Washington: What to Watch Now

Washington: What to Watch Now is a regular column that analyzes only those political and regulatory issues that could potentially affect investors. For more, listen to the WashingtonWise podcast on Apple Podcasts.

Congress managed to avoid a government shutdown last week, passing a "continuing resolution" that extends government funding through the end of the fiscal year, September 30. But the result exposed huge fissures in the Democratic party. The legislation includes a $6 billion increase in defense spending and a $13 billion reduction in non-defense spending. It was approved in the House on March 11^th on a 217-213 vote, with one Republican voting against it and one Democrat voting for it—a surprising outcome given that many conservative Republicans in the House typically vote against temporary funding measures. That put the issue in the hands of the Senate, where House Democrats expected their colleagues to block the bill. But on Friday, Senate Minority Leader Chuck Schumer (D-NY) and nine other Democrats joined all but one Republican on a procedural vote, ensuring that it had the necessary 60 votes to overcome a filibuster. The final bill then passed 54-46. President Donald Trump signed the measure into law on Saturday. 

While a government shutdown is off the table until this fall, the Democratic frustration could not be higher. Some Democrats, eager to show more resistance to Trump and Capitol Hill Republicans, were ready for a shutdown and are livid at Schumer's decision. Some have called for him to step down as leader. But Schumer faced a true Hobson's choice—there were no good options. Schumer believed that shutting down the government would give too much power to the president and businessman Elon Musk to determine who was an "essential" government worker, and potentially permanently sideline those they deemed not essential. Democrats will be debating whether he made the right decision for weeks to come. 

The Senate Banking Committee advanced a stablecoin bill. It marks the first time a congressional committee has approved a regulatory structure for a cryptocurrency, though it is limited to stablecoins, which are digital assets pegged to assets like the U.S. dollar. Notably, the bill received the support of five Democrats on the committee—a clear sign not only of the growing desire in both parties to create a better regulatory structure for digital assets but also of the increased influence of cryptocurrency companies in Washington. During a marathon session last week, numerous amendments were put forward, indicative of the broad debate that continues on Capitol Hill about the best way to regulate the crypto space. The goal of the bill is to protect consumers while also expanding innovation. It would require 100% reserve in dollars or Treasuries, monthly disclosure of those reserves, annual audits for larger companies and more. Lawmakers are also working on a broader bill to create a regulatory market structure for all cryptocurrencies, but that one is still in development. The stablecoin bill would need to be reconciled with a House version that is still in the discussion stage, so there is a long way to go. But passage by a Senate committee is a notable moment in the crypto journey on Capitol Hill and increases the likelihood of a bill passing into law later this year.

A bipartisan bill was introduced on mutual fund capital gains taxes. A bill was introduced in the House last week that would allow individual taxpayers to defer the annual taxation of capital gains in mutual funds if they reinvested their shares. The goal is to help investors avoid an annual unexpected tax hit resulting not from the investor's trading but because the mutual fund incurred capital gains over the course of its normal portfolio management. The legislation would bring mutual funds into parity with exchange-traded funds. Reps. Beth Van Duyne (R-Texas) and Terri Sewall (D-Ala.) introduced the bill, which has a long way to go in the legislative process. But proponents, which include industry trade associations like the Investment Company Institute and the Securities Industry and Financial Markets Association (SIFMA), are optimistic that the provision could be included in the larger tax bill this year. 

A second Democratic House member died. Rep. Raúl Grijalva (D-Ariz) died on March 13^th after a battle with lung cancer. He is the second Democratic congressman to pass away in just over a week, following the unexpected death of Rep. Sylvester Turner (D-Texas) on March 5^th. Grijalva, one of the most liberal members of the House of Representatives, was first elected to the Tucson-area seat in 2002. He won re-election last fall despite being absent from Washington for much of the year due to his cancer treatments. Grijalva's death changes the margins in the House to 218 Republicans and 213 Democrats, with four vacancies. A special primary election will be held July 15^th, followed by a general election on September 23^rd, to fill the remainder of Grijalva's term in Congress. The seat is considered reliably Democratic.