US: Lawmakers Ready Budget Fallback Options Amid Tax Impasse
26 November 2013
Posted by: Author: Heidi Przybyla
Author: Heidi Przybyla (Bloomberg)
With less than three weeks until
their deadline, U.S. budget negotiators have yet to break an
impasse over revenue, prompting lawmakers to draft plans to
blunt $19 billion in defense cuts set to start in January.
One idea -- known as "smoothing” -- would redistribute
the 2014 reductions across the 10-year timeframe of the
automatic Pentagon cuts known as sequestration. Instead of the
cuts hitting in January, defense spending next year would remain
at or higher than the current $518 billion level, with greater
reductions coming in future years.
Budget analysts call the smoothing approach a gimmick, and
Tea Party-aligned lawmakers probably will oppose it.
"It’s the budget equivalent of rearranging the deck chairs
on the Titanic,” said Stan Collender, managing director of
Qorvis Communications LLC in Washington and a former
congressional appropriations aide.
Still, if Democrats and Republicans on the 29-member budget
panel can’t bridge the revenue divide, smoothing may serve as an
alternative for both parties that want to stop cuts the Pentagon
says will devastate important military functions. "It’s either
this or nothing,” meaning if this doesn’t work, the deeper
automatic cuts will take effect, Collender said.
Aides to Senator Patty Murray and Representative Paul Ryan,
the top Democratic and Republican negotiators on the bipartisan
budget panel, say they are inching closer to a tentative deal.
They’re identifying savings outside major entitlement programs
to replace a small portion of the $1.2 trillion in automatic
spending cuts over a decade, with a Dec. 13 deadline for an
Ryan, a Wisconsin Republican, has drawn up options both
chambers have included in their respective budget resolutions,
and political pressure is mounting for some deal.
They remain split over whether additional revenue by ending
some tax breaks should be a part of an accord. House Speaker
John Boehner, an Ohio Republican, has repeatedly ruled out any
tax increases while Murray says revenue must be included.
Senate Democrats on Nov. 21 moved to end delaying tactics
known as filibusters for most executive nominations, leading to
an escalation in partisan battling. Republicans warned the vote
will create an environment that could undermine the work of the
budget panel and efforts to reach fiscal deals.
It "further complicated a federal budget debate that was
already overly complicated and had little chance of success,”
Collender said. The same day, Boehner said he is making
contingency plans in case the budget talks fail, saying the
House will vote on a temporary spending bill keeping the
government open and the spending caps in place.
With neither side giving in on taxes, some lawmakers are
stepping in to address the most immediate fiscal crisis on the
calendar: defense cuts.
Senator John McCain, an Arizona Republican, is proposing
the "smoothing” approach as an amendment to a defense
authorization bill in the Senate. Jeff Sessions, the top
Republican on the Senate Budget Committee, is floating the idea
to fellow panel members. Senator Angus King of Maine, an
independent who caucuses with Democrats, included it in a plan
he pitched to committee members.
Leaders of the House and Senate appropriations committees
had pressed Murray and Ryan to reach an agreement by Nov. 22 to
allow time to write legislation needed to fund the government.
Ryan’s alternatives would target some federal programs,
such as asking federal workers to contribute more to their
pension plans. He also is looking at non-tax revenue, such as
user fees for aviation security and an annual fee on holders of
wireless licenses issued by the Federal Communications
Commission, according to the aides.
Such a deal would account for no more than $50 billion to
$100 billion, or a year’s worth of cuts under sequestration.
For long-term deficit reduction, lawmakers would need to
change the biggest drivers of the debt, Social Security,
Medicare and Medicaid, which make up almost half of federal
spending. Many lawmakers are hesitant to trim these programs
with a record number of Americans living in poverty and amid
pushback from interest groups including AARP, the nation’s
largest seniors’ lobby with 37 million members.
Republican aides said the chances of a smaller-scale
agreement hinge on whether Murray drops her demand that so-called loophole closings be part of a deal and instead accepts
increased user fees as a form of revenue. Republicans may be
willing to offer concessions such as extending unemployment
benefits to reach a deal, they said.
