Early expectations for the 2024 election

Key driver: The increasing federal deficit

Our early take: According to the Congressional Budget Office, federal debt held by the public is projected to rise from 98% of GDP in 2023 to 118% in 2033. Growth in mandatory spending on entitlement programs and higher rates of interest on the national debt are expected to increase the debt-to-GDP ratio to 195% by 2053.

More than three-quarters of the federal budget consists of mandatory spending, national defense outlays, and interest payments on the national debt. Meaningful reductions to these line items are highly unlikely. Democrats were unable to enact significant tax increases while they controlled both houses in the last Congress, while Republicans have not yet been able to address the rising cost of federal transfer payments. The 2024 campaign will feature persistent and acrimonious debates over fiscal policy but will not alter the general trajectory of the deficit until a crisis takes hold.

Key driver: Tax exemption

Our early take: Public interest groups, ranging from the Government Finance Officers Association to the Conference of Mayors, have been obliged to remind Congress periodically that most non-defense-related infrastructure in the US is financed by states and local governments. Tax exemption lowers the cost of capital for these borrowers, but it comes at a cost to the federal government in the form of forgone tax revenue. The tax benefits are skewed to individuals with higher incomes, which makes them a target for progressive lawmakers. This tax exemption ranks 16^th in the top estimated federal tax expenditures over five years, at roughly USD 180.7bn, according to the staff of Joint Committee on Taxation.²

As the next Congress reconvenes in January 2025, both parties will be focused on passing a major tax bill. We expect all tax expenditures—including municipal tax exemption—to be actively debated. While some constraints may be imposed, which could include the loss of tax exemption for new-issue private activity bonds, we believe there is enough support in Congress to retain the exemption for most types of municipal securities. To the extent that additional constraints are enacted, we would expect Congress to grandfather outstanding tax-exempt securities.

Key driver: The SALT deduction was capped at USD 10,000 per year through 2025.

Our early take: The TCJA imposed a USD 10,000 per year cap on a taxpayer’s ability to deduct state and local taxes on federal tax returns. To the extent that all expiring provisions of the TCJA are made permanent, the cap on SALT deductions would persist. However, a complete repeal is unlikely because it would result in a more substantial reduction in federal tax revenue and would be opposed by members of Congress who believe that an unlimited deduction represents a subsidy to states with higher rates of taxation. Other opponents of an unlimited deduction point out that the benefit of an unlimited deduction skews to the more affluent. We expect Congress to address the cap, but an increase in the maximum deduction is a more likely outcome than a complete elimination of the cap.

Key driver: The federal estate tax exclusion is at an all-time high but is scheduled to decline at the end of 2025.

Our early take: The TCJA more than doubled the inflationadjusted estate tax exclusion, which rose from approximately USD 5.5mn in 2017 to roughly USD 12.9mn in 2023. The exclusion will be cut in half, adjusted for inflation, in 2026 if Congress does not act. We expect Congress to address this issue, but absent a unified government under GOP control, the size of the exemption would likely decline in 2026.

Key driver: 1031 exchanges

Our early take: Section 1031 now applies only to exchanges of real property. Exchanges of personal or intangible property are no longer exempt from treatment as a gain or loss under the Internal Revenue Code. We place a low probability on the restoration of personal or intangible property as eligible exchanges for 1031 treatment. In addition, previous Democratic administrations have discussed further limitations and potential eliminations of the entire 1031 program. In the event of full Democrat control of Congress and the White House, it is possible this topic could be revisited.

Key driver: Phase-out of bonus depreciation

Our early take: The TCJA extended bonus depreciation rules that were set to expire at the end of 2019 and increased the deductible amount to 100%. However, the law also provided for a phasing-out of the accelerated depreciation beginning in 2023. Barring a change in law, the bonus percentage will decline by 20% each year through 2027. There appears to be bipartisan support to slow down or eliminate the phase-out, but a legislative vehicle through which to do so has not been identified. In the absence of any action before 2025, we expect Congress to address the issue at that time.

