January 2012

'Line' Items: State of the Union Edition

Stating the Obvious – President Obama delivers the State of the Union address Tuesday evening. The SOTU is the annual rite where presidents attempt to hit the “reset” button and lay out their agenda for the coming year. Not surprisingly, Obama reportedly will focus on economic and fiscal issues in his speech, as they are the two most important issues to voters in this election year. The President is expected to lay out an economic blueprint that promotes fairness and reduces inequality. Proposals will include tax reform that requires the wealthy to pay more. Indiana Governor Mitch Daniels (R), who served as the director of the Office of Management and Budget (OMB) in President George W. Bush's administration, will give the official response immediately after the address. No doubt Daniels’s remarks will involve the need for fiscal restraint (watch him discuss the national debt and how to address it here). The coming months will underscore how intertwined the two issues are, as the fiscal impact of economic proposals are scrutinized and vice versa. Meanwhile, have some fun watching the speech with our DEBT-O bingo game.

States Weigh In On ‘Go Big’ – The National Conference of State Legislatures (NCSL) last week sent a letter to leaders in Washington urging them to include a “comprehensive, aggressive and bold plan to address America’s long-term fiscal gap” in the FY 2013 budget. The letter underscores how federal budget decisions are connected to those at the state and local levels. See the depth of support for a Go Big approach here

Still Not Much Unity on Payroll Tax Extension – The conference committee charged with forging agreement on a longer-term extension of the 2% payroll tax holiday, Medicare payment doc fix, and unemployment benefits holds its first meeting Tuesday. Paying for the extension is the main source of contention, along with the Keystone pipeline. Negotiators have until the end of next month to strike a deal. Read our ideas on how to approach the issue in a fiscally responsible manner.

Congress Looks to Improve Sorry State – The President will address a Congress suffering from historically low approval ratings on Tuesday. Lawmakers will seek to improve their standing by showing action on the budget. House Speaker John Boehner (R-OH) confirmed that his chamber will produce a FY 2013 budget resolution. The House will also move forward on a legislative package this week through committee to reform the budget and appropriations process to make it more functional. Proposals include giving the budget the force of law, moving to a biennial budget process, including government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac in the budget, and including dynamic scoring of major legislation. The Peterson-Pew Commission on Budget Reform, a project of CRFB, offered a comprehensive budget process reform package of its own and also explored other ideas such as multi-year budgeting, performance budgeting, fiscal rules, and budgeting for emergencies.

Making a Statement on the Debt Ceiling – Last week the House voted to formally reject a $1.2 trillion increase in the statutory debt limit. The Senate is expected to vote on the resolution of disapproval on Thursday. These are largely symbolic votes because even if the Senate follows the House, which is unlikely, President Obama can veto it and it would take a 2/3 super majority to override. The increase will automatically occur on Friday unless it is blocked. Keep track of debt ceiling developments here and refresh your memory on the topic here.

Trigger (Un)Happy – Some lawmakers are keen to disable, or at least alter, the sequestration of $1.2 trillion in federal spending over nine years that will be triggered next year due to the failure of the Super Committee. One proposal would exchange reductions in the federal workforce for the scheduled cuts in defense spending. President Obama has been firm that he would veto changes to the sequester absent agreement on $1.2 trillion in deficit reduction and his FY 2013 budget request reportedly will contain such language. CRFB has been vocal on the need to maintain the trigger in order to prompt a comprehensive deficit reduction plan.

State of Confusion in Election – The presidential campaign took an unexpected turn over the weekend as former House Speaker Newt Gingrich won the South Carolina Republican primary. The surprise victory has brought renewed attention to the election. The four remaining Republican candidates spar again tonight in Florida, site of the next contest. The economy and the federal budget deficit have been the top issues for voters in the three states (Iowa, New Hampshire, and South Carolina) that have voted so far. Fittingly, CRFB has re-launched its US Budget Watch project in order to inform the campaign fiscal debate, providing the 12 Principles of Fiscal Responsibility for the 2012 Campaign last month.

