March 29, 2023
What to expect in Washington (March 29)
House Speaker Kevin McCarthy (R-CA) challenged President Biden on the debt limit issue in a March 28 letter saying that he is "incredibly concerned you are putting an already fragile economy in jeopardy by insisting upon your extreme position" of refusing to negotiate spending cuts, and that Republicans are united in wanting to "Limit Spending, Save Taxpayer Money, and Grow the Economy." Speaker McCarthy said this could be accomplished through reducing nondefense discretionary spending, reclaiming unspent COVID funds, strengthening work requirements for federal programs, and measures to lower energy costs.
White House Press Secretary Karine Jean-Pierre responded with a statement saying, "Congress has a constitutional obligation to address the debt limit — as they did three times in the previous administration without conditions." She said President Biden welcomes a separate conversation about the nation's fiscal future and has released a budget reflecting his vision, but Republicans only have "a list of devastating cuts to law enforcement and border security and proposals to take health care away from Americans and raise health care and child care costs. All to pay for their tax giveaway to the super-wealthy and corporations."
The President issued a letter calling on House Republicans to deliver to him a full set of budget proposals before leaving for the Easter recess. (The House is scheduled to break on Thursday for more than two weeks, returning April 17.)
Budget Committee Chairman Jodey Arrington (R-TX) has said he expects to release the House Republican FY 2024 budget resolution the second week in May. Punchbowl reported that it will be difficult for House Republicans to pass a budget before the debt limit deadline and for Speaker McCarthy to meet the goals of passing a budget that balances in 10 years and not touching Social Security or Medicare, and that he is considering having the House pass a short-term debt limit increase of just a few months long with some modest budgetary savings provisions.
McCarthy downplayed the link between the budget and the debt limit that has been established by the President, "Let's be very honest about this: The budget doesn't have anything to do with the debt ceiling," McCarthy said on CNBC. "I can pass a budget tomorrow, and we'll still need to pass a debt ceiling. … These are apples and oranges."
Speaker McCarthy later tweeted, "President Biden has already caused record inflation. Now, his reckless refusal to negotiate could lead to a first-ever default. I am prepared to clear my calendar. Mr. President, what are you afraid of?"
The Speaker's reference to energy in the letter refers to the Lower Energy Costs Act (H.R. 1) that the House is considering this week, which addresses critical minerals processing and streamlining the permitting process, among many other issues. The White House said the bill, which also seeks to roll back some Inflation Reduction Act provisions, would draw a veto. "H.R. 1 would double the cost of energy efficiency upgrades that families need to reduce household bills and would repeal the Greenhouse Gas Reduction Fund that will cut energy costs and boost economic development in rural and urban communities across the country," said a Statement of Administration Policy.
Further on House Republican budget ideas, Axios reported March 28:
Trade — United States Trade Representative Katherine Tai and Japan's Ambassador to the United States, Tomita Koji, March 28 signed a critical minerals agreement intended to strengthen and diversify critical minerals supply chains and promote the adoption of electric vehicle battery technologies. Ambassador Tai said, "Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship. This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the Inflation Reduction Act."
Bloomberg reported, "Following the pact, EVs that use materials that have been collected or processed in Japan will be eligible for incentives under the US Inflation Reduction Act, Japanese trade minister Yasutoshi Nishimura said Tuesday in Tokyo." A similar agreement is being pursued with the European Union.
Tax - The IRS has issued proposed regulations (REG-105954-22) under IRC Sections 4661, 4662, 4671 and 4672 regarding Superfund taxes imposed on certain chemicals and imported substances as of July 1, 2022. These taxes are imposed on the sale or use of taxable chemicals by their manufacturers, producers and importers. In Revenue Procedure 2023-20, the IRS modifies the effective date for additions to the list of taxable substances under IRC Section 4672(a). The change modifies the date on which substances are added to the taxable substances list for purposes of refund claims under IRC Section 4662(e). In Notice 2023-28, the IRS extended temporary relief provided in Notice 2022-15 regarding deposits of the excise tax imposed on certain chemicals under IRC Section 4661 and on certain imported chemical substances under IRC Section 4671 (referred to as Superfund chemical taxes).
An EY Alert, "Proposed Superfund Tax regulations address many issues, but leave others open," is available here.
Senators grill regulators on Silicon Valley Bank rescue — The Senate Banking Committee yesterday began Congress' first round of hearings into the crisis surrounding the failure of Silicon Valley Bank and Signature bank, bringing federal bank regulators and a Treasury official in to describe the seizure of the institutions and the rescue of depositors. Federal Reserve Board Vice Chair for Supervision Michael Barr said regulators should strengthen bank stress testing to capture a wider range of risks, saying SVB's failure "illustrates the need to move forward with our work to improve the resilience of the banking system." Barr and FDIC Chairman Martin Gruenberg both suggested that regional banks with assets between $100 billion and $250 billion would likely face tougher regulations on their required capital, liquidity and interest-rate risk. Notably, Gruenberg said the FDIC will "undertake a comprehensive review of the deposit insurance system," releasing by May 1 a report with policy options for consideration related to deposit insurance coverage levels. Treasury Under Secretary for Domestic Finance Nellie Liang said, "We have used important tools to act quickly to prevent contagion. And they are tools we would use again if warranted to ensure that Americans' deposits are safe."
Barr said San Francisco Fed supervisors had met with SVB's chief financial officer as far back as October 2021 to convey their concerns about how the bank was managing interest-rate risks in its investment portfolio and liquidity risks, but bank executives did not make changes. "The risk model was not at all aligned with reality," Barr said. "Fundamentally, the bank failed because its management failed to appropriately address clear interest-rate risk and clear liquidity risk." Barr criticized SVB for not having a chief risk officer in place, saying the problems that caused the bank's collapse were "really basic" banking risks: "The examiners … called those issues out … and those actions were not acted upon in a timely way."
Several senators criticized regulators' oversight of SVB, however, questioning why the Fed didn't act sooner when the bank's problems were on supervisors' radar, such as long-term securities whose value had plummeted and an abundance of uninsured deposits. Jon Tester (D-MT) said, "For over a year, regulators were saying to this bank, 'straighten up and fly right,' and they never did a damn thing about it. It looks to me like the regulators knew the problem, but nobody dropped the hammer." Ranking Member Tim Scott (R-SC) said, "The warning signs should have been flashing red and SVB should have stood out as what it was — absolutely a problem child … By all accounts, our regulators appear to have been asleep at the wheel." Katie Britt (R-AL) reflected Republicans' sentiment against passing new regulations, telling the regulators, "You are not using the tools in your toolbox. That's what people hate about Washington: We have a crisis and you come in here without knowing whether or not you did your job, and you say you want more." The same group of officials will appear before the House Financial Services Committee today.