- Between the ECB meeting and the House vote, today is a big day for the US dollar
- Elimination of the SALT deduction hurts earners from high-tax states, and could derail the House vote
- If the House passes the budget resolution, the dollar can go much higher from here
As the Trump/Corker feud rages in the background, a crucial vote is set to take place later today in Washington. The House of Representatives will formally vote on the Senate’s budget resolution (passed last week), that will allow Republicans to pass Trump’s tax reforms using a tool called reconciliation.
The significance of today’s vote
Reconciliation allows lawmakers to adjust aspects of the government budget including tax rates, debt limits and mandatory spending with a simple majority in the Senate. Without the use of reconciliation, the Senate would require three-fifths of all senators (60 votes) in order to pass Trump’s tax reforms. As Republicans only have a 52-48 majority in the Senate, Trump’s tax reforms are less likely to get through Congress if they require support from Senate Democrats. Reconciliation also prevents bills from being filibustered, by imposing a 20-hour limit on debates, motions and amendments. The tool has been used historically as a means to pass major government reforms.
Opposition to SALT muddies the picture
While the Republican Party has typically advocated lower taxes and deficits, one point of contention is the proposed elimination of the State and Local Tax (SALT) deduction. SALT allows a US taxpayer to deduct any state and local taxes from gross income before computing federal taxes. It is a significant tax break for middle class and wealthy residents of high tax states such as New York, New Jersey and California. According to Fox Business, The deduction affects 30% of all US taxpayers. Eliminating the deduction will result in significantly higher federal tax rates for many households. If Republicans choose to keep the deduction, federal government revenues will fall by $1.3 trillion over the next 10 years according to estimates.
According to a recent report from Reuters, many House Republicans (particularly those with constituents in high tax states) are opposed to the budget resolution given the elimination of SALT. Representative Tom MacArthur, representing the 3rd congressional district of New Jersey, claimed that there may be enough votes against the budget resolution. “It’s got to be close,” he said. MacArthur has been at the front lines of defending the SALT deduction, given New Jersey’s relatively high taxes. So far, proposals to strike a compromise on SALT (e.g. allowing exemptions for middle class earners, etc.) have not been embedded into the budget resolution.
SALT and the dollar
Today is a crucial day for the dollar given external events and domestic politics. The US dollar index is currently rising after the ECB failed to meet expectations on tapering QE, in line with our preview of the event. If today’s budget resolution vote gets through the House, expect the dollar to keep rising as the prospect of Trump's tax reforms gets closer to reality. Despite Trump’s claims last night that the Republican Party has “great unity”, markets remain skeptical and today’s vote will be a crucial test of the White House.