Budget Release Pushed Back – The White House will release its FY 2013 budget request on February 13 as opposed to the traditional first Monday in February, which is February 6 this year.

Key Upcoming Dates (all times ET)

January 23, 2012

  • The Senate convenes for the Second Session of the 112th Congress.
  • House Rules Committee markup of HR 3575 to make the budget resolution legally binding at 5 pm.
  • Florida GOP debate sponsored by The St. Petersburg Times, NBC News, and The National Journal at 9 pm.

January 24, 2012

  • First meeting of the congressional conference committee on extending the payroll tax holiday, Medicare doc fix, and unemployment benefits.
  • House Budget Committee begins two-day markup of budget process reform bills - HR 3582, Pro-Growth Budgeting Act; HR 3578, Baseline Reform Act; HR 3581, Budget and Accounting Transparency Act; and HR 3575, Legally Binding Budget Act - at 10:15 am.
  • House Rules Committee hearing on HR 114, the biennial budgeting act, at 10:15 am.
  • President Obama will give the State of the Union Address at 9 pm.

January 25, 2012

  • House Budget Committee markup of budget reform package continues at 10 am.
  • House votes on CLASS Act repeal.
  • The World Economic Forum Annual Meeting in Davos, Switzerland begins and runs through Jan. 29.

January 26, 2012

  • Senate Budget Committee hearing on the US and global economic outlook at 10 am.
  • Dept. of Defense unveils budget cuts.
  • Florida GOP debate sponsored by CNN at 8 PM.

January 27, 2012

  • Dept. of Commerce releases 2011 fourth quarter GDP data.
  • A $1.2 trillion debt ceiling increase will automatically occur unless Congress formally blocks it.

January 31, 2012

  • Congressional Budget Office (CBO) releases its 2012 Budget and Economic Outlook at 10 am.
  • Florida Primary.

February 3, 2012

  • Dept. of Labor's Bureau of Labor Statistics releases January 2012 employment data.

February 4, 2012

  • Nevada Caucus.

February 7, 2012

  • GOP presidential contests in Colorado, Minnesota and Missouri.

February 13, 2012

  • The President will submit his FY 2013 budget request to Congress.

February 17, 2012

  • Dept. of Labor's Bureau of Labor Statistics releases January 2012 Consumer Price Index (CPI) data.

February 22, 2012

  • Arizona GOP debate sponsored by CNN at 8 pm.

February 28, 2012

  • GOP presidential contests in Arizona and Michigan.

February 29, 2012

  • The temporary payroll tax cut, unemployment insurance, and doc fix extensions will expire.
  • US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.

March 3, 2012

  • Washington Caucus

March 6, 2012

  • Super Tuesday - presidential contests in Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia.

Two Good Op-Eds From The New York Times

The New York Times had two interesting op-eds over the weekend on two essential components of deficit reduction: tax reform and health care costs.

First, former CEA chair Greg Mankiw lays out what he considers to be four consensus principles for tax reform. Essentially, these are the principles that he thinks should be followed in order to design an optimal tax code. The principles are:

These principles would result in a more economically efficient tax code and one that better accounts for the social costs and benefits of certain activities. Also, the benefits of a much simpler code would be widespread, since filing tax returns would be much less time consuming.

The second op-ed is by Ezekiel Emanuel, a former White House advisor and health care expert, who argues that controlling health care costs should be as much a worry for progressives as it is for conservatives. Given that health care costs and government health spending have been rising much faster than GDP, he considers health care cost control to be an essential issue. He says that dramatically rising health care costs detract from other liberal priorities by pressuring employers to pay less compensation in the form of wages or salaries and by crowding out spending priorities at the federal level and especially at the state level. He writes:

There is an inevitable trade-off between rising health care costs and things liberals really care about, like access to college and good wages for working Americans. We cannot have it all. The health care reform act will help us save — mainly by changing how physicians and hospitals are paid and delivering better care to our most expensive patients. But more can be done: for starters, we could speed up the implementation of payment reform, stop Medicare payments for tests and treatments that provide no benefit and endorse competitive bidding for medical goods and services.

