agreement presently exists on how to spread the pain of the $200 billion in mandatory spending cuts (down from $500 billion in Chairman Black’s initial draft) that are necessary to offset the cost of the additional military spending that Black proposes. Republican moderates with concerns about the budget resolution say passage of such a resolution will make it more difficult to pass tax reform. Even if the House Budget Committee manages to push through a budget resolution at some point in July, it’s unclear whether it will be able to attract enough support from Republican moderates to make it through the House.

The Tuesday Group (moderate Republicans), because of their concern about the impact of entitlement cuts, particularly to Medicaid, on the public, and their belief that these mandatory spending cuts could “imperil tax reform,” has asked House Speaker Paul Ryan to delay consideration of a budget until health care legislation is passed or abandoned so that the members have a clearer idea of what the fiscal picture looks like. They have threatened to oppose the curbs in entitlement spending unless there is a bipartisan deal to increase spending caps. At the other end of the spectrum within the House Republican Conference, Freedom Caucus members say that they will back an FY18 budget resolution only if it cuts mandatory programs, including Medicaid and food stamps. (The Freedom Caucus and the Tuesday Group each represent enough House Republicans that either group’s opposition to an FY18 budget resolution would be sufficient to bring about its defeat.)

Moderates say that the budget resolution’s proposed $621.5 billion in defense spending (not including war funds) also would violate the law by exceeding the $548 billion cap on defense spending for FY18 under the Deficit Reduction Act.

FY18 appropriations bills

The continuing struggle over ACA repeal-and-replace legislation has delayed consideration of an FY18 budget resolution. The failure to adopt an FY18 budget resolution has left the Appropriations Committees in the dark as to the overall level of resources that will be available for spending in FY18. As a result, the FY18 appropriations bills are being marked up without any section 301 overall spending limit or any section 302(b)s divvying up the overall spending limits among the various appropriations bills.

The foregoing factors have led to a backlog in the appropriations process. With only 25 legislative days remaining in the House before FY17 ends on September 30, the House Appropriations Committee has now marked up about half of the bills and has reported to the House only its version of the FY18 Military Construction and Veterans Affairs Appropriations bill. With 27 legislative days remaining in the Senate until the FY17 fiscal year expires on September 30, the Senate Appropriations Committee has yet to mark up and report to the Senate any of the FY18 appropriations bills.

This backlog has led some House Republicans to propose that some or all of the appropriations bills be packaged in a single bill to be taken up by the House before the August recess as a way to accelerate consideration of the FY18 bills. Whether the House Republican leadership elects to move forward with such an omnibus appropriations bill, the delays in the appropriations process and the inactivity to date in the Senate on appropriations bills make it highly likely that a continuing resolution will be required to fund the federal government’s operations after September 30 and avoid a government shutdown.

Debt ceiling increase

Treasury Secretary Stephen Mnuchin wants the debt ceiling raised before the summer recess and a vote on raising the debt limit may be held immediately before the long August recess if health care has been dealt with by the end of the month, though it could slip to September if Treasury offers reassurances to Hill leaders that such a timeline would work. (The Congressional Budget Office says that, currently, extraordinary measures can get Treasury to October before the debt ceiling is reached.)

Health care has to get done first says House Majority Leader Kevin McCarthy (R-CA). The unanswered question is whether a coalition of Democratic and Republican members can be mobilized to pass a “clean” debt ceiling increase or whether Congressional Republicans will attempt the far more difficult task of tying an increase in the debt ceiling to the adoption of further spending cuts.

Tax reform

Comprehensive tax reform legislation is not expected to be introduced and considered by Congress before the summer recess. The Big Six—Treasury Secretary Mnuchin, National Economic Council Director Gary Cohn, Speaker Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch—have been meeting to discuss tax reform, with the goal of reaching agreement on a framework to be considered by the House and the Senate this fall.

