What the Results Likely Mean for 2021 and Beyond
On the campaign trail last year, newly-elected President Joe Biden had some fairly ambitious plans on certain issues such as taxes, education, and health care. As is usually the case in Washington, implementing these plans, however, was always going to be a challenge. That challenge became even greater given the electoral gains by Republicans in Congress. Republicans not only held onto control of the Senate by a slim majority, they significantly reduced the Democrats’ majority in the House of Representatives.
So what should we expect in terms of economic policy from the Biden administration given the state of play in Washington? The answer is probably not a lot of significant pieces of legislation.
Biden had promised to roll back some of the tax cuts enacted in President Trump’s signature piece of legislation, The Tax Cut and Jobs Act (TCJA), specifically those favoring high-income taxpayers and businesses. Most of the individual tax provisions of TCJA are set to automatically expire on January 1, 2025, while most of the business provisions are permanent. Because Democrats do not control both houses of Congress, I do not see much changing on the tax front over the next two years except for possible short-term stimulus measures should they become necessary. And unless Democrats have control of both the Senate and the House in the final two years of Biden’s first term, the Trump tax cuts are likely to stay in place through 2024. So the fate of the TCJA will probably ultimately be decided in the 2024 presidential and congressional elections.
Some of Joe Biden’s most ambitious campaign promises were related to education. With some pushing from the Bernie Sanders’ wing of the party, Biden promised zero tuition at public institutions for families earning less than $125,000 along with forgiveness of some student debt with some strings attached based on public service. Biden also promised universal pre-K, greater subsidies for child care, and greater funding for K-12 education with an emphasis on low-income districts and students with disabilities. In total, the nonpartisan Committee for a Responsible Federal Budget estimated Biden’s education plans would cost around $2.7 trillion over 10 years. Again, with Republicans controlling the Senate, these major initiatives are likely not going anywhere—at least in the first two years. I do see the potential for some agreement between Biden and Republicans on smaller initiatives, such as greater tax credits for child care and maybe even higher education. But student loan debt forgiveness and free college are likely off the table.
Health care will likely be the most contentious economic policy issue during Biden’s presidency. The Affordable Care Act is before the Supreme Court once again, and this time around the court is more conservative than it was in 2012 when it upheld the law on a narrow 5-4 decision. President Biden would like to strengthen the Affordable Care Act by reinstalling some of the provisions that Republicans removed over the past four years. But that is unlikely given the makeup of Congress. The ACA, among other things, prohibited insurance companies from charging different rates based on pre-existing conditions. This is a very popular provision that many Republicans have actually voiced support for. It’s possible that Biden and congressional Republicans could reach a deal to preserve that provision should the Supreme Court strike down the ACA. But I would not expect much other agreement on health care.
COVID-19 continues to affect the economy. Tighter lockdown policies supported by a Biden administration could have short-run adverse economic effects in some sectors such as retail, travel, and food services, but if such lockdowns help defeat the virus, the economy could re-emerge even better after the lockdowns. Tighter lockdowns would likely mean more calls for stimulus to help struggling businesses and workers in the interim. I think enough Republicans in the Senate would support such measures to get enough votes for passage, but significant relief for state and local governments is more uncertain.
Finally, the stock market will likely be satisfied with the results of the election. A Biden White House will likely be less prone to trade wars with China compared to Trump, which is something the markets like. And the markets also know that Biden is restricted in passing any sweeping economic reforms, including raising taxes. Biden is also unlikely to make any major changes to Federal Reserve leadership any time soon, and this Fed has been very accommodating in its COVID-19 response.
Editor’s note: At the time this article was written, Joe Biden had been declared the winner by all major media outlets. The Senate was technically still uncertain but the assumption was that Republicans would win at least one of the runoff elections in Georgia. The House was assumed to remain a Democratic majority albeit much slimmer than before.
Gerald Prante is an associate professor of economics at the University of Lynchburg. Prior to joining the faculty at Lynchburg in 2012, he was a tax policy analyst for Ernst & Young in Washington, DC. Gerald also serves on the Joint Advisory Board of Economists for the Virginia Department of Taxation.