Policy implications: economy, markets and taxation


Liz Varley, Vice President – Federal Government Affairs, Ameriprise Financial

The U.S. Capitol dome in winter

 

As the post-election investment landscape evolves, there are near-term elements investors may want to discuss with their Ameriprise financial advisor. While events are still somewhat fluid, here are insights for investors to consider.  

  • Administration. The Electoral College has voted to select Joseph R. Biden Jr. as president.

  • House of Representatives. Democrats remain in the majority but by a smaller margin than before the election. This could be a challenge for Speaker Nancy Pelosi, but partnering with the Biden administration on key legislative priorities will likely help House Democrats stay unified.

  • Senate. Two runoff elections in Georgia Jan. 5 will determine control of the Senate. If the Democratic candidates don’t win, Congress remains divided. Ultimately, there will be a handful of opportunities to send legislation to the president’s desk. Even without unified control, the Biden administration can consider regulatory action and executive orders.


COVID-19 efforts  

Biden has said that stemming the spread of COVID-19 and addressing impacts of the pandemic will be among his first priorities. If the country can successfully navigate through the winter and early spring, policy priorities beyond the pandemic may begin to gain momentum.

There are opportunities for bipartisan policy efforts. The initial to-do list depends on whether federal lawmakers can agree to provide additional economic stimulus and fund the federal government for the 2021 fiscal year.

 

Potential policy priorities in 2021

If a stimulus package is completed before the end of 2020, a new Congress and the Biden administration will discuss a range of initiatives. Here are several areas in prime position for forward movement.

 

Infrastructure. During the 116th Congress, lawmakers on both sides of the Capitol produced infrastructure legislation. Republicans and Democrats unanimously supported the Senate proposal, which was more modest in size and scope than a House bill. Neither option identified revenue sources to offset new spending. If an infrastructure package gains steam, investors may benefit from a focus on:

  • Municipal bonds
  • Broadband expansion
  • Electric grid modernization

 

Tax policy. The potential for major changes in federal taxation appears to be limited in 2021. Here are two scenarios.

In a divided Congress (split control between Republicans and Democrats):

  • A handful of tax proposals could gain traction, but they would likely need to be paired with other reforms, such as an infrastructure package.
  • International tax improvements and digital tax are areas for potential bipartisan cooperation.
  • Provisions for individual taxpayers will likely be off the table.

In a unified Congress (Democrat majority):  

  • There could be an effort to change corporate and individual tax policy through a budget reconciliation process.
  • Unlike most legislation, reconciliation can be completed with a simple majority vote and is not subject to a filibuster in the Senate.

 

Federal deficit. While most economists agree that additional spending was vital during the early days of the pandemic, the current debt level is significant. It will impact the appetite for aggressive new spending in the next Congress.

Medicare, Social Security and interest payments on federal debt drive most of the revenue collections. In our view, the federal government will need to shore up these programs within the next decade. Revenue discussions will likely need to extend beyond the current framework of income and payroll taxes to include more innovative ways to address revenue shortfalls.

 

Climate. Biden has indicated that climate change is another area of focus in his administration. Related, the Securities & Exchange Commission is expected to consider new disclosure requirements for public companies. And the Federal Reserve Board has indicated “green” proposals will be under consideration.

While institutional investors have been asking public companies to provide this information, the result has been a mix of competing standards. Initiatives in the United States are likely to produce a more consistent disclosure framework. This could enable retail and institutional investors to more effectively assess sustainability risks among investments.

 

Retirement policy. Historically, bipartisan efforts have led to retirement-savings legislation. Next year, the Securing a Strong Retirement Act of 2020 (i.e., SECURE Act 2.0) is likely to be considered in the House of Representatives. The legislation would:

  • Raise the age for required minimum distributions (RMDs) from 401(k) and individual retirement accounts to age 75 from age 72.
  • Enhance the saver’s tax credit for individuals who contribute to a qualified retirement plan as well as to expand tax credits for employers who offer qualified retirement plans.
  • Require mandatory auto-enrollment in employer-sponsored qualified retirement plans with at least 10 employees for new plans.

 

In summary

While the ultimate makeup of Congress is uncertain, we believe it’s important to remain pragmatic in this fluid environment. Watch for the above developments and stay focused on your financial goals. If you are contemplating actions in your investment portfolio or have concerns about your tax situation, talk with your advisor. They are committed to help you navigate the near-term conditions and can collaborate with your tax professional as needed.