| Tax, entitlement deal still in play
If the first lady shops at Target, can Congress take a page from Wal-Mart?
In a sign of the times, the giant Arkansas-based retailer this fall brought back its layaway plan for hard-pressed Christmas shoppers - which could be a model for the House and Senate's supercommittee year-end holiday special: $1.2 trillion in promised deficit reduction.
If Republicans believe that tax reform will lead to higher revenues, now is the time to lay away a down payment for that future. If Democrats are committed to a long-term fix for Medicare physician payments, then layaway savings could pay for it later.
For the beleaguered 12-member deficit panel, charged with coming up with answers in just seven weeks, the combination of these two could offer a path out of the woods toward meeting its Nov. 23 deadline.
Failure to act will trigger devastating defense cuts in 2013, setting up a yearlong fight over budget priorities and rich fodder for the 2012 presidential campaign. There's a surprising nonchalance at the White House, but business interests are increasingly agitated. And with Europe in turmoil, what seems like good politics can be dangerous economics.
Testimony Tuesday by Federal Reserve Chairman Ben Bernanke that the economy is "close to faltering" underscores the delicacy of the situation. And it's a huge dilemma for Congress, already in the doghouse for pushing the nation to the brink of default in August.
What follows here draws on discussions with both parties and helps illustrate the choices ahead for the panel. There's no single formula or magic set of numbers, but two political points seem clear at this stage: Any compromise on revenues will be tied to longer-term tax reforms, and if Medicare and Social Security are to face changes, then something must also be done to end the annual fire drill over payments to physicians caring for the elderly.
The $1.2 trillion target can be broken down any number of ways, but one option would be a 3-1 split between 10-year spending reductions and new revenues. This roughly tracks with talks over the summer between President Barack Obama and House Speaker John Boehner, and each side would be allowed credit for the interest savings from their portion.
Republicans would gain a commitment to tax reform over the remainder of this Congress, something the supercommittee can help expedite and for which Boehner and House Ways and Means Committee Chairman Dave Camp (R-Mich.) have strongly argued. In turn, the GOP would be asked for a down payment on some of the tax preferences Camp and tax writers expect to end as part of any reform.
As a practical matter, this will require about $250 billion in 10-year revenues, plus the $50 billion in interest savings. Given the politics of the situation - and the practical impact the Congressional Budget Office baseline used to measure progress - big changes in the Bush-era tax cuts would be avoided. But there is a universe of tax expenditures and corporate loopholes that tax reformers are already planning to change that could become a first down payment of sorts toward that goal.
If necessary, the effective dates of these tax changes could be delayed until after reform - allowing Camp and other tax writers a chance to revisit the decisions in the final legislation that Boehner had hoped to complete next year. But it would still be real "skin in the game" for Republicans in return for spending cuts.
For their part, Democrats would lay away $900 billion in savings, which translates into about $750 billion in true cuts and $150 billion in interest savings. The administration has already proposed its list of about $577 billion in savings, some of which - such as large cuts in agriculture farm subsidies - are already controversial. To get to $750 billion will be a serious stretch and will increase the pressure to revisit the question of making some adjustment in the index used to adjust Social Security benefits each year. But Democrats would be assured of a permanent fix for Medicare physician payments - a huge issue for the elderly and unfinished business from the 2009 debate over health care reform.
The Medicare Payment Advisory Commission, an independent agency established in 1997 to advise Congress on issues affecting the health care program, is slated to vote Thursday on its own solution costing about $335 billion over 10 years. MedPAC's proposal is not without controversy: About $100 billion in the savings would come at the expense of physicians and opens up a split between primary-care doctors and specialists. But there is a determination among many Democrats that Washington can't come out of this debt fight without an answer to the problem, which has become a disruptive force inside Medicare and a threat to patients' access to physicians.
None of these steps is easy, and where it falls short, the deficit committee retains the option of ordering a smaller sequester to fill out the plan and meet the $1.2 trillion target.
In the case of revenues, the challenge is to come up with an acceptable $250 billion down payment and still stay away from the Bush-era tax cuts or the thicket of international tax issues related to deferral of taxes owed on corporate income earned abroad.
Instead, oil and gas tax preferences could be phased out together with long-sought changes in how business inventories are taxed - an estimated savings of $90 billion, for example. In the carried-interest fight, private-equity firms have been open to some blended tax rate to address complaints that too much of their income is sheltered as capital gains. And the Consumer Price Index calculations for Social Security also affect annual adjustments in tax provisions - yielding an $80 billion cushion to close the gap and meet the tax goal.
In making all these calculations, the deficit committee has to navigate between the CBO baseline used to measure its work product and what many would consider more pragmatic baselines used by the presidential debt commission in the previous Congress or the Gang of Six in the Senate.
This is especially true in the case of revenues. Unlike the CBO, which rigidly assumes all the Bush-era tax cuts will run out on schedule, the commission set a more plausible target that the more popular ones would survive. These included middle-income tax breaks, relief from the alternative minimum tax and a more moderate version of the estate tax cuts now in effect. And as a result, that commission baseline - updated for White House talks over the summer - is about $36.288 trillion over 10 years, or almost $2.7 trillion less than the comparable CBO number.
Republicans are heavily invested in the belief that reform can reduce tax rates and thereby spur growth.
And Boehner has been willing to accept the $36.288 trillion target as the "ceiling" for reform - a real concession because the number is about $800 billion more than what taxes would be if all the Bush breaks were extended.
Any deficit deal with a down payment on tax reforms would be seen at just that - a down payment, not an additional sum to the one the speaker discussed with the president. But it does hold him to the expectation that the full $800 billion in added future revenues - and deficit reduction - can be achieved.
Indeed, if measured against the baselines used by the Gang of Six, which still has a centrist following in the Senate, the deficit committee's $1.2 trillion would be larger than advertised.
The Gang, which endorsed even higher revenue targets, claimed 10-year deficit reductions of about $3.7 trillion. The supercommittee, counting the estimated $1 trillion in 10-year appropriations savings already agreed to in August, would come in at about $2.7 trillion.
In today's economy and politics, that's not a small accomplishment together with the commitment to tax reform and putting Medicare on a stronger footing. Measured against the risk of everything falling apart in November, the gap is still larger.
"I am surprised that there's not more sense of urgency," Sen. Mark Warner (D-Va.) told POLITICO. "Maybe the chances are only 5, 10, 15, 20 percent, but with the uncertainty in Europe, the notion that we could go over this precipice again?" he asked.
"A functioning Congress, where the political establishment of the country is actually looking like they are doing something that is in the country's interest, I think would be the single biggest job creator. ... We've used our biggest tools already with monetary policy and fiscal stimulus, so confidence is the best thing we can do, and this is a huge confidence builder."
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