AeANET : AeA Special Report: The New Congress & High Tech

Overview of the 110th U.S. Congress and What it Means to High Tech

Welcome to this special edition of the AeA monthly newsletter. We have received a number of requests from member companies asking us to issue a report on what the new 110^th Congress, with the Democrats in charge, will likely do and what it means for high tech. Well, here we go.

You will see below that we examine a number of specific issues that could affect high tech but before doing that we need to look at what the composition of this Congress will be:

As of the date of this special report the final tally in the House of Representatives is 233 Democrats and 202 Republicans. This is the same margin the Republicans had last year. It needs to be noted that there is still one election which is being challenged in court and was ostensibly won by the Republican. We do not know how the court will address the issue.
In the Senate the final tally is 51 Democrats and 49 Republicans. It should be noted that it is really 50 to 49 with one Independent but that Independent, Senator Bernie Sanders from Vermont, has agreed to vote with the Democratic Caucus. Another issue in the background is the health of Senator Tim Johnson of South Dakota who remains in the hospital as a result of a congenital condition that essentially caused brain blood clots and can, even after surgery, often have severe consequences for affected individuals� health. Should he have to give up his seat the Governor of South Dakota, who is a Republican, would likely appoint a Republican to fill in Senator Johnson�s term which would in turn give the Republicans control of the Senate because it would be a 50-50 tie but with Vice President Cheney acting as the tie-breaker.

And finally, separate and apart from specific issues, we need to look at the atmospherics of the new Congress. Let�s briefly do so:

The Democrats (both in the House and the Senate) are likely to move toward the center as the result of the fact that a number of seats taken from Republican incumbents were won by moderate to conservative Democrats. The so-called Blue Dog Democrats have clearly increased their numbers and are going to want a seat at the table. Furthermore, the Democrats have received wide-spread plaudits for choosing candidates who did not have to pass the Democratic liberal litmus test.
The Republicans are likely to move further right. This is so for two reasons: (1) Republican moderates, particularly in the Northeast and Midwest, got wiped out. Indeed, they were the biggest losers of a category of incumbents. (2) The rather fulsome recriminations taking place over the last few weeks have indicated that a number of Republicans in the House think that the reason they lost was because they were not conservative enough and there are many Republicans crying out �we have got to get back to our roots and our base.�
Prior to the elections the Republican leadership in the House felt that there was no need to pass an ethics bill or a lobbying reform bill as they concluded it was no longer an issue. Wrong. In three different national polls the single most prominent issue motivating voters and cited by 42% of them was corruption. Interestingly, Iraq and the economy followed corruption in importance. The Democrats, and specifically Speaker Nancy Pelosi, will likely change House rules almost immediately upon assuming office in January to tighten up the ethics standards rules on private funding of trips and a number of other elements which merely require a change in House rules as opposed to formal legislation. We believe that it is quite likely that no member of the House or staffer will be able to accept any gifts or money (outside of PACs) from lobbyists or those outside of the House.
There will clearly be a greater level of civility in the political process in Washington and in particular in the House. It needs to be emphasized that in the House of Representatives the rules overwhelmingly favor the majority party. Indeed, over the past 8-10 years the Republicans virtually excluded the Democrats from the political debate or in having a say on what legislation came up and what amendments could be made. In the past couple of years it went so far as to virtually exclude Democrats from conference committees between the House and the Senate on contested legislation. The Democrats want to return to a period of greater civility, not necessarily because they are magnanimous but because they have looked at the election results and saw how angry voters were about the poisonous partisanship in Washington. Voters want that to change. However, I would quickly note that there is not going to be any imminent probability of Republicans and Democrats sitting in a circle singing Kumbaya. The Democrats have a long memory, particularly in the House, over how they were virtually excluded from any meaningful role in debating or passing legislation. Though I think the atmosphere will indeed be more civilized there are clearly some �paybacks� to be made.
But even if there is greater civility in the new Congress, the big question is whether or not the Republicans will cooperate on passing legislation. It needs to be emphasized that the 2008 Presidential and Congressional elections have already begun. There is one school of thought that the Republicans will not be cooperative because they do not want to give the Democrats legislative victories that will carry over to the 2008 elections. Another school of thought says that they have no choice because the voters made it very clear this past November that they want to see less partisanship and more accomplishments. It is too early to tell which school of thought will prevail.
Finally, we need to directly address the impact of the Democrats being in charge. A quick anecdote conveys the atmosphere. A few weeks ago after a press conference I was asked by five different members of the press individually a form of this question, �What are you doing to prepare for the Democrats?� I told the last interviewer that her question really should be rephrased: �What are you doing to prepare for famine, pestilence, and drought?� She laughed but also indicated that she has talked to some business groups who indicated that they didn�t know a Democrat. In other instances she noted that business is generally pretty uptight about the Democrats coming in.

