Ed Mills, Washington Policy Analyst, Equity Research
With most of the focus of the 2024 elections on the rematch between President Biden and former President Trump, the race for Congress can easily get overlooked. Our analysis for the Senate shows a solid advantage for Republicans to win a majority of seats. In the House of Representatives, it is a closer call, but several factors have Democrats as the slight favourite for the majority. With divergent House and Senate calls, it is easy to assume that divided government is the most likely outcome, but we come to a different conclusion. In our view, if Democrats beat the odds and retain a Senate majority, that likely comes with a Biden re-election and a House majority. Conversely, if Republicans maintain a House majority, the chances of a Trump victory and Republican Senate majority also increase. As such, the combined odds of either a Republican or Democratic sweep should be considered. In a sweep, the ability to advance major policies on a party-line vote increases—important for the return of the debt limit in January 2025 and the expiration of the 2017 individual tax cuts on December 31, 2025.
ELECTORAL BACKGROUND: SWING STATES AND ‘DOUBLE HATERS’
In assessing the presidential race there are multiple factors we actively track, including: which states are critical for each candidate as they seek 270 electoral college votes; the favourability of each candidate; and general sentiment of the country—such as recession indicators and polling data on whether voters view the country as “on the right or wrong track”. At this time, both President Biden and former President
Trump have more voters who have an unfavourable opinion Ed Mills, Washington Policy Analyst, Equity Research than a favourable opinion, making it necessary for the winning candidate to convince some portion of voters to vote for him, despite having a negative opinion of his candidacy. The group of voters who have an unfavourable opinion of both candidates are referred to in the polling industry as ‘double haters.’ In 2016 Trump won a majority of this group and the presidency. In 2020, Biden won the majority of this group and the presidency. The winner of this group in 2024 is likely to be the winner of the presidency.
THE SIGNIFICANCE OF CONGRESS
The largest policy changes in DC come when one party has full control of the House, Senate, and the White House. In recent years, Congress has been using the budget reconciliation process to enact sweeping legislation, including tax cuts, the Inflation Reduction Act, COVID relief, and major portions of the Affordable Care Act.
In 2025, we have a series of fiscal cliffs that Congress must address: notably, the debt limit and the expiration of the individual portions of the 2017 Trump-era tax cuts. The winner of the presidency will largely dictate the terms of these debates, but the ability to enact sweeping changes would be unlocked if either party has full control.
CONGRESSIONAL FACTORS SUPPORT OUR VIEW OF A SWEEP
In the House, where all 435 seats are on the ballot, Republicans currently have a 218-213 majority. Democrats will need to net five seats to win the majority and they should get some assistance with several states adjusting their congressional districts. The fights over the Speaker of the House have also
slowed some Republican fundraising efforts compared to past election cycles, adding to the Democrats’ edge. However, with only 22 seats currently rated as toss-up and recent elections swinging the House toward the winner of the presidential election, a majority by either party remains a possibility.
As for the swing states, this is an election that will likely come down to the winner of a majority in each of Arizona, Georgia, Pennsylvania, Michigan, Nevada and Wisconsin. Underscoring the importance of these states, a swing of 45,000 in 2020 in AZ, WI, and GA would have resulted in a 269-269 tie. All indications point to a close contest again in 2024 in these states, but a number of known factors (i.e. debates, Vice President selection) and unknown factors (i.e. geopolitical events) between now and November could sway this election in either direction.
In the Senate, Democrats currently have a 51-49 seat majority, but are likely already down to a 50-50 tie when one factors in the upcoming retirement of Senator Joe Manchin (D-WV). In the Senate, one-third of the 100 seats are on the ballot every two years. This year, of the 34 seats on the ballot, 23 are currently held by Democrats and 11 by Republicans. The imbalance of seats comes from a strong performance by the Democrats six years ago in the 2018 midterm elections. Democrats are even more on the defensive in the Senate when you factor in the decline of ticketsplitting (when a voter votes for candidates from different political parties) in recent years. Top Republican targets are the Democratic senators in Montana and Ohio, two states expected to vote for Trump in November. Despite a strong playing field for Republicans, we have also seen unexpected events in recent Senate elections, and it is not out of the question that Democrats are able to “run the table” (decisively accomplish a desired outcome) and
preserve a 50-50 tie. In a tie scenario, the Vice President is the tiebreaking vote.
The ability to enact sweeping changes would be unlocked if either party has full control.
RETURN OF THE DEBT LIMIT: WHAT TO WATCH
The debt limit will be an immediate concern for the next president, with it returning in January 2025 just as either Mr Trump or Mr Biden is inaugurated for a second term. At midnight on 1 January 2025, the federal government will begin to deploy ʻextraordinary measuresʼ to stave off a default; using the 2023 debt limit as a guide, we expect that the ʻX-dateʼ (the date when the federal government is no longer able to meet its debt obligations) will fall during midyear. With a $35 trillion national debt and an almost $2
trillion annual federal budget deficit, and more than a $1 trillion annual debt service burden, lifting the debt limit has both political and market implications.
The return of the debt limit will raise the risk of brinkmanship, with negative impacts for volatility and broader market sentiment. A split government scenario would likely exacerbate these risks, as well as placing pressure on both parties to accept serious policy concessions to avert a default — especially if current concerns around the US fiscal trajectory continue to intensify. These concessions could include repeals to parts of the 2022 Inflation Reduction Act; while we do not expect the law to be fully repealed (even under a GOP sweep), certain provisions (such as the electric vehicle (EV) tax credit) could be targeted to offset the cost of new debt issuance. The debt limit is extremely likely to be lifted, but we could see the creation of a new effort to rein in the debt and deficit (with actual cuts unlikely in the near term).
WILL THE 2017 INDIVIDUAL TAX CUTS BE EXTENDED
The second key fiscal cliff to watch will be the expiration of the individual provisions of the 2017 Tax Cuts and Jobs Act (TCJA) on 31 December 2025. We would expect the winner of the White House to dictate much of the 2025 tax debate—particularly under a sweep scenario in either direction, which would unlock the ability to use reconciliation to pass a bill with a simple majority.
A key factor to watch in the tax debate will be what Congress wants to pass versus any potential market volatility that could limit congressional action. A complicating factor for the extension of the 2017 tax bill is the growing price tag, which is now estimated at $4.6 trillion to extend for ten years. The growing cost of
The return of the debt limit will raise the risk of brinkmanship, with negative impacts for volatility and broader market sentiment.
extension could reopen the debate regarding the corporate tax rate of 21%. The corporate tax rate was made ʻpermanentʼ in 2017, but members in both parties are discussing the potential need to increase this rate as a way to pay for the extension of the expiring individual provisions of the 2017 law.
In a Democratic sweep scenario, there will be pressure to let the 2017 changes expire, as taxes would revert to the tax code under President Obama, including removing the $10,000 limit on state and local tax (SALT) deductions. The removal of the limit on SALT deductions would be a tax cut for many taxpayers in states with higher taxes, including many states represented by Democrats in the House and Senate. We ultimately view Democrats as likely to preserve lower income tax brackets for those earning less than
$400,000, but allow higher taxes on individuals above that income level, as well as making changes to capital gains taxes to offset the cost.
In a Republican sweep scenario, House Speaker Mike Johnson (R-LA) has previewed a swift passage of a reconciliation bill that could include additional individual tax cuts, pairing the bill with an increase in the debt limit, but also new immigration provisions. This was also a strategy after the 2016 election, but DC was not prepared for a potential Trump victory. While there is more preparation for a potential win in 2024, the potential negative reaction to increased government debt by the bond market becomes a new variable.
