Congress returns from its August recess facing two imminent deadlines. First, Congress has appropriated funds to keep the federal government operating only through September 30, 2013. If Congress does not appropriate additional funds during September, on October 1 the federal government will shut down. House Speaker Boehner has said he will propose short term “stop gap” legislation without conditions that would fund the federal government for a few more months at 2013 levels. If Congress adopts such a resolution, the funding deadline will be pushed later into 2013.
But Congress will still have to deal with a second – and more important – deadline. The United States government has once again hit its borrowing limit. Congress had authorized the federal government to borrow only through May 18, 2013. Since that date, the government has continued to operate using current tax receipts and funds in accounts set aside for future expenses. But, according to the Treasury Department, by mid-October the government will need to borrow additional funds to pay its bills, including interest on its outstanding debt. By that time, Congress will have to raise the debt limit or the United States, unable to borrow to pay interest, will default on the national debt.
Heading into the negotiations, Republicans are calling for increases in defense spending and cuts in domestic spending (primarily social programs) and entitlement spending (primarily Social Security and Medicare). In particular, the Republicans want to change the rate of growth of Social Security benefits. Under current law, Social Security benefits increase each year based on the consumer price index (“CPI”). The Republicans seek to replace CPI with “chained CPI.” Chained CPI acknowledges that when the price of an item gets too high, people do not simply pay that higher price, they substitute something cheaper. If the price of beef gets too high, people buy more chicken. Chained CPI does not grow as quickly as conventional CPI. Thus, using chained CPI would slow the rate of growth of Social Security payments. Republicans also are calling for affluent recipients to pay more for Medicare coverage.
Some Congressional Republicans are suggesting they will refuse to vote for any bill that funds Obamacare along with the rest of the government. The party’s leaders, however, have shown a disinclination to follow that route for fear of a blowback against the party. (Historians will recall disagreements between Congress, led by Speaker Newt Gingrich, and President Bill Clinton led to two government shutdowns between November 1995 and January 1996. Most observers believe Congressional Republicans bore the brunt of the blame then, helping Clinton secure election to a second term later that year.)
Congressional Democrats have refused to accept any changes to entitlements. President Obama has taken a somewhat more lenient stance, indicating that he might accept some cutbacks in entitlements if the Republicans agree to new taxes on affluent families. In that regard, the President has proposed a number of tax changes he wants to see enacted, including taxing municipal bond interest, limiting the amount individuals may accumulate in tax-preferred retirement accounts, and reversing recent expansions of the estate and gift tax exemptions. None of these proposals is likely to get through Congress.
The President also has proposing closing certain “loopholes,” including (1) eliminating the ability of someone who inherits and IRA or 401(k) to “stretch” the payments over his or her lifetime; and (2) curtailing the availability of sophisticated wealth transfer techniques such as grantor retained annuity trusts (“GRATs”), intentionally defective grantor trusts, and dynasty trusts.
One thing is clear to me: Congress will not allow the United States government to default on its national debt. A government shutdown also is quite unlikely, but the possibility cannot be dismissed entirely. At some point a compromise will be reached. That compromise will be small, perhaps implementing chained CPI to appease the Republicans and closing some tax loopholes to appease Democrats.
How will all this affect the markets? The last debt limit crisis, in August 2011, produced a difficult month for the markets (in what was otherwise a strong year). Perhaps this time will be different; perhaps today’s markets have developed “Washington crisis fatigue.” After all, the implementation of the “sequestration” spending cuts did not thwart the market run-up this spring. But the twin threats of a government shutdown and debt default -- fueled by predictably overwrought media reports of Washington malfunction -- could roil the markets, particularly if the government does shut down or Congress can agree only to push the deadlines back a few months. A volatile September may well be in store.
To the extent market concerns are based on a perception that Washington will be unable to reach agreement, I believe they will be misplaced. The United States is not going to default on its debt. Thus, any downturn based on Washington dysfunction should be temporary, reversing when a compromise is reached. This is not to suggest that investors should sell equities in anticipation of a downturn, because they will not know if a pullback will occur or, if it does, when a compromise is imminent so they should buy back in. But market volatility due to a perception of Washington dysfunction could be a buying opportunity.
One other deadline is approaching. On January 1, 2014, health care reform (“Obamacare”) finally goes into effect. A recent white paper on the site explains, in an easy-to-read four pages, the parts of the health care reform law that affect businesses and individuals, and what individuals and businesses must do – and the decisions they must make -- before that date. The paper also explains the purported goals of the health care reform law and the extent to which the law is likely to achieve those goals. Members may read the white paper here.
Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2013. Reprinted by permission. All rights reserved.
