Senate Democratic Proposal and Other Plans to Replace the Sequester

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Update: This post has been updated as of February 27, 2013 to reflect new proposals from the Senate Republicans

With time running out before the sequester is scheduled to hit, Senate Democrats have released [4] a proposal that would replace the across-the-board cuts until January 2, 2014 with a 50-50 mix of revenue and spending changes. On February 27, CBO scored [5] The American Family Economic Protection Act as adding $7.2 billion to the deficit. Provisions include:

• The “Buffett Rule,” requiring taxpayers earning over $1 million annually to pay a 30 percent effective rate; phased in from $1 to $2 million ($53 billion).
• Eliminating tax deductions for outsourcing costs — i.e. the costs of relocating a U.S. business unit to a foreign country (less than $1 billion).
• Changes to the tax treatment of oil extraction from oil sands. Establishes an 8-cent per barrel fee on domestic and imported supplies, with revenues going to the Oil Spill Liability Trust Fund ($2 billion).
• Ends direct agriculture subsidies, saving $31 billion, and uses $3 billion of those savings to pay for the extension of Farm Bill programs that were left without funding after the fiscal cliff deal and $6 billion to exempt mandatory accounts in the Department of Agriculture from the sequester (net $21.7 billion).
• Cuts defense spending by $27 billion beginning in FY2015 spread out over 7 years. The reduction would be about $3 billion in FY2015 and FY2016, and then would rise slowly to reach about $5 billion in FY2021.

This is the latest in many plans put forward to either prevent one year of sequestration cuts or replace the sequester altogether. Below are summaries of some of the other proposed plans:

The White House Proposal [6]: While details are still unclear, White House spokespersons have said that everything the President proposed in the fiscal cliff negotiations is still on the table, including an additional $600 billion in revenue that could be achieved through limiting tax expenditures. Specifically, these policies include:

• Taxing carried interest as ordinary income as opposed to at capital gains rates
• Eliminating special depreciation schedule rules for corporate jets
• Repealing various tax preferences for fossil fuels
• Limiting the value of itemized deductions and certain exclusions to 28 percent
• Switching to the Chained CPI [7]

The Down Payment to Protect National Security Act of 2013 [8]: This sequester replacement bill has been introduced in the House by Rep. Buck McKeon (R-CA) and in the Senate by Sen. Kelly Ayotte (R-NH). It would pay for the first year of sequestration by achieving approximately $85 billion in savings, sufficient to pay for both defense and non-defense accounts. The offsets for this bill include:

• Requiring a government-wide reduction in the number of federal employees by 10 percent through attrition. This would allow federal agencies to hire 1 person for every 3 who leave their employment. It would occur on an agency level as opposed to an across-the-board reduction and could be waived due to a national security concern or another emergency.
• Freezing pay for Members of Congress in years that they are not able to achieve a federal budget surplus.

The Balancing Act of 2013 [9]: This bill, introduced by Keith Ellison (D-MN) and members of the House Progressive Caucus, would replace the sequester with $960 billion in new revenue through reforms to the individual and corporate tax code. It would also reduce defense spending by $278 billion to pay for a one-year re-instatement of the Making Work Pay tax credit ($61 billion), funds for teacher and school modernization ($55 billion) and transportation infrastructure investments ($160 billion). Some of the largest options in their bill include:

• Limiting the value of deductions and certain exclusions to 28 percent ($482 billion).
• Closing the carried interest loophole ($17 billion).
• Eliminating special depreciation schedule for jets and eliminating mortgage interest deduction for boats used as second homes ($4 billion).
• Enacting international tax reforms ($161 billion).
• Eliminating fossil fuel subsidies ($94B).

Senate Republican Proposal: Senate Republicans are developing a sequestration replacement proposal that would cancel the across-the-board cuts for FY2013, but:

• Require the President to offer a sequester alternative by March 8. Congress would then have until March 22 to pass a resolution of disapproval by a simple majority vote. If that resolution is signed by the President, the original sequestration order would be restored. The process is subject to a veto, requiring two-thirds to overrule.
• Require that no more than $42.6 billion of the cuts come from defense (like sequester).

