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Option 2: New Supers Save the Day?

We saw the Supercommittee and even heard whispers of a Super-duper committee for a while, but after a long and unsuccessful history of Domenici-Rivlins, Simpson-Bowleses, and now Murray-Hensarlings, it begs the question – Is anyone really going to be willing to take up this losing battle anytime soon? Senate Majority Whip Dick Durbin (D-IL) thinks so. Sen. Durbin suggested this morning that any bipartisan group of 12 senators could produce a “super” deficit reduction plan and bring it to the Senate floor for a vote. “It’s time to move to the committee of the whole. Let’s start moving beyond these special committees and let’s do something pretty basic and maybe radical,” said Durbin.

Option 3: Back to the Beginning

Before the Supercommittee even had a chance to fail yesterday, Republicans launched an assault against sequestration. Both Sen. John McCain (R-AZ) and former Massachusetts Gov. Mitt Romney went on the offensive against defense cuts. In a statement released yesterday, “We are now working on a plan to minimize the impact of sequestration on the Department of Defense and to ensure that any cuts do not leave us with a hollow military,” said Sens. McCain and Lindsey Graham (R-S.C.). “The first responsibility of any government is to provide for the common defense; we will pursue all options to make certain that we continue to fulfill that solemn commitment.” Romney echoed their sentiment, calling for the $600 billion in proposed defense cuts to be shifted to other parts of the federal budget. President Obama has vowed to veto any effort to prevent sequestration.

Domenici noted that the United States faces two major challenges. First, it must accelerate growth and job creation; and second, it must reduce future deficits so that the U.S. debt will no longer grow faster than the economy. He argued that these objectives reinforce one another, saying that faster growth will reduce deficits, and stabilizing the debt will cut future interest rates and reduce uncertainty, spurring growth. In order to achieve these goals, Domenici contended that the committee will have to go well beyond the charge of identifying at least $1.5 trillion in savings over the next ten years, because even savings of this magnitude would still leave the debt rising faster than economic growth. Domenici suggested that they should work on a bargain involving structural entitlement and tax reforms, which would save at leave $4 trillion over ten years. He went on to say that the committee should take advantage of the full scope of its authority by compelling authorizing committees to produce fundamental tax and entitlement reforms and provide for “fast-track” consideration of those reforms.

Dr. Rivlin focused her testimony on the Bipartisan Policy Center Debt Reduction Task Force’s recommendation for reforming Medicare and the federal tax code. She argued that there can be no lasting solution to the U.S. debt crisis without structural changes in the Medicare program to slow its cost growth. She recommended transitioning Medicare to a “defined support” plan that would keep traditional Medicare but give seniors the opportunity to choose among competing private plans that could save them money. Dr. Rivlin also suggested a number of reforms the tax code in order to raise revenue and increase fairness, including a two-bracket income tax with rate of 15 percent and 28 percent; setting the corporate tax rate at 28 percent; and taxing capital gains and dividends as ordinary income.

Sen. John Kerry (D-MA) was the only Super Committee member to speak in terms of specific proposals, questioning Dr. Elmendorf about the potential impact of a $3-$4 trillion deficit reduction, rather than the $1.2-1.5 trillion required by the Budget Control Act. Sen. Kerry said that if the Super Committee only achieves the minimum required, it will be forced to reconvene in a year or two to address the same problems. He said that a meaningful solution requires at least $3 trillion in deficit reduction based on a three-to-one or two-to-one cuts-to-revenue model. During the hearing, several news outlets began reporting that the Super Committee Democrats are expected to produce a plan creating $2.5 to $3 trillion in deficit reduction over the next ten years.