The bottom line? We need tax reform and we need entitlement reform. Both of these op-eds offer valuable perspectives on two very important issues, and are definitely worth checking out.

Click here to read Greg Mankiw's op-ed on tax reform, and click here to read Ezekiel Emanuel's op-ed on health care costs.

Spotlight on the States: Public Pension Reform

Continuing their efforts to close budget gaps, states across the country have looked to public pension reform as part of a possible solution. Among the states considering such reforms are Illinois, California and New York.

Illinois has been dealing with the issue of public pension reform for a few years now. In 2010, the state passed a reform bill that made various changes to the system for new employees, including raising the retirement age to 67 and increasing the number of earning years pensions are based off from the highest four to the highest eight. Earlier this year, Illinois took another step to improve the state's pension system. On January 5th, Gov. Pat Quinn (D) signed legislation aimed at ending so-called "double dipping" -- instances where state employees took leaves and went to work for unions, but continued to accrue benefits in the state’s pension system based on union pay.

While these reforms have made progress, much more remains to be done on the fiscal front. Earlier this month, Moody’s Investors Service downgraded Illinois’ bond rating from A1 to A2, making it the lowest-rated state in the country (rating agencies S&P and Fitch have California as the lowest-rated state, with Illinois one notch above). In their report, Moody’s stated that "severe pension under-funding" was a key factor in their decision. On a more positive note, a release from Fitch Ratings on January 17th stated that the agency "believes that steps toward improving the status of the state of Illinois' underfunded pension liabilities could be taken during the course of the next year," while still touching on the concerning fiscal projections.

Out west, the state of California is also wrestling with reforms to its public pension system. In his "State of the State" address on January 18th, California Gov. Jerry Brown (D) stated that:

As for pensions, I have put forth my 12 point proposal. Examine it. Improve it. But please take up the issue and do something real. I am committed to pension reform because I believe there is a real problem. Three times as many people are retiring as are entering the workforce. That arithmetic doesn’t add up. In addition, benefits, contributions and the age of retirement all have to balance. I don’t believe they do today. So we have to take action. And we should do it this year.

Released on October of last year, Gov. Brown’s 12-point pension reform plan would apply to all state, county and municipal workers in California and, according to a press release, if fully implemented would cut the cost to taxpayers of providing pensions for state employees in half. The plan includes the following changes:

  • Raising employee contribution level to at least half of costs
  • Creating a new mandatory hybrid retirement system that would include a defined-benefit component as well as a 401(k) style plan
  • Raising retirement age for new hires to 67
  • Increasing the number of earning years pensions are based off of from the single highest year to the highest 3 years (this has already been put into effect for new state employees)
  • Requiring more years of state service for new workers to become eligible for health care benefits at retirement (15 years for the state to pay a portion of premiums, 25 years for the state to pay maximum amount of premiums)

Up in New York, Gov. Andrew Cuomo's (D) proposed budget for FY 2012-2013 includes several reforms to the state's public pension system. His proposal would, among other things, increase employee contributions, raise the retirement age, and create a new option in the system that would allow new state workers to choose between a defined contribution plan or a pension with benefits less than those offered now. These reforms would reduce pension costs by one half compared to the current benefit design, and save public employers outside of New York City $83 billion over 30 years (New York City's savings would be $30 billion over 30 years). NYC Mayor Mike Bloomberg voiced his approval of Gov. Cuomo's focus on reforming the state's pension system, saying in his "State of the City" speech on January 12th that "Governor Cuomo is right to make pension reform a top priority, and he’ll have our full support."

For all of these states, as well as many others, structural and long-term reforms to public pension systems could go a long way toward improving their fiscal outlook. Like all important aspects of the budget, however, the issue of public pension reform can be a political minefield. Hopefully, state government officials will work together to reduce the burden pension systems place on state budgets and taxpayers, while still ensuring a stable financial future for government workers.

