Welcome to ACG Analytics' Policy Percentages weekly forecast, which is published on Thursdays. In this edition, we will discuss our outlook on key policy issues in U.S. domestic policy and other macro areas. Please note that these are our estimates on the date published, are re-evaluated regularly and subject to change. For more information, please feel free to reply to this email or reach out to us at research@acg-analytics.com.

• Yesterday, on a 357-70 vote, the House passed bipartisan tax legislation which secures tax code priorities for both parties: extending a version of the enhanced Child Tax Credit (CTC) as well as business tax breaks from the 2017 Republican tax reform bill that have expired or were being phased out in short order. These include provisions on business expensing and a tax credit for research and development (R&D).
• The measure now heads to the Senate where Senate Majority Leader Chuck Schumer (D-NY) promises to bring it up for consideration (where it will pass). Getting the measure to the President’s desk is another matter. Senate Finance Committee Chairman Ron Wyden (D-OR) is under pressure from Senators who hope to see the legislation go through a committee markup where it could be changed. Any changes would necessitate passage by the House of a new Senate version.
• Republican lawmakers from New York in particular have been promised a vote on some relief from the $10,000 cap on the state & local tax (SALT) deduction. This could come in the form of eliminating the “marriage penalty” to allow joint filers to receive a $20,000 deduction. The contours and timing of any legislation are very much up in the air and face strong headwinds in the Senate should any reform pass the House where it would presumably come to the Floor under regular order and thus face issues in the House Rules Committee.

• Where is the text of the evolving U.S. border security agreement? Lawmakers in both parties and both chambers want to know. This includes not just rank-and-file lawmakers who are hearing from constituents, but senior lawmakers in both chambers including House Speaker Mike Johnson (R-LA) who has promised that if what is rumored to be true, the legislation will not even get a vote in the House.
• This week, leaders of the House Progressive Caucus and the House Hispanic Caucus also said that if the rumors of what they have heard are true they will oppose the legislation as well should it come to a vote. Republican lawmakers believe the legislation will not actually solve the border crisis, these latter Democratic lawmakers are worried, among other things, that because border security is not comprehensive immigration reform, it will set back a pathway for citizenship 10-15 years. For weeks, lawmakers have been promised that the text would soon be released. Speculation of what is or is not being negotiated is leading to a revolt against whatever agreement comes to light when or if it does.
• As ACG Analytics said last week, “There is wide discontent in the Senate over the absence of text and concerns about policies that many Republicans believe will thwart, not enhance, U.S. border security to which aid to Ukraine and Israel are currently tied. Even if these objections may be overcome in the Senate, it is unclear whether the House will take up the legislation at all and if it does, whether it would pass the House in a form the Senate and the White House would stomach.” We amplify those remarks today.
• “We are approaching the finish line. Work is not yet done.” said Senate Majority Leader Chuck Schumer (D-NY) on the Floor earlier this week. “We’re still working on it,” said Senate Minority Leader Mitch McConnell (R-KY) when approached by reporters.
• Because of the sinking hopes for passage of U.S. border security legislation, there is increasing chatter about passing aid to Ukraine and Israel separately. For now, Senate leaders and the White House continue to tie aid to a border security package. For now...
• With the growing discomfort in Democratic circles with the war in Gaza, aid to Israel is no longer on the fast track it once appeared to be. Many Democrats are insisting now that aid to Israel be conditioned on how it conducts the war and also want to include aid to Palestine. That is an anathema to many, especially those who believe that aid to Palestine would never reach Palestinians in any significant amount but would instead be diverted to fund further terror against Israel and/or be siphoned off to benefit a small coterie of Palestinian leadership. Senate Majority Leader Chuck Schumer (D-NY) refused to bring up the House-passed bill months ago because of IRS cuts, some of which Democrats already agreed to as part of budget negotiations. Now, it appears that aid to Israel will move in tandem with aid to Ukraine as was the original Biden Administration plan (not anticipating the degree of opposition among Republicans to continued Ukraine aid without greater oversight).  

