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Business braces for Democrats’ return to power

With late polls showing Democrats making gains in midterm Congressional elections,  businesses are already bracing for change in Washington. Despite widespread predictions of legislative gridlock, some companies and industries face changes that could affect the bottom line . By John W. Schoen.
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With late polls showing Democrats making gains — and possibly winning control of Congress — Wall Street is busy handicapping fortunes of investors, companies, industries and the economy. Though the two parties have very different views on a number of key issues, the likeliest outcome is another two years marked largely by legislative gridlock.

“What you’re going to get is a Congress that’s essentially tied — with a president that has veto power,” said Greg Valliere, an analyst with Stanford Research Group.

But businesses are already bracing for a change, making last-minute campaign contributions to Democrats and lining up out-of-power lobbyists whose phones have recently begun ringing again.

With both sides spending heavily on last-minute ads and get-out-the-vote drives, late polls showed the Democrats well on their way to gaining the 15 seats needed to take control of the House for the first time in 12 years. To win back the Senate, which the Democrats last controlled in 2002, they need to pick up six seats. Late polling showed races tightening in key battleground states. 

Aside from having the votes to advance their party’s agenda, Democratic control of the House or the full Congress would bring a change in leadership of powerful committees, with broad oversight of the legislative agenda. Control of those committees would also give Democrats a high-profile platform for hearings on issues like oil industry profits and CEO pay. Even without the votes to override a White House veto, Democrat control of oversight committees could bring tighter regulation of industries from utilities to telecommunications to pharmaceuticals.

Democrats also would regain some control over the federal budget, though it remains to be seen whether the party would any have better luck than Republicans in taming deficit spending. With the economy growing and tax receipts rising, the deficit has already fallen sharply. So legislative gridlock may once again be an effective means of cutting deficits further, according to Martin Regalia, an economist at the U.S. Chamber of Commerce, who follows tax policy.

“Because of the gridlock (in the late 1990s) the growth rate of federal spending slowed to about 4 to 5 percent and the growth rate of revenue, because the economy was doing reasonably well, was 8 to 9 percent. And that actually produced a surplus.”

Democrats, including Rep. Charles Rangel, D-N.Y., who would be in line to take over the House Ways and Means Committee, have opposed the Bush administration’s tax cuts and have said they would like to see them rolled back. Those include lower top rates on income and lower taxes on capital gains, dividends and inheritance.

Those tax cuts have been one of the central accomplishments of the Bush administration, and Republicans point to rising tax receipts and falling deficits as proof the cuts are working. So tax increases would likely face a Bush veto.

One source of compromise could come from the alternative minimum tax, which originally targeted wealthy taxpayers but was not indexed to take rising incomes into account. As more taxpayers get hit with the AMT, the chances rise for an overhaul, said Stuart Hoffman, chief economist for PNC Financial Services Group.

“Both Republicans and Democrats understand it’s going to be catching more and more middle-income individuals,” he said. “They almost had a deal this summer.”

And though Democrats and Republicans have disagreed on key economic issues, broad changes may be slow in coming. One reason: Despite a recent slowdown in growth, especially in the housing market, many analysts say the economy is still on a firm footing.

Specific policy changes promised on the campaign trail may be tough to enact — even if control of Congress shifts. Democrats have been much more vocal than Republicans about the need for trade protection, for example. With mounting trade deficits rising, some Democrats have proposed trade restrictions, especially with China, which is rapidly increasing shipments of manufactured goods to the U.S. But clamping down on trade with China is easier said than done, according to Hoffman.

“They buy an awful lot of our government bonds,” he said. “So the idea of a tariff or quotas on Chinese goods — no matter who controls the Congress — is not likely to be passed.”

A Democratic Congress would likely have better luck with another hot issue for employers — the minimum wage. With 18 states already moving to raise floor on workers’ paychecks higher than the federal minimum of $5.15 an hour, the chances of getting a national law passed have improved.

Employers could also see changes in the laws on immigrant workers. Democrats have supported a guest worker program that would provide temporary work visas to immigrants. Democrats also have favored tougher sanctions on employers who hire illegal immigrants. Though the Republican Congress has focused more on preventing illegal immigrants from entering the country, the Bush White House has supported reforms that would include expanding the availability of temporary visas.

Specific industries could also feel the impact of Democrats’ return to power — especially energy, pharmaceuticals and financial services.

One of the major accomplishments of the Bush administration and Republican Congress, the Energy Policy Act of 2005, included a variety of incentives to oil, gas and coal companies, including tax breaks that many Democrats opposed. The Republican-controlled Congress has also backed moves to open areas for oil and gas exploration that Democrats have opposed. Chipping away at various provisions of the law wouldn’t require a new comprehensive bill.

Moves to extend the licensing of nuclear power plants and incentives to new ones could also be rolled back or slowed. A Democratic Congress might also slow the deregulation of the electric power industry and would also more likely favor tighter restrictions on carbon emissions. 

Even before proposing new laws or regulations, Democrats have already proposed hearings on oil industry profits; some have favored a “windfall” profits tax.

The pharmaceutical industry would likely feel some of the biggest impact from a change in control; Democrats have long favored using the immense buying power of federal Medicare insurance to negotiate lower drug prices. Such a move could effectively cap prices if lower government-negotiated prices are also adopted by private health insurers.

Such a move would hurt profits for large pharmaceutical companies that hold exclusive patents on brand-name drugs. But the move to cut the cost of Medicare drugs could benefit makers of cheaper generic drugs.

The financial services industry also could see changes proposed by a Democratic-controlled House, where Rep. Barney Frank of Massachusetts would be in line to take over the powerful Financial Services Committee. 

One likely outcome would be a reversal of Republican-sponsored controls on Fannie Mae and Freddie Mac, the two congressionally chartered companies that control some 40 percent of the more than $10 trillion market for residential mortgages.

Also up for grabs: Proposed changes in the Sarbanes-Oxley law, enacted after a wave of corporate accounting scandals, requiring tighter financial controls and greater disclosure. Businesses have said the rules are too onerous and expensive. But Democrats have generally supported the idea of fuller disclosure, especially in areas like CEO pay, which could also become a target.

“Companies are now allowed a certain number of executives that they can write off salaries for $1 million or more,” said Valliere. “That could be tightened up.”

Democrats have also said they want to roll back interest rates on student loans and ease repayment terms. But it’s not clear where the money would come from to pay for those changes; without higher taxes, the changes could hurt the profits of companies that make student loans.

As one of the biggest line items in the federal budget, defense spending, is also a potential target for change. But though many Democrats oppose the open-ended timetable for the war in Iraq, it’s far from clear that a Democrat Congress would cut defense spending.

“The Democrats in the next two years want to show the country that they have just as much testosterone as the Republican do,” said Valliere. “The last thing the Democrats want to do is be portrayed as being weak on defense.”

But a Democratic Congress may shift defense spending priorities — scaling back big-ticket weapons projects and increasing spending on homeland security, for example.