What's On Congress's Plate

Nov 7, 2012 | Other Spending| Taxes

First off, CRFB would like to congratulate President Obama and all of those who were elected and re-elected to the Senate and the House. CRFB is looking forward to continue working with policymakers from both sides of the aisle to help make deficit reduction a reality.

While the campaigns may be over, there's no time to waste in transitioning into governing mode. Lawmakers have a ton on their plate over the coming months and an incredible opportunity to make meaningful progress on controlling federal debt this decade and beyond. The lame duck session is going to be a busy and critical time of negotiations as we work to avoid the fiscal cliff and a mountain of debt. There will be plenty of work to do.

To get a sense of how big the fiscal cliff really is, here are all of its components:

  • 2001/2003/2010 Tax Cuts: The 2010 tax cut will expire at the end of the year, taking with it many provisions originally enacted in 2001 and 2003. This will mean rate increases for earned income, capital gains and dividends, and large estates; reductions in refundable tax credits; the return of phaseouts of personal exemptions and itemized deductions for higher-income taxpayers; the elimination of reductions in marriage penalties; and reductions in education tax benefits. Extending these provisions permanently would cost $2.7 trillion over ten years.
  • AMT Patch: The Alternative Minimum Tax is a tax intended to ensure that higher-income taxpayers pay at least a minimum amount of tax. However, the exemption from the AMT is not indexed for inflation, so Congress does so manually every so often to ensure the tax does not ensnare millions more taxpayers. The most recent patch expired in 2011, meaning that Congress would have to retroactively patch it for 2012. If the AMT is not patched, it would hit 30 million taxpayers, as opposed to the current four million who are affected. Permanently patching the AMT would cost about $860 billion by itself, but almost $1.8 trillion if the 2001/2003/2010 tax cuts are extended.
  • Sequester: The sequester, enacted in August 2011 in the Budget Control Act, would make a 9.4 percent across-the-board cut to defense spending and a roughly 8 percent cut to non-defense spending on January 2. Neither party wants the sequester to go off then, but there are differences about how to pay for a delay and whether to keep some of the savings for the later years. The House Republican budget, for example, re-assigned the defense cuts to non-defense discretionary spending, keeping the total savings about the same (other than repealing the 2013 cuts). By contrast, the President's budget repealed the sequester entirely. Full repeal would cost about $970 billion over ten years.
  • Payroll Tax Cut and Unemployment Insurance: The payroll tax cut was originally passed in the 2010 tax cut, reducing the employee tax rate by 2 percentage points. It was extended through the end of this year in February. There was initially little interest in extending it for 2013, but recently Democrats have started to jump on the bandwagon again. The White House reportedly has interest in bringing back the Making Work Pay tax credit, which the payroll tax cut replaced. Extended unemployment benefits will also expire at the end of the year, at which time the maximum number of weeks a person could collect benefits would fall from 73 weeks to 26 weeks. There has been less discussion about what will happen to UI benefits, but it will certainly be on the table in December, given the continued high unemployment rate.
  • Doc Fix: Due to the Sustainable Growth Rate (SGR) formula, which was intended as a backstop to limit Medicare spending growth, Medicare physician payments will be cut by 27 percent at the end of the year. Congress has rolled back the SGR every few years since 2003, usually freezing physician payments but leaving a cliff in place for future years. Permanently repealing the SGR and freezing physician payments would cost $245 billion over ten years. There are also a number of small "health extenders," temporary provisions related to Medicare and Medicaid that are typically extended along with the doc fixes.
  • Tax Extenders: Tax extenders are temporary provisions of the tax code that are routinely extended. Many of these extenders are business tax breaks, like the R&E tax credit, but there are also some individual tax breaks for things like education expenses and state and local sales taxes. Like with the AMT patch, the most recent extension ended in 2011, so a retroactive extension in 2012 would need to take place. So far, the Senate Finance Committee has passed a two-year extension (extension through 2013) of most of the extenders, but otherwise there has been little action. We'd expect that there will be by the end of the year. Extending all of the extenders permanently would cost $890 billion over ten years.

There are also many other fiscal-related issues that will come up in the lame duck session and into next year. They are:

  • Debt Ceiling: The Treasury Department recently stated that the U.S. may breach the debt ceiling by the end of this year, although it will be before early 2013 before there is serious danger. As they did previously, Treasury will use "extraordinary measures" to create extra space under the ceiling. House Speaker John Boehner (R-OH) has reiterated his position from last year that any increase in the debt ceiling must be accompanied by an equal or greater amount of spending cuts. If all goes well, an increase in the debt ceiling would be rolled into a deal that responsibly replaces the fiscal cliff.
  • Appropriations: In September, Congress passed a continuing resolution to fund the government through March 27. This setup is somewhat parallel to what happened in the spring of 2011, when there nearly was a government shutdown. Although the partisan make-up of Congress and the Presidency is the same, it does not seem likely that there will be another showdown. There may be a dispute over riders, however, which has been commonplace in the past few years.
  • Farm Bill: The 2008 farm bill lapsed on September 30 with no Congressional action on either that or a discussed drought relief bill. Although the Senate passed a farm bill in June, the House did not take one up. The expiration means that we now revert to the 1949 law, the last time a permanent bill was passed. For now, the expiration means that certain conservation and other programs will no longer take new enrollees. In terms of commodity programs, the expiration will affect dairy products on January 1 and other crops sometime during the 2013 crop season, at which point commodity payments would soar and the target prices for many crops would be well above the market price. 
Cost of Various Provisions (billions)
Provision/Task 2013-2022 Cost
2001/2003/2010 Tax Cut Extension $2,736
AMT Patch* $1,796
Sequester Repeal $972
Jobs Measures One-Year Extension ~$150
Doc Fix $245
Tax Extenders Extension $890
Debt Ceiling Increase $0
Appropriations Bills Completion $0
Farm Bill Completion^ -$23 to -$35

Source: CBO
*Includes interaction with 2001/2003/2010 tax cuts
^CBO has scored the leading House and Senate-passed farm bills as saving $35 billion and $23 billion, respectively, relative to CBO's baseline. CBO has estimated that these bills would authorize slightly less than $1 trillion of spending over ten years.

There are also, of course, many non-budget related items that Congress is also looking to deal with, so they have their work cut out for them to say the least. In these last couple of months, politics has dominated. But now it's time to govern and focus on policy. We hope lawmakers will use this election to give the country a comprehensive debt deal.