While we certainly have some concerns, our overall view of the Democrats is generally positive. Our cautious optimism is attributable to several factors:

High tech is virtually a union-free industry. The Democrats know that and therefore do not suspect high-tech�s motives like they do other industries. In other words, they don�t think that our policy goals are motivated by a not-too-subtle desire to screw unions. That fact gives us access to Democrats that some other industries don�t have.
A number of senior Democratic leaders come from high-tech districts or are quite close to districts with a high concentration of high-tech companies. Nancy Pelosi represents San Francisco, which is very close to Silicon Valley, and possibly her closest friend in the Congress is Anna Eshoo, one of the Democratic Reps from Silicon Valley.
AeA has particularly good relations with Democratic leaders. Speaker Pelosi addressed the AeA Board meeting this past June and was demonstrably positive about the role of AeA and its members. George Miller, the new Chairman of the House Education and Labor Committee and also Chairman of the Democratic Policy Committee, addressed our Board this past February and also sang the praises of AeA�s work on competitiveness. AeA worked very closely with Anna Eshoo, George Miller, and Speaker Pelosi last year in putting together the Democrats� Innovation Agenda. Indeed, Ms. Pelosi stated at the introduction of their agenda in front of a very large audience, �AeA provided the intellectual basis for the Democrats� Innovation Agenda.�

We saw their gratitude for our work and collaboration when Ms. Pelosi, accompanied by George Miller and Anna Eshoo, came to the AeA offices nine days after the election where Ms. Pelosi gave her first speech off Capitol Hill since the election. There were 100 executives from member companies in attendance and she was effusive in her praise of AeA.

Don�t get me wrong. We have been clearly tilling the bipartisan soil over the last few years. We have excellent relationships with the Republicans and on the same issue of competitiveness we were the co-sponsor of the National Republican Summit on Competitiveness last year.

As with any new Congress there will be some good and there will be some bad, but we are confident that AeA�s voice will be heard on Capitol Hill and we will get a full hearing on high-tech issues.

Okay, now that we have conveyed the atmospherics and other stuff, let�s talk about specific issues and what might happen.

Sincerely,

William T. Archey (bio)
AeA President and Chief Executive Officer

The issue of American competitiveness has been a major priority for the high-tech sector for the past two years. High tech and especially AeA have made a strong case with the Congress and Executive Branch that the decline in R&D spending for basic research in the physical sciences is clearly going to hurt America�s technological leadership. We have also made a strong case on the need for a new approach to math and science education. And we have been especially vocal on the ability of the high-tech industry to once again be able to attract the best and the brightest to the United States from throughout the world. This means visa and green card reform.

AeA has been especially complimentary of the Democrats� Innovation Agenda. Speaker Pelosi noted at the AeA offices in November that she wants to see a competitiveness program passed with not 230 votes but rather 350-370 votes so as to emphasize that American competitiveness is not just a bipartisan issue�it�s a major national priority.