A Way to Reform the Tax Code, from AEI

Alex Brill of the American Enterprise Institute (AEI) recently put out a tax reform plan that focuses on corporate taxes, but includes some individual provisions as well. The aims of his proposal, he says, are to "reduce tax rates for job creators, limit subsidies that promote excessive leverage, and phase out tax policies that encourage larger state and local governments."

On the corporate side, he first cuts the tax rate to 25 percent. Then, he:

  • Reduces the interest expense deduction by ten percent
  • Repeals the domestic production activities deduction
  • Makes permanent the 50 percent bonus depreciation that was in effect prior to this and next year's full expensing

Brill's plan ventures beyond the corporate tax system into the individual income tax as well. He:

  • Replaces the mortgage interest deduction with a 12 percent credit and reduces the amount of mortgage principal on which the deduction could be claimed from $1 million to $500,000
  • Phases out the deduction for state and local income taxes paid
  • Eliminates the AMT

Brill's plan is not intended to be comprehensive, but to some extent, he tries to appeal to both sides of the political spectrum by reducing marginal rates for corporations but raising effective rates--in this case, on the individual side--in a progressive manner by eliminating tax expenditures or making them more progressive.

The numbers below are Brill's own calculations of what each provision would cost or raise.

AEI Tax Reform Revenue Impact (billions)
  Ten-Year Savings
Cut Corporate Tax Rate/Repeal Domestic Production Deduction -$400 to -$500
Bonus Depreciation -$300 to -$400
Reduce Interest Expense Deduction $200 to $300
Subtotal, Corporate -$400 to -$700
Reduce Mortgage Interest Deduction $250 to $350
Repeal State and Local Deduction and AMT $200 to $300
Subtotal, Individual $450 to $650
   
Total -$250 to $250

 

An issue with the plan is its intended revenue-neutrality. If policymakers are going to take a hard look at some of the bigger tax expenditures, which they desperately need to do, they should also seek to reduce the deficit in addition to lowering tax rates. On that front, the Fiscal Commission serves as a useful guide. Still, Brill's plan provides an interesting example of how to reduce distortions in the tax code and improve economic growth through a more efficient allocation of resources.

Prelude to a Trigger

Both CBO and OMB in the last week released sequestration reports, technical reports that detail whether the government is adhering to discretionary spending caps. Normally, these are unnoteworthy reports, but there is a small detail in the most recent ones that is worth noting.

The Budget Control Act caps set up separate caps for security and nonsecurity spending in 2012 and 2013 (security spending being defense plus homeland security, the VA, and international affairs spending), but only an overall discretionary cap in 2014 and beyond. With the failure of the Super Committee to recommend a package of savings, OMB was required by January 15, 2012 to revise those caps to have separate defense and nondefense caps that extend through 2021. These separate caps add up to the same overall discretionary spending caps of the previous caps, and it is off this baseline to which the across-the-board cuts would be applied next year if lawmakers are unable to recommend savings greater or equal to the magnitude of the trigger. It is a small detail, but it shows the trigger's first step towards going into effect.

All the more reason for lawmakers to negotiate and enact a comprehensive solution for the debt.

Budget Control Act Caps (billions of budget authority)
  2012
2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2021
Old Caps
Security $684 $686 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Nonsecurity $359 $361 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Total $1,043
$1,047 $1,066 $1,086 $1,107 $1,131 $1,156 $1,182 $1,208 $1,234 $11,260
New Caps
Defense $538 $546 $556 $566 $577 $590 $603 $616 $630 $644 $5,866
Nondefense $505 $501 $510 $520 $530 $541 $553 $566 $578 $590 $5,394
Total $1,043
$1,047 $1,066 $1,086 $1,107 $1,131 $1,156 $1,182 $1,208 $1,234 $11,260
New Caps With Trigger
Defense $538 $546 $501 $511 $522 $535 $548 $561 $575 $589 $5,426
Nondefense $505 $501 $472 $483 $493 $505 $517 $531 $545 $557 $5,109
Total
$1,043
$1,047* $973 $994 $1,016 $1,040 $1,066 $1,093 $1,120 $1,146 $10,538

*Although the trigger goes into effect in FY 2013, it does so after the start of the fiscal year, so it is not represented in the 2013 cap

An Analysis of Rick Santorum's Tax Plan

After evaluating Mitt Romney's, Newt Gingrich's, Rick Perry's, and Herman Cain's proposals, the Tax Policy Center (TPC) has put out another analysis of a Republican presidential candidate's plan, this time Rick Santorum. Santorum's plan includes a number of changes to the tax code, although he doesn't restructure the system like Gingrich, Perry, or Cain.