Other Democrats on the committee focused their questions on the impact of increased revenues and the need to reduce defense spending. Dr. Elmendorf emphasized that while increased revenues could have a positive impact on the overall budgetary picture, it would very much depend on what policies were instituted to generate such an increase. Sen. Max Baucus (D-MT) asked about the current levels of defense spending, saying it currently exceeds every other period in history, with the exception of World War II, and questioning whether the Appropriations Committee is misusing designated “war funding” for other purposes. Dr. Elmendorf said Sen. Baucus was correct about the current level of spending and said that sometimes it is difficult to draw clear lines between what constitutes war spending and what does not. Rep. Chris Van Hollen (D-MD) also emphasized that if Congress were to repeal the automatic, across-the-board cuts to defense spending, the deficit would increase.

Republicans challenged Dr. Elmendorf on the CBO’s election to include the Obama Administration’s announcement that it would not implement the CLASS Act into its projections but not the Administration’s announcement that it will be reducing the U.S. role in Iraq and Afghanistan. Sen. John Kyl (R-AZ) said that CBO was “drawing a distinction without a difference.” Dr. Elmendorf countered that the CBO treats mandatory spending (including the CLASS Act), differently than discretionary spending (including defense spending). Sen. Rob Portman (R-OH) also asked about the role of uncertainty in hindering economic growth, and Dr. Elmendorf said that it is certainly impacting every sector of the economy.

Dr. Elmendorf said that in order for the CBO to conduct a full analysis of the Super Committee’s proposals, it will need to receive them by early November. The Super Committee has until November 23, 2011 to present its proposals to Congress, and Congress has until December 23, 2011 to pass the proposals or automatically trigger across-the-board cuts. If the cuts are triggered, the process, known as sequestration, would begin in January 2013.

The Super Committee will hold its next public hearing on Tuesday, November 1. The Committee will receive an overview of previous deficit reduction proposals, hearing testimony from Erskine Bowles and former Sen. Alan Simpson (R-WY), co-chairs of the National Commission on Fiscal Responsibility and Reform and authors of the “Simpson-Bowles plan,” as well as Alice Rivlin and former Sen. Pete Domenici (R-NM), co-chairs of the Debt Reduction Task Force and authors of the “Rivlin-Domenici plan.”

Debt Ceiling Increase

The Act creates a two-step process for increasing the $14.3 trillion statutory debt ceiling by an amount between $2.1 trillion and $2.4 trillion. Upon passage, the Act provides a $900 billion debt ceiling increase—$400 billion is immediate and an additional $500 billion is subject to a congressional joint resolution of disapproval that can be vetoed by the President—that will provide sufficient government borrowing authority through 2011.

For the second raise of the debt ceiling—expected in early 2012—the size of the increase would be contingent on whether Congress approves recommendations made by the newly created Joint Select Committee on Deficit Reduction. If Congress approves recommendations that enact savings of $1.5 trillion, or alternatively, if Congress approves a Balanced Budget Amendment to the U.S. Constitution and sends it to the states for ratification, then the debt ceiling would be increased by $1.5 trillion. However, if Congress enacts savings less than $1.5 trillion or no savings, the second debt limit increase would be $1.2 trillion, which would also be subject to a joint resolution of disapproval that could be vetoed by the President.

Spending Cuts

The legislation cuts more spending than it increases in the debt limit. In order to achieve an immediate reduction in the deficit, statutory caps will be placed on discretionary appropriations for fiscal years 2012 through 2021. According to the Congressional Budget Office, these savings would amount to $917 billion over 10 years, starting with a $25 billion reduction in fiscal year 2012 and a $47 billion reduction in fiscal year 2013.

