The recent November elections marked one of the greatest swings in Congressional political power in U.S. history. The Republicans won even more seats than the 1994 Republican Revolution lead by Newt Gingrich and their Contract with America. Republicans picked up 60 seats in the House with seven undecided and six seats in the Senate with one undecided as of press time.
Many around the country are wondering what this Congressional overhaul will mean for small business and various industries. It is not surprising that there was a backlash against Obama and the more liberal element of the Democrats. Americans are considered about the poor economy, the prospects of rising taxes and excess government spending.
Plus, the Republicans had history on their side. Election data from 1934 to 2006 indicate that the president’s party lost seats in the House in 16 out of the 19 midterm elections. And where there were gains, those were very small compared to some of the losses.
Political history records a number of times where the president’s party lost big in the midterm elections only to see the sitting president re-elected in two years.
Political Split = Gridlock Potential
What is clear is that a split Congress means that President Obama will no longer have easy access to pass his legislative agenda. Both parties will need to find common ground to pass major legislation. But this may not be easy to achieve because the political extremes of both parties seem to be emboldened to hang in for a tough fight next year.
Polls indicate that the electorate wants both parties to work together. The Kiplinger Letter, a DC-based forecast newsletter, reported, “The odds of that happening are very slim. Far too many obstacles stand in the way. Though both sides will make conciliatory gestures, neither is willing to move far toward compromise.”
Liberals are likely to control the Democratic House minority because many of the moderate Democrats were sent packing in the recent election. Republicans know that they have to follow their promises to fiscal conservatives or risk a revolt in 2012.
The Kiplinger Letter suggested that a “genuine ideological rift” exists between the two major parties that will result in gridlock on many major issues and potentially very bloody political battles next year.
Look for the Obama administration to use its authority over the executive branch to push its legislative agenda where it can. Also, many of the key bills passed over the last two years are still being implemented by the Obama administration – which could have a major impact on health care, tax, Wall Street and energy policy. You have to remember that 2012 will impact whatever happens in the next two years because each party wants to improve on the recent results.
Lame-Duck Session
Don’t expect much to get accomplished during the lame-duck Congress. President Obama has indicated that he is willing to consider a temporary extension of the Bush-era tax cuts. Congress will also pass a continuing resolution to keep government running. And it may approve at least temporary fixes for some tax situations that need to be addressed, such as the Bush-era tax cuts and estate tax.
It is very likely that a number of amendments will be added to the continuing resolution as a last-ditch effort to get projects covered in this Congress. Some in the forest products industry are lobbying for a pro-wood amendment to the HomeStar energy program sponsored by Senator Ron Wyden which would include adding “energy efficient wood products” to the list of home improvements eligible for tax rebates under the new program. This may be one of several issues addressed in the continuing resolution spending bill.
Forest Products Industry Issues
Key issues for the forest products industry include: renewable energy policy, taxes (especially the estate tax), measures to stimulate the housing market, and fair trade laws for U.S. exports. Generally, the Republicans are fairly friendly to issues of concern to the forest products industry.
One major concern is if people are appointed to key committee leadership spots that do not have significant forest products interests in their district. This could reduce the influence of the industry on Capitol Hill. One issue where Democrats may have been more business friendly than Republicans is international trade laws where Democrats have favored a more aggressive agenda to eliminate unfair competition by countries, such as China.
Focusing particularly on the forest products industry, Deb Hawkinson of the Hardwood Federation, said, “We lost some friends, such as Senator Blanche Lincoln (D-Ark). But we also have some friends returning and look forward to making relationships with the incoming Congress.”
Deb said that the new Congress will be fairly friendly to small business, oppose higher taxes, and support leveling the playing field to protect U.S. jobs.
Changes are expected to a final rule for a Clean Air Act amendment which Congress passed earlier this year. Senator Susan Collins has said that EPA proposed rules on the maximum achievable control technology rule, commonly referred to as boiler MACT, will likely be changed. Sen. Collins said the proposed rules were the product of “overzealous bureaucrats,” and that an independent analysis put the nationwide cost to the forest products industry for installing the required technology at $21 billion, more than double what the EPA estimated.
Bellwether Issues
Some issues may serve as a bellwether of things to come. For example, the estate tax is a major concern for small businesses, including the forest products sector.
The estate tax currently sits in limbo. It expired this year due to a 2001 tax law although it is set to return in January 2011 to the lower exemption and higher rates that were in place in 2001. There are a number of options. Do nothing and let the 2001 rules return. Make the 2009 rates and exemptions permanent, which the Obama administration favors. Or make the 2010 rules permanent and thereby eliminate the estate tax, which is preferred by Republicans.
In 2001, the estate tax exemption was $1,350,000 for a married couple, and half of that for a single person with a maximum tax rate of 55%. Between 2002 and 2009, the exemption for a couple rose to $7 million with a maximum tax rate of 45%. These higher rates would reduce the burden of estate taxes on most small businesses.
The outcome of the estate tax and other tax proposals may indicate what could happen as the parties struggle to find common ground on key issues. One thing is clear, the midterm elections have set the stage for some interesting political theater over the next year.