We expect that some time in March, a competitiveness program will in fact be on the docket though some issues like R&D may be dealt with individually because of the Congressional appropriations process. It is interesting to note that in the Republican Congress that just ended there was a Democratic competitiveness agenda, several Republican competitiveness agendas, and President Bush�s American Competitiveness Initiative. All of these programs were very similar in content but because of the 2006 election none were passed. We think the new Congress will finally do something about this issue.

For additional information contact John Palafoutas (bio), Senior Vice President, Domestic Policy & Congressional Affairs, at 202.682.4451.

Rep. Anna Eshoo (D-CA), Chairman of the House Education and Labor Committee George Miller , and Speaker of the House Nancy Pelosi, at AeA on November 16, 2006 (L-R)

AeA�s groundbreaking report, Losing the Competitive Advantage? explored the challenges the United States were facing in 2005. It has been two years since the release of the report and AeA will be re-releasing with new data in February 2007 and an update on what has happened --- and more importantly, what hasn�t happened.

Additionally, since the release, AeA has published thirteen Competitiveness Series reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy.

The reports included: eHealth: Electronic Medical Records; Mid-year Tech Employment Update
(2006); The Case for Preserving Network Neutrality; Strengthen the R&D Tax Credit and Make It Permanent; Attracting the Best and Brightest to the United States; Free Trade Colombia; Free Trade Peru; RFID: Security, Privacy, and Good Public Policy; RFID 101: Benefits of the Next Big Little Thing; Like It or Not, China and the U.S. Are Intricately Linked; Mid-year Tech Employment Update (2005); The U.S. Patent System: Why It Has To Be Fixed; and CAFTA-DR: The Misunderstood Trade Agreement.

Speaker of the House Nancy Pelosi Visits AeA on November 16, 2006

With the Democrats taking over Congress, there has been a lot of speculation about what might happen on trade issues. As always, there are two opposing views: pessimists expecting an end to any trade legislation for the next two years and optimists getting ready for Trade Promotion Authority (TPA) renewal and completion of the Doha negotiations. AeA expects the new Congress to be more insular than the last Congress as many of the newly elected moderates blame free trade for job losses in their districts while a surprising number of Republicans are turning against trade agreements.

China
It is likely that new legislation targeting China's currency valuation will be introduced in Congress. Other possible China-related targets could be export controls, intellectual property protection (IPR), human rights and/or overall WTO compliance issues. Speaker of the House Nancy Pelosi (D-CA), Chairman of the House Ways and Means Committee Charles Rangel (D-NY), and other leading democrats will look at this relationship with China more from the economic perspective than the foreign relations perspective which has driven the Executive Branch approach to China.

Doha Development Agenda
Doha is the latest round of multilateral talks within the World Trade Organization. Currently, the Doha Round has reached an impasse. If a breakthrough in the negotiations on agriculture issues can be reached early in 2007, this could provide the impetus for bipartisan action to extend Trade Promotion Authority in Congress. Both political parties want to see an ambitious agreement that opens markets for U.S. goods and services around the world. The Doha Development deal could be supported by both Democrats and Republicans, but serious doubts remain whether an agreement can be reached that U.S. farmers could support.

Fair Trade
The new Congress will push for "fair trade" in place of "free trade.� Negotiated Free Trade Agreements (FTAs) will have to include substantial environmental and labor standards as well as strong Intellectual Property Rights (IPR) protection and enforcement language. The possibility of losing American jobs to outsourcing will be a major concern when Democrats consider free trade agreements. The Chairman of the House Ways and Means Committee, Rep. Charles B. Rangel (D-NY), is far from a protectionist but he believes that the business community must work with Members of Congress to sell the idea that free trade benefits American workers.

Free Trade Agreements
On the agenda for next year are bilateral FTAs already concluded with Colombia and Peru - and two others currently under negotiation with Malaysia and South Korea. The Malaysia and Korea FTAs offer good opportunities for strong bipartisan support since both are very lucrative markets. On the other hand, a few issues might hold up getting the agreements completed in time for consideration under Trade Promotion Authority such as beef, auto, and pharmaceutical issues in the case of Korea.

