Congress, Obama Continue Fierce Debates over “Fiscal Cliff”
Rob Randhava
Throughout 2012, the U.S. House of Representatives continued its efforts to radically reshape federal budget and tax policies. While Congress and President Obama managed to hammer out a year-end deal to temporarily avert a budgetary crisis that became known as the “fiscal cliff,” heated battles over spending are expected to continue well into 2013. Vital programs affecting health care, social safety nets, education, housing, civil rights, and countless other federal priorities rest in the balance.
Efforts to Undo the Budget Sequester
Following the Republican Party takeover of the House in the 2010 elections, in which tea party fiscal conservatives claimed a mandate to cut government spending, a number of lawmakers refused to raise the federal debt ceiling—threatening the credit rating of the United States—if massive spending cuts were not made. In August of 2011, on the brink of a government default, Congress and Obama agreed to legislation to allow several increases in the debt ceiling in return for more than $2 trillion in savings over the next decade. The details of most of those savings were to be worked out that fall. If the parties could not reach an agreement, the legislation would impose automatic spending cuts, or “sequestration,” evenly split between domestic and defense spending, beginning on January 1, 2013.
Not surprisingly, given the tense atmosphere in Washington, Democrats and Republicans failed to reach an agreement. Democrats argued that higher revenues should be a part of any deficit reduction package, but most Republicans had signed campaign pledges to oppose any tax increases, and many feared they would face electoral consequences if they compromised. As a result, the November 2011 deadline came and went without any agreement.
By early 2012, however, members of both parties voiced alarm over the size of the defense cuts that were scheduled to take place under the sequester, raising expectations that the August 2011 deal would be revisited. The Leadership Conference on Civil and Human Rights and many of its coalition partners also expressed concern about the looming cuts to non-defense spending, and business leaders also became more vocal about the impact of the sequester on the economy as a whole. In March, focusing only on the defense half of the sequester, the House passed a budget championed by House Budget Chair Paul Ryan, R. Wis., which aimed to eliminate the defense cuts for 2013—and actually increase military spending—while making even bigger cuts to non-defense spending.
In May, the House passed another bill that worked out the details of these non-defense cuts. In legislation that The Leadership Conference described as “morally deficient” and “an embarrassment,” the House proposed cutting the Supplemental Nutrition Assistance Program (formerly known as food stamps) by $36 billion, health care expenditures by $115 billion, and social services block grants (to fund programs such as Meals on Wheels) by $16.7 billion. Farm subsidies and other forms of corporate welfare, on the other hand, were left untouched.
Obama and Senate Democrats rejected these cuts to safety net programs and insisted that revenue increases had to be a part of any agreement to undo the sequester. With the 2012 presidential race heating up, however, neither party had much incentive to resolve the stalemate until the election.
Simultaneous Fight over Tax Policies
The spending cuts required by the 2011 budget sequester were not the only major budgetary change set to take effect on January 1, 2013. After several extensions, the 2001 and 2003 tax cuts championed by former President George W. Bush were once again set to expire. While both parties supported making the lower rates permanent for most taxpayers, they disagreed sharply over whether they should be renewed for those with higher incomes. Obama and his allies in Congress argued that taxes should be allowed to rise on anyone making more than $250,000 a year, while Republicans insisted on extending them across all tax brackets. At the same time, the 2010 cut in federal payroll taxes was set to expire, but neither party expressed strong support for continuing it because of its impact on Social Security coffers.
In July 2012, both the House and Senate took largely symbolic votes on the expiring Bush tax cuts. The Senate passed a measure that would have made the cuts permanent for incomes up to $250,000 while returning higher incomes to the Clinton-era tax rates. The House, on the other hand, voted to extend the cuts to all taxpayers, triggering a veto threat from Obama.
As with the issue of spending cuts, neither party had much incentive to compromise on taxes before the 2012 presidential election. Yet there were visible signs of strain in the Republican Party, particularly against the rigid anti-tax pledge that most candidates had signed in previous election cycles. Some Republican candidates in 2012 distanced themselves from it. Others suggested that the outcome of the election would be a mandate on the issue of taxes, one way or another. “If the president wins re-election, taxes are going up,” said Rep. Tom Cole, R. Okla., and “there’s not a lot we can do about that.”