The overall discretionary spending cap for fiscal 2012 would be $1.043 trillion, $6 billion less than fiscal 2011 levels. In order to avoid sacrificing domestic spending on behalf of more security spending, a “firewall” would be erected between security and non-security accounts for both fiscal years 2012 and 2013, essentially creating two separate spending caps for security and non-security spending. National security spending, which would include Pentagon, State Department, Department of Homeland Security, military construction, part of the Department of Veterans Affairs and intelligence spending, among others, would be capped at $684 billion in fiscal 2012 and $686 billion in fiscal 2013, compared with $689 billion in fiscal 2011. Non-security spending would be capped at $359 billion in fiscal 2012 and $361 billion in fiscal 2013, compared with $360 billion in fiscal 2011. Essentially, these amounts mean nominal spending would be frozen in fiscal years, 2012 and 2013. This represents a spending “cut” in Washington budget-speak, because it allows less spending than would be anticipated by the “current services” level, which is current year spending plus inflation.

Bipartisan Joint Congressional Committee

For long-term deficit reduction, the Act tasks the 12-member bipartisan Joint Select Committee on Deficit Reduction to develop a proposal to cut the deficit by at least $1.2 trillion over 10 years. All of the federal budget would presumably be on the table, and the committee is likely to look closely at entitlement spending to achieve its deficit reduction goals. The committee is required to report this legislation to Congress by November 23, 2011. Both the House and the Senate must vote the Joint Committee Proposal up or down, without any amendments, by December 23, 2011.

If the Joint Committee fails to produce a proposal containing at least $1.2 trillion in savings, a sequestration process is triggered that would automatically cut spending across the board. Any sequester would be equal to the portion of the $1.2 trillion savings target that was not achieved by Congress. The first automatic cuts would take effect Jan. 2, 2013, and would fall equally on defense and non-defense accounts, including both discretionary spending and some entitlement spending. If the sequestration process is triggered, revised security and non-security categories would be created. The new security spending category would be comprised solely of funding for the Department of Defense, Department of Energy nuclear-weapons related activities, the National Nuclear Security Administration, and the national security activities of several other agencies and would be capped at $546 billion in fiscal 2013 and $556 billion in fiscal 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014.

Please note that the programs contained in the “security” and “non-security” categories under sequestration do not correspond exactly to the programs contained in each category under the immediate spending cuts described above. When one examines the total annual spending though, it becomes clear that for each year nominal spending will be increased. But because in each year the totals fall farther and farther behind the “current services” levels, the amount of deficit reduction achieved each year grows. As with the immediate cuts, the sequestration process essentially keeps spending flat.

Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely. The arbitrary nature of the sequestration process appears intentionally designed to incentivize Congressional action on the Joint Committee’s recommendations.

Taxes

Congressional Republicans were successful in preventing any immediate revenue increases within the Act. Although House Republicans, in particular, remain unified in their opposition to increasing revenues in the short-term, the jurisdiction of the Joint Select Committee on Deficit Reduction is intentionally broad, leaving room for proposals to increase revenues, likely by way of comprehensive tax reform.

Balanced Budget Amendment

The Act requires both the House and Senate to hold votes by the end of 2011 on a Balanced Budget Amendment to the U.S. Constitution. The inclusion of the amendment language was intended to satisfy the demands of House conservatives, who successfully included an even stronger provision into a previously-passed House plan that would make any second debt ceiling increase contingent on passage of the amendment.
 

Debt Ceiling Increase

The Act creates a two-step process for increasing the $14.3 trillion statutory debt ceiling by an amount between $2.1 trillion and $2.4 trillion. Upon passage, the Act provides a $900 billion debt ceiling increase—$400 billion is immediate and an additional $500 billion is subject to a congressional joint resolution of disapproval that can be vetoed by the President—that will provide sufficient government borrowing authority through 2011.

For the second raise of the debt ceiling—expected in early 2012—the size of the increase would be contingent on whether Congress approves recommendations made by the newly created Joint Select Committee on Deficit Reduction. If Congress approves recommendations that enact savings of $1.5 trillion, or alternatively, if Congress approves a Balanced Budget Amendment to the U.S. Constitution and sends it to the states for ratification, then the debt ceiling would be increased by $1.5 trillion. However, if Congress enacts savings less than $1.5 trillion or no savings, the second debt limit increase would be $1.2 trillion, which would also be subject to a joint resolution of disapproval that could be vetoed by the President.

