Middle East conflict poses new challenges for divided House

Topline

• Congress remains paralyzed without speaker as Middle East conflict escalates

• Year-end tax package in jeopardy

• New VC diversity disclosures to take effect in 2025

• Governor Newsom signs new climate disclosure laws with private market implications

• White House announces new actions concerning junk fees, and signals impending CFPB guidance impacting fintechs

Developing Middle East conflict

On October 7, Hamas fighters attacked Israel, launching raids that killed more than 1,300 people including American citizens and captured approximately 150 hostages. Israel declared war, commencing a military campaign that has thus far reportedly killed more than 1,500 and displaced more than 400,000 people in Gaza. The U.S. government has pledged its support to Israel and is working to prevent a wider regional conflict.

We know you do not read Carta Policy Weekly for foreign policy analysis, and we are not foreign policy experts. Given the tragedy, however, we felt it important to start with acknowledging it and where things stand. Further, this conflict will reverberate throughout the U.S., our political system, and shape policy dynamics across the board. 

Congress remains paralyzed without speaker

Despite the geopolitical environment, a deeply divided House Republican Conference is no closer to electing a speaker. Current House Majority Leader Steve Scalise narrowly defeated House Judiciary Committee Chairman Jim Jordan to secure the GOP speaker nomination, but dropped out of the race late in the week after it became apparent he could not gain enough Republican support to secure the gavel. At this point, there is no consensus candidate, nor a clear path forward. Without a speaker, Congress is essentially paralyzed as the House cannot move legislation. This means congressional efforts to support Israel, provide supplemental assistance in Ukraine, and fund the government cannot move forward—not to mention other legislative priorities such as an end-of-year tax bill. 

What happens next: While the situation remains extremely fluid, there are a few possible scenarios:

• Republicans try to coalesce support around Jim Jordan, though he will face the same math problems as Scalise as enough members have already vowed to oppose his speakership. Other candidates have been floated, but given the deep fractures and anger in the GOP conference, there is not an obvious choice to provide the unity needed to get 217 votes at this point.

• Coalition government—or a speaker elected with some bipartisan agreement. Although unlikely now, this may be an option the longer this process draws out. 

• Acting Speaker Pro Tempore Patrick McHenry granted authority, at least on a temporary basis, to move legislation. This could require some Democratic support, but it would allow the House to function at such a critical time. This is the most likely scenario if there is no movement in the short term.

Year-end tax package in jeopardy

A potential year-end package is now more challenging than ever due to House leadership changes and an impending government funding deadline. 

• The top tax extenders to address this year include R&D tax cuts, expansion of the child tax credit, along with the restoration of bonus depreciation and business interest expense—all costly provisions which make passage even more difficult given the current fiscal situation.

• Negotiators remain at an impasse over how to combine the tax breaks into one package. 

What’s next: Spending bills, and any tax legislation that might be attached to them, could likely drag into 2024. And even if an opportunity arises, the recent political conflicts broiling in Congress could make it more difficult than ever to reach a tax deal. 

New VC diversity disclosures to take effect in 2025

California Governor Gavin Newsom signed into law legislation that will require venture capital funds to report diversity metrics on the founders of the portfolio companies in which they invest. Beginning in 2025, venture firms will be required to survey the founders of their portfolio companies on gender, race, ethnicity, disability, veteran, and LGBTQ+ status and report these demographics to the California Civil Rights Department, which will be published in a searchable online database. Firms will also need to report financial data around investments made in diverse founders broken down by category, as well as the principal place of business for each portfolio company. 

• The new requirements will apply to venture firms headquartered or with significant operations in the state, in California, funds that invest in portfolio companies with significant CA operations, and funds who receive or solicit investments from CA residents—in other words, virtually all venture funds.

• Funds that do not comply will face monetary fines and could face potential civil actions based on data collected, though founders will be able to opt-out of providing such information without penalty. 

Why it matters: The venture capital industry has historically faced criticism for a lack of diversity, and this legislation is aimed at increasing accountability and transparency through disclosure as opposed to investment quotas. These new requirements will increase compliance costs for VC firms, on top of new obligations by the SEC’s recently adopted private fund adviser rules. Governor Newsom acknowledged implementation and compliance challenges when signing the law, so there could be some changes. While strides and commitments have been made to increase diversity in VC, some in the industry caution these rules could have a chilling effect and could potentially raise First Amendment concerns. 

