Senate Majority Leader Harry Reid (D-NV) issued a firm warning before the Memorial Day recess.  “I am not going to back off the sequestration,” Reid said. “That’s the law we passed. We did it because it wouldn’t make things easy for us. It made it so we would have to do something. And if we didn’t, these cuts would kick in.” (See Politico, May 23).  He insisted that without a deal including revenues and reasonable defense cuts, sequestration (automatic across-the-board cuts starting January 2013) would kick in as scheduled.
Republicans have been used to getting their way in prior negotiations.  As a consequence, the $2.4 trillion in deficit reduction laid out in the Budget Control Act enacted last August comes solely from spending cuts.  Congress was willing to accept these cuts in the abstract, but now that the reductions are taking specific shape, discomfort is rising.  At the same time, all the Bush-era tax cuts are about to expire.  Come January, there will be plenty of deficit reduction if Congress just keeps doing what it now does best:  nothing.  If Congress just stands still, the impending spending cuts and tax increases will reduce the deficit by over $600 billion in FYs 2012-2013, according to the Congressional Budget Office (CBO).

Leader Reid was banking on that leverage when he said ‘no’ to replacing the sequestration cuts with still more human needs spending cuts, as the House proposed in its Sequester Replacement Act (see Human Needs Report, House Votes to Replace 2013 Across-the-Board Cuts With Deep Slashes at Low-Income Programs, May 14).  The Obama Administration also knows its position is strengthened by the changes now scheduled under existing law.  It has vowed to veto any legislation that would replace the enacted mix of defense, domestic and international reductions by slashing domestic spending even more.

Still, no one likes current law, with its indiscriminate spending cuts and wholesale elimination of lower tax rates. Many in Congress, Republicans and Democrats alike, do not want the $55 billion in annual defense cuts starting in January (see House Rejects Agreed-Upon Funding Level for Pentagon elsewhere in this issue); the $55 billion in domestic cuts are opposed as well.

Republicans in the House and Senate do not want any tax increases; Democrats want to spare the middle class, but would let upper-income tax cuts expire.  The House is planning to take a vote on extending the Bush tax cuts for all income levels before the election, perhaps during the summer.  They want to be able to go into the November election claiming that Democrats who voted ‘no’ want to raise taxes.  The Administration has called repeatedly for letting the Bush tax cuts for the richest 2 percent of taxpayers expire, and has proposed a more balanced package of spending cuts and revenue raisers.  The Administration has not provided details about how the 2013 spending cuts would be implemented, since it wants to press Congress to agree on a better alternative.

House Speaker John Boehner tried to re-stack the deck in his caucus’ favor by reverting to the brinksmanship strategy that worked in the past.  On May 15 he announced that before he would allow the debt ceiling to be raised again, there would have to be equivalent spending “cuts and reforms,” and no tax increases. The limit on federal debt is likely to be reached again early in 2013.

The pressures on Congress to come up with alternatives intensified with the Congressional Budget Office analysis, which estimated that allowing hundreds of billions in spending cuts and tax increases to take place in 2013 could tip the fragile economy back into recession.

CBO pointed out that a balanced approach could avoid harm to the economy in the short and long terms, by ensuring that spending cuts and revenue increases are written into law, but lessening their impact in the first year or two.  There is a strong argument for allowing tax cuts for upper-income taxpayers to expire.  Respected economist Mark Zandi of Moody’s Analytics has estimated that every federal dollar spent on making permanent the Bush-era tax cuts for capital gains and dividends generates only 39 cents of economic activity; a loss, in other words.  Making all the Bush income tax cuts permanent would only produce 35 cents of economic growth for every dollar spent.  In contrast, every dollar spent on increased SNAP/food stamp benefits leads to $1.71 in new economic activity. Nonetheless, House Republicans have targeted SNAP/food stamps for cuts while insisting that all the tax cuts continue.

Congress can save $829 billion in revenue over the next decade by allowing the tax cuts for the top 2 percent to expire. As the specific impact of cuts already approved becomes more understood, it is clear that these dollars are needed to prevent harm to the economy and to vulnerable people and to achieve the long-term benefits of deficit reduction.  Advocates were disappointed when Minority Leader Nancy Pelosi (D-CA) called for a vote in the House on permanently extending the tax cuts for all but millionaires. According to a recent analysis by the Center on Budget and Policy Priorities using Joint Committee on Taxation estimates, the difference between letting the tax cuts expire at $1 million as compared to $250,000 (the top two percent) is $366 billion over ten years. The Pelosi position may have been intended to focus attention on Republican unwillingness to let even millionaires’ tax cuts expire, advocates are quite concerned that taking this public position will adversely affect the final negotiations around tax cuts and sequestration.

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