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May 22, 2023

What to expect in Washington (May 22)

House Speaker Kevin McCarthy (R-CA) and President Biden are meeting again today on the debt limit as they remain far apart in talks that became stuck over the weekend while the President was at the G7 Hiroshima Summit. While there are said to be issues with all the potential elements of a package of concessions to Republicans to accompany a debt limit bill — spending caps, energy permitting, rescinding COVID funds, and work requirements — the spending issue is the most problematic. The issue is treated by Republicans as perhaps the most emblematic element of the effort, and while Speaker McCarthy has softened the demand to roll back spending to FY2022 levels, he is insisting that there at least be a cut from current levels.

"The numbers are foundational here," Representative Garret Graves (R-LA), a top GOP negotiator, said on Sunday, as reported by the New York Times (NYT). "The speaker has been very clear: A red line is spending less money and unless and until we're there, the rest of it is really irrelevant." The report said, "The latest White House offer would hold both military spending and other spending — which includes education, scientific research and environmental protection — constant from the current fiscal year to next fiscal year."

"Republicans have lowered their demands on spending caps from 10 years to six years, according to two people familiar with the talks, but the White House still wants the deal to last two years," Bloomberg Government reported. "One of the people said the GOP is still seeking a large increase to defense spending next year, something that would deepen cuts to social services. Democrats have demanded that defense, which is about half of all federal discretionary spending, not be fenced off from cuts."

President Biden said during a Hiroshima news conference Sunday that if veterans' benefits, entitlements, and other items are "off the radar" according to Republicans, then "that means if you want to get the number you wanted from freezing the budget at 2023 [levels], plus the additions you added, then it means you're going to go from 22% — you're going to end up cutting 30% or 35% of the discretionary budget. For example, if you calculate what they're talking about, you're going to lose — they're going to lose 100,000 teachers and assistants. They're going to lose thousands of police officers across the board."

Democratic tax increase ideas have been ruled out of the negotiations, in public — including by House Budget Chairman Jodey Arrington (R-TX) on Sunday — and behind closed doors. The President said Sunday that "part of what I've been arguing from the beginning is a need to consider the tax structure as well as — as well as cutting spending. I'm willing to cut spending, and I proposed cuts in spending of over a trillion dollars. But I believe we have to also look at the tax revenues. The idea that my Republican colleagues want to continue the $2 trillion tax cut that had profound negative impacts on the economy from the Trump administration … "

A Washington Post analysis said Democrats haven't been pushing the tax issue as forcefully as they have in the past. "President Biden and his allies have not made higher taxes on the rich and powerful a centerpiece of the talks. Instead, following Republican admonitions that raising taxes is a nonstarter, Democrats have focused their line of attack against House Speaker Kevin McCarthy (R-Calif.) and have made dire predictions of defaulting on the federal debt … " the analysis said. "Going on offense by promising to raise rates on the wealthy … [has] been a politically winning message since Democrats honed it during the 2011 and 2012 fiscal fights between President Barack Obama and House Speaker John A. Boehner (R-Ohio)."

With the two sides far apart, President Biden said he continues to examine the use of the 14th amendment, under which the validity of public debt authorized by law can't be questioned, and the government would be required to continue issuing new debt. "I think we have the authority. The question is: Could it be done and invoked in time that it could not — would not be appealed and, as a consequence, pass the date in question and still default on the debt. That's a question that I think is unresolved," he said.

Clean energy — A May 21 NYT story on the demand for minerals resulting from the Inflation Reduction Act's tax incentives for investments in the electric vehicle supply chain explained, "For decades, a group of the world's biggest oil producers has held huge sway over the American economy and the popularity of U.S. presidents through its control of the global oil supply, with decisions by the Organization of the Petroleum Exporting Countries determining what U.S. consumers pay at the pump. As the world shifts to cleaner sources of energy, control over the materials needed to power that transition is still up for grabs." The story said while the US has negotiated a critical minerals agreement with Japan and is seeking a deal with the EU "figuring out how to access all of the minerals the United States will need will still be a challenge. Many mineral-rich nations have poor environmental and labor standards. And although speeches at the G7 emphasized alliances and partnerships, rich countries are still essentially competing for scarce resources."

On Saturday, May 20, G7 leaders vowed to "support local value creation in critical minerals supply chains" and to "continue our collaboration through the Minerals Security Partnership to strengthen supply chains for critical minerals, promote responsible and sustainable investment in extraction and processing, and recycling and drive high Environmental Social and Governance (ESG) standards." Also on May 20, the US and Australia committed "to enhance bilateral cooperation under a Climate, Critical Minerals and Clean Energy Transformation Compact (the Compact), establishing climate and clean energy as a central pillar of the Australia-United States Alliance."

Tax — An EY Alert, "G7 Finance Ministers welcome OECD progress report on tax cooperation and reiterate commitment to implementation of Pillars One and Two," is available here.

Congress — The Senate is out this week. The House is set to be in recess the week of Memorial Day, May 29. Debt limit default looms as early as June 1, according to Treasury Secretary Janet Yellen.

The House is in session and the Ways and Means Committee has trade and Social Security hearings set, but nothing on tax or health:

  • On Wednesday, May 24 at 2 p.m., the House Ways and Means Social Security Subcommittee will hold a hearing on "The Social Security Administration's Role in Combatting Identity Fraud."
  • On Thursday, May 25, at 9 a.m., the Ways and Means Trade Subcommittee will hold a hearing on "Modernizing Customs Policies to Protect American Workers and Secure Supply Chains."


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For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
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