On the individual side, he:

  • Pares down the number of tax brackets to two rates of 10 and 28 percent
  • Repeals the tax increases in the Affordable Care Act
  • Repeals the AMT
  • Eliminates the estate tax
  • Lowers capital gains and dividends rates to 12 percent
  • Triples the exemption for dependent children
  • Eliminates all marriage penalties
  • Otherwise extends the 2001/2003 tax cuts

On the corporate side, he:

  • Cuts the corporate tax rate to 17.5 percent and eliminates the tax for manufacturers
  • Allows businesses to write off the cost of equipment purchases immediately
  • Increases the R&D tax credit from 14 to 20 percent and makes it permanent
  • Allows firms to permanently repatriate funds from overseas at a 5.25 percent rate, or 0 percent if those funds are invested in plants or equipment

As one would expect, these changes come with a large price tag. TPC estimates staggering revenue losses for Santorum in (calendar year) 2015 alone: $1.3 trillion relative to current law and $900 billion relative to current policy (2001/2003 tax cuts are extended). It'd be a tough climb to make up all those lost revenues with spending cuts, much less actually start reducing deficits and debt.

NCSL Urges Washington to Go Big

Earlier this week, the National Conference of State Legislatures (NCSL) released a letter to the President and leaders in Congress, urging them to "Go Big" and enact a bold, comprehensive fiscal plan to reduce our nation's debt and deficits. The letter stated that while the savings from the Budget Control Act were a start, a more comprehensive approach will be needed to ensure long-term fiscal stability. They pointed to the reports from the Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force as possible models for a bipartisan plan.

The letter urged President Obama to address our mounting debt in his upcoming FY 2013 budget, saying:

We strongly urge you, President Obama, to include in your FY 2013 proposed federal budget a comprehensive, aggressive and bold plan to address America’s long-term fiscal gap. We respectfully suggest that your plan last year that would have reduced the deficit by $4 trillion is a starting point.

We likewise urge Congressional leadership to pass a budget resolution that adheres to the "go big" principle. Putting America on a sustainable fiscal path is crucial. Many members of Congress have reached that conclusion in their own proposals, letters and statements. The private sector has also voiced similar sentiments. NCSL believes that the White House and Congress need to examine all possible avenues for deficit reduction, including discretionary spending, entitlement reform and revenue-related options. Both the budget proposal and budget resolution should include an explanation of the potential intergovernmental and fiscal federalism implications of any recommended actions.

As always, we are happy to see such a group urge leaders in Washington to embrace a bipartisan and comprehensive approach to debt and deficit reduction. The support of state lawmakers underscores how federal budget issues impact state and local budgets and that addressing deficits and debt is truly a cross-cutting issue.

Click here to read the full letter from NCSL, and click here to see more support for Go Big.

Debt Ceiling Watch 2011

In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures". Keep checking back as we update this table (and here for the 2012 Debt Ceiling Watch).

 

Date
Extraordinary Measure
Headroom Given Debt (Gross/ Subject to Limit)
09/22/11

Debt Ceiling Increased by $500 billion

Today, the Treasury Department, as the Debt Deal allowed it to do, raised the debt limit an additional $500 billion, bringing the total to $15.194 trillion. This action was subject to disapproval by Congress, which the Senate failed to do on September 8th. The final increase will come anywhere from $1.2 - $1.5 trillion depending on the performance of the Super Committee. Read more here. 

