No Resolution in Sight

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Publication date: 
9 January 2013

On the next-to-last page of the 59 page long just-enacted “American Taxpayer Relief Act of 2012” the Congress and the Obama Administration delayed mandated January 2 cuts in federal budgets with a provision of about fifty words.  This long-sought agreement turned out to be all about taxes, and, when viewed in retrospect in coming weeks will likely look easy in the context of what are expected to be difficult negotiations over three fiscal deadlines in February and March.

It was not surprising that this bill contained a provision entitled “Modifications of Sequestration” for amending the Budget Control Act, with the key words being “striking ‘January 2, 2013’” and “inserting ‘March 1, 2013.’”  Few policymakers favored across-the-board cuts of 8.2 and 9.4 percent in non-defense and defense budgets that were scheduled to occur last week. 

The threat of sequestration in the 2011 Budget Control Act was intended to force the Administration and Congress to devise a mechanism “to reduce the deficit by at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021.”  Components of this mechanism were expected to be changes in tax law, spending, and entitlements.

Prompting last week’s agreement was soon-to-expire legislation passed early in the last decade lowering tax rates.  The American Taxpayer Relief Act keeps almost all of these tax rates in place.  The act did little to change sequestration.  The legislation delays sequestration by two months through a series of revenue and spending changes, reducing the mandated cut in this year’s discretionary funding from $109 billion to $85 billion.   As was true before, half of this amount would come from non-security budgets, and the other half from what is now called security budgets.

With many billions of dollars still to be found beyond new tax revenues to reach this year’s share of the mandated “at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021,” negotiations will again return to changes in tax law, spending, and entitlements.  Not surprisingly, none of the key players have expressed any changes in their positions.

Reaching an agreement on a mechanism to avoid sequestration on March 1 will be far more complicated because of other fiscal deadlines.  Congress failed to pass any of the twelve appropriations bills for this fiscal year that started three months ago.  A stop-gap funding bill continuing most federal budgets at a constant level expires on March 27.  “Extraordinary measures” now being taken by the U.S. Treasury to avoid a default on the government’s debt will run their course by the end of February.

There are many conflicting strategies on how all of this will be resolved in the next 78 days.  Senate Minority Whip John Cornyn (R-TX) wrote in a January 3 op-ed that “It may be necessary to partially shut down the government in order to secure the long-term fiscal wellbeing of our country.”  Others have suggested selective repayment of some federal debts, entailing the reduction or closure of other government functions.  Seeking to decouple the federal debt deadline from the sequester and FY 2013 appropriations, White House Press Secretary Jay Carney said yesterday “the President has said and others have said he will not negotiate with Congress when it comes to the essential responsibility of Congress to pay the bills that Congress has incurred.  It would be irresponsible to flirt with default.”

Time is of the essence, with Senate Minority Leader Mitch McConnell (R-KY), who with Vice President Joe Biden struck agreement on the tax rates last week, perhaps said it best.  On ABC’s This Week, McConnell said “Now, we know these three issues are coming up . . . why don’t we sit down now and not wait until the last minute to get these matters resolved?”

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