Update 808: Budget’s September Sprint

September 25, 2024 | Appropriations, Jobs, Update, Weekly Round Up | By

Update 808 — Sprint: September and Beyond:
FY25 Budget, Harris Tax Proposals, Jobs Report

This week’s leading macroeconomic news: the August jobs report, which showed that the American labor market has solidly shifted into lower gear, with job gains, 142,000 for the month, notably cooling. Also, Democratic presidential nominee Kamala Harris debuted a new set of proposals to provide tax and regulatory relief to start-ups and small businesses in New Hampshire this week. In addition, Harris clarified her position on taxing capital gains. 

In other news, Congress has been discussing terms for next year’s budget. When it returns from August recess next week, members will resume negotiations on September’s leading must-pass item: providing spending authority for the federal government beyond fiscal year 2024, which ends on September 30. Background on the appropriations process status as well as House Speaker Johnson’s plans for a Continuing Resolution (CR) for half of fiscal 2025 and reactions of the House GOP to it are detailed in-depth below.

Good weekends all…

Best,

Dana

Weekly Economic Updates

August Jobs Report: Labor Market Noticeably Cooling

The U.S. economy added a slightly lower-than-expected 142,000 jobs in August, while the unemployment rate ticked back down to 4.2 percent after rising to 4.3 percent last month. The new data, included in the August jobs report released by the Bureau of Labor Statistics (BLS) this morning, shows that last month’s cool jobs report was not simply a blip and that the labor market has continued shifting into a lower gear after growing at a remarkably strong pace over the past two years. 

Source: Council of Economic Advisers

Job growth in July was revised down by 25,000 jobs, from 114,000 to 89,000 jobs, while job growth in June was revised down by 61,000 jobs, from 179,000 to 118,000 jobs. This brings the average monthly jobs gain over the past three months to a still-strong but notably moderating 116,000 jobs. 

Last month, job gains increased for the forty-fourth consecutive month. The largest gains came in:

  • construction (34,000 jobs)
  • health care (31,000 jobs)
  • social assistance (13,000 jobs)

The unemployment rate dropped by roughly 0.1 percent from 4.3 percent in July to 4.2 percent in August. 

In a sign that some aspects of the labor market remain quite strong, average hourly earnings rose by 0.4 percent on a monthly basis and by 3.8 percent on an annualized basis in August. Additionally, the average work week for all employees on private nonfarm payrolls edged up by 0.1 hour, showing that workers are getting more hours. 

The report comes about two weeks before the Federal Reserve’s interest-rate-setting committee, the Federal Open Market Committee (FOMC), next meets to decide the fate of the interest rate. Fed Chair Jerome Powell has suggested that the committee will likely opt finally to cut rates from its elevated level at that meeting. The FOMC has held the interest rate at the 5.25 to 5.5 percent range since last July. The question now is whether the committee will opt to lower rates by 25 or 50 basis points. 

If the FOMC is indeed taking a data-dependent approach in deciding its coming interest rate decisions, balancing focus on both parts of its dual mandate, then the continued labor market cooling revealed in today’s report should further solidify Powell’s hints of a rate cut in September and push committee officials towards a 50 basis point cut. 

Harris Provides Clarity on Tax Proposals

This week, Democratic Presidential nominee Kamala Harris announced a series of tax proposals, shining more light on her likely approach to tax policy as Congress gets ready to consider expiring provisions of the Tax Cuts and Jobs Act next year. Despite making a prior statement supporting the tax policies included in President Biden’s FY25 Budget proposal, it seems she would now like to separate herself from Biden by adding moderate tweaks to his proposed policies. 

In her most recent proposal, made at a rally in New Hampshire on Wednesday, Harris addressed plans to increase taxes on capital gains for wealthy individuals. While President Biden had suggested taxing capital gains at 39.6 percent for individuals earning over $1 million annually, Harris has put forward a rate of 28 percent. She does, however, support Biden’s plans to raise the surtax on investment income for wealthy individuals from 3.8 to 5 percent, bringing her proposed top capital gains rate to 33 percent. 

This proposal follows Harris’ endorsement of Biden’s plans to increase the stock buyback excise tax passed through the IRA from one to four percent and enact a Billionaire Minimum Income Tax (BMIT). The BMIT would levy a 25 percent minimum tax on income and capital gains, including unrealized gains, for individuals with net worths over $100 million. Harris’ endorsement of a tax that targets unrealized gains has received pushback from conservatives and wealthy individuals who fear it would open the door for more progressive wealth taxes. The tax would, however, only apply to around 10,000 people, a small percentage of American taxpayers. The BMIT would raise $500 billion over 10 years, offering crucial offsets for Harris’ series of proposals to cut taxes for the working and middle class.

