The Joint Select Committee on Deficit Reduction, or “supercommittee,” failed to agree on a bill that would reduce future budget deficits by $1.2 trillion over the next 10 years. Members of Congress were hoping that the supercommittee would solve many difficult political issues in its bill. Failure sets in motion seven issues that will set the political debate for the next year.
1. Payroll Tax Cut
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act, hereafter) included a temporary reduction in the payroll tax for Social Security (or FICA) paid by employees, from 6.2 percent to 4.2 percent. The tax cut expires at the end of 2011.
The goal of the tax cut was to put more money into the hands of workers, which they would spend and help stimulate the economy.
President Obama has long favored a cut in payroll taxes. It was part of his platform in the 2008 campaign and he tried to get it put into the 2009 stimulus bill. Since the tax cut is favored by Obama and Republicans generally favor tax cuts, extending it should be easy, correct? Actually, it is not that simple.
Due to large budget deficits ($1.3 trillion in 2011), over $15 trillion in national debt and over $116 trillion in unfunded liabilities, Congress is in a period of fiscal restraint. Extending the payroll tax cut will make the nation's fiscal situation worse. Also, the payroll tax is the funding mechanism for Social Security. The amount of money raised by the payroll tax is not currently enough to pay for current beneficiaries. Extending the payroll tax cut serves to worsen Social Security's fiscal viability.
2. Unemployment Benefits
Unemployment benefits are set to expire at the end of this year. Proponents of extending the benefits argue that failure to do so could tip a weak economy into a recession. By putting money into the hands of the unemployed, they argue, beneficiaries will continue to spend money on necessities, such as groceries, which help businesses.
Critics of extending unemployment benefits point to research, such as the research that won the Nobel Prize in economics in 2010, showing that if unemployment benefits are extended for too long, it serves to keep the unemployment rate high. Those receiving unemployment benefits will hold out for a better job, rather than seek immediate employment, the argument goes.
3. Medicare Payments to Doctors
The Patient Protection and Affordable Care Act of 2010, sometimes called “Obamacare,” reduced the future growth of Medicare by cutting the amount of money doctors receive for providing care for Medicare patients.
When PPACA was passed, Obama touted the fact that the legislation would not add to the national debt, according to the Congressional Budget Office. Critics charged that Congress would later rescind some of the cost saving measures, such as the doctor payment cuts. Congress had tried to cut doctor payments before, but it always rescinded those cuts before they went into effect. Since Congress had done it before, it would likely do it again, the critics charged.
As those critics suspected, some in Congress are currently trying to stop the Medicare doctor payment cuts from going into effect. They worry that Medicare patients will have less access to health care because doctors would be less likely to take Medicare patients if the cuts go into effect.
4. Alternative Minimum Tax
The Alternative Minimum Tax was intended to make sure that the wealthy were not able to take advantage of so many deductions and credits in the tax code that they end up paying a lower tax rate than the middle class. When the AMT was passed, it was not indexed to inflation. So, over time, more middle-income taxpayers were affected by the AMT.
Since the two parties have not agreed to a permanent “fix” to the AMT, they end up agreeing to a temporary fix each year to prevent middle class taxpayers from paying more in taxes. Lawmakers had hoped the supercommittee would come up with a permanent AMT fix as part of a broader tax reform package.
5. Bush/Obama Tax Cuts
The tax cuts passed in 2001 and 2002 under President George W. Bush were set to expire in 2010. In December 2010, President Obama and a Democratic-controlled Congress passed a two-year extension of those tax cuts, which are now set to expire in 2012.
In his 2008 campaign, Obama wanted to extend the Bush-era tax cuts for all but the top two income brackets, which would be about $175,000 for individuals or about $200,000 for married couples filing jointly. Republicans wanted to preserve the tax cuts for all income brackets. Since Senate Republicans held firm to this demand, and 60 votes are required to overcome a filibuster, Republicans were able to win that debate in 2010.
Obama's willingness to go along with Republicans in order to extend the tax cuts for two more years became a source of deep consternation among Democrats in 2011. Democrats were again unable to extract tax increases on the top two income brackets in the fight to raise the nation's debt limit.
Democrats on the supercommittee, however, held firm. They would not go along with any bill that reformed entitlements but did not include increased taxes on upper-income wage earners.
The Bush-era tax cuts became a major point of disagreement in the supercommittee hearings. Sen. Pat Toomey (R-Pa.) made an offer that would increase revenue by closing loopholes and lowering rates. Republicans argued this was a “breakthrough” offer because they agreed to increasing taxes. Democrats argued, however, that it was a tax cut because, while some would pay more in taxes than they pay today, they would still pay less than if the Bush/Obama tax cuts expired.
So, will Congress agree to another extension of the Bush/Obama tax cuts? Since Obama is unlikely to agree to another extension that would keep the tax cuts on the top two brackets, which he refers to as “millionaires and billionaires,” and Republicans are unlikely to agree to an extension that does not include the top two brackets, gridlock is the most likely scenario.
6. Sequestration or Automatic Cuts
Since the supercommittee failed, $1.2 trillion in automatic spending cuts, or sequestration, is supposed to go into effect beginning in 2013 and spread over nine years. Social Security and Medicare are not included in the cuts.
About half of the cuts would be in defense spending, the rest would be in other domestic spending programs, such as Head Start, NASA and the Environmental Protection Agency. In Washington, D.C., lingo, these “cuts” are not actual spending cuts, but reductions in the growth of these programs. The federal government will be spending less than they had planned, but still more than they spend today, on these programs.
Secretary of Defense Leon Panetta has warned that the Defense Department cuts will “hollow out” our military and leave us less safe. There are bills in Congress now that would rescind the Defense Department cuts. President Obama said on Monday that he would veto any bill that attempts to rescind the sequestration.
7. 2012 Election
These issues will likely need an election to be sorted out. With all these issues on the table, voters will have some clear choices going into the 2012 election. They can choose Republicans, who want to not raise taxes and reduce government spending by reforming Medicare and Social Security. They can choose Democrats, who want to keep Social Security and Medicare without any major changes and increase taxes on the wealthy to pay for it.
There is also the possibility that, in a spirit of bipartisanship, Republicans and Democrats will work together to give Americans both low taxes, with the AMT fix, payroll tax cut and extension of the Bush/Obama tax cuts, and increased benefits, with the Medicare doctor payment fix, extension of unemployment benefits and rescinding the sequestration. But, of course, low taxes and high spending is what caused the current debt crisis in the first place.