What the midterm ‘blue tsunami’ means for CFOs

As you may have heard last week, Democrats will have a majority in the House and Senate come January. Companies have many questions as to what this stunning turnaround means for them on the legislative front, Rohit Kumar, principal and co-leader of PwC’s national tax office, told CFO Brew.

Kumar, who spent nearly 11 years in the offices of the Senate Republican leader and majority leader before joining PwC, said clients are asking what they can expect both in the “lame duck” session between now and when the next Congress is sworn in, and in the next two years.

Legislative “gridlock,” but pay attention. A “divided government,” with power split between Congress and the White House, means that major legislation is unlikely to pass, Kumar said. Any legislative change next year, he said, is likely to occur around a debt limit increase and government funding. “House and Senate Democrats, if they calibrate carefully, could probably extract some collateral policy concessions out of that,” he said.

However, “gridlock does not mean stability for CFOs,” Michelle Carlsen, director and analyst at Gartner, told CFO Brew in an email. “It changes where policy risk comes from. Finance leaders should prepare for a more fragmented planning environment in which executive, judicial and state-level actions can materially affect cost forecasts and investment decisions.”

CFOs should keep an eye on legislative moves, even if they don’t expect them to result in change, to suss out the Democrats’ priorities, Kumar said. The Democrats, he said, will be thinking ahead to the possibility of having a Democratic president and “a trifecta in 2029. You want to start laying the groundwork now for what you might want to achieve in that as-yet unrealized universe. And you have two years to kind of roll out proposals and vet them and refine them.”

Tax policy? Watch this space. In terms of tax policy, Kumar said that he doesn’t expect “big, meaningful change.” Jen Acuna, principal in KPMG’s Washington national tax practice, likewise told CFO Brew in an email that “the year ahead is likely to be more about tax policy adjustments than tax reform.”

“The bigger tax debate is further out,” she added. “A Democratic House or Senate would likely use oversight investigations to build the case for policy changes, laying the groundwork for broader reform heading into 2029.”

Democratic priorities around tax reform are likely to center on affordability. For instance, they might seek higher tax rates on corporations and wealthier taxpayers, Mark Luscombe, principal analyst at Wolters Kluwer, told CFO Brew, or pursue measures such as increasing the child tax credit or earned income tax credit. And they may look to raise business taxes to make such provisions “deficit-neutral,” Kumar said.

Democrats have also floated putting “limits on how much you can deduct for executive compensation,” Luscombe said, as well as “penalties for stock buybacks” and “further modifications in the international tax rules to help domestic manufacturing.”

Scrutiny of companies with White House ties. Much of the Democrats’ messaging has centered around cracking down on self-dealing or “corruption, in the political vernacular,” Kumar said. Leading Democrats have signaled that they will increase scrutiny of companies that have supported Trump administration projects such as Freedom 250 and the White House ballroom, he noted.

Companies that have worked with the administration should be paying attention to “what sort of correspondence” other organizations are “getting from Congress with respect to hearings and oversight,” Kumar said. “I would be asking the question, ‘What kind of interaction have I had with the administration?’ If that becomes a matter of public record, as it very well might, if it’s the object of a congressional hearing, how’s this going to look?”