Don’t Jump Yet—Congress May Avoid the Fiscal Cliff
Business + Economy

Don’t Jump Yet—Congress May Avoid the Fiscal Cliff

Interest is mounting on Capitol Hill to avert a much-feared ‘fiscal cliff‘ at year end by  postponing the scheduled expiration of  trillions of dollars’ worth of tax cuts for six months in return for a commitment from lawmakers to reform entitlement programs and the tax code.
Senate Democrats and some Republican House leaders may be “kicking the can down the road,” but talks are intensifying with special interest groups to keep $8 trillion in combined tax increases and spending cuts from automatically kicking in beginning the first week of January.

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In a speech Monday, Senate Finance Committee Chairman Max Baucus, D-Mont., said he sees no chance for a major budget, tax and entitlement reform agreement before the November election. He also signaled a strong interest in using the lame-duck session to lock Congress into an agreement to complete a major overhaul of the tax code and entitlements by mid-2013, or face the expiration of all the Bush-era tax cuts and other popular tax provisions.

Baucus described the current tax code as the “worst of all worlds” and noted that tax breaks and loopholes have doubled since the last time Congress overhauled the tax code, back in 1986 during the Reagan administration. He said there is a serious mismatch between spending needs and revenues, and that any comprehensive effort to bring down the deficit and control the debt must include additional tax revenues – a view anathema to the Republicans’ anti-tax stand.

“We simply don’t raise enough revenue,” he said during an address at the Bipartisan Policy Center.

As part of a deal last summer to cut spending and raise the debt ceiling, President Obama and Congress agreed that $1.2 trillion of future spending savings or “sequestration” would take effect next January unless House and Senate members could agree on how best to achieve the savings. A “super committee” of lawmakers failed to reach an agreement late last year, and now Congress is saddled with those cuts unless they change the law.

Baucus sees the virtue of extending some or all of the tax cuts through mid-2013, to give Congress and the administration sufficient time to reach agreement on major tax and entitlement reform. The continued threat of a massive tax increase would be a strong incentive for Congress to address the government’s problems of overspending and inadequate revenues that are driving up the deficit and debt.

Sequestration is very important and I’ve said it’s a good point of leverage to get results,” Baucus told reporters after his speech. “You shouldn’t give up that leverage.  I’m not saying how it should be resolved, but it’s leverage that should not be given up easily.”

House Ways and Means Committee Chairman Dave Camp, R-Mich., recently endorsed a strategy for linking an extension of the Bush-era tax cuts and other expiring tax breaks  to “fast-track procedures” to compel Congress to enact comprehensive tax reform next year.  Congress has embraced this approach 34 times over the years, according to Camp, including most recently as part of the Trade Promotion Authority.

“This is an idea House Republicans support, the Speaker [John Boehner] endorsed . . . and I urge the Senate and the president to get behind it as well,” Camp said in a May 17 speech. “Doing so will send a clear, strong message to the markets, to employers and families that Washington is serious about reforming our tax code and putting us on a path to sustained economic growth.”

While Republicans and Democrats remain miles apart on budget and tax policy and are unlikely to reach any new budget and tax accord until after the November elections, there is widespread agreement that something must be done to prevent the government and the country from going over the fiscal cliff at the end of the year. The combination of tax hikes and spending cuts would take more than $500 billion out of the economy in 2013 alone. The Congressional Budget Office predicted a recession if Congress allowed all the Bush tax cuts to expire at the same time and the automatic spending cuts to begin to take effect.

Some of the most powerful Democrats in the Senate, including Sen. Richard Durbin of Illinois, Charles Schumer of New York, Senate Budget Committee Chairman Kent Conrad of North Dakota and Baucus held an unannounced dinner with economists last Wednesday night to discuss ways of avoiding a fiscal train wreck, The New York Times reported on Monday.

While many issues separating the two parties are daunting, taxes have long loomed as the major stumbling block to a comprehensive deficit reduction agreement. Republicans and GOP presidential candidate Mitt Romney favor a major tax overhaul that would consolidate and bring down corporate and individual rates and eliminate many costly tax loopholes, while insisting on  no overall increase in the tax burden. Camp says a chief GOP goal is to “block massive, job-killing tax increases.”

President Obama and the Democrats insist that wealthier Americans must pay more in taxes to address the long-term deficit and debt, and they are opposed to any deal to cut Medicare, Medicaid and other social programs without a firm commitment to boosting taxes on families making more than $250,000 a year.

In his speech, Baucus blamed the deficit in part on historically low tax revenues as a percentage of the gross domestic product. “America’s deficit and debt are unsustainable,” said Baucus. “Today the debt to GDP ratio is 73 percent, the highest since World War II.  Deficits and debt are not just spending problems. Revenues as a share gross domestic product for the past two years are the lowest they’ve been since World War II.”Baucus said the U.S. economy, the nature of global competition and nagging debt problems have changed dramatically since 1986, when Congress last passed major reforms of the tax code. Back then, lawmakers and the Reagan administration kept the tax overhaul  legislation  “revenue neutral,” meaning there was no net increase in tax revenues. The Montana Democrat said any tax reform measure passed in the coming year must help reduce the deficit.

Baucus said that in considering an overhaul of the federal tax code, “everything is on the table,” but he declined to be more specific about the shape of the package, other than it had to be designed to expand the job base,  increase overseas competitiveness, encourage technological innovation and increase employment and investment opportunities for Americans.

Camp has outlined a House GOP approach that would collapse the six current individual tax rates to two rates of 10 percent and 25 percent, eliminate the Alternative Minimum Tax and “move from an outdated worldwide system of taxation to a more competitive territorial system” with lower corporate tax rates.

Budget policy experts, including former CBO Director Alice Rivlin and Robert Greenstein of the Center on Budget and Policy Priorities, strongly endorsed the idea of giving Congress the first half of next year to come up with a comprehensive package or framework  of savings and tax revenues, with the threat of the major tax expirations hanging over them.

“The fiscal cliff is a real cliff,” Rivlin said. “ It would be very bad for the economy and very bad for a lot of things  people care about if we let all of the tax cuts expire all at once and the Alternative Minimum Tax and all the things that are in the cliff  as well as the sequester.”

 “It’s called [by some] kicking the can down the road,” she said. “It shouldn’t be. It is moving the fiscal cliff for a few months. It’s still there.”