• A group of lawmakers are considering ways to pass “The Secure and Fair Enforcement Regulation (SAFER) Banking Act” as part of a trade for crypto-related legislation. Senate Banking Committee Chairman Sherrod Brown (D-OH), who faces a difficult re-election campaign in November, is pushing to pass SAFER, as is Senate Majority Leader Chuck Schumer (D-NY). House Financial Services Committee leadership are presently considering the crypto legislation and the path forward, if there is one, could become more clear over the coming weeks.
• This increases the likelihood that the bill makes it through the Senate but until we have more concrete information on the trade, SAFER failing to pass the Senate remains our base case scenario. In any event, the House led by Johnson would be unlikely to move it.
• While SAFER is still unlikely to move beyond the Senate this year, we expect the Administration to announce that it is rescheduling cannabis down to Schedule III by Q2 2024. This process will likely include a 60–90-day comment period. President Biden is incentivized to finish this quickly, particularly as SAFER’s odds have decreased. Rescheduling will solve the industry’s 280e tax problems which prohibits business deductions and will be a positive catalyst.
• Recently released Department of Health and Human Services (HHS) documents are largely supportive of HHS’s recommendations that marijuana be moved to Schedule III, confirming our expectations that the Drug Enforcement Administration (DEA) will reschedule cannabis by mid-year.

• Hamas is reviewing a cease-fire proposal from Israel which would allow for the release of hostages in Gaza. This comes amidst continued shelling and military operations in the North and South of Gaza this week. This would likely just be a short-term cease-fire and not represent a catalyst for a longer-term cessation of the conflict. In Israel, public opinion is still squarely behind ongoing military operations.
• As we noted last week, the prospects for the conflict broadening out of Gaza have become markedly higher after an intensification in the Red Sea, Israeli strikes in Iran, Iranian strikes in Iraq among other places, Iranian movement to prepare attacks in the Strait of Gibraltar, and most recently the strike on a U.S. military outpost in Jordan which killed 3 and wounded dozens of other U.S. soldiers. There is also a high chance that Israel begins conducting both air and ground operations across the Lebanese border targeting Hezbollah. This would mark a significant escalation and likely would require a rearrangement of troops from Southern Gaza to do so.
• President Biden has announced publicly that the United States will respond to the provocation, but any plan will likely be carried out over weeks. The Administration has been careful to balance a strong response to deter Iran with escalating and provoking Iran and its proxies to further action in the Middle East. For this reason, we do not believe that the United States will strike targets inside Iran. It is more likely that the U.S. military hits targets in the region, combined with cyber-attacks and perhaps additional economic measures. This response will undoubtedly increase tensions in the region and increases the risk of broader intensification.

• This week, President Maduro formally banned leading opposition candidate Maria Corina Machado (MCM) from this year’s election and imprisoned many other opposition staffers. The Biden Administration responded by reimposing sanctions on Venezuela’s mining (gold) industry and threatened to reimpose energy sanctions on April 18th unless it sees material progress from President Maduro towards free and fair elections. The Administration phrased this as allowing “opposition parties and candidates” to participate, alluding to MCM but not saying it definitively.
• Despite the Administration’s words, we have reservations about their willingness to follow through with the threats. In previous comments, Administration officials signaled that they do not want to return to the status quo ex ante—i.e. President Trump’s maximum pressure sanctions campaign. Further, rather than reimpose sanctions immediately on energy (the mining sanctions are largely inconsequential as most mining is done illegally anyways), they chose to wait until the General Licenses expire in April, giving Maduro time to make a change and time for the developments to fade from the headlines.
• Most likely, the Administration is waiting for Maduro to give them any concession towards the election (whether that be a date for the election, freeing of political prisoners, etc.) to allow them political cover to back off energy sanctions. The reasons this benefits Biden are clear:

1. The Administration has given up on Florida, and Venezuela is not a national issue;
2. Immigration remains a huge political problem for Biden ahead of the November elections—should Venezuela choose to stop accepting return flights from the United States, it would exacerbate the issue;
3. We are far from an inflationary shock to energy prices, but the Administration would prefer to keep the market stable, particularly with tensions in the Middle East increasing;
4. Many in the Biden Administration question the efficacy of sanctions anyways—they have not yet forced a change in Maduro’s behavior, nor have they prompted regime change.

• We have increased our odds of the Biden Administration imposing energy sanctions from 45% to 55% to reflect these developments, but we are still skeptical that it happens. The Biden Administration will do everything it can to avoid reimposing sanctions.
  

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