Year-end troubles ahead.
Consider what happens in December (at least between November 2012 and January 2013):
* The Bush-era tax cuts expire December 31.
* The Social Security payroll tax exemption expires December 31.
* The U.S. deficit reaches its statutory limit, requiring legislation to increase the limit in November or December.
* The extension of unemployment benefits expires December 31.
* A vote on either a continuing resolution or an omnibus appropriations bill will be needed in December.
* A 7.5 percent sequestration of all federal non-exempt spending occurs (both discretionary and entitlements) on January 2, 2013.
* The 112th Congress adjourns sine die and the new 113th Congress is sworn in at noon on January 3, 2013.
* Either President Obama starts his second term or a new President takes over at noon on January 20, 2013.
Any one of these events has the potential to cause a lot of problems or result in a major change in current policy or the direction of future policies. Both the Republican and Democratic parties will be maneuvering all year to position themselves to take advantages of the opportunities each of these issues represent. Combined, they have the potential to create a total gridlock on Congress' ability to effectively deal with the many issues confronting the nation. Each event is worth a short review of the major issues at stake.
The Bush-era tax cuts expire December 31.
Two bills, the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PI. 108-27) are referred to as the "Bush-era tax cuts." Together these cuts reduced revenues to the federal government by many billions of dollars. They were originally scheduled to expire at the end of 2010, but with President Obama's support, they were extended two years. (1) Extending the tax cuts was extremely controversial. Many Democrats called it an abomination. (2) Most congressional Democrats wanted to extend the tax cuts for the "middle class" but not for the "wealthiest taxpayers." In the end, a compromise was reached that provided a two-year extension of the cuts in all income tax brackets, an extension of long-term unemployment benefits for one year, a new lower estate tax rate, and a one-year payroll tax reduction from 6.2 percent to 4.2 percent. (3)
Since then, President Obama has made it absolutely clear that he will not agree to another extension of tax cuts for upper-bracket wage earners. In 2011, President Obama stated he would refuse to sign another extension of the tax cuts. He does favor extending the tax cuts for those earning less than $250,000 a year, but not for those who are above that level. (4)
The current makeup of the House of Representatives is very unlikely to agree to any tax increase. However, unless Congress acts, the Bush-era tax cuts expire at midnight on December 31, 2012. Members of Congress who do not want to increase taxes may face a dilemma, either to support a tax increase for those earning over $250,000 or to allow the Bush-era cuts to expire, resulting in a tax increase for virtually everyone who pays taxes.
In lieu of debating the Bush-era tax cuts, many have argued in favor of a major tax overhaul. (5), (6) But rewriting the current tax code is a monumental task. Even if Congress had the time to draft a major tax reform proposal (which it does not before the end of 2012), it is highly unlikely that there would be a consensus on what a new tax code should look like. But Congress is pressed for time. If a serious effort were underway to reform the tax code, Congress would have to be holding hearings and moving toward debate now, and yet there is virtually no movement in that direction.
Much of the debate of extending or modifying the Bush-era tax cuts will depend on where the United States and world economies will be in December. When Congress and the President agreed in 2010 to extend the cuts for two years it was done on the basis that the weak economy could not handle a major tax increase. (7) That may well be the case again in December.
The Social Security payroll tax exemption expires December 31.
If the Bush-era tax cuts were not enough, the current holiday on Social Security payroll taxes expires at the same time. These cuts were part of the compromise that led to the Bush-era tax cuts being extended. Originally scheduled to expire on December 31, 2011, Congress voted to extend them through December 2012. The arguments about how well the economy can absorb a tax increase apply to both the Bush-era cuts and the payroll tax. Obviously these two issues are closely related and will be debated as if there they were one issue.
The U.S. deficit reaches its statutory limit, requiring legislation to increase the limit in November or December.
In 2011, Congress debated at length on proposals to deal with the growing national debt. When the 112th Congress organized, there were 93 freshmen members of Congress--84 Republicans and 9 Democrats. These Republicans took control of the House with a near virtual mandate to do something significant about the deficit problem. As the federal government neared its statutory debt limit in the summer of 2010, there was considerable disagreement over the issue of increasing the limit. Because there was no consensus over what to do, Congress compromised and enacted the Budget Control Act. This bill established the Joint Select Committee on Deficit Reduction (the so-called Super Committee because it has carte blanche authority to develop a package to reduce the deficit by at least $1.2 trillion over ten yea rs). (8)
Since the Budget Control Act passed, the deficit situation has worsened. On February 16, Treasury Secretary Timothy Geithner testified before the Senate Budget Committee. (9) At that time he stated that the savings created by the Budget Control Act would lower the deficit only temporarily and that by FY 2018 the deficit will start rising again as a percentage of the gross domestic product reaching 4.7 percent by 2022. The President's budget predicted that the deficit for FY 2013 will be $901 billion. (10) Even the House Budget Committee's FY 2013 Budget Resolution, drafted by Republican Congressman Paul Ryan (R-WI), predicts a deficit of $797 billion. (11)
The provisions contained in the Budget Control Act that allowed the President to increase the debt limit without having Congress' act expire will not be operational in November or December. It will be difficult for Congress to pass a bill to increase the debt limit without it attracting all kinds of riders and/or substantial opposition after what happened last time. Perhaps this issue could be rolled into some resolution over what to do about the tax increases scheduled for the end of the year.