At the Edge of the Fiscal Cliff
Emboldened by a decisive re-election victory, Obama announced on November 14 that he was reopening the negotiations over the looming sequester and expiration of the Bush-era tax cuts. At the center of his proposal was a $1.6 trillion revenue increase, which included a tax hike on households making more than $250,000 a year. He also proposed $50 billion in new infrastructure spending, and pressed for another increase in the federal debt ceiling.
Over the next several weeks, Obama and House Speaker John Boehner, R. Ohio, sought to work out a compromise. Boehner maintained his opposition to tax hikes, however, and argued for savings from entitlement reform. By mid-December, the parties were moving toward each other, but there were few signs that they would actually reach a breakthrough. Meanwhile, business leaders and economists voiced growing concerns about the fiscal cliff looming on January 1, 2013. The combined impact of tax increases and spending cuts would equal roughly 5 percent of the gross domestic product over the next year, enough to tip the economy back into recession.
On December 18, with negotiations stalled, Boehner announced what he called his “Plan B”: He would bring a bill to the House floor that, among other things, would increase taxes for households making more than $1 million a year. He hoped that passing it would increase public pressure on the White House to cut a deal more favorable to Republicans. Yet Boehner misjudged the support in his own party for the proposal. Unable to secure enough votes for passage, he pulled the bill from the House floor two days later.
In the final week of 2012, negotiations resumed—this time, between Senate Majority Leader Harry Reid, D. Nev., and Minority Leader Mitch McConnell, R. Ky. —amid growing pessimism. Finally, late on December 31, the two senators announced they had reached an agreement. Under the deal, the Bush-era tax cuts would expire on households making more than $450,000 a year (or $400,000 for individuals), and estate and capital gains taxes would be increased. The deal also extended unemployment insurance, blocked a 27 percent cut in reimbursements to doctors for treating Medicare patients, and permanently blocked an expansion in the Alternative Minimum Tax. The payroll tax cut would also expire. In all, the agreement would raise $660 billion in the next decade. Left unresolved, however, were two key items: the sequester cuts and the increase in the debt ceiling. The sequester was delayed for two months, while the Treasury Department indicated that it could use accounting maneuvers to avoid the debt ceiling for another two months. Early on the morning of January 1, the Senate approved the deal on an 89-8 vote.
The House still had to approve the deal, and House Republicans were not at all happy about the prospect of doing so. In an unusual move, Boehner announced that he would hold a vote on the measure even though it was unlikely to garner a majority of Republican support. This was significant because for years, House Republicans—when they controlled the House – had adhered to what they called the “Hastert Rule,” named after former Speaker Dennis Hastert, R. Ill., which barred any measure from coming to the House floor unless it was supported by a “majority of the majority,” i.e. most Republicans. Late in the evening on January 1, the House passed the measure by a 257-167 margin, but with only 85 Republicans supporting it and 151 opposing it. Obama signed the deal into law the following day.
Budget Fights to Continue Into 2013
As explained above, the January 1 deal addressed only the issue of taxes, while temporarily punting on the issues of the sequester and the debt ceiling. The sequester is now scheduled to take effect on March 1, and House Republican leaders have recently indicated that they are prepared to go over the cliff this time if Obama does not agree to cuts elsewhere. It is unclear if they will maintain that position. Throughout 2012, defense hawks in both parties voiced strong concern about the depth of military spending cuts, and those concerns have not changed. While Defense Secretary Leon Panetta has ordered the Pentagon to “prepare for the worst,” Congress is likely to face much greater pressure to negotiate as the March 1 deadline approaches.
With respect to the debt ceiling, Congressional Republicans appear more hesitant than they did in 2011. While some initially called for breaching the debt ceiling if additional spending cuts were not made, they soon backed off their threats. On January 23, the House passed a measure that would suspend any enforcement of the debt ceiling until May 18 of this year. While a growing number of experts have called for eliminating the debt ceiling entirely, many fiscal conservatives believe they can continue using it as leverage to force additional spending cuts.
In other words, this story is far from over. Given the strongly held positions of both parties on the issue of the federal budget, and the repeated use of short-term compromises to stave off fiscal crises, it is unclear whether we will see a lasting resolution any time soon.
Rob Randhava is a senior counsel for The Leadership Conference on Civil and Human Rights and The Leadership Conference Education Fund and specializes in immigration and housing/finance issues.
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