Although the current session of Congress has made a profound policy impact — approving sweeping health care and financial regulatory reform — Democrats are struggling to maintain their Capitol Hill majorities as voters question whether they addressed the right priorities. A Republican victory in either the House or Senate, or both, could have a dramatic impact on advisers and their clients.
An amalgamation of polls by the website RealClearPolitics.com shows that 62% of respondents said that America is on the “wrong track.”
“The electorate is clearly frustrated with the speed of the economic recovery,” John Strangfeld, chairman and chief executive of Prudential Financial Inc., told an audience last week at the annual conference of the Insured Retirement Institute in Chicago.
That frustration very well may allow Republicans to roll back or derail some Democratic initiatives. At the very least, if the GOP takes over the House, party members no doubt will try to shape some of the voluminous Dodd-Frank rulemaking.
The easiest path of resistance could come through the appropriations process, denying funds that agencies such as the Securities and Exchange Commission need to implement the law. In essence, Republicans could starve Dodd-Frank mandates.
Under the landmark legislation, the SEC's budget will be doubled to $2.25 billion by 2015. But those are authorized funds that need to be appropriated each year by Congress.
This year's funding increase is stalled until at least next month. If Republicans take over the lower chamber, they will have a platform to try to take more money away from the SEC, an agency whose track record the party often has questioned.
In his Oct. 24 radio address, President Barack Obama warned that Republicans will gut Dodd-Frank if they prevail tomorrow. He praised the new Consumer Protection Agency as a bulwark against “unfair practices in mortgage transactions and foreclosures.”
But the consumer office has been the target of fierce GOP criticism. If the party does try to unwind parts of Dodd-Frank, it likely will start there. A budget-cutting blitz could undermine the push to adopt a universal fiduciary standard for both financial advisers and brokers, and could hamstring efforts aimed at establishing a self-regulatory organization for financial advisers.
Cutting regulators' budgets is fraught with difficulty and danger, however. Mr. Obama, of course, eventually would have to sign appropriations measures and could portray Republicans as obstructionists.
On the other hand, voters continue to vent their anger about the burgeoning $1.294 trillion deficit, which may force the president's hand. It may also get the next Congress to focus on new ways to raise revenue — or at least pay for new programs.
Tax breaks for retirement plans offer an inviting target. Tax-advantaged defined-contribution plans will cost the government $184.3 billion in tax revenue from 2009 to 2013, according to a report from Congress' Joint Committee on Taxation. Traditional individual retirement accounts will produce a so-called tax expenditure of $40.7 billion. The tally for Roth IRAs is $18.3 billion and $275.7 billion for defined-benefit plans.
There are plenty of other tax targets as well — and some may be addressed in the lame-duck session before the next Congress is seated.
Certainly, the first order of business for the session that is set to begin this month is determining whether to extend Bush tax cuts set to expire Dec. 31.
The Obama administration and most Democrats favor making permanent the reductions in individual tax rates for individuals earning $200,000 or less, or families earning less than $250,000. Republicans are seeking to extend the cuts for all income levels, saying that raising taxes on anyone is foolish in the middle of a tepid economic recovery.
Both parties seem to be amenable to keeping capital gains and dividend taxes at their current 15% level. But if the Bush tax cuts are not extended, dividends will be taxed as income — and thus could double and nearly triple for some filers.
Neither party wants to see the estate tax, which is currently zero, snap back to 55% with a $1 million exemption. Talk on the Hill has centered on a possible 45% rate with a $3.5 million exemption.
One point to keep in mind on Election Day: Republicans could bring a significant change to the Capitol by achieving far less than taking control of the House. Currently, there are 41 Republicans in the Senate — the minimum needed to block a final vote on legislation under parliamentary rules.
The GOP must pick up 10 seats for a Senate majority. But the party needs to gain only four seats to move to a level — 45 — where it will be extraordinarily difficult for Senate Democrats to overcome a filibuster.
If Congress is to make significant policy accomplishments, both parties must find a way to compromise.
“I don't think anything's going to change ... very quickly” as a result of the midterm elections, said David Sapadin, a retired air traffic controller who spoke at the IRI conference. “Everything is indefinite.”
E-mail Mark Schoeff Jr. at [email protected].