Key driver: Defense spending and supplementals

Our early take: The debt ceiling agreement stipulated that the defense budget can rise by only 3.3% in FY24 and 1% in FY25—a sizable step-down from FY23 growth. This is seen by many in Congress as shortchanging military preparedness amid a precarious geopolitical backdrop, but loud voices on both sides would prefer to see spending reduced. Given the ongoing war in Ukraine and elevated tensions with China, we expect these numbers to be the floor, not the ceiling. However, the timing and size of new supplementals will depend on the voting power of the vocal opposition. Aside from the absolute level of spending, passing an annual budget and authorizing funds will be important for defense contractors’ cash flows. Operating under a continuing resolution for an extended period could become increasingly disruptive.

Key driver: Maintenance of existing provisions

Our early take: The Inflation Reduction Act (IRA) and its generous tax credits are accelerating investment in green and blue hydrogen, sustainable aviation fuel, carbon capture, and electric vehicles—a rising tide that lifts the value chain, many of which are large industrial and material companies. We do not believe the core of the IRA will be renegotiated, as much of the investment is taking place in red states, and incentives are spurring global participants to focus investment in the US. However unlikely it may be, should provisions of the IRA be called into question, rates of return on certain projects may no longer be worthwhile. The success of the IRA also likely means that tax credits on offer could cost the government significantly more than initially contemplated. If budget hawks gain influence, the uncapped nature of the tax credits may be reassessed.

Key driver: Regulatory burden and prices at the pump

Our early take: Energy policy is a recurring issue in election years. Though we expect some candidates to talk about trying to weaken provisions in the IRA and increase US fossil fuel production, we do not believe either topic has much policy potential. US crude oil and natural gas production continues to grow slowly, and the IRA is driving renewable project developments (and jobs) in red and blue states across the country. The key issue to watch during 2024 will be oil prices. Higher oil prices could drive gasoline and diesel prices in 4Q23 and 1H24 higher than they were a year ago (and thereby influence inflation). A release from the Strategic Petroleum Reserve is possible, but with potential negotiations for a US-Saudi Arabia bilateral deal in early 2024, this appears less likely in the first half of next year.

Key driver: Banking system stability

Our early take: Elections inevitably lead to headline and regulatory risks for the financial sector. A third—legislative risk—seems remote given a divided Congress, and the 2010 Dodd-Frank Act already covers a lot of ground. That said, there could be changes with broad implications such as market structure reforms promoted by the SEC and credit card interchange controls advanced by Congress.

We would expect the Biden administration to continue to impose rules and interpret regulations that raise banks’ compliance and capital costs. A Republican candidate would be more likely to support some deregulation and tailoring of existing rules and regulations that could simplify the oversight of banks and lower compliance and capital costs. It is too early to determine which of the two outcomes is more likely.

Key driver: Medicare drug pricing regulation and legislation

Our early take: Overall, we expect only a modest impact from any healthcare proposals discussed in the upcoming presidential election. We expect President Biden to tout Medicare drug pricing negotiation provisions included in the IRA and advocate for additional pricing reforms, both in Medicare and in the commercial/employer market.

Given the challenges faced by Democrats in the past two congresses, we do not expect additional drug pricing reforms to gain much traction in a closely divided Congress. Republicans are unlikely to sponsor major healthcare policy initiatives during the upcoming election, and appear to have little appetite to roll back the IRA’s drug pricing provisions, but will focus attention on rising healthcare costs.

Key driver: Privacy, trade, and geopolitics

Our early take: From bipartisan clamoring to rein in “Big Tech” to increasing restrictions on chips and chip equipment shipments to China, technology has been front and center in both domestic policy and international relations for much of the past five years. The 2024 election cycle will see more of the same.

We believe there will be four pivotal issues that presidential candidates address: 1) the perception of outsize market power of large technology companies and the associated impacts on competition, politics, and society; 2) a continued focus on restricting mergers and acquisitions by large technology companies; 3) bilateral relations with China; and 4) the risks, threats, and opportunities of artificial intelligence.