Trade Promotion Authority at Stake
Trade Promotion Authority (TPA), also known as Fast-Track Authority, allows the President to negotiate trade agreements and then submit them for congressional approval on an expedited basis. Congress can only vote yes or no on the agreement and it has no power to make amendments. Without an extension, this authority will expire on July 1, 2007. In this new Congress there are three possible options for extension of Trade Promotion Authority:

It will get extended only for certain trade deals, such as the U.S.-Korea Free Trade Agreement or the Doha Development Agenda. (This way Democrats could choose to support trade deals of their liking without looking anti-trade.)
It will get extended for a limited time with certain amendments to it. (Possible extension of a fast track authority in a much different form - most likely including labor and environment provisions.)
l It will not get extended and it will expire as scheduled on July 1, 2007. (Democrats would avoid giving President Bush a blank check on trade to gain a major political victory so close to the 2008 Presidential elections.)

For additional information contact Rob Mulligan (bio), Senior Vice President, International, at 202.682.4452.

With the Democratic takeover in both the House and the Senate, we can expect a return to a number of issues that were not only left on the table when the Democrats lost the Senate in 2002, but have been simmering within the House for a number of years as well.

Of particular interest to AeA members will be Rep. Edward Markey (D-MA), as he takes the top slot at the influential House Energy and Commerce Subcommittee on Telecommunications and the Internet. Having jurisdiction over both the telecom industry and the Internet, high-tech issues such as privacy and Net Neutrality will suddenly find a new spot on the front burner this year � with the heat turned up as high as it will go.

Digital Copyright
Digital copyright is another topic that likely will be heavily influenced by the congressional shakeup. Hollywood tends to be solidly Democratic, so we can look forward to legislation mandating digital rights management (DRM) tools on the horizon.

Rep. John Conyers (D-MI) has become Chairman of the House Judiciary Committee and Sen. Patrick Leahy (D-VT) Chairs the Senate Judiciary Committee � key committees that have the responsibility for writing the nation�s Copyright laws. While a staunch advocate of protecting IP rights, Sen. Leahy has refused past efforts to mandate DRM protections in high-tech equipment, and will most likely continue opposing any such mandates.
However, if current ranking member Rep. Howard Berman (D-CA) on the House Judiciary Courts, the Internet and Intellectual Property Subcommittee takes over as the subcommittee chair, the recording industry and motion picture industry will have an unwavering ally. Berman, a Hollywood Democrat, has sponsored legislation in the past that would let copyright holders legally hack into peer-to-peer networks.

Net Neutrality

Rep. Markey�s elevation to the top slot on the Telecom and Internet Subcommittee will also create an opportunity for Net Neutrality�s return � meaning more headaches for telephone and cable giants who wanted regulatory relief this year. AeA supports strong principles of Net Neutrality, which Rep. Markey staunchly supports as do incoming full committee Chairman John Dingell (D-MI) and Speaker Nancy Pelosi (D-CA).
Incoming Senate Commerce Committee Chairman Daniel Inouye (D-HI) is also a strong supporter of Net Neutrality provisions. As Democratic law makers in both chambers prepare to take a fresh look at a rewrite of the Telecommunications Act, the only question is whether Chairmen Inouye and Markey will introduce Net Neutrality in its very own bill or wait to insert it in a larger telecom bill.

Privacy

Rep. Markey has always been a zealous champion of consumer privacy rights; as an incoming chair of an extremely powerful subcommittee that oversees online business practices, we�re certain to see vigorous activity on privacy issues once more. In the past year, Markey has complained about privacy concerns in computer chips and tried to force web sites to delete information about visitors. He also attacked prominent ISPs after they disclosed user search histories and asserted that increased privacy laws are necessary. It is safe to say that these issues will get significant airplay in the upcoming Congressional session.
While incoming Senate Commerce Committee Chairman Sen. Daniel Inouye (D-HI) has been silent on his plans for online consumer protection legislation, incoming Senate Judiciary Chairman Sen. Patrick Leahy (D-VT) has outlined an ambitious agenda designed to restore Americans' privacy rights in the 110^th Congress. This includes a review of the Electronic Communications Privacy Act (ECPA) which bans unlawful access to stored communications, as well as legislation to strengthen identity theft penalties and mandatory notice to individuals when their information has been compromised.

