Even if the “do nothing Congress” lives up to its reputation and doesn’t come up with a deal, President Obama could still soften the economic blow of the fiscal cliff.
That might seem surprising for all the dire warnings being issued by lawmakers about the pending devastation from the combined $600 billion in tax hikes and spending cuts that are scheduled to hit at the start of 2013.
“Even if you went over the cliff for one month and then corrected it, you would still have a loss of GDP,” House Minority Leader Nancy Pelosi, D-Calif., declared in an interview broadcast Sunday by ABC News’ “This Week.”
But budget experts say the White House has several tools for delaying the potential pain, should talks between Obama and congressional leaders about how to avoid the cliff spill into next year. Negotiations could stretch into February with minimal economic suffering, they say.
However, the five potential steps outlined below to blunt the impact of the fiscal cliff are a mixed proposition for Obama—they buy some additional time to reach a deal, but they also remove many of the economic pressures that would force a compromise.
Barry Anderson, deputy director of the National Governors Association, has been flying across the country to brief incoming state governments about the different options. “The question everyone asks is, ‘Isn’t this a risky game?’” Anderson told The Fiscal Times. “You bet it’s a risky game.”
Treasury Doesn’t Collect More Taxes—Should we cross the fiscal cliff, income tax rates that were initially lowered by George W. Bush would reset to levels not seen since 2001. A family with a household income of $72,000 would owe a top marginal rate of 28 percent instead of the current 15 percent.
Most Americans pay their taxes by having a pre-determined sum withheld from their paychecks. This is the loophole the administration could exploit to shield families from the tax hike. “Just because the tax rates change, that doesn’t mean the secretary of the Treasury has to change the withholding amounts,” Anderson said.
Treasury Secretary Tim Geithner could decline to publish new tables indicating how much income should be withheld. Companies would continue to withhold taxes at the current levels, temporarily sparing families from a rate hike that would total more than $200 billion over the entire course of 2013.
Obama won re-election by promising to continue the existing rates for Americans earning less than $250,000 a year. House Speaker John Boehner, R-Ohio, began discussions by pushing to extend the current rates across-the-board for everyone, saying a tax increase would sideswipe economic growth.
But avoiding any increase through the use of withholding tables cannot last indefinitely, since the government would eventually have to increase the amounts collected. If Obama deploys this strategy, it would suggest his confidence that he’s on the cusp of a deal with congressional leaders, Anderson said.
Spend Now, Cut Later—Congress approves agency budgets, but the White House often decides how to “apportion” money over the course of the year.
The White House Office of Management and Budget does not have to instantly demand that agencies meet the combined $109 billion worth of cuts to Defense and domestic programs next year. Obama could fund some agencies at their current levels, while planning for later cuts that—if a deal is reached—might never be needed.
An April GAO report on sequestration noted that the “execution and impact of any spending reductions will depend on legal interpretations and actions taken by OMB.” But it’s also a gray zone in the law. The Comptroller General ruled way back in 1957 that such an approach could not cause a “drastic curtailment” of expenditures at the end of the fiscal year.
The OMB also has a limited ability to parcel out funding, since the continuing resolution to finance the government runs through March 27.
“You would not see the same impact on all parts of the federal government,” said Patrick Lester, director of federal fiscal policy for the budget transparency organization OMB Watch. “We could get through most of the month of January without most of the federal agencies being put in a terrible jam.”
Agencies Have Multi-Year Funding – Many agencies receive multi-year funding that could be tapped if funding is squeezed, according to a recent analysis by OMB Watch. If those leftover balances are not obligated for any specific program, they can easily ensure a steady revenue stream since they’re not subject to the $54 billion in sequestration cuts that are scheduled next year for non-Defense programs.
Agencies Can Shuffle Their Budgets – Federal agencies do not need congressional approval to shift money within their appropriations. By “reprogramming” their appropriations, agencies have the “substantial ability to redirect cuts away from sensitive areas of spending to other areas that may be less sensitive in the first few weeks of the year,” the OMB Watch analysis noted.
Soldiers Follow Orders, and the Pentagon Hasn’t Gotten Them Yet – It’s not like 2013 starts and the Defense budget is instantly dragged in front of a firing squad. The government can delay the impact of sequestration just by taking some time to pinpoint possible cuts, said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments.
First, the White House OMB sends the Pentagon a memo ordering the 10 percent reduction. That would happen around Jan. 2. Then the military’s accountants toy with their spreadsheets to decide where to trim. This exercise should take long enough that any actual cuts couldn’t be implemented until February or early March.
“It really won’t be until the second-half of the fiscal year [April] that we see the real impact of this, because DoD hasn’t done detailed planning yet, and they can’t do it any faster,” Harrison said. “Don’t expect the apocalypse that has been predicted. You will be disappointed.”