When the DJIA fell 62 points yesterday during the last half-hour of trading, we assumed immediately that there was bad news on the wire relating to the Senate consideration of legislation to replace the Foreign Sales Corporation (FSC). Sure enough, there it was on our Bloomberg terminal at 3:24 PM, with Chairman Chuck Grassley of Senate Finance essentially telling the world that there was no chance of a cloture vote succeeding today. Worse, he saw probably no chance of anything happening until the World Trade Organization (WTO) penalties on American exports really begin pinching as they escalate month-by-month with no action from Congress.
Because this is the most important piece of legislation we are likely to see this year that could juice up the equity markets with the supply-side components it contains, the market now must realistically discount the possibility that it may remain in gridlock all year as it gets tangled up in presidential politics. The bill, which we have been watching develop since last summer, has been caught in the Senate because of a struggle over an overtime pay amendment by Senator Tom Harkin (D-Iowa). Harkin wants a vote on the unrelated amendment, which passed the Senate last year but stalled in the House with White House opposition. A Republican staffer told me last night, “Senator McConnell and Senator Harkin are dug in on opposite sides of the overtime issue. Until they move, we’re stuck.”
A large part of the market’s weakness during the past six weeks has been tied to the failure of the legislation to move on the House side, where it also is gridlocked. Wall Street, which had appeared to give the legislation a very high probability of success, now must recalibrate. In the House, Chairman Bill Thomas of House Ways and Means is short about 30 votes on this version of the bill because “rust-belt” Republicans want the FSC “fix” aimed at manufacturing interests in their districts, not spread uniformly over the national economy. Thomas actually singles out Caterpillar, Boeing and Microsoft as the culprits, with Caterpillar first on his list. Democrats insist that they would be willing to negotiate with Thomas to cut the pie differently. However, it appears that Thomas thinks he would have to give away the pie the way things stand now, so he will do nothing until he see what happens in the Senate after the Easter recess. You may recall that this was to be wrapped up in both the House and Senate by April 1.
Both House and Senate versions would provide for a tax holiday permitting U.S. multinationals to repatriate profits earned abroad through a 5.25% tax rate instead of the normal 35% rate. Most Democrats oppose this provision on the grounds that it will not require the repatriated capital to stay at home, but it does have enough bipartisan support to pass both the House and Senate if the overall legislation could ever get that far.
I have assumed for months that the GOP leadership would find a way to deal with the politics, because the WTO penalties are real and will aggravate the U.S. economy. In a client letter last fall, I expressed concern that because the bill had to be delayed until this year – because of the time lost in Congress in deliberations over Medicare – it could get tangled up in election-year politics and run into trouble. It now is conceivable that Congress will remain gridlocked through the elections on the FSC issue, preferring the dogfight to removing the WTO tariffs, which increase by one percentage point per month on selected industries. A Democratic staff member on the House side told me yesterday that in his 20 years on Capitol Hill, he has never before seen such unwillingness to work things out. Senator Grassley remains the best hope as he still genuinely wants this worked out on a bipartisan basis, but he does not seem happy now.
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