Special Elections and Senate Healthcare Bill May Signal Likelihood for Tax Reform

This last week, in the most expensive congressional election in U.S. history, Republican Karen Handel defeated political newcomer Democrat Jon Ossoff for Georgia’s 6th Congressional District seat. The former Georgia Secretary of State won by 4 percentage points on Tuesday in the suburban Atlanta district that Republicans have held since the 1970s. Democrats also lost a special election in South Carolina where former state representative Republican Ralph Norman defeated Democrat Archie Parnell. Democrats lost two other contested special elections earlier this year for Republican-held seats in conservative Kansas and Montana. That makes the party 0-for-4 in this year’s races for Republican-held congressional seats.

The outcome also raised questions about the reign of House Democratic leader Nancy Pelosi. Republican groups spent millions on television ads linking Ossoff to Pelosi, portraying him as a captive of the party’s liberal wing, despite Ossoff’s efforts to present a more moderate image. In South Carolina, an attorney in Charleston who is a Democratic political newcomer, Joe Cunningham, announced that he would seek the House seat now held by Republican Mark Sanford, but said that if elected he would not back Pelosi as the Democratic leader.

Democrat leaders overly ambitious claims regarding these races is simply an indication that they were caught up in their own rhetoric. Notwithstanding Democrat expectations, the results are well within the norm. After all, the Republicans did not win any of the five House special elections of 2009, though in November they did gain two governors and, of course, the breathtaking election of Scott Brown to succeed Ted Kennedy in Massachusetts in January, 2010.

Also last week, Blue Dog Democrats huddled with the leading members of President Trump’s economic team and discussed bipartisan reforms to the nation’s tax code. Just 18 members strong, the centrist Blue Dogs are a small group. However, with GOP leaders struggling to rally their divided conference around big-ticket legislation, they could step in and perhaps broker a bipartisan deal for the sake of getting tax reform to Trump’s desk this year.

The win in Georgia also could strengthen the political will of Republicans in Congress evaluating their next steps on replacement of the Affordable Care Act and the tax reform package. The President tweeted, “”Democrats would do much better as a party if they got together with Republicans on Healthcare, Tax Cuts, Security. Obstruction doesn’t work!”

Without Democrat support, Republicans will be required to adopt a 2018 budget bill that includes procedural language, known as reconciliation, that would allow them to move a tax package through the Senate with just a simple majority. That budget bill is on hold while the Republicans attempt to pass their Obama Care repeal bill, which is slated for a Senate vote next week. The Blue Dogs are watching the healthcare vote with particular interest because they think it will likely dictate both the tenor of the subsequent tax debate and the extent of their influence over it. If healthcare reform passes on a party-line vote via reconciliation, there will likely be less appetite for Republicans to reach across the aisle for Democratic votes on tax reform.












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                  FROM THE CHART ROOM

                  Demand for Octane Increase Price Difference Between Premium and Regular Gas



                  The difference between U.S. average retail prices for premium and regular gasoline reached 50 cents per gallon in late 2016, and it has remained near that level so far in 2017. This price difference, or spread, has been generally increasing since 2000. Many factors on both the supply and demand sides are influencing this trend. One of the main performance characteristics of motor gasoline is octane, a measure of gasoline’s resistance to spontaneous combustion. In the United States, retail gasoline is usually classified by its octane rating: regular gasoline with a typical octane rating of 87 is the least expensive option, and premium gasoline with a typical octane rating of 91 to 93 is the most expensive option. The price spread between the two grades of gasoline is most often representative of the cost to produce the additional octane.

                  On the demand side, the premium gasoline share of total motor gasoline sales has steadily increased in recent years, reaching a high of nearly 12% in August 2016—the highest share since 2004. Although lower gasoline prices may be making premium gasoline more affordable, thereby encouraging demand, the upward trend in premium gasoline sales is more likely driven by changes in fuel requirements for light-duty vehicles in response to increasing fuel economy standards. To meet these standards, more car manufacturers are producing models with turbocharged engines that may require or recommend the use of high-octane gasoline.

                  This long-running trend has occurred at the same time as costs to produce and supply octane for gasoline have increased. Energy policy reforms in recent years have promoted the widespread use of ethanol as a source of octane in gasoline, replacing previous octane sources such as tetraethyl lead and methyl tertiary-butyl ether (MTBE). However, there is limited demand for, and challenges associated with, blending ethanol into gasoline in concentrations greater than 10%. Ethanol inputs as a percentage of total gasoline consumed approached 10% in 2013 and have since plateaued, even as the demand for higher octane blends increased.

                  The combination of increasing demand for premium gasoline and market challenges to further increases in ethanol blending has led refiners and blenders to acquire more expensive sources of octane, leading to an increase in the price differential between premium and regular gasoline in recent years. Read more on the EIA website.



                  Michael Best Strategies’ Energy Team

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