As 'fiscal cliff' looms, pressure for a solution builds but details remain elusive
This article first appeared in the St. Louis Beacon, Nov. 19, 2012 - WASHINGTON – With the stock market shaky, business leaders nervous and lawmakers on Capitol Hill still divided, efforts to find a bipartisan path to avoid the “fiscal cliff” are likely to extend deep into December.
But there were some initial signals – notably, Friday’s White House meeting between President Barack Obama and congressional leaders – that a way might be found to develop a plan to allow Congress to stop at least some of the tax increases and automatic spending cuts that are slated go into effect on Jan. 1.
“If we went off the ‘cliff,’ taxes would go up, not just on the rich; they’ll go up on every American paying federal income tax – including working families,” warned U.S. Sen. Dick Durbin, D-Ill., the second-ranking Senate Democrat who is among the “group of eight” senators seeking a bipartisan deficit solution.
“Secondly, if we go off the cliff, [experts] tell us it would push us back into a recession. I don’t want that to occur,” Durbin told reporters last week. “Let’s find a way to avoid those two terrible outcomes. I think we can with a bipartisan agreement.”
While Durbin was not one of the four congressional leaders at the White House meeting, all of them said afterward that they saw some grounds for hope that a deal could be reached. “There’s still a lot of work to be done, but I’m confident both parties can come together around a deal to avert the fiscal cliff,” House Speaker John Boehner, R-Ohio, said in a Tweet.
Senate Majority Leader Harry Reid, D-Nev. – who has taken a harder line than Durbin against changing entitlements as part of a deal – told reporters that the congressional leaders now “feel very comfortable with each other, and this isn’t something we’re going to wait until the last day of December to get it done.”
But it won’t be easy to hammer out the details, in spite of what Durbin calls "a perceptible change in rhetoric" from GOP congressional leaders. Even though the overall goal of avoiding the fiscal cliff is as popular as apple pie on Capitol Hill, the steps that need to be taken – revenue increases and sharp budget cuts – are extremely bitter pills for the parties.
“Both parties are going to have to contend with policies they don’t like. In fact, a $4 trillion debt deal is going to be filled with policies that nobody likes,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget and a leader of the wider campaign to Fix the Debt, which is lining up business and popular support for a long-term deficit reduction deal.
She told reporters that “every outside, bipartisan effort to look at this” has made it clear that “all parts of the budget are going to have to be included.” MacGuineas added: “Any deal is going to have to include structural entitlement reform, and it’s going to have to deal with revenues through tax reform.”
Missouri, Illinois lawmakers disagree on approach
As they returned for the lame duck session of Congress, lawmakers from Missouri and Illinois – all of whom said they wanted at least to agree on a blueprint and an enforcement mechanism before Congress adjourns – were weighing in on what sort of a deal they wanted to see to avert the fiscal cliff.
U.S. Sen. Roy Blunt, R-Mo., for one, said he would prefer that any new revenue would result from a reform of the federal tax code – rather than a targeted increase in tax rates for wealthy Americans.
“You can increase revenue without increasing [tax] rates,” Blunt said in an interview. “You do that by making the tax code simpler and fairer, and looking to be sure that all of the intricacies of the tax code – including the current deductions, expensing and other things – are truly justifiable. And if they’re not, you eliminate them.”
But U.S. Sen. Claire McCaskill, D-Mo., scoffed at the notion that revamping the tax code alone would raise enough revenue for true deficit reduction. “It’s impossible to do this – to get where we need to be, in terms of our debt, our deficit – without additional revenues,” she told reporters.
“I certainly support the principle that the president has been firmly stating, and that is that some of that [revenue] needs to be (from) those at the very top of the economic ladder paying a little more.” She said the level above which there would be tax hikes – whether $250,000 or $1 million – would depend on other revenue sources in the plan.
Durbin, who says the a Group of Eight talks are making progress but have not yet produced a firm agreement, told reporters that the key question in Congress will be “the breakout between taxes and cuts in spending and entitlement reforms.”
If negotiators take Obama’s suggestion for a deal to raise about 30 percent of the deficit-reduction goal through taxes and other revenue – about 10 percent below the level of the 2010 Simpson-Bowles deficit commission – Durbin said negotiators than have to agree on what spending cuts and entitlement reforms would make up the difference.
Many Republicans, including Senate Minority Leader Mitch McConnell, R-Ky., want to squeeze savings through “structural reforms” in Medicare and other entitlement programs. But Durbin says the voucher approach advocated by House Budget Committee chairman U.S. Rep. Paul Ryan, R-Wisc., and other Republicans would be “disastrous.”