The revenue dispute is raising concerns among some
lawmakers who are already sketching out other options for
dealing with the defense cuts.
"The military wants more predictability, they want time,
and they want more flexibility,” Sessions said in an interview.
"We can give them all of those without altering the net
sequester reductions. You could avoid the cut this year and grow
at a lesser pace in the future.”
Sequestration led to $80 billion in automatic reductions
starting in March to domestic programs, including Head Start for
poor children and scientific and medical research. An added $19
billion cut in Pentagon spending is slated for January.
The panel could trade steeper cuts scheduled for 2014 and
2015 for greater cuts in future years -- sequestration goes
through 2021 -- or soften its effects by spreading the total of
cuts over a longer time, into 2022 and 2023, the aides said.
For instance, McCain’s plan would keep 2014 defense
spending at $524 billion instead of $498 billion under
sequestration. Beginning in 2018, the plan would begin cutting
more from defense than sequestration does, with the sharpest
reductions coming in 2020 and 2021. Panel members also could
give federal agencies more flexibility in distributing the cuts.
Three years of budget fights have helped drive
congressional approval ratings to 9 percent, a 39-year low,
according to Gallup Organization polling. Lawmakers now want to
reconfigure sequestration and avoid another government shutdown
in mid-January, when Congress must approve federal funding.
Any effort to reapportion the automatic cuts faces a
roadblock in the Republican-led House, where Tea Party-aligned
lawmakers want to resist trading concrete spending cuts for
future reductions that future Congresses may reverse.
It also could face opposition in the Democratic-led Senate
if members view it as a way of watering down the cuts. Senate
Minority Leader Mitch McConnell, a Kentucky Republican, warned
House Republicans in a closed-door meeting on Nov. 19 against
trying to change sequestration’s $967 billion spending cap.
"It’s a bad idea to revisit a law that is actually working
and reducing spending for the government,” McConnell said later
that day. "We’ve reduced government spending for two years in a
row for the first time since the Korean War.”
Another fallback option for easing the defense cuts would
be trimming defense entitlements, a politically unpopular path
that could include cuts to veterans’ supplemental Medicare
program or require higher co-payments for prescriptions.
Spreading sequestration over a longer period or pushing
cuts into future years could appeal to some lawmakers.
"While I’ve been a vociferous advocate for the big deal
for a long time, at this point, to at least take the first
step” by reconfiguring the cuts might "make some sense,” said
Senator Mark Warner, a Democrat from Virginia, home to a large
number of defense contractors and federal employees.
"Anything we can do to relieve pressure on the Defense
Department through flexibility” or stretching out sequestration
"would be acceptable to me,” said South Carolina Senator
Lindsey Graham, a Republican on the panel. "There would be a
lot of bipartisan support” for such an approach, he said.
In the first round of cuts, the Army had to cancel training
for seven brigade combat teams and deferred maintenance on 172
aircraft, more than 900 vehicles, almost 2,000 weapons, and more
than 10,000 pieces of communication equipment.
Lockheed Martin Corp. (LMT), the largest U.S. government
contractor, will cut 4,000 jobs in response to declining federal
The next round will "directly affect the purchasing of new
equipment, funding of research and innovation within the defense
industry and put hundreds of thousands of middle-class jobs at
risk,” according to a statement from Senator Richard Durbin of
Illinois, the chamber’s second-ranking Democrat.
Rudy Penner, a Congressional Budget Office director from
1983 to 1987, dismissed the idea of tinkering with the automatic
"There are a lot of gimmicks you could use,” said Penner,
who warned in 2011 that sequestration was a flawed mechanism
with a history of failure. "I frankly was hoping they’d do a
little better than that.”
Such a strategy "could lead to a continuous cycle in which
Congress repeatedly avoids making cuts by promising even greater
cuts in future years,” said Ed Lorenzen, policy adviser at the
Committee for a Responsible Federal Budget.
This article first appeared in bloomberg.com.