Meanwhile, Ways and Means will hold tax reform hearings in July, with a hearing on how tax reform will help small businesses grow and create jobs already scheduled for July 13. The Senate Finance Committee, for its part, will begin considering comments it has received as a result of Chairman Hatch’s June 16 request for submissions and recommendations for tax reform (Chairman Hatch’s letter gave a deadline of July 17).

Perhaps the most significant event for tax reform in July will be how the Senate deals with health care reform, as passing or failing to pass health care legislation will directly impact both its likelihood of success and potential scope. The reconciliation process can’t be used for tax reform unless and until there is an FY18 budget resolution and an FY18 budget resolution can’t be addressed until ACA repeal-and-replace legislation is disposed of, one way or the other.

Conflict in Iraq and Syria: Debate on the 2001 Authorization of Military Force (AUMF)

On Thursday, June 29, the House Appropriations Committee approved an amendment to the FY18 Defense Appropriations Act from Congresswoman Barbara Lee (D-CA). The amendment would repeal the 2001 Authorization for the Use Of Military Force (AUMF) 240 days after enactment of the Department of Defense Appropriations bill. As of 2013, the AUMF had been invoked more than 30 times to authorize troop deployments and other military measures, including detentions at Guantanamo Bay and military trials for terrorism suspects.

According to the Congressional Research Service, the AUMF has been used more than 37 times in 14 countries to justify military action. Under Presidents George W. Bush and Barack Obama, the AUMF was used to justify the deployment of US forces to Afghanistan, the Philippines, Georgia, Yemen, Djibouti, Kenya, Ethiopia, Eritrea, Iraq and Somalia. President Obama also used it to justify military action against ISIS, a group that did not even exist when the AUMF was adopted in 2001.

While Rep. Lee’s AUMF language is expected to be stripped from the FY18 Defense Appropriations bill at some point before it becomes law, the inclusion of this language in the text of the Defense Appropriations Act, as adopted by the House Appropriations Committee, makes it likely that the House, and possibly the Senate as well, will have a debate on the relevance and propriety of the AUMF language at some point before the Defense Appropriations Act becomes law. GOP military veterans have voiced strong support for a debate on the AUMF.

Flood insurance

Authorization for the National Flood Insurance Program expires at the end of September. A dispute in the Senate Banking Committee over a privatization proposal offered by Senator Jon Tester (D-MT) is keeping the version of an NFIP reauthorization from moving forward to date in the Banking Committee.

The House version of an NFIP reauthorization is further along. On June 15 and June 21, the House Financial Services Committee approved a package of seven flood insurance bills. While the House has yet to take up these bills, the chamber is expected to vote at some point in July on a five-year reauthorization of the NFIP. That said, several members of the Louisiana delegation say that because of reductions in funding levels and several controversial privatization proposals, this package of bills currently lacks the votes to pass the House. (The National Association of Homebuilders, the National Association of Realtors and many members of Congress are said to oppose the House bill.).

Infrastructure

While many observers hoped and believed that a proposal to upgrade America’s roads, bridges and airports would be an early priority for the Trump administration—as well as one with the potential to attract bipartisan support—it now seems clear that infrastructure sits behind health care, tax reform, a debt ceiling, government funding and even an FAA reauthorization on the administration’s legislative wish list.

On June 29, with the White House still yet to unveil formal legislative text for its massive infrastructure proposal and not expected to do so until the fall, Senate Commerce Committee Chairman John Thune (R-SD) observed that congressional work on the president’s $1 trillion infrastructure package would likely slip to next year.

FAA reauthorization

The House and Senate committees of jurisdiction have marked up two separate versions of FAA reauthorization bills, the major difference being air traffic control reform. The Senate bill lacks the ATC reform language and is very similar to the comprehensive bill passed (with a bipartisan majority) in the Senate in the 114th Congress. Congressman Bill Shuster (R-PA), chair of the House Committee on Transportation and Infrastructure, wants to bring his bill to the floor in mid-July. However with the expectation of a highly contentious dispute over the ATC privatization proposal, the bill’s prospects in the House are uncertain. Meanwhile, consideration of the Senate FAA reauthorization bill may be delayed by the pendency of health care legislation in the Senate.