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The 2010 midterm elections were one for the history books. Looking at the early outcomes of the various campaigns around the United States, it becomes clear that the political process in this nation is as unique as the citizens who participate in it. Pundits and talking heads will continue to debate the meaning of the electoral outcomes for months and years to come, but what is certain is that the balance of power is changing and new leadership in Washington, D.C., will drive many new legislative priorities that will impact the business community across the U.S. and beyond.

Republicans made historic gains during the midterms and will bring a new style of leadership to the House of Representatives, which switched control from the Democrats to the Republicans. There will be new chairmen of various committees that will impact businesses on such issues as tax, international trade, financial services and health care. Republicans also won a number of seats in the Senate, which will impact committee assignments and legislative initiatives. Many commentators believe that business leaders will find a friendlier atmosphere in Washington as they meet with their elected leaders in the 112th Congress.  That said, however, business leaders and members of Congress will be faced with a tough economic environment, competing priorities, fiscal challenges and increasing global concerns.

Much has happened since Barack Obama was sworn in as president less than two years ago. The president ran on a message of hope and change that brought a record number of voters to the polls. Now, just two years later, voters embraced change again in Washington, not because they necessarily favored Republicans over Democrats, but because the current Congress brought forth many legislative changes that a slight majority of voters found unfavorable due to their ideologies, continued economic softness and the growing U.S. debt.

An essential role for FEI, as an important part of the business community, is to continue the education process with legislators and policymakers on the issues that impact our membership. FEI’s Government Affairs office is comprised of personnel who have served on the staffs of congressmen, senators, governors, government agencies and the executive branch. FEI staff spends numerous hours a month educating elected leaders on Capitol Hill on important legislative priorities ranging from employee benefits, tax, treasury and issues specific to private companies. 

When the 112th Congress arrives in Washington on Jan. 4, FEI members can be assured that the issues vital to them are being represented on the national level. The following briefly outlines the potential impact to members on key issues identified by FEI’s Government Affairs staff.

HOUSE OF REPRESENTATIVES OUTCOME

At the time of this publication, the Republicans have gained 61 seats in the House of Representatives with the opportunity to gain more once the recount process is finished in nine currently uncalled races. To put this into perspective: This was the single largest gain of either party since the elections of 1948, and it trumps the famous 1994 takeover by at least seven seats.

Many senior Democrats who had been in the House for years lost their races, including the chairmen of three committees: Armed Services, Budget and Transportation. The group called “McCain Democrats,” those that won in a district that was carried by John McCain in 2008, suffered the heaviest casualties by losing three quarters of those seats.  The House Blue Dogs Coalition, a pro-business, middle-of-the-road Democratic caucus, lost over half of its membership during the elections.  Many conservative tea party candidates were ushered in by voters. The makeup of Republicans in the House shifted further to the right, while the overall Democratic body shifted further to the left.

Republicans will now control all committees in the chamber. Due to reapportionment, Republicans will gain a considerable number of new committee seats, while Democrats will see their numbers decrease significantly.  This can prove to be valuable for the GOP, as incoming Speaker of the House, John Boehner (R-Ohio) has pledged to make the committees more powerful by requiring a majority of legislation to originate in the committees, something that the current Speaker of the House, Nancy Pelosi (D-Calif.) does not require.

Key committees that will be of interest to FEI members include:

Ways and Means: Tax legislation always originates in the House of Representatives, so the new incoming chairman, Dave Camp (R-Mich.), will be a powerful voice during the upcoming tax debate that will most likely take place during the 112th Congress.

How this will impact business: Camp has been an outspoken voice for business, especially during the health care debate and through various discussions that were aimed at increasing taxes on businesses to pay for other legislation. It is anticipated that Camp will be pro-business in the tax realm, having expressed in the past his opposition to the high U.S. corporate tax rate and its effect on the competitiveness of American companies abroad.

Camp would also like to reduce federal spending to 2008 levels and calls for a two-year extension of the Bush-era tax cuts for all levels. The discussion on the 1099 requirement that was part of the sweeping health reform package will also likely get increased attention. Republicans as well as many Democrats would like to see this portion of the law removed, as it would be very onerous for businesses. It is expected that Republicans will push for a “symbolic” vote to repeal and/or revamp the health care law, but it is unlikely to move beyond the House and any move to repeal would certainly be vetoed by President Obama.

Budget: Paul Ryan (R-Wis.) will be the new chairman of the House Budget Committee. Ryan has stated, “The president … needs to change and come in our direction, and it’s up to him to whether he does it or not.” The year 2010 was the first year in decades that a budget was not passed by Congress.  The government is currently operating with a temporary continuing resolution. 

How this will impact business: Ryan has become known as a fiscal hawk and supports tax cuts, a simplified tax code and government spending controls. Ryan has stated that he will be writing the budget next year and will not be the one “watching it being written.” Ryan is very savvy both politically and also as a policy wonk. He is very pro-business and sees business as a key driver to stabilizing the economy and bringing down the unemployment rate. Look to Ryan to be a rising political star, and someone that conservatives are calling a future presidential candidate.