California Governor Newsom signs new climate disclosure laws with private market implications

In addition to the diversity disclosures, California Governor Newsom signed the Climate Corporate Data Accountability Act into law, which will require companies with over $1 billion in revenue (public or private) doing business in the state to disclose greenhouse gas emissions. 

• California has taken the lead in implementing greenhouse gas emissions disclosure requirements, while federal agencies including the Securities and Exchange Commission (SEC) continue to consider their own climate disclosure rules.

• This new law goes further than the SEC’s current climate disclosure proposal and would require companies to start reporting direct emissions in 2026 and indirect emissions in 2027. While the requirements would only apply to larger companies, startups and small businesses could be impacted in the supply chain. 

What’s next: The California climate law could pave the way for other states to follow suit, with lawmakers in WA and NY signaling as much. Some climate disclosure supporters are pushing back on other states’ legislation to allow for California and the SEC to figure out how to avoid a patchwork of complex and costly regulations—an outcome that opponents marshal against climate disclosure rules. Red-leaning states are also working to pass a competing set of requirements, and Europe is also wading into the fray: Starting in 2028, non-EU companies of a certain size will have to comply with European climate disclosure regulations. Ultimately, a fragmented approach is not workable for businesses, particularly small businesses with fewer resources to dedicate to regulatory compliance.

Join Carta Public Policy Director Amy Miller next week at DC Startup Week where she will walk through strategies that can help small businesses lower their tax burden and provide more benefits to their employees. Register here.

News to know

• SEC adopts amendments to rules that govern beneficial ownership reporting. The SEC adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The amendments update Regulation 13D-G to require market participants to provide more timely information on their positions to meet the needs of investors in today’s financial markets.

• Senate Democrats send letter to IRS asking for quicker implementation on crypto taxation. In response to the IRS’s recently proposed rule concerning tax reporting requirements for crypto brokers, Democratic senators, led by Sen. Warren, criticized the two-year delay for the rule’s implementation.

• Senate Finance Committee leadership calls on USTR to push back on Canadian proposed tax on American digital businesses. Leaders of the Senate Finance Committee called on U.S. Trade Representative Katherine Tai to make clear the United States will forcefully defend American employers against discriminatory taxes being proposed by Canada. 

• Vice President Harris to discuss AI guardrails at UK AI summit. Vice President Harris will represent the U.S. at the summit, which will discuss recommendations for AI guardrails. The news comes as the Biden administration is expected to issue an executive order establishing additional guardrails for AI companies in the coming weeks.

• Supreme Court to hear oral arguments on Moore v. US tax case on Dec. 5th. As the policy team has noted, this case could have major implications for the tax code, including passthrough treatment of partnerships and S corporations, and mark-to-market regimes.

• White House announces new actions concerning junk fees, signals coming CFPB guidance impacting fintechs. The White House noted that the CFPB will propose a rule later this month that, if finalized, would require financial companies to allow customers to send their banking transaction data to other companies and banks. This reform will create more competition among banking providers and ensure they compete based on service quality and up-front pricing.

Upcoming events

• House Committee on Science, Space and Technology: Balancing Knowledge and Governance: Foundations for Effective Risk Management of Artificial Intelligence - October 18 at 7:00 a.m. PT / 10:00 a.m. ET

• House Committee on Energy and Commerce: Safeguarding Data and Innovation: Building the Foundation for the Use of Artificial Intelligence - October 18 at 7:00 a.m. PT / 10:00 a.m. ET

• SEC Open Meeting - October 18 at 7:00 a.m. PT / 10:00 a.m. ET

• Carta presentation at DC Startup Week: Tax Planning & Policy Updates for Small Businesses - October 19 at 3:00 p.m. ET at the International Square Conference Center, D.C.

• SEC Chair Gensler will speak at the Securities Enforcement Forum 2023 - October 25 at 5:00 a.m. PT / 8:00 a.m. ET

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