Moments ago, the House of Representatives just passed the $1.15 trillion spending bill that includes a $680 billion package of tax-break extensions, in a 316 to 113 vote, and will now move to the Senate, where its passage is likewise assured and will be signed by the president over the next few days.
While there was clearly no risk of the Omnibus not passing, this particular portion of pork is relevant, because as Richard Breslow notes, “fiscal policy may begin to emerge from hibernation. The spending and tax bills Congress is in the process of passing today is something that probably couldn’t have happened last year. Ryan and Pelosi working together to pass a bill that has White House support gives rise to holiday optimism. The Federal government is actually expected to boost GDP growth next year.”
How the market reacts to Congress becoming the driver of the market economy, instead of the Fed’s monetary policy, is still unclear although it will likely not be an enthusiastic handoff.
For those wondering what are the main components of the spending bill, here is a quick summary.
From Goldman Sachs.
1. A broad year-end spending and tax deal has been reached. Congressional negotiators finalized their year-end agreement on spending for FY2016 and a long-term extension of tax provisions early this morning. The bill — particularly the tax components — includes several changes of interest to the market, as described in more detail below. Details of those changes can be found here and here. We provided background on many of these issues in a US Daily last week.
2. We expect this legislation to become law. While each party opposes certain aspects of the deal, overall we expect there to be sufficient support to get majorities in both chambers. Although the White House has stated opposition to certain changes in the bill, such as the repeal of the oil export ban, they appear to have been careful not to have threatened a veto, and we do not view a presidential veto as a major risk to enactment at this point.
3. The bill would provide a small fiscal boost in 2016. As the bill is over 2000 pages long and formal budget estimates of the spending totals and tax provisions have not yet been released, we will wait to assess the fiscal impact. However, in general we expect the legislation to provide a boost to spending in 2016 that is in line with the increase in the spending caps enacted last month. On the tax side, we expect the legislation to be slightly stimulative in 2016, but will wait until formal estimates are released before making a more detailed assessment.
4. The repeal of oil export ban and extension of renewable incentives made it into the final version. The ban on US crude oil exports would be repealed, and the administration would be prohibited from restricting exports except in national emergencies and similar circumstances. Also, as part of the agreement on oil exports, the production tax credit (PTC) for wind power installations would be extended through 2019, with a phase-down from 2017 through 2019. The investment tax credit (ITC) for solar installations would be extended for three years, through 2019, at the current rate and would then be phased down through 2021, expiring in 2023 (note that the deadline has also been changed, so that it now applies to projects where construction has started by the expiration date, rather than being put into service by expiration). This represents a significant win for the renewable sector, as discussed in our recent report. Refiners, which are negatively affected by the oil export ban, would get limited consolation from a tax benefit for independent refiners. The bill would also extend the existing biodiesel credit for two years, through 2016, but it does not appear to shift it to a “producer” credit as the Senate had proposed.
5. Delay in ACA-related taxes slightly more generous than expected. Implementation of the “Cadillac tax” (40% excise tax on high-cost employer-sponsored health premiums) would be delayed from 2018 to 2020. The tax would also be made deductible as a business expense, easing the burden on employers who might eventually pay the tax. However, in light of widespread opposition to this tax (its delay had just as much Democratic support as Republican) we would expect further changes in years ahead. The existing 2.3% tax on medical device sales would be suspended for two years, so that it would not apply to sales in 2016 and 2017. The existing tax on health insurance premiums would be suspended for one year, in 2017. To generate a small amount of budget savings, the bill would limit the Medicaid payment for durable medical equipment to the Medicare rate starting 2019 and would make changes to payments for imaging. To provide relief for Puerto Rico, hospitals there would receive payments at 100% of the US rate, rather than a blend of 75% US and 25% PR. As expected, the bill also extends last year’s requirement that CMS implement the “risk corridor” for plans in ACA exchanges on a budget-neutral basis, which will limit CMS’s ability to make the full payments.
6. Real estate provisions largely as expected, but with relief for pending transactions. The restrictions on REIT conversions proposed last week by Ways and Means Chairman Brady were largely maintained in the final version. However, REIT transactions that were pending as of December 7, 2015 are allowed to proceed, provided there was already a formal ruling request with the IRS by that date. The final bill includes the relaxation of restrictions on foreign investment in US real estate under FIRPTA, which would allow foreign pension funds to more freely invest in US real estate assets, including but not limited to REITs.
7. Permanent R&D credit and small business expensing, bonus depreciation extended four years. The bill would permanently extend the R&D tax credit and “Section 179” expensing for small businesses, with thresholds in the latter indexed to inflation starting in 2016. 50% bonus depreciation would be extended four years, through 2019.
8. Stimulus-related personal tax incentives were made permanent. Enhanced refundable tax credits for low-income earners originally enacted in the 2009 stimulus legislation have been scheduled to expire in 2017, reverting back to less generous levels. The bill would make the enhanced versions of the child tax credit (CTC), earned income tax credit (EITC), and American opportunity tax credit (AOTC) permanent.
9. Miscellaneous items of potential interest. Income from gains on timber sales for C corporations (i.e., not REITs) would be taxed at 23.8% in 2016. Heating and air-conditioning would become eligible for small business expensing (Section 179), increasing the tax incentive to install new systems.