Unemployment benefits expire December 31.
When the current, extended unemployment benefits were about to expire in December 2011, there was considerable disagreement over how to pay for an extension. Most members of Congress agreed to extend the benefits, but Republicans insisted that there be an offset in other spending while Democrats were willing to pay for the extended benefits through deficit spending. Those arguments will certainly resurface this December when the current benefits expire. Increasing the debt ceiling and pending tax increases will act a backdrop to the argument over how to pay for the benefits. It is possible, but no one is predicting it, that the economy will recover enough so unemployment is lowered to the point where extended unemployment benefits are not desirable.
A vote on either a continuing resolution or an omnibus appropriations bill will be needed in December.
In 1976, the beginning of the federal fiscal year was moved from July 1 to October 1. Part of the rationale for the change was to give Congress more time to finish its work on appropriations bills. The provisions of the 1974 Budget Reform Act (12) state that Congress should pass all 12 appropriations bills and have them signed by the President before October 1. Since the fiscal year date was changed, Congress has never been able to meet the October deadline. In fact it seems more common lately for Congress to pass only one or two, and in some years none of the bills before October. (13)
Therefore, it is a very safe assumption to assume that 2013 will not be the first year Congress passes all appropriation bills in time. The House and Senate will most likely not even be able to agree on a Budget Resolution. In that case they will be working from different assumptions on tax and spending policies that should, under normal circumstances, help produce a consensus on appropriations bills.
Chapter one of the drama over spending levels is likely to play out in September as the threat of closing the government grows. If the past can predict the future, Congress is most likely to pass a continuing resolution that will get us past the presidential and congressional elections on November 6. But the pressures on Congress to finish its work in a "lame-duck" session will be high. It is true that in the past, Congress has punted and made the following Congress finish the work, but that is more the exception than the rule. How this issue plays out will depend upon the outcome of the November elections.
A 7.5 percent sequestration of all federal non-exempt spending occurs on January 2, 2013.
When the Super Committee failed to develop a package of deficit reduction measures, the Budget Control Act (BCA) established two major initiatives to reduce spending, one for entitlement programs and one for discretionary spending. Entitlement spending is reduced by a process called sequestration, or an across-the-board cut in all non-exempt programs. (The BCA included a provision to exempt numerous entitlement programs, including many important human service programs such as TANF and SNAP.) Discretionary spending is reduced by establishing caps on aggregate discretionary spending over the next ten years. (Congress normally passes a Budget Resolution every year that establishes an aggregate cap on discretionary spending. While Congress is still free to establish caps lower than those contained in the BCA, they cannot establish higher caps without changing the law.)
Under the BCA provisions, half of all discretionary cuts must come from the defense function and half from all other discretionary programs. Furthermore, cuts between discretionary and entitlements must be made on a proposal basis.
The BCA applied sequestration only to mandatory spending (entitlement programs) with one exception. On January 2, 2013 all programs, not exempt, will be subject to a 7.5 percent sequestration. This means that both entitlement and discretionary spending will be reduced. And in particular, this means significant cuts in defense spending. Both the Administration and several key members of Congress, including the Chairman of the House Armed Services Committee, Congressman Buck McKeon (R-CA) have been lobbying to prevent cuts in defense spending. (14) Even Secretary of Defense Leon Panetta has argued that the currently scheduled sequestration of defense funds would be a "disaster" for the Pentagon. (15) The Chairman of the Senate Budget Committee, Kent Conrad (D-ND), has said neither party wants sequestration to occur. (16) The Chairman of the Senate Armed Services Committee, Senator Carl Levin (D-MI), called sequestration of the defense budget "mindless and irrational." (17)
McKeon has introduced a bill, H.R. 3662, that would exempt the defense function from sequestration and instead put a hiring semi-freeze on the federal government until the number of employees is reduced by 10 percent. To date that bill has not received any consideration. Even though Panetta wants to exempt the defense budget from sequestration, the Administration opposes the McKeon bill because, as Panetta told the Senate Armed Services Committee, the bill would solve the problem "on the backs of" the civilian workforce. (18)
The Budget Resolution adopted by the House of Representatives and drafted by Budget Committee Chairman Paul Ryan (R-WI), would replace sequestration with a process called reconciliation. The 1974 Budget Act created the reconciliation process. This procedure allows expedited consideration of bills enacting the spending, revenue, and debt policies contained in the budget resolution. To trigger these expedited procedures, the budget resolution must include reconciliation instructions calling on specific committees to achieve specified amounts of savings in programs within their jurisdictions. The committees choose which programs to address and which policies to adopt. This procedure would give committees the opportunity to prioritize programs and reduce spending for programs that receive a low priority, while fully funding those considered most important. The Ryan Budget Resolution is not going to be adopted by the Senate. Therefore, it will be very hard for Congress to pass a reconciliation bill. Needless to say, the threat of sequestration in January will hang over Congress until it is able to find a solution.