$500 Billion $14,726,790/ $14,681,855
08/02/11

Debt Ceiling Increased by $400 billion

Today, President Obama signed into law an increase of the debt ceiling. Under the terms of that agreement, the debt ceiling was raised an additional $400 billion, bringing the current ceiling up to $14.694 trillion, which Treasury estimates will get it through September. The deal gives a mechanism for an additional $500 billion in debt ceiling upon a Presidential request, subject to Congressional disapproval, and anywhere from $1.2 - $1.5 trillion depending on the performance of the joint committee. Read more here.

$400 Billion $14,580,705/ $14,532,332
07/15/11

Suspension Reinvestment of the Exchange Stabilization Fund

Treasury Employs Last Extraordinary Measure by suspending reinvestment of funds into the Exchange Stabilization Fund.

Measures like this have been used in 1996, 2000, 2003, 2004, and 2006.Read more here.

$23 Billion $14,342,943/ $14,293,975
07/01/11

Treasury Reaffirms U.S. To Reach Limit August 2nd

The Treasury Department once again confirmed that the U.S will exhaust its borrowing authority on August 2nd, which is unchanged from its last projection. Read more here.

 

$14,344,434/ $14,293,975

06/01/11

Treasury Still Projects U.S. To Reach Limit on August 2nd

The Treasury Department is still estimating that the U.S will exhaust its borrowing authority on August 2nd, which is unchanged from its last projection. Read more here.

  $14,344,434/ $14,293,975
05/16/11

Suspension of New G-Fund and CSRDF Issuances

The Treasury Department has suspended reinvestments and issuances of Treasury securities in the Civil Service Retirement and Disability Fund (CSRDF) as well as the Government Securities Investment Fund (G-Fund). It has also begun redeeming certain investments in the CSRDF.

Measures like this have been used in 1996, 2002, 2003, 2004, and 2006. Read more here.

$147 billion

($130 billion from G-Fund; $17 billion from CSRDF)

 $14,345,538/ $14,293,975
05/16/11

Statutory Debt Limit Reached

The Treasury Department has announced that without taking extraordinary measures, it will exceed the debt ceiling imminently. The debt is now within $25 million of the statutory debt limit.

   $14,345,538/ $14,293,975
05/06/11

Suspension of New SLGS Bond Issuances

The Treasury has suspended new issuances of State & Local Government Series (SLGS) bonds -- special purpose securities which are issued to state and local government to help them with certain cash management issues.

Similar measures were taken in 1995/96, 2002, 2003, 2004, 2006, and 2007. Read more here.

None

(Absent this suspension, debt could grow an extra $6 billion/month)

$14,322,687/ $14,271,008
05/05/11 Day Before Extraordinary Measures Begin
  $14,321,667/ $14,269,975
01/27/11

Unwinding of Supplemental Financing Program

The Treasury Department has now started to allow the assets held in the Supplemental Financing Program to mature and rollover. This will decrease its balance from $200 to $5 billion. This fund was set-up as a supplemental finance program for the Federal Reserve.

This measure has never been used before as the program was created in 2008. Read more here.

$195 billion $14,059,409/ $14,006,870

 

Hoyer Reaffirms Membership in Announcement Effect Club

Democratic Whip Steny Hoyer (MD) has been a member of CRFB's Announcement Effect Club since June of last year. During a briefing on the Hill yesterday, Rep. Hoyer reaffirmed his position in the club when he pointed out that simply committing to a balanced and comprehensive fiscal plan could do a lot to restore confidence in the U.S. economy.

More specifically, Rep. Hoyer stated that:

We need to address jobs. We need to address deficits and debt. I suggest that they are interrelated. My view is that one of the most positive things we could do to address confidence in the economy would be to come up with a big, bold and balanced fiscal plan for the coming decade to get us to balance.

We are glad to see Rep. Hoyer highlight the immediate potential benefits of agreeing on a comprehensive deficit-reduction plan. It is not that reducing the deficit through immediate spending cuts or tax increases would help the economy, but that having a plan with gradual savings that puts the debt on a downward path would increase confidence in our economic future. In addition, there would be confidence that leaders in Washington of both parties are willing and able to work together and compromise for the good of the country.

