June 12, 2017
House Appropriations – Financial Services and General Government Subcommittee: Department of the Treasury – Budget Hearing
Key Topics & Takeaways
- Debt Ceiling: During the hearing, Mnuchin expressed his preference for a clean debt ceiling increase before the August recess. Mnuchin also said that the Treasury was prepared to take steps to fund the government through at least September, but declined to provide a specific date that government funds would run out.
- Basel: Mnuchin was asked once about the Federal Reserve’s ongoing negotiations at the Basel Committee on possible new capital requirements. Mnuchin declined to comment on the Treasury’s role in or approval of the negotiations, but did say that community banks should be exempted from Basel capital requirements and that no international agreements should put U.S. institutions at a competitive advantage.
- Tax Reform: Mnuchin was asked several questions about the administration’s plans for tax reform during the hearing. The secretary told the subcommittee that the administration is committed to tax simplification, a reduction in the number of brackets, and the elimination of certain deductions. He declined to provide details on the proposed changes, except to say that all deductions (with a few exceptions) were on the table for elimination or alteration.
- The Honorable Steven Mnuchin, Secretary, Department of the Treasury
In his opening statement, subcommittee Chairman Tom Graves (R-Ga) defended the President’s FY18 budget, noting that it would provide a trillion dollars for infrastructure while reducing the size of government. Graves then discussed the FY18 budget’s request for funding for the Department of the Treasury, which cut total department funding by approximately $400 million. Graves noted that due to its size, most of the cuts were made to the Internal Revenue Service (IRS) which constitutes the overwhelming majority of the Treasury’s budget. Graves closed by applauding the administration’s and the Department’s focus on national security, as well as their pro-growth economic policies.
In his opening statement, subcommittee ranking member Mike Quigley (D-Ill.) expressed dismay with the FY18 budget’s proposed cuts to Treasury, both to the IRS and to the department generally. Quigley estimated that if implemented, the cuts to the IRS would reduce its staff headcount by approximately 6,000, which could increase the customer service problems of the entity. Quigley also criticized the dramatic proposed cuts to the Community Development Financial Institutions (CDFI) fund (the FY18 budget would cut the CDFI’s funding from 2$48 million to $14 million). Quigley closed by criticizing the Financial CHOICE Act, which the House of Representatives recently passed, saying the bill would create “inadequate regulatory oversight” and calling for bipartisan solutions to improve the safety and soundness of the financial system.
Committee Chairman Rodney Freylinghuysen (R_N.J.) made a brief statement before the hearing began, calling on Mnuchin to address the proposed cuts to the Treasury’s Office of Terrorism and Financial Intelligence (TFI).
Committee Ranking Member Nita Lowey (D-N.Y.) criticized the Treasury’s FY18 budget request, saying the funding level would harm taxpayers and the nation’s ability to combat national security threats. Lowey was especially critical of the cuts to TFI, CDFI, and the IRS.
The Honorable Steven Mnuchin, Secretary, Department of the Treasury
In his testimony, Mnuchin defended the FY18 budget proposal, saying that “more money” would not automatically lead to “better policy.” Mnuchin frequently described the proposed budget as the result of “hard choices” but that despite the cuts, the Treasury would still operate effectively. Mnuchin said the budget request prioritizes national security and cybersecurity, which are administration priorities. Mnuchin also discussed the administration’s plans for boosting economic growth through a mix of trade, regulatory, and tax policy changes. Mnuchin also provided a brief overview of the Treasury’s report to the President on financial regulations (which was released after the hearing ended) as well as the process that Treasury undertook to create the report.
Question and Answer
Quigley asked Mnuchin about his preferences for dealing with the approaching debt ceiling. Mnuchin said that he would prefer if Congress raised the debt ceiling before leaving for the August recess and that the debt ceiling be treated independently of a spending bill. He assured the committee that the Treasury could fund the government through September if necessary, though he declined to provide a specific date whereby the Treasury’s funding would be exhausted. Mnuchin said that hitting the debt ceiling would create a “significant market disruption.”
Rep. Jaime Herrera-Beutler (R-Wash.) noted that the President’s freeze on new regulations does not apply to independent agencies, and that the Federal Reserve has been exploring new capital regulations at the Basel Committee. Herrera-Beutler asked if Mnuchin supported the negotiations and was consulted on them. Mnuchin avoided the question, saying he did not think that community banks should be subject to Basel and that the administration did not want agreements that put U.S. banks at a competitive disadvantage.
Lowey asked Mnuchin about the administration’s plans for tax reform, specifically regarding the state and local tax deduction. Lowey described the elimination of this deduction as “unacceptable.” Mnuchin said that on tax reform, the administration is committed to simplification of the tax code and eliminating deductions. Mnuchin said the administration was exploring eliminating all deductions except the charitable and mortgage interest deductions. Mnuchin defended eliminating the state and local tax deduction, saying the federal government should not “subsidize the states.”
Rep. Sanford Bishop (D-Ga.) asked Mnuchin about the administration’s ideas on taxes for pass-through business, and expressed concern that a low pass-through tax rate could lead to abuse and tax avoidance. Mnuchin said that the administration shared these concerns about pass-through’s but wants to allow small and mid-sized enterprises, of which many are pass-throughs, to have the benefit of new, lower tax rates.
Numerous representatives queried Mnuchin about the administration’s trade policies. Kevin Yoder (R-Kan.) asked Mnuchin for assurances that any new or renegotiated trade agreements preserve access to foreign markets for U.S. agricultural producers. Mnuchin assured Yoder that the administration would help agricultural producers, and described the administration’s efforts to smooth over frictions with U.S. trading partners.
Rep. David Young (R-Iowa) asked if the administration is pursuing new trade agreements. Mnuchin said the administration’s first priority is changes to the North American Free Trade Agreement (NAFTA), and that the administration is also having discussions with China. Rep. Chris Stewart (R-Utah) asked why the administration opposed the Trans-Pacific Partnership (TPP) and Mnuchin said that while there were good provisions within TPP, the overall agreement was unpalatable to the administration.
Rep. Matt Cartwright (D-Penn.) discussed the provision within the Financial CHOICE Act that would change the regulatory requirements for disclosing executive compensation at public companies, including several provisions that were established by the Dodd-Frank Act. Cartwright asked if Mnuchin supported eliminating disclosure requirements for executive pay. Mnuchin said that both he and the administration supported the Financial CHOICE Act overall, but that he had no strong opinion on the relative pay provisions of Dodd-Frank, and said that executive boards should not be overburdened with compliance, but should instead be allowed to focus on management and risk.
Financial Stability Oversight Council (FSOC)
Graves asked Mnuchin to discussion his view on the FSOC, and what changes the Treasury’s report would propose to that council. Mnuchin said that the Treasury report would recommend giving the FSOC more ability to coordinate regulators to prevent duplicative regulations. Mnuchin said that to the extent and institution is regulated by multiple independent agencies, one agency should be named as lead to coordinate regulation and supervision. Mnuchin specifically listed cybersecurity as an area in need of regulatory coordination.
Mnuchin declined to comment on the FSOC’s designation of nonbank financial institutions as systemically important financial institutions (SIFIs).
For more information on this hearing, please click here.