Line Items: Thanksgiving Edition

Giving Thanks...and Little Else – As we prepare to spend time with family and celebrate Thanksgiving, Congress gave itself a head start on the holiday rush and left town. While lawmakers may be giving thanks this week, there is little they can say they have offered. Much work remains on a budget and farm bill and there is some pessimism in Washington that anything more will be accomplished before the end of this year. As the New York Times and Washington Post both point out, it is politics, not policies, that are preventing a comprehensive fiscal plan from being agreed to. We made clear in a paper last week that “Our Long-Term Debt Problems Are Very Far from Solved,” and only a comprehensive approach will adequately address our long-term fiscal challenges. The report points out that: 1.) the federal debt is growing unsustainably over the long run due to health care cost growth and population aging; 2.) little has been done to change the long-term trajectory of the debt; 3.) we’ll need around $13 trillion of deficit reduction over the next two decades to put the debt on a clear downward path relative to the economy; 4.) economic growth alone cannot solve our long-term debt problems; and 5.) starting now will allow more gradual and less distressing changes to be phased in over time. Another recent paper provides guidance on how to look beyond the short term, including identifying long-term deficit reduction; replacing short-term cuts with long-term savings; and evaluating the long-term impact of policies.    

Talking Turkey on the Budget – The leaders of the budget conference committee – Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) – are negotiating towards a small-scale deal that could provide a budget framework for the rest of the fiscal year and next and replace a small portion of the sequester. Talks are revolving around a possible $85 billion deal. About $65 billion of the automatic cuts of sequestration over two years would be replaced by cuts elsewhere, along with some non-tax revenues. Revenue options include increased user fees such as airline security fees and proceeds from selling government assets, such as auctioning broadband spectrum. Spending reduction possibilities include cuts in farm subsidies and decreased federal contributions to civilian employee pensions. We warn against double-counting when it comes to the pension issue. Murray and Ryan will continue their talks over the Thanksgiving break.   

“Smooth” Sailing for Sequestration? – Black Friday sales aren’t the only place to watch out for gimmicks. Legislators may resort to gimmicks as they seek to at least loosen the noose of the sequester. The back-up plan if a budget deal cannot be reached appears to be spreading some of the 2014 sequester cuts among the remaining years of sequestration, referred to as “smoothing.” We previously warned that simply canceling sequestration for one year and increasing it down the road was a gimmick. Lawmakers must be careful to not cross the line between adjusting sequestration to make it more bearable and continually kicking it down the road and not making real changes. Have more questions about sequestration? We have lots of answers here.  

A Heaping Serving of Tax Reform – Senate Finance Committee chair Max Baucus (D-MT) continued his effort to fundamentally rewrite the tax code by releasing three discussion drafts last week and indicating more are to come. The drafts tackle specific tax topics – international taxation, tax administration, and cost recovery and tax accounting rules. The international tax draft proposes a hybrid territorial/worldwide system designed to discourage corporations from keeping profits overseas. The tax administration draft offers ideas to reduce fraud, close the “tax gap” by collecting more taxes that are owed and making the filing process simpler. The cost recovery draft recommends ways to simplify how businesses treat expenses. For example, Baucus consolidates some 40 accelerated depreciation rates into 5; see our “Tax Break-Down” for more on the topic. He also proposes repealing the “last-in first-out” (LIFO) accounting method for measuring profits on inventory; see our LIFO “Tax Break-Down” to learn more about one of the biggest corporate tax breaks. Meanwhile, Baucus’ counterpart, House Ways and Means Committee chair Dave Camp (R-MI) is continuing his parallel tax reform effort. He is meeting with business groups and plans to mark-up comprehensive tax reform legislation by early next year. His efforts have bore some fruit as members of one of the tax reform working groups he formed in his committee introduced bipartisan legislation to reform education tax incentives. The Student and Family Tax Simplification Act, introduced by Reps. Diane Black (R-TN) and Danny K. Davis (D-IL), consolidates four tax breaks into one tax credit - simplifying education tax breaks, increasing the benefits for lower-income families and likely saving money. Follow our “Tax Break-Down” series to learn more about various tax expenditures that could be a part of tax reform.

Debt Ceiling Takes a Break – The statutory debt ceiling may not be home for the holidays, but it won’t be far from policymaker’s minds. Although the suspension of the debt limit expires on February 7, 2014, the Congressional Budget Office predicts that “extraordinary measures” could hold off a breach of the debt ceiling until as late as June. But policymakers no doubt will not want to go to the brink of a national default in an election year. Keep up with debt ceiling developments here. 

Will Farm Bill Be a Cornucopia of Savings? – In addition to the budget conference committee, there is another committee working to reconcile the differences between the House and Senate on a major piece of legislation. Lawmakers are working to overcome differences on the farm bill. Savings generated by the bill, such as by cutting direct payments to farmers, if an agreement is reached, could contribute to deficit reduction. But many differences still exist, especially in regards to funding for food stamps. 

Stuffing with Mushroom Cloud – Last week the Senate voted to change its rules to prohibit filibusters against nominations to federal office, except for Supreme Court justices – the dreaded “nuclear” option. While the filibuster is still an option for legislation and won’t have any direct impact on budget policy, the change could further sour already tense relations between the two parties on Capitol Hill. That could make reaching a budget deal even more difficult.

Key Upcoming Dates (all times are ET)

December 13, 2013

• Date by which the budget conference committee must report to Congress.

January 1, 2014

• The "doc fix," temporary tax extenders, extended unemployment insurance benefits, and the farm bill expire.

January 15, 2014

• The continuing resolution funding the federal government expires.
• 2014 sequester cuts take effect.
• First set of IPAB recommendations expected.

February 7, 2014

• The extension of the statutory debt ceiling expires.