Policy: Budgets & Deficits

Lawmakers ready budget fallback options amid tax impasse

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Congress,Taxes,Budgets and Deficits,Bloomberg News

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 agreement.

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 spending.

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 cuts timeframe.

“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.

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