Spending Cuts

The legislation cuts more spending than it increases in the debt limit. In order to achieve an immediate reduction in the deficit, statutory caps will be placed on discretionary appropriations for fiscal years 2012 through 2021. According to the Congressional Budget Office, these savings would amount to $917 billion over 10 years, starting with a $25 billion reduction in fiscal year 2012 and a $47 billion reduction in fiscal year 2013.

The overall discretionary spending cap for fiscal 2012 would be $1.043 trillion, $6 billion less than fiscal 2011 levels. In order to avoid sacrificing domestic spending on behalf of more security spending, a “firewall” would be erected between security and non-security accounts for both fiscal years 2012 and 2013, essentially creating two separate spending caps for security and non-security spending. National security spending, which would include Pentagon, State Department, Department of Homeland Security, military construction, part of the Department of Veterans Affairs and intelligence spending, among others, would be capped at $684 billion in fiscal 2012 and $686 billion in fiscal 2013, compared with $689 billion in fiscal 2011. Non-security spending would be capped at $359 billion in fiscal 2012 and $361 billion in fiscal 2013, compared with $360 billion in fiscal 2011. Essentially, these amounts mean nominal spending would be frozen in fiscal years, 2012 and 2013. This represents a spending “cut” in Washington budget-speak, because it allows less spending than would be anticipated by the “current services” level, which is current year spending plus inflation.

Bipartisan Joint Congressional Committee

For long-term deficit reduction, the Act tasks the 12-member bipartisan Joint Select Committee on Deficit Reduction to develop a proposal to cut the deficit by at least $1.2 trillion over 10 years. All of the federal budget would presumably be on the table, and the committee is likely to look closely at entitlement spending to achieve its deficit reduction goals. The committee is required to report this legislation to Congress by November 23, 2011. Both the House and the Senate must vote the Joint Committee Proposal up or down, without any amendments, by December 23, 2011.

If the Joint Committee fails to produce a proposal containing at least $1.2 trillion in savings, a sequestration process is triggered that would automatically cut spending across the board. Any sequester would be equal to the portion of the $1.2 trillion savings target that was not achieved by Congress. The first automatic cuts would take effect Jan. 2, 2013, and would fall equally on defense and non-defense accounts, including both discretionary spending and some entitlement spending. If the sequestration process is triggered, revised security and non-security categories would be created. The new security spending category would be comprised solely of funding for the Department of Defense, Department of Energy nuclear-weapons related activities, the National Nuclear Security Administration, and the national security activities of several other agencies and would be capped at $546 billion in fiscal 2013 and $556 billion in fiscal 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014.

Please note that the programs contained in the “security” and “non-security” categories under sequestration do not correspond exactly to the programs contained in each category under the immediate spending cuts described above. When one examines the total annual spending though, it becomes clear that for each year nominal spending will be increased. But because in each year the totals fall farther and farther behind the “current services” levels, the amount of deficit reduction achieved each year grows. As with the immediate cuts, the sequestration process essentially keeps spending flat.

Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely. The arbitrary nature of the sequestration process appears intentionally designed to incentivize Congressional action on the Joint Committee’s recommendations.

Taxes

Congressional Republicans were successful in preventing any immediate revenue increases within the Act. Although House Republicans, in particular, remain unified in their opposition to increasing revenues in the short-term, the jurisdiction of the Joint Select Committee on Deficit Reduction is intentionally broad, leaving room for proposals to increase revenues, likely by way of comprehensive tax reform.

Balanced Budget Amendment

The Act requires both the House and Senate to hold votes by the end of 2011 on a Balanced Budget Amendment to the U.S. Constitution. The inclusion of the amendment language was intended to satisfy the demands of House conservatives, who successfully included an even stronger provision into a previously-passed House plan that would make any second debt ceiling increase contingent on passage of the amendment.