To read more about CRFB's Announcement Effect Club and see a full list of members, click here.

Jeff Zients to Serve As Acting OMB Director

Jeff Zients will once again ascend to the role of acting OMB director, according to a blog post on OMB's website. Zients had previously stepped into that role in 2010 during the gap between Peter Orszag's and Jacob Lew's tenures as director. Otherwise, he has been serving in the roles of Deputy Director of Management and Chief Performance Officer for nearly three years.

As we noted in our blog post last year when he became acting director, Zients's experience with the "M" side of OMB is useful in the efficiency efforts that the Administration has been undertaking, like the Campaign to Cut Waste. We wish him the best of luck as acting director.

‘Line’ Items: Playoff Edition

Playoffs in Full Swing – The Packers packed it in; the Broncos got busted; the Saints went marching out; and Houston had a problem as the NFL Playoffs eliminated more contenders in the annual march towards crowning a champion. Challengers were eliminated in the presidential contest as well as former Utah Governor Jon Huntsman backed out and more may fall away after Saturday’s South Carolina primary. Meanwhile, in Washington both parties continue to play off against each other as they vie for field position in the upcoming fiscal battles that will be pivotal in this election year. The House returns Tuesday to begin the 2nd Session of the 112th Congress and the Senate is back in town next week. The White House is busy preparing its FY 2013 budget request and State of the Union address. Will we see some touchdowns, or just more punts? Who will be Tom Brady and step up in crunch time to carry the day?

Payroll Playoff Time – The drama at the end of last year that resulted in a two-month extension of the payroll tax holiday, expanded unemployment benefits and the doc fix was only a warm-up. The real action begins next week when conferees meet to begin hammering out longer-term extensions. Paying for the extensions remains the biggest sticking point, and both sides will present a variety of ideas. We’ll see how this team produces in the red zone as negotiators will have about a month to work out a deal with the current extension expiring at the end of February. CRFB has offered its own ideas on how to proceed in a fiscally responsible manner.

The Other Tax Extenders – Like the Baltimore Ravens, extensions of other tax provisions like the AMT patch have taken a back seat as others have grabbed the headlines. But Congress must contend with those other tax extenders as well, and just like the Ravens, they pack a wallop.

Lining Up for Another Debt Ceiling Increase – Like Tim Tebow, the debt limit just keeps coming back. On Thursday, President Obama formally requested a $1.2 trillion increase in the debt ceiling. As set forth by last year’s Budget Control Act, the increase will occur unless Congress blocks it through legislation, but the president can veto the bill, requiring a two-thirds supermajority to override him. The House will vote on a resolution of disapproval on Wednesday. The Bottom Line is keeping up with the developments though its ongoing Debt Ceiling Watch. Just like with Tebow, it will take a bunch of Patriots to dispatch of the debt ceiling issue through a ‘Go Big’ comprehensive fiscal plan. Refresh your memory on the debt limit here.

Opening at OMB – The Office of Management and Budget is in need of a new quarterback as current chief Jacob Lew has been tapped to be the new White House Chief of Staff. Lew will stay on at OMB through the release of the White House budget request next month.

Looking at the Budget Playbook – The White House is set to release its FY 2013 budget request on February 6, but we are already getting an idea of some of the things that will be in it. President Obama’s submission to the Super Committee in September offers some possible proposals, and we know that "insourcing", Pentagon cuts and a raise for federal workers will be in the budget as well.

European Downgrades – Europe took another sack last week as Standard & Poor’s downgraded the credit ratings of nine nations including France, Austria, Italy, Spain and Portugal. France’s loss of its AAA rating was the biggest blow and could complicate efforts to end the European debt crisis.

Defense Cuts to be Announced – The Pentagon will try to emulate the San Francisco 49ers in implementing a stingy defense. Defense Secretary Leon Panetta on January 26 will announce the results of a months-long review as he aims to reduce defense spending by $450 billion over ten years.

