November 30, 2010
UPDATED 12-01-10 5:02 PM
The co-chairmen of the Fiscal Commission released their final proposal Wednesday morning after acknowledging they probably don’t have the votes to win the necessary super-majority backing for their nearly $4 trillion deficit-reduction plan that combines spending cuts, tax increases, and major entitlement changes.
Erskine Bowles, former President Bill Clinton’s chief of staff, and Alan Simpson, the former Republican Senator for Wyoming, offered the package at the final public meeting of the 18-member commission with only minor changes from their proposal issued earlier this month after holding a series of one-on-one meetings with members of the bipartisan panel. The controversial proposal includes sharp cuts in defense spending, a boost in the retirement age and tax reforms that could cost the average taxpayer an additional $1,700 a year. A final vote has been set for Friday.
Bowles had vowed Tuesday that “It will not be a watered-down version of the chairman’s market, I guarantee you.” He added that “I don’t know if we’ll get two, five, or fourteen votes. There are plenty of reasons not to vote for this plan.”
Bowles and Simpson stressed that the government was on an “unsustainable fiscal path” that could lead to a long-term debt crisis comparable to the one currently confronting Europe. But after most of the commission members reacted to the final plan it was still unclear if the vote on Friday will garner the 14 votes needed to send the report to Congress.
Five members joined Bowles and Simpson today in supporting the plan: Senate Budget Committee Chairman Kent Conrad, D-N.D.; Sen. Judd Gregg, R-N.H.; David Cote, Honeywell International’s chief executive; Alice Rivlin, former Congressional Budget Office Director; and Ann Fudge, former chief executive of Young & Rubicam Brands. “This is a moment of truth,” said Conrad. “The nation is headed for a fiscal cliff. We have to act. This is the time for us to pull together. If not now, when?
House Budget Committee Chairman John M. Spratt Jr., D-S.C., signaled he was leaning in support of the proposal, while eight other Republican and Democratic members put off a final decision until Friday. A few, including Republican Reps. Paul Ryan of Wisconsin and Jeb Hensarling of Texas, raised strong concerns about provisions of the tax proposals and what they described as major shortcomings in addressing long-term health care costs. GOP leaders have vowed to try to scuttle the health care reform legislation signed into law early this year by President Obama, and Republican commissioners are unlikely to go along with any plan that doesn’t reflect their party’s concerns. Rep. Jan Schakowsky, a liberal Democrat from Illinois who opposes changes to Social Security and cuts in programs for the middle class, was the only panel member to openly oppose the plan.
The final plan sticks with the centerpiece of the original Bowles-Simpson proposal: about $200 billion a year in spending cuts coupled with a revamped tax code that would raise taxes by nearly $1 trillion by 2020 through the elimination of most so-called tax expenditures, ranging from special tax breaks for business to the home mortgage, health insurance, and retirement savings deductions that affect middle class households.
The far ranging proposal for revamping the federal tax code would lower tax rates while eliminating most tax breaks for individuals and corporations. But taken together with a 15-cents-a-gallon increase in the federal gasoline tax and other changes, the new approach would lead to an across-the-board tax increase -- certain to draw fire from Republicans and Democrats alike because they would lead to an across-the-board tax increase.
According to a tax distributional table included in the final plan, produced by the Urban Institute-Brookings Institution Tax Policy Center, the average annual tax increase for all Americans would be $1,746 a year -- a 9.3 percent increase. For the bottom quintile of taxpayers with the lowest taxable income, the annual tax increase would be 4.1 percent. Americans in the second lowest income quintile would see their taxes rise by 13.5 percent a year, according to the analysis, while the middle quintile’s taxes would go up by 7.2 percent, the fourth quintile’s by 5.8 percent and top taxpayers by 10.4 percent.
A commission staff member suggested that the tax package was a work in progress and could be tweaked to address disparities adversely affecting lower income taxpayers. However, the proposed boost in the federal gas tax invariably would hit lower income families the hardest because of its regressive nature.
The Bowles-Simpson plan includes measures for ensuring the long term viability of Social Security, including gradually raising the retirement age, switching to a less generous cost of living formula and broadening the payroll tax base. Those proposals already have drawn fire from seniors’ and liberal advocacy groups, despite assurances that the savings would be used to guarantee the long-term viability of Social Security and not to help reduce the deficit.
Bowles and Simpson scrambled earlier this week to garner a majority of the 18 members of the bi-partisan National Commission on Fiscal Responsibility and Reform. Given the dug-in stance of liberal and conservative lawmakers on the commission, it appears almost impossible for the panel leaders to round up the additional 12 votes needed to send legislation to Congress.