For additional information contact Marc-Anthony Signorino (bio), Director/Counsel, Technology & Environment Policy, at 202.682.4428, or Chris Merida, Manager, Public Policy, at 202.682.4439.

Lisa Sutherland, Republican Majority Staff Director, Senate Commerce, Science and Transportation Committee, Speaking at an AeA CyberSeries Event in 2006

Jim Turner, Chief Democratic Counsel to the House Science Committee, Speaking at an AeA CyberSeries Event on November 17, 2006

It is no secret that there will be significant changes regarding environmental issues and potential legislation under the new Democratic leadership. Many of the new leaders, including the Speaker of the House Nancy Pelosi (D-CA), are not shy to talk about their plans to hold extensive hearings on environmental issues. She has made clean energy a key part of the agenda that Democrats plan to accomplish within the first 100 hours of the 110^th Congress.

Climate Change
Sen. Barbara Boxer (D-CA), who is the incoming Chair of the Senate Environment and Public Works Committee, has her list of priorities ready. The list starts with legislation on global warming accompanied by numerous hearings on climate change. The Senator outlined her plans to model federal legislation after the California law that aims to reduce planet-warming emissions 25% by 2020. In July, Ms. Pelosi co-sponsored climate legislation introduced by Rep. Henry Waxman (D-CA) that proposed to cut greenhouse gas emissions 80% below 1990 levels by 2050.

Energy Efficiency
The new chair of the Senate Energy and Natural Resources Committee, Sen. Jeff Bingaman (D-NM), is expected to focus on requiring electric utilities to generate more power from renewable energies and to pursue other measures to reduce demand through efficiency and conservation. The new Congress will try to create a cleaner environment, while trying to diminish U.S. dependence on oil by providing initiatives for energy efficient technologies and various alternatives. Leading House Democrats, including Majority Leader Steny Hoyer (D-MD) and Rep. John Dingell (D-MI), are proposing a comprehensive energy independence bill entitled the Progress Act.

RoHS-Like Federal Legislation

Rep. Hilda Solis (D-CA), slated to take over the top spot in the House Energy & Commerce Subcommittee on Environment and Hazardous Materials, has in the past promoted federal legislation that would ban some materials. Further, the State of California enacted its Electronic Waste Recycling Act (California Restriction on Hazardous Substances-RoHS), which as of January 1, 2007, will ban the sale of some electronic devices that contain certain hazardous substances.
In the past legislative session Minnesota, Maine, Maryland, New Jersey, Tennessee, Vermont, Washington, and Wisconsin contemplated RoHS-like legislation. The number of states considering similar legislation will expand in the next few years creating enormous costs for companies that will have to comply with these requirements.
Democrats are likely to consider a federal RoHS bill to address the core concerns causing this proliferation of state bills � the prohibition of materials thought to be harmful to people and the environment. A number of dangers exist, such as whether any proposed federal legislation would:
- Have a strong basis in science or merely copy what was done in California and the EU;
- Mirror or exceed the current California and EU RoHS restrictions;
- Preempt existing state RoHS laws or allow the states to legislate on top of any proposed federal requirements; or
- Create mandatory take-back requirements or impose advanced recovery fees for waste electronics.

For additional information contact Michaela Muranova, Director, Trade & Environmental Policy, at 202.682.4445.