“We’ve got to come up with a balance that includes entitlement reform but preserves these basic entitlements,” argued Durbin. For example, one “reasonable path,” he said, might be a “means test” under which “higher-income retirees in America will either pay more into Medicare or take a little less out. I think that’s fair.”
Durbin added, however, that he questioned other GOP proposals for structural changes in Medicare. “Ten thousand people a day turn 65 in America. That will be the case for 18 years. So when they talk about the growth in spending of the federal government, a lot of it has to do with the demographics of America.”
Is it a 'cliff' or a slope?
The fiscal cliff – an imperfect metaphor because its actual impact would be gradual, more like a slope – describes the drastic reductions in federal spending, combined with a sharp increase in taxes and other revenues, that would hit the economy starting in 2013.
Those changes include the activation of $1.2 trillion in automatic “sequester” budget cuts; the expiration of major Bush-era tax cuts, amounting to thousands of dollars a year for many families; a steep reduction in Medicare payments to doctors; and the disappearance of “patches” that have protected many Americans from paying the alternative minimum tax.
In the last two years, Congress has trimmed about $1.1 trillion from the federal budget, partly as a result of the Budget Control Act of August 2011, which also set up the “trigger” that would lead to across-the-board “sequester” cuts if Congress does not act. Those automatic cuts, many lawmakers complain, would impact disproportionately on defense.
One problem with a “temporary fix” to delay expiration of the Bush tax cuts and other tax reductions – including the payroll-tax cut and the alternative minimum tax patch, plus a number of business tax breaks, or “extenders” – are the logistical hurdles. The Treasury Department would have to decide how to write the new tax-withholding tables, which might end with
MasGuineas contends that waiving the budget sequester or extending the Bush tax cuts without offsetting the costs "would send a dangerous signal to global markets, businesses and the American public that Washington is not serious about fiscal responsibility and, frankly, can't govern."
Blunt contends that delaying the tax hikes, at least, would be important to the economy. For example, if lawmakers do not "patch" the alternative minimum tax, that threshhold could ensnare nearly 30 million Americans, raising their tax bills by an average of $2,700.
While Blunt conceded that revamping the federal tax system would take longer than the few weeks left in this Congress, he said he was optimistic that Congress and the White House would at least agree to a mechanism for avoiding sequestration cuts and the expiration of tax cuts on Jan. 1.
“I’m optimistic because I think the consequences of not doing that … are so bad, that surely no one will let that happen,” Blunt said. Both the White House budget office and the Congressional Budget Office “have said that, if you let these two things happen, you’re looking at the likely reduction in economic growth to the point that we guarantee a recession. And surely the president wouldn’t want that to happen.”
U.S. Rep. William Lacy Clay, D-St. Louis, says he is open to a balanced approach that would cut federal spending – especially at the bloated Defense Department – and raise revenue. In an op-ed last week in the Capitol Hill newspaper Roll Call, Clay proposed a solution similar to one proposed earlier this year by Obama: a formula that would cut $3 in federal spending for every $1 in increased revenue.
“We are even willing to discuss significant savings in Medicare and Medicaid, as long as essential benefits for seniors and the most vulnerable are preserved,” wrote Clay. Among the spending cuts might be ending subdies to Big Oil companies, forcing hedge fund managers to pay a higher share of income taxes and eliminating “unneeded agricultural subsidies.”
But U.S. Rep. Sam Graves, R-Tarkio, MO, chairman of the House Small Business Committee, said in a statement Friday that he was “particularly concerned about the impact of the president’s proposed tax rate hikes on small businesses and job creation.”
While Graves said he agreed that lawmakers “must come together to avert the fiscal cliff,” he said that the solution must be fair. “Small business hiring has already slowed to a crawl under the threat of potential tax hikes, so the prospect of actual tax hikes is a serious matter.”
Outgoing U.S. Rep. Todd Akin, R-Wildwood, is especially concerned with the impact of automatic sequestration cuts on defense. He thinks the spending cutbacks should be made elsewhere, but was was pessimistic about prospects for action during Congress' lame duck session.
"I wish I could say that we’re going to take some decisive action to fix the problems. But my gut is that the lame duck session will reflect the gridlock that exists between the House and the Senate right now," Akin said in an interview in October.
“I think we’re going to have to get to Jan. 1. And that means there’s going to be all sorts of hardships and difficulties in the military if they have to prepare for sequestration.”
All of the lawmakers agree that there will be no easy solutions. Former U.S. Rep. Richard A.Gephardt, who as a St. Louis Democrat took part in a major budget compromise talks back in the 1990s, said it is devilishly difficult to get lawmakers to agree to take actions that are politically painful. He said:
“What you always look for is the least worst alternative.”