Harris also discussed broader efforts her administration would take to promote small business creation and growth, establishing a goal of reaching 25,000 new small business applications by the end of her first term in office. Harris proposed:

  • expanding the tax deduction for startups to $50,000,
  • providing low- and no-interest loans to small businesses that want to expand,
  • cutting red tape that can make starting and growing a small business more difficult,
  • making it cheaper and easier for small businesses to file their taxes,
  • expanding access to venture capital, supporting innovation hubs and business incubators, and
  • increasing federal contracts with small businesses with a particular focus on supporting small businesses in rural communities.

We will review the aforementioned proposals, as well as other tax proposals from the Harris and Trump campaigns, in-depth in next Wednesday’s update. 

Appropriations Update

CR Proposals Come to Light Ahead of Congress’ Return

Action on government funding for Fiscal Year 2025 (FY25) picked up this week as Congress prepares to return from its August recess on Monday. Speaker of the House Mike Johnson (R-LA) and President Biden made their first moves: Johnson proposed a temporary funding stop-gap that would last well into next year and include extreme policy add-ons, while Biden submitted his administration’s formal request for anomalies – adjustments to current spending and policy often negotiated when Continuing Resolutions (CRs) are used to enact temporary government funding at prior-year levels. 

With three weeks remaining before the end of FY24 and a possible government shutdown on October 1, Congress will turn its attention to the CR for FY25 funding as soon as Monday. The House GOP hopes, however, to wrap up the CR and head out for October recess by September 20, giving members as much time as possible to make their case for reelection in their home districts. This ambitious target is unrealistic, but it will surely add to Congress’ urgency in the CR process.

FY25 Recap: Where did Congress Leave off?

Though a CR has been long expected given the contentious election in November and the distance between the parties’ demands following a contentious FY24 budget process, appropriators in the House and the Senate worked this summer to advance proposals for their respective final funding legislation. Still governed by strict caps that were set in the Fiscal Responsibility Act (FRA) last year, the FY25 process could very well see the same difficulties as the FY24 process, in which final funding was not approved until March – almost seven months after the beginning of the fiscal year. The House process has been marked by chaos and extreme proposals while the Senate process has largely focused on bipartisanship, possibly foreshadowing what’s to come in the CR and final funding negotiations. 

In an ambitious endeavor, House appropriators, led by new Committee Chair Rep. Tom Cole (R-OK), vowed to pass all 12 funding bills out of the full chamber before the start of last month’s recess. While the House GOP initially showed unity in passing bills containing military funding, fissures within the party bubbled to the surface leading to disagreement between moderate Republicans worried about how their voting record on bills containing extreme policy riders (also known as “poison pill” provisions) on issues such as abortion and far-right members asserting that proposals were not extreme enough to gain their support. Ultimately, the lack of consensus within the House Republican party led the House GOP to eventually abandon their goal of passing all 12 bills before the start of August. In total, the House was able to pass five bills before adjourning for recess a week early. 

In stark contrast to the House’s initial appropriations process, the Senate focused on finding bipartisan agreement for its proposals. Representative of their focus on bipartisan compromise, Senate Appropriations Chair Patty Murray (D-WA) and Ranking Member Susan Collins (R-ME) agreed on an additional $34.5 billion ($21 billion for defense and 13.5 billion for non-defense) in emergency funding above the discretionary spending caps set by the FRA. 

The Senate solely focused on passing proposals out of committee, feeling little pressure to proceed to a floor vote on legislation that will surely need to be reconciled with extreme House proposals months down the road. Senate Appropriators successfully passed 11 of the 12 bills out of committee, with a majority of them gaining unanimous approval. 

Johnson Teases Partisan CR

This week, attention switched from the pre-recess work on proposals for final appropriations bills to preparation for the all-but-certain CR seeking passage by the end of the month to avoid a government shutdown. 

