Congress, White House Prepare for Battle

Both Democrats and Republicans will use AMT reform, a homeowner bailout, and China trade as 2008 issues.


"Forget about 2007. It's all about the 2008 and the election," is how one veteran Capitol Hill watcher said I should think about all the upcoming goings-on and machinations in Congress. Both parties are trying to "prepare the battlefield" this fall to put themselves in the best position with voters come Election Day 2008.

In the language of business, it's all about brand building. Republicans are trying to again make the GOP brand mean "small government" and "fiscal responsibility." Democrats are going the populist route by portraying themselves as the party of a beleaguered middle class under pressure from globalization and stagnant incomes.

Keep in mind, too, that President Bush has threatened to become a veto machine, particularly with a series of upcoming spending bills. Indeed, there is a reasonable chance that there will be a government shutdown given the current poisonous atmosphere inside the beltway. Here are some other key issues and how they might play out over the next few months.

The mortgage crisis and a homeowner bailout: Bush has already ruled out any direct payments to homeowners, and besides, a full bailout might cost $100 billion or more. Good luck finding that dough given current congressional budget rules, which would force either higher taxes or big budget cuts. The "Chrysler" or "savings and loan" bailout scenario just doesn't seem to be going anywhere. Democrats have also called for lifting regulations on government-sponsored mortgage funding companies Fannie Mae and Freddie Mac. But both the White House and Federal Reserve Chairman Ben Bernanke have come out strongly against this.

Instead, the administration, as it announced today, favors changes in the Federal Housing Administration mortgage insurance program to let more people refinance with FHA insurance, particularly those with bad credit and big loans. Bush also wants to change the tax law so that if a homeowner renegotiates his loan, any less money owed would not be counted as taxable income. Another approach Congress seems likely to try is more regulation of the mortgage industry and creation of a new regulator. Again, expect a Bush veto of Sarbanes-Oxley: The Homeowners Edition.

The alternative minimum tax, private equity, and hedge funds: I'm lumping these all together because it still seems likely that tax increases on carried interest and publicly traded partnerships like the Blackstone Group will be linked to a temporary patch of the AMT. While changing how such partnerships are taxed is not a huge revenue raiser, taxing hedge funds' carried interest at higher rates could bring in as much $10 billion a year, helping pay for AMT reform. (But Congress may still have to vote to ignore its own budget rules to get it done.) Expect Bush to lobby to make a cut in corporate income taxes part of any such deal, though that would negate the additional income from the tax hikes.

China currency. Both the House and the Senate have bills that seek to push China into revaluing its currency, partially blamed for the $250 billion trade deficit America has with China. Bush has threatened to veto any such bills, yet there may be enough bipartisan support to override. But this is likely to be such a juicy 2008 issue that you can expect any final legislative action to get pushed into next year, closer to the election. That way, Democrats can force free-trade Republicans to make tough, high-profile votes against a bill that may be politically popular.