March 13, 2023
What to expect in Washington (March 13)
Treasury Secretary Janet Yellen testified before the House Ways & Means Committee about the President's Budget on Friday, where there was a focus on the OECD-led global tax agreement, and she is scheduled to appear before the Senate Finance Committee this Thursday. Her TV appearance on Sunday, March 12, however, and much of the attention in Washington and elsewhere over the weekend was focused on banking concerns.
Regulators wary of financial contagion create emergency facility to honor deposits at Silicon Valley Bank — After a weekend of high-pressure activity following the seizure of Silicon Valley Bank (SVB) by regulators on Friday, the Treasury Department, Federal Reserve and FDIC announced March 12 that depositors of both SVB and New York state's Signature Bank — which was also closed by regulators on Sunday after experiencing runs — would have access to all their assets on Monday. In a joint statement, Secretary Yellen and other regulators also issued assurances that "no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer." The regulators said that shareholders and "certain unsecured debtholders" of the two banks would be wiped out, senior management had been removed, and "any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." Racing the clock to develop a solution before banks opened on Monday, officials had considered finding a buyer for SVB and had held an auction, but ultimately decided that creating a special "section 13(3)" emergency lending facility to honor redemptions and halt a possible "contagion" among regional banks was the clearest and fastest approach. While the FDIC insures deposits up to $250,000, most of SVB's deposits were held by companies banking millions of dollars, leaving them largely uninsured. "The U.S. banking system remains resilient and on a solid foundation, in large part due to [Dodd-Frank Act] reforms that were made after the financial crisis," Yellen, Federal Reserve Chairman Jerome Powell and FDIC Chairman Martin Gruenberg said in the statement. "Those reforms, combined with today's actions, demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe."
Silicon Valley Bank, the 16th-largest bank in the U.S. by assets and the largest U.S. bank failure since the collapse of Washington Mutual during the 2008 financial crisis, suffered a historic run on Friday (March 10), as depositors spooked by social media withdrew more than $40 billion in assets in a single day. The bank had attempted to raise capital after many of its long-term bond investments lost value as the Fed hiked interest rates over the last year. Signature Bank, previously a commercial real estate lender that in recent years had positioned itself to appeal to cryptocurrency investors, was caught in the crypto market panic that followed the collapse of the FTX exchange in November. In a joint statement, Senate Banking Committee Chairman Sherrod Brown (D-OH) and House Financial Services Committee Ranking Member Maxine Waters (D-CA) said, "Today's actions will enable workers to receive their paychecks and for small businesses to survive, while providing depository institutions with more liquidity options to weather the storm. As we work to better understand all of the factors that contributed to the events of the last several days and how to strengthen guardrails for the largest banks, we urge financial regulators to ensure the banking system remains stable, strong and resilient, and depositors' money is safe." For his part, Financial Services Committee Chairman Patrick McHenry (R-NC) said, "This was the first Twitter-fueled bank run. At this time, it is important to remain level-headed and look at the facts — not speculation — when assessing the right path forward. I have confidence in our financial regulators and the protections already in place to ensure the safety and soundness of our financial system."
Budget — President Biden released his FY 2024 Budget plan last week, demonstrating how to raise trillions in proposed tax increases, his commitment to Social Security and Medicare benefits, and contrasts with the unspecified spending cuts House Republicans are calling for as a condition of supporting a debt limit increase that will be required by roughly midyear. The House Republican FY2024 Budget resolution isn't expected to be released until May. The conservative Freedom Caucus did lay out their own budgetary demands on Friday, including holding spending levels at FY 2022 levels for 10 more years and rescinding President Biden's student loan forgiveness plan, unspent COVID-19 funds that haven't yet been allocated, and the Inflation Reduction Act (IRA) $80 billion funding increase for the IRS.
The FY 2024 Budget was the President's third such proposal and includes tax ideas collated from Biden's first Budget (FY 2022), the House BBBA, and last year's Budget (FY 2023). The first, for FY 2022, laid out an ambitious wish list of spending initiatives financed by tax increases after the bruising 2020 campaign and contested election. Last year's version presumed enactment of the House-passed Build Back Better Act, which eventually led to the much-narrower IRA. For now, and maybe for some time after the Republican plan is released, the policy differences are pushing the two sides into their corners and no closer to a resolution of the debt limit impasse. The contrasts could also last into the 2024 campaign season.
The Wall Street Journal (WSJ) reported March 12, "The plan Mr. Biden released Thursday will find little support in the House, where Speaker Kevin McCarthy (R., Calif.) is preparing his own budget proposal and must overcome his intraparty divisions. The document will showcase the president's differences with Republicans on Capitol Hill and in the 2024 field. Republicans in turn will use Mr. Biden's budget — including its plans to raise taxes and increase spending — as fuel for their case that he doesn't deserve a second term." The report said, "More broadly, Republicans signaled a fight to come over taxes. Among other things, Mr. Biden proposed raising the top individual tax rate to 39.6% from 37%, raising the corporate tax rate to 28% from 21%, taxing top earners' capital gains at higher rates and increasing taxes on U.S. companies' foreign profits to 21% from 10.5%."
President Biden and other officials are suggesting that the as-yet-unspecified spending cuts House Republicans are calling for in the debt limit debate could envision clipping some public health benefits. House Speaker Kevin McCarthy (R-CA) has warned that it is the President's proposed tax increases that should be worrisome, tweeting last week that the President's Budget proposes "trillions in new taxes that you and your family will pay directly or through higher costs."
Health — President Biden today "will meet in San Diego on Monday with British Prime Minister Rishi Sunak and Australian Prime Minister Anthony Albanese to discuss long-standing security issues," the San Diego Tribune reported. The Las Vegas Review-Journal reported "he will be in Las Vegas to discuss prescription drug costs … Biden will travel to Las Vegas on Tuesday and on Wednesday, the president will discuss his plan to lower prescription drug costs, a White House official said." The WSJ said, "Mr. Biden will seek to sell some of his budget ideas this week during a West Coast trip that will include an event on prescription drugs in Las Vegas on Tuesday. The president has made bringing down the cost of insulin for diabetics a centerpiece of his healthcare agenda."
Congress — The House is out this week, but the Senate is in session. The Senate will reconvene Tuesday, March 14, at 3:00 p.m. to resume consideration of Executive Calendar #62, the nomination of Brent Neiman to be a Deputy Under Secretary of the Treasury for International Finance and will vote on the nomination at 5:30 p.m. Punchbowl reported that the Senate will begin voting this week on legislation to repeal the Iraq war authorizations.
The Senate Finance Committee has scheduled a hearing on the Budget with Treasury Secretary Janet Yellen for Thursday, March 16 at 10 a.m.
The EY Webcast, "Tax in a time of transition: legislative, economic, regulatory and IRS developments," is Friday, March 17 at 12 p.m.