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Legislative Updates: March 2013


Capitol Call

The run-up to "the sequester," which took effect on March 1, brought the definition of hyperbole to the next level, a significant achievement here in Washington. Breathless pronouncements of impending disaster were made daily by President Obama and his Democratic allies. House Financial Services Committee Ranking Member Maxine Waters (D-CA) even said publicly that the sequestration would cost our country 175 million jobs, which is about the size of the entire American workforce.

She had misspoken and later corrected herself, referring to a still-dubious but widely cited figure of 750,000 jobs, but the urgency in her comments was very real. Also very real was the immediacy with which many conservative commentators seized upon her honest mistake and skewered her for inflating the impact of the sequester. It was a good example of the deep divide between the parties and their base supporters on the issue.

While most Congressional Republicans were delighted to see spending reduced through the sequester, they maintain they would have preferred to use a scalpel rather than a meat cleaver to cut spending, because of the outsized impact the cuts will have on defense. But they stood firm nonetheless, unwilling to give in to President Obama's demands that the sequester be ended with equal measures of cuts and additional revenues.

The true impact of the sequester will be somewhere between nonexistent and devastating, so take the declarations of both parties with a grain of salt. Like so much else here in Washington, the truth lies somewhere in the middle of what the Democrats and Republicans in Congress would have you believe. One thing that was noteworthy, however, is that Wall Street did not appear to be put off by the sequester. The Dow had a ten-day streak of record highs just days after it hit.

There is less uncertainty about how another congressional proposal will affect the options industry, namely the House Ways and Means Committee Republican draft proposal on reforming the tax treatment of derivatives. The leaders of the U.S. Securities Markets Coalition have been hard at work meeting with Ways and Means Committee staffers to explain how the draft proposal would negatively impact the options industry and make the taxation of listed options more complicated for individual investors. A formal comment letter on the draft proposal is being prepared by the Coalition's tax counsel.

Ironically, the draft tax proposal is intended to simplify the tax code. It is just one part of the larger tax reform package that will emerge from the Ways and Means Committee later this year. Speaker Boehner has already assigned the package the number always given to the first official bill introduced by the House, H.R. 1, to indicate the importance Congress is placing on tax reform. Across the Capitol, Senate Finance Chairman Max Baucus (D-MT) is expected to discuss his tax reform legislative strategy in more detail later this spring.

Fortunately for the options industry, Congress has just begun the long process of examining tax reform, and there should be sufficient time for the Coalition to make its arguments against the changes in the taxing of derivatives.

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