What Business Should Expect In Next Congress

Nov 9, 2006

Wall Street Journal, Print Edition

WASHINGTON -- Democrats' election victory Tuesday ended a six-year partnership between a business-friendly White House and Congress that enacted free-trade agreements, cut taxes on corporations and investors and -- with the significant exception of the Sarbanes-Oxley corporate-reform bill -- avoided new regulations.
Now, the question is how far the Democrats, tempered by a Republican president and a closely divided Senate, can push the pendulum in the other direction.
The party has yet to spell out its entire legislative agenda, but its leaders are talking about quickly boosting the minimum wage, seeking to curb executive pay and pushing for higher taxes on business, particularly oil companies. Many stocks, especially health-care shares, took a hit early yesterday as investors weighed the new political uncertainties, but the market went on to finish higher (see related article.)
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Rep. Charles Rangel, the New York Democrat who is expected to become chairman of the tax-writing House Ways and Means Committee, cites "ending tax shelters for companies that move American jobs overseas" as one of his main objectives. He is also expected to complicate the White House's efforts to further liberalize trade by demanding strong protections for labor in any trade deals.
California Rep. Nancy Pelosi, the probable new speaker of the House, has already called for ending "tax giveaways" to oil companies, negotiating with pharmaceutical companies for better drug prices for federal health programs and rolling back tax cuts for the wealthiest Americans.
Many political observers, however, doubt the Democrats can gain traction on more than a few of these issues, especially with business groups and their political allies keen to avoid losing any ground on trade and taxes.
Raising the minimum wage is one fight the Democrats are expected to win. That would be a victory for organized labor, which has pushed for an increase for years, but a defeat for the restaurant and retail industries and small-business owners, who argue it would hurt the economy by forcing them to hire fewer workers.
Mrs. Pelosi has promised to bring legislation to the floor within the first 24 hours of the new Congress to boost the minimum wage to $7.25 an hour from the current $5.15. The idea is popular with voters: Six states overwhelmingly passed ballot initiatives Tuesday to raise the minimum wage and tie future increases to inflation. Republicans may feel hard-pressed to oppose the move.
At a news conference yesterday, President Bush cited the minimum wage as "an area where we can ... find common ground."
On the trade front, businesses face the growing threat of protectionism. Several victorious Democrats campaigned as trade skeptics, arguing that U.S. manufacturers are being battered unfairly by companies in China and other low-wage countries with weaker environmental and labor protections. Trade watchers on both sides of the issue say President Bush will have a tough time winning a free hand from Congress to negotiate trade accords. The president's "fast track" authority -- under which Congress has to vote up or down on trade agreements, forgoing amendments -- expires in July, and a Democrat-led House is less likely to grant him such sweeping powers again.
Leo Gerard, president of the United Steelworkers union, told reporters yesterday that the coming showdown over Mr. Bush's fast-track authority is "the first battle that we're going to win."
U.S. trading partners are reluctant to negotiate new trade accords if they think Congress will change the terms before ratifying them, and the current Doha round of global trade talks is already considered to be in deep trouble. European Commission President José Manuel Barroso appealed yesterday to the new U.S. Congress to help revive the stalled talks.
The trade debate is particularly heated when it comes to China, with its fast-growing export industries. Lawmakers could take steps to press China to improve its enforcement of intellectual-property rights and other trade rules. Yesterday, Mr. Rangel, the New York Democrat, said the U.S. needs to "be angry as hell and try to protect American industry....We have to protect American jobs and American manufacturers."
Robert Portman, the former U.S. Trade Representative who now heads the White House budget office, says the Democrats could create "a real nervousness among people who invest in and look at our economy closely. The trade dynamic has been very good. Export-driven growth is important, and if we're not knocking down barriers to trade that's a concern."
Democratic control of the House also will end the Republican Party's drive to lower taxes and could frustrate President Bush's hopes of extending the reduced 15% tax rates on capital gains and dividends, which expire in 2010. Republicans' decade-long push to scrap estate taxes is also likely to be halted.