Financial Services: The committee chairmanship might become a political fight. The current ranking member, Spencer Bachus (R-Ala.) is perceived by some Republicans as having worked too closely with Democrats during the financial regulatory reform debate. This might put his chairmanship in jeopardy during the leadership elections that will take place the week of Nov. 15. Bachus has a reputation for being a good fundraiser, which benefits his case for chairman; however, in a year that will most likely see an attempt at revising the Dodd-Frank Wall Street Reform and Investment Act that was passed in July, it may require a bulldog. That bulldog could well be Ed Royce (D-Calif.), who was an active voice during the last year, especially during the debate on financial regulatory reform.  It is also worth noting that the 112th Congress will also see seven certified public accountants in its ranks. 

How this will impact business: With the economy in the U.S. still on unstable footing, the Financial Services Committee will most likely attempt to scale back the Dodd-Frank legislation.  Any proposals to the new law will likely be considered immediately, as most of the provisions take effect this coming July. Expect hearings on the topic, especially on issues regarding the Bureau of Consumer Financial Protection and the too-big-to-fail provisions. There will also be an active opportunity for those in the over-the-counter (OTC) derivatives markets to raise concerns with the committee as well.  OTC derivatives were an important debated component to the financial regulatory reform debate in Congress.

Oversight and Government Reform: The incoming chairman of the Oversight and Government Reform Committee is expected to be Darrell Issa (R-Calif.). Issa has been an outspoken critic of the Obama administration and will certainly use his power to subpoena various government officials to testify on key issues.

How this will impact business: While this committee does not directly impact businesses, it should be noted that Issa plans on wielding significant investigatory power under his chairmanship. Issa will more than likely investigate the government funds related to the Troubled Asset Relief Program (TARP) and the other stimulus programs that have been instituted during the last few years. Funds that were sent to the private sector will be scrutinized for being wasteful, inefficient or fraudulent. Issa is also a big proponent of transparency in government and will continue to push his legislation on making the government more open, honest and accountable.

SENATE OUTCOME

The Republicans also made significant gains in the Senate by picking up at least six seats. The likelihood of the Republicans winning control of the Senate had always been slim at best, but Republicans will yield more influence and bargaining power when the new Senate convenes in January. The infamous filibuster will continue to be used, and Republicans expecting to pass significant legislation will likely be greeted with a presidential veto from President Obama.

Many key Democrats lost reelection including incumbent Senators Russ Feingold (D-Wis.) and Blanche Lincoln (D-Ark.). The most closely watched race was that of Majority Leader Harry Reid (D-Nev.). Reid, who defied a number of polls and won reelection with a sizeable five-point margin, will continue to serve as the most powerful Democrat in the Senate. As such, he will need to be courted by Republicans to get any serious legislation moved through the chamber.  He will also need to be willing to work side-by-side with Republicans to avoid legislative deadlock.

Three newly elected senators will be immediately sworn into the Senate. They are replacing three appointed senators whose terms were only through the actual election. Those new senators include one Republican, Mark Kirk (Ill.), and two Democrats, Joe Manchin (W.V.), and Chris Coons (Del.).

While Republicans continue to be the minority party, their key gains in a number of races will strengthen their standing in the chamber and on various committees. The Republicans will have a better shot at reclaiming the Senate during the 2012 elections, as 23 seats will be up for reelection for Democrats, compared with 10 for Republicans.

Key committees that will be of interest to FEI members include:

Finance: Max Baucus (D-Mont.) will remain chairman of the committee. The ranking membership will change. Charles Grassley (R-Iowa) is term-limited out from serving in leadership on the committee and has announced that he is moving to the Judiciary Committee. The incoming ranking member of the Finance Committee will be Orrin Hatch (R-Utah). Hatch has already announced key staffers who will help design his strategy for the 112th Congress. Hatch has been a member of the Senate since 1976 and has a history of being pro-business. When asked if he will negotiate with President Obama on the Bush-era tax cuts, Hatch stated, “Absolutely not.”

How this will impact business: Recently, the Senate Finance Committee has started looking at broader tax reform proposals, including holding a hearing on lessons that were learned from the last major tax reform laws that were instituted in 1986. There will certainly be discussions on modifying the current tax system as well as taking a look at new proposals such as a value-added tax. Republicans with increased power may also push to replace certain aspects of the health care law.

Banking:  Democrat Sen. Tim Johnson (S.D.) will take over for retiring Sen. Christopher Dodd (Conn.) on the Banking Committee. Johnson, a moderate, is one of the Senate’s biggest supporters of community banks. Richard Shelby (Ala.) will remain as the Republican ranking member.

How this will impact business: The Republicans in the House of Representatives will push significant legislation toward the Senate, especially on a potential roll-back of the financial regulatory reform laws. With the Senate remaining in Democratic hands, any significant legislation is unlikely to be passed in the Senate, but Republicans will push as hard as possible for it.

LOOKING AHEAD: WHAT TO EXPECT IN THE LAME DUCK OF THE 111th CONGRESS AND BEYOND

The House of Representatives and Senate reconvene on Nov. 15 for a lame-duck session of Congress. There are a large number of unfinished legislative priorities that could significantly impact businesses, especially in relation to tax cuts and extensions. While gridlock is often favorable to business, in this case it could put many key expiring provisions in jeopardy that would immediately be felt by businesses come 2011.