A new Congress and, perhaps, a new Administration
It is impossible to know the results of the November election in advance and it is even harder to predict how the results will shape the debate in Congress in December. It is clear that the potential for a "game changer" is there. One can argue equally that the Democrats or Republicans might control both chambers of Congress and the White House.
The combination of tax increases, sequestration, and reaching the debt limit makes the potential impact on the economy very high. Chairman of the Federal Reserve Ben Bernanke told the House Financial Services Committee that allowing both the Bush-era tax cuts to expire and sequestration to occur at the same time would drive the economy "over a cliff." (18) Clearly Congress is going to have to find some way to form a consensus on all these issues. That will not be an easy task. A Congress that would have difficulty agreeing on National Ice Cream Week certainly will struggle with a series of interrelated controversial issues.
Conclusion: Stay tuned, it's going to be a rough ride.
(1.) Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, H.R. 4853, signed into law December 17, 2010 (Public Law 111-312)
(2.) CBS Evening News, December 3, 2010, "The Story Behind the Bush-Era Tax Cuts," http://www.cbsnews.com/2100-18563_162-7111732.html, accessed March 20, 2012
(3.) Fox News, December 7, 2010, "Obama Announces 'Framework' for Deal With Congress to Extend Bush-Era Tax Cuts," http://www.foxnews.com/politics/2010/12/06/obama-proposes-payroll-tax-reduction-deal-taking-shape-bush-tax-cuts/, accessed March 20, 2012
(4.) USA Today, April 13, 2011, Obama: "I refuse to renew" Bush tax cuts for rich," http://content.usatoday.com/communities/heoval/post/2011/04/obama-i-refuse-to-renew-bush-tax-cuts-for-rich/l, accessed March 20, 2012
(5.) American Enterprise Institute, March 14, 2012, "Romney vs. Obama on corporate tax reform," http://www.aei.org/article/economics/fiscal-policy/taxes/romney-vs-obama-on-corporate-tax-reform/, accessed March 20, 2012
(6.) U.S. House of Representative, Ways and Means Committee, http://waysandmeans.house.gov/taxreform/, accessed March 20, 2012
(7.) Capitol Hill on msnbc.com, September 15, 2010, "Obama: GOP holding middle class tax cuts 'hostage," http://www.msnbc.msn.com/id/39193114/ns/politics-capitol_hill/t/obama-gop-holding-middle-class-tax-cuts-hostage/, accessed March 20, 2012
(8.) Budget Control Act, S. 365, signed into law August 2, 2011, Public Law 112-025
(9.) U.S. Senate, Budget Committee, http:// www.budget.senate.gov/democratic/index.cfm/files/serve?Flle_id=24aa0c80-ebda-4e44-b240-9e278cd93366, accessed March 26, 2012
(10.) Office of Management and Budget, "Budget Overview," http://www.whitehouse.gov/omb/overview, accessed March 20, 2012
(11.) U.S. House of Representatives, Budget Committee, "The Path to Prosperity, A Blueprint for American Renewal," http://budget.house.gov/prosperity/fy2013.htm, accessed March 20, 2012
(12.) Wm. Holmes Brown, Parliamentarian Constitution Jefferson's Manual and Rules of the House of Representatives of the United States Ninety-Seventh Congress, US Government Printing Office, Washington, 1981
(13.) The Library of Congress Status of Appropriations, http://thomas.loc.gov/home/approp/app12.html, accessed March 20, 2012
(14.) U.S. Congressman Buck McKeon Press Release, February 2, 2012, http://ckeon.house.gov/this_in_detad.aspx?NewsID=2021, accessed March 20, 2012
(15.) Washington Post, March 4, 2012, "Budget sequestration would be a dagger to defense," http://www.washingtonpost.com/opinions/budget-sequestrationwould-be-a-dagger-to-defense/2012/03/02/gIQArPfWrR_story.html, accessed March 20, 2012
(16.) Forexlive, February 28, 2012 "US Senate Budget Chiefs Call for Adjustments to Sequestration," http://www.forexlive.com/blog/2012/02/28/us-senate-budget-chiefs-call-for-adjustments-to-sequestration/, accessed March 20, 2012
(17.) Battleland, February 28, 2012, Sequestration: A Big Word And a Bigger Problem that Demands Action Now, http://battleland.blogs.time.com/2012/02/28/sequestration-a-big-word-and-a-bigger-problern-that-demands-action-now/, accessed March 20, 2012
(19.) U.S. House of Representatives, Financial Services Committee Hearing, "Monetary Policy and the State of the Economy," February 29, 2012, http://financialservices.house.gov/Ccdendar/EventSingle.aspx?EventID=281399, accessed March 20, 2012
Ron Smith is APHSA's director of legislative affairs.
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|Title Annotation:||washington viewpoint|
|Publication:||Policy & Practice|
|Date:||Jun 1, 2012|
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