President Looks to Consolidate – Just as the New York Giants turned things around through reshuffling, President Obama is asking Congress for fast-tack authority to reorganize the government to make it more efficient and to find some budget savings. In particular, he wants to consolidate six commerce and trade agencies into one unit. Obama seeks to get a vote in Congress within 90 days on any reorganization proposal that saves money.

Jobs Council Proposes Tax Reform – One of the recommendations made Tuesday by the jobs and competitiveness council formed by President Obama is to reform the corporate tax code. Tax reform promises to be a big issue this year.

Key Upcoming Dates (all times ET)

January 17, 2012

  • The House of Representatives commences the Second Session of the 112th Congress.
  • House Rules Committee will hold a hearing on the resolution of disapproval of the debt ceiling increase

January 18, 2012

  • The House will vote on a resolution of disapproval of a debt ceiling increase.
  • House Ways and Means Committee will hold a hearing on the Fiscal Responsibility and Retirement Security Act, which repeals the CLASS Act

January 19, 2012

  • South Carolina GOP debate sponsored by CNN.
  • Dept. of Labor's Bureau of Labor Statistics releases December 2011 Consumer Price Index data.

January 21, 2012

  • South Carolina Primary.

January 23, 2012

  • The Senate convenes for the Second Session of the 112th Congress.
  • Florida GOP debate sponsored by The St. Petersburg Times, NBC News, and The National Journal.

January 24, 2012

  • President Obama will give the State of the Union Address.

January 26, 2012

  • Dept. of Defense unveils budget cuts.
  • Florida GOP debate sponsored by CNN.

January 27, 2012

  • Dept. of Commerce releases 2011 fourth quarter GDP data.

January 31, 2012

  • Congressional Budget Office (CBO) releases its 2012 Budget and Economic Outlook at 10 am.
  • Florida Primary.

February 3, 2012

  • Dept. of Labor's Bureau of Labor Statistics releases January 2012 employment data.

February 4, 2012

  • Nevada Caucus.

February 6, 2012

  • The President must submit his FY 2013 budget request to Congress by this date.

February 7, 2012

  • GOP presidential contests in Colorado, Minnesota and Missouri.

February 17, 2012

  • Dept. of Labor's Bureau of Labor Statistics releases January 2012 Consumer Price Index (CPI) data.

February 22, 2012

  • Arizona GOP debate sponsored by CNN at 8 pm.

February 28, 2012

  • GOP presidential contests in Arizona and Michigan.

February 29, 2012

  • The temporary payroll tax cut, unemployment insurance, and doc fix extensions will expire.
  • US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.

What Is, and What Should Be, on the Table?

As lawmakers slowly return to town this week and next week, there will be an increasing focus on possible offsets for any extensions to expiring policies. An Associated Press article today lays out some of the possibilities that Congress will have for nickle-and-diming their way to offsetting the extenders they must pass next month. Some of them are familiar to those who followed the payroll tax cut debate, while others are low-hanging fruit savings options that have been used in budget negotiations for the past six months or so.

Of course, there is the ever-present millionaires' surtax, and indications are that Democrats will continue to press to include one. The Republican offer from December included a number of smaller policies, like freezing federal employee pay for 2013, reforming civilian employee retirement programs, raising Medicare premiums for high earners, auctioning spectrum licenses and others.

Other policies reportedly in the bag of possible options come from President Obama's September deficit reduction plan, like expediting the sale of federal property, raising TSA security fees, reforming the Postal Service, and eliminating a tax break for corporate jets. Additional policies include increasing premiums that employers pay for pension insurance with the Pension Benefit Guaranty Corporation and raising aviation fees.

Any extenders bill must be offset with real savings, and it is encouraging to see both parties appear committed to doing so. While ensuring that any extensions are fully paid for, lawmakers need to also be thinking about broader solutions to all of our fiscal challenges. A comprehensive approach to deficit reduction that includes revenue and entitlement changes could offset the costs of any extensions while reducing the debt in one fell swoop. These larger, more structural reforms are key to getting out of the fiscal hole we're in.

So, what should be on the table? You guessed it: everything.