Federal Relations

December 18, 2012

Possible Deal to Avoid the “Fiscal Cliff”

A deal appears to be in the making to avoid the “fiscal cliff.”  Late yesterday, President Obama made a counteroffer back to House Speaker Boehner (R-OH) that would raise the top tax rates on income above $400,000, $400 billion in health care cuts, and $200 billion in discretionary cuts. The White House proposal also includes a debt limit increase for two years, a permanent extension of expired tax extenders, and a turning off “except in select areas” of the sequester. Additionally, it proposes a modified version of the “chained CPI,” which would calculate the Consumer Price Index in a way that would save the government money on entitlements, such as Social Security, but would include provisions to protect “vulnerable” populations.

According to news reports, the plan would eliminate at least most of the sequester.  Specifically, it would void the automatic across-the-board spending cuts but would be replaced with other spending cuts.  It is unclear at this point as to which areas will take the cuts or whether those cuts will be evenly applied to defense and non-defense discretionary programs.  We had hoped that the cuts made back in August 2011 as part of the Budget Control Act would be counted toward any new debt deal but it now appears that there will be additional discretionary cuts without any credit toward previous cuts.  It is also unclear as to what cuts are proposed as part of the $400 billion in health care cuts.

The current offer would provide for spending on infrastructure and extending unemployment insurance but apparently would not extend the temporary payroll tax cut.  Additionally, the debt ceiling would be extended for two years, twice as long as Boehner is reported to have proposed in an offer to Obama last week.  Finally, the current proposal would extend provisions that prevent the alternative minimum tax (AMT) from hitting millions more taxpayers, as well as prevent cuts in federal payments to doctors who treat Medicare patients – the so-called “Doc Fix.”

The $2.4 trillion proposal, when added to the existing $1.1 trillion in spending cuts from the 2011 Budget Control Act and war savings, would produce $4 trillion in deficit reduction.

There are just two weeks left to solidify a deal before the end-of-year deadline.  Legislation could be drafted, scored, and cleared in as little as four days if an agreement is struck. But with two holidays and two weekends between now and the end of the year, that would make December 27th the outside deadline for an agreement. It’s even still possible to get the legislation passed before Christmas if an agreement were reached and members agree to work through the coming weekend.

If the end-of-year deadline is missed, the real deadline for passing the legislation would be just before noon on January 3rd, shortly before the 113th Congress convenes. Or if no accord is reached, Congress could simply pass a bill to delay the tax increases and spending cuts into next year.

We will continue to monitor closely and provide an analysis of the specific spending cuts and tax changes as they become more apparent.  While this current action is seen as a positive step toward reaching a debt deal, many things can still change the final outcome.