The co-chairs canceled the full commission meeting planned for Tuesday and instead scheduled a series of one-on-one meetings with committee members. The co-chairmen also put off a final vote on their plan until Friday, to give members an opportunity to study the revised package – but to also buy time to try to try to line up support. Today is the deadline that was set by Obama last February for the commission to complete its work.
Under the executive order that established the commission last spring, a super-majority of at least 14 of the 18 members must sign off on recommendations before they can be submitted to Congress for action. Even getting a simple majority of ten commissioners to endorse a plan will be a tough sell. Staffers worked throughout the long holiday weekend to come up with changes to the tax increases and budget cuts contained in the original draft proposal released earlier this month, sources said.
The Bowles-Simpson draft called for reducing projected budget deficits by $3.9 trillion over the next decade through a combination of budget cuts (about 75 percent) and tax increases (about 25 percent). It also included a controversial proposal to raise the retirement age for Social Security and cut benefits for upper-income households.
A subsequent plan offered by the Bipartisan Policy Center task force chaired by Alice Rivlin, a former Democratic head of the Office of Management and Budget, and Pete Domenici, a former Republican Senator, adjusted the budget cut-tax increase mix closer to 50-50.
The changes appeared aimed at winning moderate votes on the Democratic side of the aisle. They included postponing some of the budget cuts until the economy improves, imposing deeper cuts in defense spending, and increasing the progressivity of the tax hikes.
However, those changes would only make the plan an even more difficult sell with most of the elected Republican House members on the commission, who vowed to resist any tax increases in their successful bid to take over the House of Representatives. They include Ryan, the incoming chairman of the Budget Committee, Rep. David Camp (R-Mich.), the incoming head of the Ways and Means Committee, and Hensarling, who joined with the other two in saying they had “concerns with some of the specifics” in the “provocative proposal” when it first came out.
A House Democratic source described the commission as a “very diverse group,” adding that “There’s not a heck of a lot of common ground there.”
The original Bowles-Simpson plan eliminated most tax deductions for both corporations and individuals, including the home mortgage deduction, the health care benefit tax exclusion and the income deductibility of retirement savings. While no official government body has evaluated the proposal for its tax consequences, its architects projected it would raise nearly $751 billion over the next decade, which clearly means some households and some corporations will be paying higher taxes.
“It may score as bringing in more money, but almost all the money is used to reduce rates or reduce the deficit,” said Sen. Judd Gregg, R-N.H., a member of the commission. “Those are two things most Republicans want to do.”
The attempt to win votes appears aimed at the budget-cutting side of the ledger. Gone will be the call to begin cutting the budget in 2012, a time when the economy is still likely to be suffering from high unemployment, a source said. The plan may also adjust the mix of $200 billion in cuts to discretionary spending that had been slated for 2015.
The most far-ranging proposal in the Bowles-Simpson
plan would have eliminated most tax breaks
and established significantly lower income tax rates
The original proposal called for half the cuts coming from defense, even though defense and homeland security now constitute well over half of annual government discretionary spending, which doesn’t include entitlement programs including Medicare and Medicaid. It also called for a freeze on wages for federal employees. Obama on Monday announced a two-year pay freeze for most of the 1.9 million civilians who work for the federal government, an action that must be approved by Congress.
The commission chairmen may also attempt to mollify liberals by adjusting the tax rates included in the original proposal, which offered several options for simplifying the income tax code.
The most far-ranging proposal in the Bowles-Simpson plan would have eliminated most tax breaks and established significantly lower income tax rates: 8 percent for low-income people; 14 percent for the middle class; 23 percent for upper income households; and 26 percent for corporations. Those roughly correspond to current brackets, including the Bush era tax cuts, that range from 10 percent to 35 percent.
But a second option mentioned in the plan included higher rates that ranged from 13 to 28 percent. That option preserved a number of tax breaks aimed at low-income and middle-class households, such as the earned income tax credit, the child tax credit, and the mortgage interest, health benefits and retirement savings deductions.
Could that succeed in winning Democratic supporters? Likely targets are Sen. Max Baucus, D-Mont, who chairs the Finance Committee, and Sen. Kent Conrad, who chairs the Budget Committee. Baucus in particular could have problems with some of the rigid health care caps contained in the original Bowles-Simpson proposal, which could undermine the health care reform bill he played a central role in crafting.
Andy Stern, the former head of the Service Employees International Union, considered a reliable liberal vote on the commission, said he was already crafting his individual response to the commission’s handiwork.
“I’m trying to be responsible to all the goals that were set out,” he said, “but it has to improve a lot for middle class Americans.”
Gregg, the ranking Republican on the Senate Budget Committee, said that regardless of the outcome, Bowles and Simpson “deserve the financial badge of courage.” “What they’ve done has been extraordinary and it really has already moved the debate aggressively into the right arena,” Gregg said. “Now the question is can they push anything across the goal line. Certainly they’ve moved the issue substantively down the field.”