Bush-era Tax Cuts: The timeliest of the tax priorities is the extension of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (widely referred to as the “Bush tax cuts”). Democrats will remain in power during the lame-duck session, and will make many of the key decisions involving the extension of the cuts. There is a fundamental debate going on between Republicans and Democrats regarding extending the tax cuts for the top two tax brackets.

Democrats hesitate to extend tax cuts for the top earners, viewing those individuals as “wealthy” (with income over $250,000 a year). Republicans would like to extend the tax cuts for all Americans, with the belief that will assist in jump-starting the economy, since many owners of private companies around the U.S. fall into the top two brackets.

Certain aspects of the 2001-03 tax cuts are exempt from the pay-as-you-go rules, and could be passed without any significant revenue offsets.  If the tax cuts are not extended, a majority of Americans will see their income decrease early in 2011 as the rates return to previous, higher levels.

Estate Tax: The estate tax has remained a burr in the side of Congress during the last year. It officially expired this year, so any estates that become subject to taxation during 2010 will not pay any estate tax. The estate tax will return, however, in 2011 – to the 2001 rates, which tax any amount over $1 million at 55 percent. It is uncertain if there is enough consensus in Congress to pass this very costly extension. Many small and family owned businesses could be severely impacted if the estate tax is allowed to return to the 2001 levels.

Research and Development Tax Credit: Many companies are continuing to press for the extension of the research and development tax credit. This was always considered a must-pass piece of legislation; however, it was not extended for 2010 and has not yet been extended for 2011. While Republicans and Democrats agree that the R&D credit is vital to businesses and jump-starting the economy, there is a serious debate on how to pay for the credit. Businesses have started to get into this debate as well. There are two schools of thought in the business community involving the R&D credit. Many businesses are stating that the benefits of the R&D credit are outweighed by the effect of revenue-raising provisions, especially those that would impact international taxes.

GOING FORWARD IN THE 112th CONGRESS

Taxation: Taxation looks to be a key issue to be taken up in the 112th Congress. With Republicans now controlling the House of Representatives, it’s expected to be much more businesses friendly than the last session. In the 111^th Congress, long-standing business taxation policies were used as a way to pay for costly new programs and legislation.

International provisions will continue to be a major part of the tax debate. Businesses will likely receive support from Republican leaders on the fight to preserve critical international tax rules that promote global competitiveness. The National Commission of Fiscal Responsibility and Reform, a bipartisan commission established by President Obama to tackle the mounting deficit, will be releasing its report in December. While a consensus between Republicans and Democrats on the commission is unlikely, there may well be some key ideas that result from the report. If the commission is deadlocked, look to chairmen former Wyoming Senator Alan Simpson and former Chief of Staff to President Bill Clinton, Erskine Bowles, for their own set of recommendations.

Health Care: While the debate happened during the current Congress, expect the Republicans in the House to try to repeal or replace key portions of the health reform law. This vote will most likely be entirely symbolic, as the Senate remains Democratic and President Obama will likely veto any proposals that come his way. The Form 1099 provision in the health care law that mandates that companies provide 1099s for any services over $600 will likely be overturned in the 112th Congress. This provision is burdensome to companies, especially smaller, private firms, and has the repeal support from both Democrats and Republicans. This could be one of the Republicans first legislative victories of the 112th Congress.  Look to Republicans to start an attempt to remove key provisions like Medicare cuts, individual and business mandates and the tax on high-cost health insurance plans. 

Energy: With Republicans taking control over the House and making significant gains in the Senate, it is unlikely that any major energy legislation will emerge in the 112th Congress. While the larger cap and trade provisions are likely dead, there are some provisions that could see a spot on the congressional calendar, such as tax incentives for more energy efficient products, a new application process for off-shore drilling and the extension of renewable energy grants, all initiatives which have received bipartisan support.

International Trade: Look for the 112th Congress to review the passage of outstanding free trade agreements (FTAs) with Panama, Colombia and South Korea. The U.S.-Korean FTA alone could add $10-$12 billon to the U.S. GDP, and it would be the most significant FTA since the North American Free Trade Agreement. It is still uncertain when these agreements will pass, but Dave Camp, chairman of the House Ways and Means Committee, has been a proponent of their passage in the past, and his new leadership role could be an indicator of finally concluding these agreements. Nevertheless, state concerns surrounding the protection of certain industries may influence House and Senate legislative action despite the economic significance of the agreements.

Additionally, U.S.-Chinese trade relations will remain a top concern with the growing frustrations stirring in Congress over China’s devaluation of its currency and its negative impacts on U.S. business. Overall, look for Congress to promote exporting and find ways to allow U.S. businesses to have greater access to international markets. President Obama has expressed an interest in FTAs and significantly increasing U.S. exports, which could be seen as an olive branch that shows a pro-business side of the administration.

For more information on subjects discussed here or to get involved with FEI advocacy committees, please contact Tyler Roberts, policy analyst, troberts@financialexecutives.org or 202.626.7807.