Senator Barbara Boxer (D-CA) speaking at AeA event on Capitol Hill

Bill Cable, Chief of Staff, House Majority Leader Steny Hoyer at an AeA CyberSeries Event on November 30, 2006

Bipartisanship
Since the November election, House Ways and Means Committee Chairman Charles Rangel (D-NY) has discussed his first priority for the new Congress: his desire to create a bipartisan atmosphere in the tax writing committee. This would be in sharp contrast to the atmosphere created by former Chairman Bill Thomas (R-CA), who Democrats say fostered a bitter partisan environment.

When the new Congress convenes in early January, Chairman Rangel plans to hold a daylong retreat between Republicans, Democrats, and key Administration officials in order to find common ground on tax and trade policy. Treasury Secretary Henry Paulson has already agreed to attend the retreat.
By reaching out to Republicans, Mr. Rangel hopes to establish trust before tackling difficult issues such as the Alternative Minimum Tax (AMT). He has stated that the first bill to pass through his committee will be by unanimous vote.
The shift to democratic control in the Senate Finance Committee will be less dramatic than in the House. Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) have a long history of bipartisanship and cooperation and that is expected to continue in the 110^th Congress.

Fiscal Responsibility

Democrats in the House and Senate have promised to reinstate the pay-as-you-go (PAYGO) rules. These rules would require any new tax break to be offset with a tax increase or spending decrease, which will make any tax legislation more difficult in 2007. PAYGO will play heavily in any tax bill consideration, and corporate tax changes could be considered as part of any revenue-raising package.

Agenda

No Tax Increases: Both Chairmen Rangel and Baucus have made it clear that they will not attempt to repeal President Bush�s 2001 and 2003 tax cuts that are set to expire in 2010. That said, Rangel has also indicated that when it comes to evaluating the tax code, all provisions are on the table for consideration.
Alternative Minimum Tax (AMT): Addressing the expanding reach of the AMT is a priority for Chairmen Rangel and Baucus. It is likely that this issue will receive considerable attention early on in 2007. More and more middle class Americans are impacted by the AMT, and there is strong bipartisan sentiment for repealing it. Working on AMT relief would be a good test of bipartisanship. This type of middle class tax relief would also provide Democrats with a huge victory. The biggest challenge, however, is figuring out how to pay for the fix and dealing with the huge loss of tax revenue. For instance, one estimate puts the potential cost of full AMT repeal at $1.2 trillion through 2015.
R&D Tax Credit: Both of the tax writing committee chairmen support making the R&D tax credit permanent, and House Speaker Nancy Pelosi has also promised to champion the R&D tax credit. Neither Rangel nor Baucus seemed happy that it took almost one year to extend the R&D tax credit, and there is a desire to provide greater certainty for tax extenders in 2007. This type of incentive is about U.S. competitiveness and creating jobs in the United States. Rangel has discussed making the credit permanent, and he has indicated that there could be hearings to discuss permanence. Baucus will likely reintroduce his competitiveness bill to modify the credit and make it permanent. As with the AMT, however, its cost could stall any serious consideration beyond extension.
Foreign Tax Policy: Democrats will likely examine corporate tax policies that they perceive as encouraging U.S. companies to take jobs and operations overseas. Chairman Baucus has also been interested in the issue of international taxation, and he will likely want to examine the competitiveness of the current rules. Changes to the international tax rules would not be easy.
Closing the �tax gap:� Congress is likely to address the current tax gap, the difference between federal taxes owed and received, in any tax package next year. As Congress attempts to tackle costly issues such as AMT relief and the R&D tax credit, they will need to focus on how to pay for such items. The approximately $350 billion tax gap is often cited as one possible source of income.
Tax Simplification: It is possible that Congress will examine tax reform proposals in 2007. Tax simplification is seen by some in Congress --- including Chairman Rangel --- as a potential source of revenue, and the issue could come up during any discussion of AMT relief. Serious examination of the issue would require Congress to pick winners and losers, however, making it unlikely that reform would extend beyond the discussion point.

For additional information contact Marie Lee (bio), Director/Counsel, Finance and Tax Policy, at 202.682.4448.