Fiscal Cliff Update

Posted on December 27, 2012

The Senate reconvenes today and will make a last attempt to legislate before large automatic tax increases and spending cuts take effect on January 1st. The House is scheduled to meet only in a pro forma session after Republican leaders said the Senate would need to act first to produce a legislative solution after their own “Plan B” effort fell apart last week. House GOP leaders have promised to give members 48-hours notice before calling them back to the Capitol. As of this morning, that notice has not yet been given and the “fiscal cliff” countdown clock continues to wind down.

Most congressional leaders have signaled a strong desire to pass some sort of fiscal package before New Year’s Day. However, what sort of legislation could move quickly through the Republican House and Democratic Senate remains uncertain. President Obama is pushing for a less ambitious package that extends tax cuts on household income below $250,000, continues unemployment benefits, and delays the across-the-board spending reductions or sequestration. There is still time to get this done if the Senate can act quickly.

Another wrinkle appeared yesterday when Treasury Secretary Timothy Geithner sent an open letter to Congress noting that the national debt limit would be hit on December 31^st. While the letter indicated that the Treasury could pursue “extraordinary measures” to postpone the impact of reaching the limit, it also cited the looming fiscal cliff for some uncertainty, saying “Given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.”

Finally, the White House issued guidance last week to federal agencies on how to handle sequestration if Congress fails to act by the end-of-year deadline. This is significant as it signaled a decision on the White House’s part to publicly prepare for sequestration, which they have avoided doing in the past. Of note in the guidance is that the implementation of sequestration would not result in a government shutdown, but rather a gradual reduction in spending that would begin to be felt in the early months of 2013 if a solution is not identified shortly after the New Year.

Everything is still very uncertain at this point. We will continue to monitor the situation closely and report as new information becomes available.

Possible Deal to Avoid the “Fiscal Cliff”

Posted on December 18, 2012

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 27^th 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 3^rd, 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.

FISCAL CLIFF COUNTDOWN: 15 DAYS

Posted on December 17, 2012

As we move into the last two weeks of the calendar year – and come ever closer to the edge of the “fiscal cliff” – House Speaker Boehner (R-OH) has offered to allow a tax increase on millionaires, which is a significant shift toward President Obama’s position on raising tax rates for the wealthy. But is comes with a caveat: Boehner would only agree to this if Democrats agree to significant spending cuts, including to entitlement programs. In exchange for higher tax rates for annual income of more than $1 million, the GOP offer would raise the eligibility age for Medicare benefits from the current 65 to 67 and require $1 trillion in new spending cuts.

The GOP appears to be moving closer to President Obama’s position on tax rates, but the Speaker’s offer is still nowhere close to what the President or Democratic leaders on Capitol Hill can ultimately accept. The two sides also remain far apart on the extent and source of cuts to entitlement programs. No new talks have yet been announced for this week, but both sides say the lines of communication between the Administration and Capitol Hill Republicans remain open.

17 Days to “Fiscal Cliff”

Posted on December 14, 2012

President Obama and House Speaker Boehner (R-OH) met for almost an hour yesterday at the White House to discuss issues related to the fiscal cliff, but there were no obvious signs of progress. Instead, both sides appear to be holding fast to their partisan views on taxes and spending. This is the second face-to-face meeting they have held in the past week on a deal to extend expiring tax cuts and replace scheduled across-the-board spending cuts (sequestration). Republicans continue to demand additional spending cuts and democrats continue to show confidence that taxes will go up on high-income earners without having to give in on entitlement reform. Democrats said Thursday they have no plans to discuss concessions on spending, at least until Republicans accept a tax rate increase on upper-income earners. Many had expected a deal to come together by this point in the lame duck session. It now appears that Congress will remain in session right up to Christmas and may even be working during the week between Christmas and New Years.

Fiscal Cliff Countdown: 26 Days

Posted on December 6, 2012

Negotiations continue between the Obama administration and congressional leaders on deficit reduction legislation that would need to be approved by Congress before the end of the year to avoid the sequester and tax increases. Last week the President released his proposal, which took a hard line on both taxes and entitlement spending, with increased tax revenues accounting for the greatest share of deficit reduction. Not surprisingly, that proposal was quickly criticized by republicans who then issued a counteroffer that was much more focused on entitlement cuts, although with substantial tax revenues included as well.

For their part, congressional democrats appear increasingly unwilling to major cuts to entitlements, which have been a big driver of spending over the past few decades. The state of affairs has led to predict that the nation may well go over the cliff and leave the difficult task of cleaning up the mess when the new session of Congress convenes in January.

Meanwhile, appropriators are working toward an omnibus FY 2013 spending bill that could emerge for a vote next week. The bill would complete the appropriations cycle for the full fiscal year if agreement can be reached. The government is operating through March 2013 under a continuing resolution that sets total discretionary spending in accord with the $1.047 trillion limit agreed to in the Budget Control Act. The omnibus may adopt this spending level for the full year, although House Republicans have sought to reduce that level by $19 billion.