Senate Republican Alternative Plan: Sens. Lindsey Graham (R-SC), John McCain (R-AZ), and Kelly Ayotte (R-NH) are developing their own alternative to the Senate Republican proposal. Details have not yet been released, but reports indicate that it would be similar to the House Republican replacement plan from last year. Specifically, the plan would include:

• A $10 billion cut from defense appropriations
• Other unspecified savings, targets may include food stamps, the refundable child tax credit, and federal employee retirement benefits

Sequester Replacement Reconciliation Act of 2012 (H.R. 5652) [10]: Last year, Rep. Paul Ryan (R-WI) put forward a bill [11], which was passed by the House, that would have canceled the sequester and offset the cost through budget reconciliation savings from six House committees -- Agriculture, Energy & Commerce, Financial Services, Judiciary, Oversight & Government Reform, and Ways and Means. The sequestration of FY2013 non-defense mandatory funding of approximately $12 billion would remain in place and include additional mandatory spending cuts, equaling $316 billion in ten year savings. The changes to mandatory programs include (longer description here [11]):

• Altering food stamp (SNAP) benefits and eligibility criteria
• Modifying certain housing and financial authorities
• Reducing spending related to health insurance exchange subsidies established by the ACA
• Increasing the required retirement contribution rates paid by federal employees and Members of Congress
• Making a number of changes to Medicaid and CHIP

Sen. Whitehouse's One-Year Plan [12]: Sen. Sheldon Whitehouse (D-RI) has proposed two plans for replacing the sequester, a one-year waiver and a full replacement, paying for both by making changes to the corporate and individual tax code. The one-year repeal of the sequester for the rest of FY2013 would pay for the $85 billion in lost savings using a combination of the following options, together totaling $102.7 billion:

• Enacting the “Buffett Rule,” requiring taxpayers earning over $2 million annually to pay a 30 percent effective rate [13]. The minimum tax begins to phase in at $1 million ($46.7 billion).
• Requiring S corporation owners to pay payroll taxes on all their business income, not just their compensation ($9 billion)
• Repealing special depreciation schedule for private jets ($3 billion).
• Ending various tax expenditures for oil and gas companies ($24 billion).
• Prohibiting deferral of taxation for manufacturers that produce goods overseas for sale in the U.S. ($20 billion).

Sen. Whitehouse's Nine-Year Plan [12]: Whitehouse has also proposed a full replacement for the sequester. The plan would include all of the offsets in the one-year plan above ($102.7 billion), as well as the following proposals:

• International tax reforms such as ending tax incentives to outsource jobs and profits to foreign countries ($148.5 billion).
• 28 percent limit on itemized deductions for families earning over $250,000 and individuals over $200,000 ($293.3 billion).
• Impose a 0.15% fee on the largest financial firms ($70.9 billion).
• Tax transfers of securities at a rate of 0.03 percent and provide a tax credit for transfers within tax preferred savings accounts ($352 billion).
• Ends the "last in, first out" (LIFO) and the "lower cost or market" (LCM) methods of taxing inventories ($97.5 billion).
• Repeals the corporate deduction for stock options cashed in by an employee at the inflated current market value, rather than the original cost to the corporation ($24.6 billion).

Rep. Chris Van Hollen's Amendment [14]: Rep. Chris Van Hollen (D-MD) submitted an amendment to the Require a PLAN Act which would offset the costs of eliminating the sequester for 2013 with a combination of spending cuts and revenues, but it did not receive consideration on the floor. Offsets in the amendment include:

• Eliminating direct payments to farmers (roughly $30 billion).
• Eliminating several oil and gas tax breaks (roughly $30-$35 billion).
• Enacting the Buffett Rule (unknown savings post-ATRA).

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The sequester was never intended to be policy; rather, it was enacted as an enforcement mechanism to help pressure the Super Committee to come to an agreement on deficit reduction. While these proposals that offset the cost of a one-year repeal or a full replacement of the sequester will at least ensure that deficit reduction does take place, lawmakers should ideally use this opportunity to come together and enact a comprehensive plan that would do more than just tread water.

We can do much more if we are willing to take up entitlement and tax reform but above all, lawmakers should avoid the worst option of simply waiving the sequester without offsets and without addressing our unsustainable debt path.