‘Line’ Items: Goals Edition A Weekly Update on Fiscal Policy Developments
Clutch Goals -- The U.S. Women’s Soccer team scored an improbable victory over Brazil on Sunday in the Women’s World Cup, overcoming a scoring and manpower deficit with a last-minute goal and sealing the victory through penalty kicks. A similar storyline is playing out in Washington involving a different deficit -- the federal budget deficit. It looks as if negotiations to raise the statutory debt limit and reduce the deficit will also come down to the wire. Hopefully, a last-minute deal can be achieved that averts the catastrophe of default, but it is difficult to score when the goals cannot be agreed upon. The cause was dealt a setback over the weekend as House Speaker John Boehner (R-OH) said a grand bargain including $4 trillion in deficit reduction would not be possible because his caucus could not support the tax increases involved. Negotiators, as they meet again today, must still decide how long of a debt-limit extension and how much deficit reduction they can agree upon in a quickly-diminishing timeframe. The Treasury Department says it cannot hold off a default past August 2, and the White House wants a deal soon to provide enough time to draft and enact the legislation codifying the agreement. CRFB recently offered its thoughts on what needs to come out of the talks and reiterated its position that a multi-year plan to stabilize the debt should accompany a debt ceiling increase last week in a statement. Let’s hope Team USA can pull out another dramatic win.
AMT…CPI…TBD – There is growing talk that a debt limit/deficit reduction deal will include a fix of the Alternative Minimum Tax (AMT) and a change to the Consumer Price Index (CPI). An AMT fix that keeps the tax from affecting the middle class while being offset by revenue increases elsewhere, such as through eliminating or reducing certain tax expenditures, could gain enough support on both sides to pass. And switching to an alternative CPI, which measures inflation and is used to adjust federal benefits like Social Security for cost of living changes year to year as well as certain tax breaks, could also find bipartisan support and produce significant deficit savings. A recent paper makes the case for how a switch to ‘chained CPI’ can reduce the deficit.
Ethanol Deal Fuels Tax Expenditure Reform Hopes – A bipartisan trio of senators announced late last week that they reached agreement on a measure to end tax subsidies for ethanol production. The deal reached by Sens. Amy Klobuchar (D-MN), John Thune (R-SD), and Dianne Feinstein (D-CA) will abolish the ethanol tax credit and dedicate two-thirds of the estimated $1.3 billion in savings to deficit reduction, with the rest going to promote alternative fuel development. The agreement underscores the increased scrutiny tax expenditures are receiving as lawmakers look for ways to reduce the deficit. See here and here for more on reforming tax expenditures.
Defense Spending Getting Harder to Defend – The House passed the FY 2012 Defense spending bill last week. Although it passed easily and is the only 2012 appropriations bill to increase rather than decrease spending over the previous year, votes on amendments presage Pentagon spending battles to come. For example, an amendment that would have shifted $200 billion in funds from reconstruction in Afghanistan to deficit reduction was narrowly defeated in a 210-217 vote.
Balanced Budget Amendment Gets Its Moment – House Majority Leader Eric Cantor (R-VA) announced that the House will vote on a balanced budget amendment to the Constitution next week. Senate Minority Leader Mitch McConnell (R-KY) also wants a vote in his chamber that week. The proposal preferred by Republicans will not only require that the President submit a balanced budget annually, but would also cap spending at 18 percent of GDP and require a two-thirds supermajority vote in Congress to raise taxes. The Peterson-Pew Commission on Budget Reform has offered its own blueprint for improving the budget process towards facilitating debt reduction in Getting Back in the Black. The Commission also recently produced a Fiscal Toolbox that summarizes and compares ideas like balanced budget amendments, spending caps, and debt triggers. Both publications are part of a one-stop online resource created by the Commission to help policymakers, media, and the public better understand the fiscal tools that are being discussed regularly.
Eyeing IPAB – The Independent Payment Advisory Board (IPAB), an entity created by the health care reform law to help constrain the rise of Medicare costs, will come under intense scrutiny this week with two congressional hearings. Both the House Energy and Commerce Committee and House Budget Committee will look at the agency. Lawmakers on both sides have raised concerns about the board because they claim it usurps congressional power. CRFB sees IPAB as essential to controlling health care costs and offered suggestions to strengthen it in a paper last year.
Ideas for Social Security Reform – The House Ways and Means Committee held a hearing on Friday on Social Security’s finances. CRFB board member Gene Steuerle was one of the witnesses and offered ideas to reform the program to ensure its long-term solvency. Among his recommendations were to increase the retirement age and capping expected lifetime benefits. See here for ideas from CRFB for strengthening the program’s long-term finances.
Key Upcoming Dates
- Meeting between White House and congressional leaders towards a deal to raise the debt limit and reduce the deficit. President Obama is scheduled to give a press conference at 11 am ahead of the meeting.
- House Budget Committee hearing on “Medicare’s Future: An Examination of the Independent Payment Advisory Board” at 10 am.
- House Energy and Commerce Committee hearing on “IPAB: The Controversial Consequences for Medicare and Seniors” at 9 am.
- House Budget Committee hearing on “Medicare and Social Security: The Fiscal Facts” at 10 am.
- Federal Reserve Chairman Ben Bernanke testifies before the House Financial Services Committee at 10 am.
- Senate Finance Committee hearing on “Perspectives on Medicaid from Select Governors” at 2 pm.
- Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.