Sequestration, Tax Increases, and Shutdowns, Oh My!

As Congress winds down its last two weeks of work before a five-week break, the inside-the-Beltway media are cranking out stories about the looming “fiscal cliff.”  That's the point at the end of this year when the Bush-era tax cuts expire, sequestration (explained below) automatically cuts $1.2 trillion from the budget, and the FY 2013 spending bills are expected to be done.

The conventional wisdom all year has been that Congress would start the budget process as usual, but then would complete appropriations bills and tax extenders in the already scheduled post-election lame-duck session - which miraculously would include some way to avoid the non-negotiable cuts ordered in last year’s Budget Control Act.  This bipartisan understanding is now morphing into a partisan anxiety attack:  What if Congress, while fighting for control of the wheel, actually does drive off the fiscal cliff?

These recent articles will give you a flavor of the issues at hand: 

• "The cuts no one believes will come" (Politico, July 10) 
• "Domestic programs gird for sequester" (Politico, July 18)
• "Sequester cuts hit home for Republicans" (Politico, July 18)

Sequestration

In last summer’s Budget Control Act, Congress passed, and the president signed, a budget deal that cut $1 trillion in spending, and appointed the Joint Committee on Deficit Reduction - aka “the Super Committee” - to write legislation saving an additional $1.2 trillion over the next 10 years.  The penalty if the Super Committee failed to come up with a plan that Congress could approve was sequestration, or automatic spending cuts. 

Last November, the Super Committee did fail, and now a year after the Budget Control Act, Washington is fretting about how to avoid sequestration on January 3, 2013.

Sequestration is a budget mechanism that forces automatic spending cuts by the Office of Management and Budget (OMB).  It's tacit recognition that Congress failed in its job of making spending decisions.  The Budget Control Act calls for half of the cuts under sequestration to come from defense spending, and half to come from non-defense spending.  This means reductions of $500 billion in each category, with the remaining savings achieved through lower interest costs.

Secretary of Defense Leon Panetta (who earlier was House Budget Committee Chairman, and director of OMB), congressional hawks, and the defense lobby have been loud and clear all year about how $500 billion in cuts to defense would hurt the nation's military efforts, eliminate jobs, and have a devastating impact on the economy. The non-defense community has been quieter in making its case, hoping the administration would release analyses of the impact of sequestration on various agencies, in support of protecting those areas. 

Now, however, with the temperature rising in the capital, and with no numbers coming out of the administration, the non-defense groups have created a coalition to garner Washington and grassroots support for domestic programs.  The NDD (non-defense discretionary) Coalition estimates that sequestration would translate into a nine percent cut across all programs next year.  This includes education, except Pell grants for 2013.  The NDD coalition sent this letter, with over 3,000 signatories, to Congress and the White House.  In it, the NDD Coalition outlines the problems for domestic programs if they were to be cut this deeply, and asks for a balanced approach to avoiding sequestration.   “Balanced approach” refers to including revenue increases and changes to entitlement programs as well as spending cuts.

At the same time, the American Association of School Administrators, which represents superintendents, released a report on the findings from their latest economic impact survey - the first in-depth look at how schools are responding to and planning for the deep cuts.  And, the Association of American Universities and the Association of Public Land-Grant Universities sent a joint letter to Congress, requesting the protection of research funding and a balanced approach to fixing the situation. 

Other developments have included former Vice President Dick Cheney meeting with congressional Republicans on defense cuts; the House Budget Committee passing a bill requiring the President to outline how OMB would implement sequestration; and Senate amendments to other legislation requiring sequestration transparency. 

It's increasingly clear that the “new” conventional wisdom is that no one wants sequestration to be triggered.  Former members of the bipartisan Super Committee have begun working behind the scenes to craft a plan to avoid the hatchet.  A compromise might include revenue increases that Republicans could support, and spending cuts that Democrats could support.  But before any plan can be considered, both parties will have to decide if they want to use sequestration as campaign fodder or not.  Right now, each side blames the other, even though they all agreed to it.

Tax Cuts 

Meanwhile, the White House and Congress agree that a host of tax breaks set to expire at the end of 2012 need to be extended – including several important to higher education.  The controversy, though, centers on whether to limit the tax breaks based on income levels.  President Obama wants to extend the cuts only to taxpayers with an annual income below $250,000.  The Senate largely supports the $250K cap, but some Senate and House Democrats representing higher income constituencies, and with closer ties to the business and employer communities, would prefer a $1 million cap.  The House supports an extension without income limitations. 

In addition, the House and Senate are each expected to pass a one-year extension of the 2012 expiring provisions prior to August recess.  The bills, however, will not be negotiated in a House/Senate conference, nor will either reach the President’s desk.  They are merely symbolic at this stage, and the real negotiations and final deal will emerge at the end of the year. 

The one-year extension is said to be a short-term solution before Congress attempts a large scale tax reform effort in 2013.  Given the fact that Congress has been committed to large-scale tax reform for over 15 years, and has yet to produce a bill that actually reforms the tax code, it's likely that Congress will renew the debate over the tax extenders again next year.

Shutdown?

As noted above, the unwritten plan for the appropriations bills was to get spending bills through committees, and negotiate a final omnibus bill for FY 2013 in the post-election lame-duck session.  Toward that end, the House is on the verge of writing its 12th and final spending bill before the August recess, while the Senate has written nine of its bills (here's an overview).  The House has considered six bills on the floor, while Senate Majority Leader Harry Reid (D-Nev.) has said he will not bring appropriations bills to the floor for fear of time-wasting filibusters. 

To get to the final omnibus in the lame-duck session, Congress would need to pass a continuing resolution in September to avoid a government shutdown.  With this in mind, two new camps have emerged in the budget battles.  One is touting a long-term continuing resolution be passed in September, and cancellation of the lame duck session.  The other camp proposes not passing a continuing resolution, letting the government shut down, and then hurtling off that fiscal cliff to see which party gets blamed.

In Washington, it's the proverbial long hot summer - inside and out.

For more information, please contact:
Stephanie Giesecke