SequesterWatch: Dueling Replacement Alternatives Emerge in the House

Update: The House has passed the reconciliation and replacement bills by a 218-199 vote.

We have already talked about the House reconciliation bills that would replace the sequester that is set to hit on January 2 of next year. Now House Budget Committee ranking member Chris Van Hollen (D-MD) has offered his alternative to the replacement. The alternative leans more heavily on tax increases and limiting tax expenditures, rather than the spending cuts approach that the reconciliation bill contains.

The Van Hollen bill includes the elimination of direct payments for agriculture as its main spending cut. For revenue increases, it eliminates the domestic production activities deduction for oil and gas companies, prohibits their use of last-in, first-out (LIFO) inventory accounting, and modifies the way the foreign tax credit is calculated for oil and gas companies that are "dual capacity taxpayers" (ones that receive a specific economic benefit from another country). In addition, the proposal imposes the Buffett Rule and increase retirement contributions for Members of Congress.

CBO has scored the Van Hollen proposal as reducing deficits by $30 billion from 2013-2022, with $112 billion of savings being netted against the $82 billion cost of repealing the sequester for a year. However, CBO notes that once final appropriations are made for FY 2013, thus raising the amount of discretionary spending that gets cut, the cost of repealing the sequester will rise by about $25 billion.

The CBO score for the reconciliation bills and sequester replacement show deficit reduction of $238 billion over the same period, with $310 billion of savings being netted against $72 billion for repealing the sequester (it has a lower cost than the $84 billion in Van Hollen's bill because the House majority chooses to keep the sequester for mandatory spending). Once final appropriations are made, their cost of repealing will also rise by about $25 billion.

^{*Estimates assume enactment on October 1.
***Less than $500 million.
Note: Numbers may not add up due to rounding.}

It is good that both sides are putting forward alternatives to the sequester to put in place smarter and more gradual reforms. It is very important that all lawmakers start working toward a solution now so that there is time to reach an agreement.

However, one somewhat disturbing theme in the two bills is that both only cancel the sequester for 2013. This would simply continue the temporary extension mentality that has dominated fiscal policy for a long time. If the intent is to get rid of the sequester, it is better to come up with a plan to replace the many elements of the fiscal cliff permanently with a smart, gradual, and comprehensive debt reduction plan to control future debt.