The US Government Did Something … and It Isn’t Awful!

Congress gave investors a gift this holiday season, and we don't think you will want to return it. Photo by Chip Somodevilla/Getty Images News.

Over the last few weeks, we've been following the progress (to the extent there was progress) on the US government's omnibus spending legislation in our daily headline roundup, and on Friday that progress came to fruition. Thursday night, the Senate passed its versions, and the House followed suit Friday, approving two separate bills (a spending measure for fiscal 2017 and a tax break bill estimated at roughly $650 billion over 10 years). Friday afternoon, President Obama signed them. This eliminates the "risk" of a government shutdown^[i], and it seems US politicians are closing the year with a rather kumbaya-type moment-there is a lot of give-and-take in these new acts. While many parts of the bill are very modest and unlikely to materially matter to investors, there are a couple that stick out. And they are more positive than we anticipated.

Here is a quick rundown of some of the highlights along with a few links to more detailed coverage elsewhere, in case you are interested.

• It boosts spending in the coming fiscal years slightly above the amounts mandated by 2011's Budget Control Act (the dreaded "sequester," in effect since 2013), which amount to fairly modest increases. In 2017, it's $50 billion in added spending, or about a 1% increase over the estimated 2015 spending level prior to the bill. Many media sources cite this as a $1.15 trillion spending bill, but this is the 10-year total of spending increases, and a number that is rather unrealistic considering the government has to finance itself via legislation every year. Now, none of this is really news, because the amounts involved here stem from the debt ceiling deal reached back in October. It is worth noting the mandated reductions in the sequester were small and had little economic effect. Expect the same from this small increase in spending. Here is a fair discussion of this aspect of the legislation:

Congress Passes $1.15 Trillion Spending Bill

Kristina Peterson, The Wall Street Journal

• In the most surprisingly positive part of the bill, it makes permanent a number of "tax extenders" (mostly focused on individuals) that had lapsed year after year recently, forcing retroactive renewal.

Of special note: This new law makes permanent the ability for retirees 70 ½ years of age or older with IRAs to donate their required minimum distribution directly to charity and avoid tax. If this is you, now is probably a good time to contact your tax advisor and talk it over with him or her. Be sure to gather any instructions necessary to transmit the funds or securities to the eligible charity of your choice. And, don't wait until the last minute! These transactions can take a couple days to complete^[ii].

So this one is much bigger for investors. Congress not only renewed the tax extenders for individuals, it made them permanent. This means no more annual political football while charities, retirees and folks who would be eligible for higher-education or child-care tax credits dangle. The certainty here is a key plus. Kudos to politicians for giving up one of their favorite political footballs that allowed them to claim they voted for X number of tax cuts or benefits for the middle class in their term.

Here are a few very good articles for further reading on the subject:

Tax Cut Bill, Passed By House, Makes These Charity Tax Breaks Permanent

Michael S. Fischer, ThinkAdvisor

Tax Deal Makes Permanent R&D Credit, Generous Child and College Breaks

Tony Nitti, Forbes

• Many of the business tax extensions were extended retroactively and looking forward, adding some clarity for things like bonus depreciation. (Tony Nitti's article from Forbes in the above section also details these well.)

The R&D tax credit was permanently extended, ending an annual renewal game that has existed for more than 30 years, and it increases the size of businesses that use it slightly. Businesses with up to $50 million in sales can now use it. This is a modest plus for the economy/businesses. 50% bonus depreciation-the ability to take an extra writedown of a newly purchased asset-was also extended, an incremental positive. But it didn't get permanently extended-it will remain at 50% until 2017, then fall to 40% in 2018, drop to 30% in 2019 and vanish thereafter.

• The US's oil export ban is over, and in exchange for this Congress extended some solar and wind power subsidies and grants by five years. The big news here is the lifting of America's oil export ban, in place since 1975.

The short-term impact of this is likely very small, as the vast oversupply of oil relative to demand growth overwhelms it. In addition, West Texas Intermediate crude (the US's benchmark blend) is basically trading on par with Brent (the global benchmark), which likely means importers have little incentive to suddenly switch. So in other words, this isn't a newfangled reason you should go out and load up on Energy stocks.

Now then, this likely does help globalize the oil market in the long run, a key plus, and could very well incrementally reduce gasoline prices here in the US. While that may surprise some, consider that US law already allowed refined oil (gasoline, etc.) exports, so this in no way impacts the movement of US gasoline supply. However, it does mean US oil will now be available to refineries abroad, which also happen to be better equipped to refine it into gasoline than US firms, which are geared for heavier blends of oil.

• Affordable Care Act taxes on the sale of medical devices will be lifted for two years, and the excise tax on so-called "Cadillac Plans"-pricey plans costing more than $10,200 annually for an individual ($27,500 for family coverage)-will now take effect in 2020, not 2018 as previously planned. Moreover, when the Cadillac Plan Tax does come into effect, it will also now be deductible as a business expense, mitigating the impact (which would not have been big either way).

The delay of the tax on medical devices is a teensy plus for Health Care firms engaged in the practice, but it isn't exactly a gamechanger. The Cadillac Plan Tax likely has even less actual impact for investors. Some see it as the largest change made to the law since its passage, claiming it symbolizes a new era of compromise on the subject in Washington, but this is very speculative and mostly sociological.

Congress to Delay ACA's 'Cadillac' Tax on Pricey Health Plans Until 2020

Amy Goldstein, The Washington Post

• It did not include language blocking or defunding the Department of Labor's proposed fiduciary rule for all investment professionals dealing with retirement accounts, so this rulemaking process will go forward.

We discussed this just the other day when it was emerging that Congress may add language preventing the DoL from advancing, but it didn't survive Congressional horse trading. Now, this doesn't mean separate legislation won't be proposed to forestall the DoL-and two bills were introduced Friday to that effect. Both would require Congressional approval of the DoL rule and, if that rule failed, install one of lawmakers' creation. Both bills are in the very early stages presently, and it would not be surprising if these died on the vine, like so many other bills. Either way, though, our view remains the same: Whether a fiduciary standard is installed by the DoL or not, it will not materially improve the quality of financial advice disseminated by Wall Street.

New Bills Aim to Stop DOL Fiduciary Rule

Mark Schoeff, Jr., InvestmentNews

Is the DOL's Fiduciary Rule DOA?

Us, Here

All in all, not a bad day's work for the government. And with that, we give them a hearty pat on the back and suggest they can now go back to being gridlocked and doing next to nothing.