Page 12 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

“
Aside from the immediate focus on COVID-19 mitigation
and recovery, we expect the bulk of Biden’s executive

actions to be focused on climate and foreign policy. ”

tax changes and focus on the economic items (market positive) be paired with extending middle class tax cuts on the personal side
before tax and regulatory changes (market negative). We believe on a permanent basis. There is a big debate in DC over timing on any
that there is some truth to this assumption and the Democratic potential tax changes. Legislation is not allowed to be retroactive,
agenda will not be as robust than if they had won 53-55 Senate with the exception of tax law, which can be retroactive to January
seats in the November election, but it is important not to understate 1 of the year passed. We believe that Democrats would take a stag-
how impactful having control of the Senate will be for control of gered approach, if given the opportunity, but some changes would
the Senate agenda. begin in 2021. As highlighted earlier, compromise will be necessary to
achieve this goal and with zero margin for error, we can expect false
We expect Democrats to use budget reconciliation in 2021 to
enact tax changes and implement other portions of their agenda starts and potential breakdowns in the process – further heightening
(i.e., paid sick leave, child care, and/or infrastructure spending). policy uncertainty.
Budget reconciliation is allowed once per budget and only requires
a simple majority vote in the House and Senate (no filibuster). It EXECUTIVE ACTION IN A BIDEN ADMINISTRATION:
is generally subject to revenue (taxes and spending), but it has EXPECT CLIMATE AND FOREIGN POLICY AS THE FOCUS
limits (current rules do not allow changes to Social Security). A very thin majority Congress elevates the prominence of executive
With a narrow House majority and the need to get every Senator action as a driver of policy change in the Biden administration. Aside
on board before passage, this debate is likely to have false starts from the immediate focus on COVID-19 mitigation and recovery, we
and breakdowns in negotiations. However, with reconciliation expect the bulk of Biden’s executive actions to be focused on climate
the only pathway for legislation with a simple majority, we expect and foreign policy. Specifically, we expect a Biden administration to
Democrats to do everything possible to find a final compromise. use executive authority to drive a clean energy transition in the federal
government through procurement and modernisation of federal facili-
The filibuster (the 60-vote threshold for votes in the Senate) is not ties toward increased energy efficiency. Biden’s newly-created White
expected to be eliminated for legislation. Changing the filibuster House Climate Coordinator position, to be held by former Obama
is a change to Senate rules, which only requires a simple majority, EPA administrator Gina McCarthy, is a clear sign of executive climate
so it is within their power to change the threshold, if they have action as a key priority for 2021. A longer-term area to watch is the
unanimous support. Currently they do not have the support to Biden trade agenda, especially the direction of economic ties with
change the filibuster, but we will be watching to see if there are China. Biden has signaled there will be no quick action on Trump-
incremental changes that place more requirements on the minority era China tariffs, but we ultimately expect the administration could
to sustain a filibuster or eliminate the filibuster for appropriations explore tariff adjustments for widely-available goods or goods tied
bills. Pressure may build on Democratic lawmakers to change the to climate policy objectives as a further economic boost.
filibuster if it is effectively used to block key agenda items.

As is typical with discussions on increasing spending, there will AS FOR THE REGULATORY AGENDA,
also be negotiation on how to pay for it. This is where we expect tax PERSONNEL IS POLICY
adjustment considerations to come into play, and a Biden admin- Biden’s picks to lead regulatory agencies are another factor impacted
istration supported by Democratic lawmakers has a clearer path by the Georgia Senate outcome flipping Senate control to Democrats.
to raise certain taxes through the budget reconciliation process. Biden has largely avoided polarising picks, however, there are still
Biden’s tax plan broadly calls for raising the corporate tax rate to 28% key positions without a nominee. Democrats would have control
and tightening tax rules on overseas income, which we expect could over setting confirmation votes and would ensure many more of

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