Democrats are expected to support some tax sweeteners for business, such as the research and development tax credit. Mr. Rangel also said one of his priorities is to ease the burden of the so-called alternative minimum tax, which is designed to keep wealthy taxpayers from taking so many deductions and credits they escape taxes altogether. Easing the burden of the AMT, which has begun to ensnare many middle-class families, could cost the government $1 trillion over 10 years, and many policy watchers expect Democrats to rescind tax breaks for corporations and the wealthy to help offset any tax cuts or new spending.
At the same time, Democrats have vowed to force pharmaceutical companies to charge less for drugs sold to Medicare beneficiaries -- an idea strongly opposed by the drug industry. Mrs. Pelosi is expected to push a bill to allow direct price negotiations between the government and the drug industry. Though such a measure might not clear the Senate or the White House, it could give Democrats traction to advance other ways of driving down drug prices, such as widening the availability of imported drugs.
Drug prices are also likely to be a major focus for investigations, reports and hearings by the new Democratic House committee chairmen, particularly California Rep. Henry Waxman, who will head the House Government Reform Committee. A favorite drug-industry benefit -- six months of exclusive marketing of medications in return for studies on their effects in children -- is up for renewal and likely to draw scrutiny from Mr. Waxman and others. In an interview, Mr. Waxman says his priorities will include "reducing the price of prescription drugs."
Similarly, investors who own stock in student-loan providers like Sallie Mae worry about Democratic campaign promises to significantly reduce student-loan interest rates and speculation that they'll promote the William D. Ford Federal Direct Loan Program, in which students borrow directly from the federal government, rather than banks. That direct-lending program competes with the other federal student-loan program, Federal Family Education Loan Program, in which students borrow through a middleman such as Sallie Mae. In 4 p.m. New York Stock Exchange composite trading, shares of SLM Corp. -- better known as Sallie Mae -- were down 4.8% at $47.21.
The Democrat takeover of the House is expected to put outsize executive pay back in the spotlight, with a push toward giving shareholders a vote to approve pay packages. Massachusetts Democrat Barney Frank, who is expected to head the House Financial Services Committee, says he will hold hearings on executive pay and plans to move forward on a bill he introduced last year.
However, Mr. Frank and other Democrats have been receptive to business efforts to review the Sarbanes-Oxley corporate-governance law and to have regulators adjust some of the more controversial provisions. Sen. Charles Schumer, a New York Democrat, has spoken recently about curbing some aspects of the law, which he says is driving business away from U.S. financial markets.
Mr. Frank also has a strong interest in affordable housing and his chairmanship could shift the odds in the three-year-old struggle to tighten regulation of mortgage giants Fannie Mae and Freddie Mac. The Bush administration's efforts to persuade Congress to force the companies to slash their mortgage holdings had already sputtered before the election, and Treasury Secretary Henry Paulson has been looking for possible compromises. Now almost any legislative language to rein in the two companies may be politically impossible to sell.
Fannie and Freddie shares gained 2.9% and 2%, respectively, to $61.25 and $71.23 yesterday in 4 p.m. Big Board trading.
Still, Mr. Frank is expected to push hard for the legislation to require Fannie and Freddie to use more of their resources for financing loans to low-income people. That may hurt the companies' profitability. And both parties still want to create a more powerful regulatory agency to oversee Fannie and Freddie in light of their violations of accounting rules in recent years.
Another industry that could both benefit and suffer from the Democratic takeover of the House is the auto industry. Democrats are likely to push for greater use of alternative fuels, which could hurt or help Detroit depending on how legislation is structured. The industry is sharply opposed to tougher fuel economy standards supported by Democrats. But domestic auto makers are bullish on the potential for ethanol to partly replace oil as a transportation fuel and would support efforts to build the ethanol infrastructure and production capacity.
More perilous for the industry is Democratic interest in addressing climate change by limiting carbon dioxide emissions. Automobiles are among the worst offenders, and car companies could be hurt by new taxes or regulations aimed at limiting carbon emissions.
President Bush is said to be interested in climate change as well, and he has repeatedly spoken in favor of alternative fuels, making them an area where potential exists for successful legislation.
--Kara Scannell, Brody Mullins, James R. Hagerty, Anna Wilde Mathews, Laura Meckler and Anne Marie Chaker contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com and Michael M. Phillips at michael.phillips@wsj.com