Amid calls from the House Freedom Caucus (HFC) for a longer-term CR and inclusion of far-right priorities, Johnson unveiled a CR proposal that he is expected to formally propose upon Congress’ return on Monday. In addition to a six-month timetable, the proposal reportedly includes: 

  • The SAVE Act – Introduced by Rep. Chip Roy (R-TX) and passed by the House earlier this year, this legislation would require individuals to provide documentary proof of U.S. citizenship to register to vote in federal elections. It also prohibits auto-registration, requiring states to only register voters to vote on the federal level when they apply and provide proof of citizenship. The HFC formally called for the addition of this policy to the CR last month and the legislation has the support of Donald Trump. 
  • Farm Bill Extension – The Farm Bill is due for an extension at the end of September, in line with the CR deadline. As neither chamber has made much progress on their respective proposals, Johnson is expected to include a one-year extension as opposed to a longer-term solution both parties have been working towards. 
  • Funding for the VA – A $15 billion funding shortfall for the Department of Veterans Affairs was identified recently due to higher-than-expected costs of the PACT Act, which expanded healthcare and benefits for veterans exposed to toxic substances. Benefits for Veterans will likely be delayed without action to address the shortfall by September 20. 
  • Funding for FEMA – FEMA’s main disaster relief account needs further funding to adequately address emergencies/natural disasters across the country. 

While these last three points are capable of garnering bipartisan support, the SAVE Act and a six-month timetable appear to be a non-starter for Democrats. The Biden administration issued a Statement of Administration Policy in opposing the SAVE Act earlier this year, citing the fact that it is already illegal for non-citizens to vote and the hurdles it would introduce for citizens who are trying to participate in the voting process, sentiments that have echoed throughout the Democratic party. Additionally, Senate Appropriations Chair Patty Murray (D-WA) has stated opposition against a CR that pushes consideration of FY25 funding legislation into the next Congress, meaning Johson’s problems with the Senate could not be resolved by simply dropping the partisan SAVE Act. 

Johnson could, however, push legislation through the House without the support of Democrats and secure a ceremonial win for the conservative wing of his party — extremely unlikely as even Republicans have expressed doubts about the Speaker’s CR proposal. In a call with Speaker Johnson and members of the House GOP caucus on Wednesday morning, members such as Rep. LoLota (R-NY) and Rep. Miller-Meeks (R-IA) expressed concerns that the unlikely-to-pass proposal could yield a government shutdown, as GOP frontliners approach tough reelection contests. Rep. Massie (R-KY) went as far as to declare he would vote no on the proposition, which can only lose four Republican votes to pass the House. Ranking Member of the Senate Appropriations Committee Susan Collins (R-ME) has joined Chairwoman Collins in opposing a longer-term CR, suggesting opposition to a six-month package among the Senate GOP. 

Unclear for now: how Johnson plans to navigate these roadblocks upon Congress’ return next week. Wasting key legislative days on a proposal that would surely fail in the Senate and receive a veto from the administration could serve to do more hard than good. But the Speaker is again stuck between a rock (far-right Republicans) and a hard place (moderates hoping to avoid tough votes in an election year), a position that has largely defined his speakership. 

Other Potential Roadblocks for FY25 CR

Looking past the partisan proposal from Speaker Johnson, there are still other factors that could serve as roadblocks to passing a CR before the September 30 deadline: 

  • Anomalies – Anomalies, or provisions in a CR that deviate from simply extending the previous year’s funding levels (or make legislative changes to existing policies), are a common tool Congress uses to address shortfalls and emerging needs not met by a continuation of the previous year’s funding levels. This week, the Biden administration released a list of anomalies it will seek in this month’s CR, including:
    • $15.4 billion to help the Social Security Administration deal with staffing and customer service issues,
    • $12 billion for the VA due to increased spending related to benefits provided under the PACT Act,
    • $7.7 billion to ensure that women, infants, and children can continue receiving federal food assistance through WIC, 
    • $2.4 billion to help manage federal student aid operations, and 
    • $2 billion for Navy shipbuilding. 

Anomalies will be debated among leadership, appropriations committee heads, and the administration in the coming week, though some, such as funding for WIC, may prove to be sticking points. Debate over anomalies could surely stifle progress on the CR, especially given that the Republican party has not made its demands crystal clear on this front. Though most of this process will play out behind closed doors, it will be crucial to ensure that programs and people are not affected dramatically by Congress’ unwillingness to consider full-year funding before the election. 

  • Electoral Outcomes – Many Members of Congress support addressing FY25 funding before the end of the year during the lame-duck session following the election. However, shifts in polling for November’s election could cause either party to change course if they expect to be in a more powerful position following the November election. There is a chance that either party would support ‘kicking the can down the road’ in the case of an unlikely trifecta, which would give them a key opportunity to enact their spending priorities wholesale early next year. Even if Congress opts for a CR that ends in late November or early December, the deadline could always be extended pending electoral outcomes. 

The Week Ahead:

Wednesday, September 11

Thursday, September 12

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