Paul Marcone & Associates, LLC

POST ELECTION ANALYSIS FROM PAUL MARCONE & ASSOCIATES

(November 7, 2012) -- The 2012 elections, at the federal level turned out to be, as predicted by most polls, a status quo election.

The Republicans retained control of the U.S. House and the Democrats retained control of the White House and the U.S. Senate.

The most immediate challenge facing both the White House and Congress is the so-called "fiscal cliff" -- the expiration on December 31st of the Bush-era tax cuts, the payroll tax cut and the automatic implementation of mandatory, across-the-board cuts in federal spending (the "sequester").

There will likely not be enough time to come to a long-term "grand bargain" on tax reform/cuts and spending reductions.  Most likely scenario is a short-term deal to avoid taxes going up and federal spending being cut come January 1.  But that is not a given.

What is certain is that Congress will be consumed during the lame duck session with trying to deal with these issues.

If Congress and the President do reach an agreement during the lame duck on a short-term fix, then the first several months of 2013 will be dominated by the negotiations on long term plan that will include changes to the tax code - the basic template is to close loopholes while lowering rates across the board. 

The stumbling block is that the President and Congressional Democrats want any tax reform plan to result in additional revenues (read: slightly higher rates for those making more than $250,000) while the Republicans are adamant that any tax reform plan be "revenue neutral." 

On the spending side, the President will likely to be more willing than Congressional Democrats to accept steep cuts in domestic spending if he can get Republicans to agree to a tax reform plan that results in more net revenues.  That is a big "if."

While these negotiations are going on, look for the House to embark on efforts to repeal parts of the Dodd-Frank law, more investigations of the bothched "Fast and Furious" gun running scam, additional hearings on Bengazi and possible plans to reform entitlement programs.  Most of those efforts will die in the Democratic-controlled Senate.

Congress also has to pass a Farm Bill in 2013 (it is unlikely a deal on the Farm Bill will be reached during the lame duck session).  The Farm Bill could be an attractive vehicle for amendments on nutrition issues.  The big sticking point is that the Republican-controlled House feels the Senate-passed bill spends too much on nutrition programs (eg food stamps and WIC) while the Senate will likely not be able to approve any compromise bill that cuts nutrition more than the bill passed by the Senate in 2012.  Pressure from farm belt Republicans will eventually force the House GOP leadership to pass a bill and negotiate a compromise with the Senate.  But that battle could rage on well into 2013.

As for the annual appropriations process, what Congress does on the indidivual 12 appropriation bills to fund the federal government (which have to be passed and signed into law by September 30) will depend largely on the negotiations on the grand bargain.  That will be the blueprint Congress will work under.  If an agreement cannot be reached, then look for the Republican-controlled House Appropriations Committee to start passing its version of the 12 spending bills in late Spring-early summer based on the severe constraints of the sequester and/or a budget resolution approved by the Republican-controlled House Budget Committee.  It is not likely that the Senate Appropriations Committee will move at the same time as the House and it is also not likely that the Senate Budget Committee will produce a budget resolution.

How much work the Congress gets done in 2013 will depend a lot on whether or not a grand bargain can be struck with the White House on taxes and spending.  If a bargain can be reached, the appropriations process will go rather smoothly and we might see some bi-partisan action on issues such as immigration and education.

One way or the other, Congress will have to pass, in some shape or form the annual appropriation bills.  And there will be several tax reform bills getting attention.  These bills will be likely vehicles for amendments.

So, I see some room for productivity in the new Congress in 2013, but, again, that goes out the window if a grand bargain on taxes/spending cannot be reached.  One motivating factor could be the stock market which would react very negatively if an agreement cannot be reached by December 31st.

Opportunities will still abound to get initiatives approved as amendments to larger vehicles.

One final word.  There is a slight chance that House Republicans, now that Obama has been re-elected, will move to bring back earmarks in some limited fashion.  The thinking is that many Republicans do not want to give the Obama Administration carte blanche on spending decisions for the next four years.  Any move by the House GOP to begin earmarking next year may be opposed in the Senate, but I don't think that the Senate would block earmarks if the House "jumped off the cliff" first.

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