Congress returns to the nation’s capital next week with hopes of a big deal but strong odds favoring another piecemeal approach to avoid the so-called fiscal cliff, in a race against the clock to address tax and budget issues while keeping the U.S. economy from tumbling back into recession.
The cliff is a series of tax measures that have expired, or are set to expire at year’s end, along with automatic, deep budget cuts that will take effect unless lawmakers agree to an alternative plan. Additionally, the government is slated to hit a debt ceiling sometime between December and February, and tough negotiations are expected over terms under which more government borrowing would be allowed.
Going over that cliff carries huge economic risks. Financial markets could respond negatively, erasing the wealth of ordinary Americans who rely on stocks and bonds for their retirement income. Seniors who live off of investment income, and Americans nearing retirement age, are sure to suffer under this scenario.
Congress and the White House usually devise a solution to avoid such crises, but not until they absolutely must. When lawmakers waited until the last minute to resolve the debt ceiling fight last year, and voted down a 2008 bank bailout, stock prices dropped sharply. It could happen again.
“That to me is the wild card,” said R. Bruce Josten, executive vice president for the U.S. Chamber of Commerce.
Lawmakers sent mixed signals this week about serious negotiations vs. driving briefly off the cliff’s edge before settling.
Tuesday’s election results kept the same power players in place, the same group that went to that edge repeatedly during budget and debt ceiling negotiations over the last two years.
House Speaker John Boehner, R-Ohio, said Wednesday that he was ready to “find the common ground that has eluded us” and talk to Democrats, even about raising revenue.
Senate Majority Leader Harry Reid, D-Nev., also talked conciliation, promising not to draw “any lines in the sand.”
The election’s status quo result – the same president, Republicans still controlling the House of Representatives and Democrats remaining in charge of the Senate – suggests the public “is obviously saying work together, meet halfway, come together,” said Sen. Charles Schumer, D-N.Y., usually a fierce partisan.
The rank and file may feel less sanguine. The election solidified conservatives’ hold on the House and liberals’ strength in the Senate, suggesting any deal could have a difficult time winning approval.
The key, said Republicans, is for President Barack Obama to take the lead and offer a detailed plan.
“The only thing that’s changed since the election is that the president is not campaigning,” said Don Stewart, spokesman for Senate Minority Leader Mitch McConnell, R-Ky.
Ultimately, say insiders, the doomsday alternative to inaction will force a deal. The nonpartisan Congressional Budget Office said in a report Thursday that failing to act on the fiscal-cliff components could shave half a percentage point off of growth in the first half of 2013, raising the jobless rate to 9.1 percent and probably would trigger another recession. The CBO also said that addressing the components of the fiscal cliff results in a 3 or 4 percentage point swing between contraction and growth.
Taxes are likely to be the thorniest issue.
Obama campaigned on extending the Bush-era tax rates only for family incomes below $250,000 and individual incomes below $200,000. Republicans are adamant that current rates should be extended for all. Partisan sniping already has begun.
“There is no mandate for raising taxes on the American people,” said House Majority Leader Eric Cantor, R-Va.
Not so, countered Rep. Sander Levin of Michigan, the top Democrat on the tax-writing Ways and Means Committee. “The president’s re-election sent a clear message that House Republicans must end their intransigence . . . to find a balanced approach that combines spending reductions and revenue,” he said.
There is an escape hatch: Lawmakers don’t have to act this year. The Bush-era cuts could expire, but Congress would have all next year to find a way to restore some or all before the 2014 tax filing deadline. The Treasury Department could tell the Internal Revenue Service to maintain existing tax withholding schedules in the meantime.
That could become part of a compromise that includes a tax code overhaul. Boehner signaled as much Wednesday, suggesting a 2012 agreement could be a “down payment on, and catalyst for, major solutions” in 2013.
The other big fight this year involves budget cuts. As part of the 2011 debt ceiling deal, automatic cuts of $109 billion for the current fiscal year, including $55 billion from defense, will kick in starting in January unless a separate deal can be forged. Few want that to occur – Obama has flatly said the defense cuts “will not happen.”
The challenge: how to cut government spending but not so quickly and so deeply that it hurts a fragile recovery.
Private talks began well before the election. The Senate’s “Gang of Eight,” four Democrats and four Republicans, met this fall at Mount Vernon, Va., and held a conference call Wednesday to discuss strategy. They were unable to find agreement but plan to keep talking. Other discussions are being held by different lawmakers and their staffs throughout the Capitol.
“We all know they will come to some sort of deal that removes the worst-case possibilities from the table, but we don’t know how they will do that. The risk is how long they wait,” said Neil Dutta, director of economic research at Renaissance Macro Research in New York.
The private discussions include ways to ease the cliff without a “grand bargain” on taxes or the budget by attaching smaller provisions to different pieces of legislation.
“Folks have already been meeting about (tax) extenders, and both sides have packages,” said Steve Bell, a former Republican chief of staff for the Senate Budget Committee and now senior director for economic policy at the Bipartisan Policy Center, a policy research group. “That shows me that there is likely to be a legislative vehicle that will be available in the lame-duck session.”
Must-do items involve a patch to the alternative minimum tax and preventing a steep cut in Medicare payments to doctors from taking effect. There’s also urgency to deal with the Social Security payroll tax holiday, which is scheduled to expire at year’s end.
The AMT was passed decades ago to close loopholes that allowed the rich to escape paying a fair share of taxes, but it was never indexed for inflation, so as many as 30 million families could get a surprise April 15 absent a solution.
Similarly, Congress has punted on the so-called Doc-Fix. For more than a decade, Medicare’s funding formula has failed to keep pace with spending, leaving a choice of cutting physician reimbursement or providing additional money. Since 2003, Congress has decided to pay doctors. The last Doc-Fix, passed in December 2011, expires at the end of next month absent another patch. The AMT and Doc-Fix are big worries on Capitol Hill because constituents would instantly feel the impact.
The only consensus seems that small stuff gets done, big stuff waits.
“In general, my prediction is we won’t go over the cliff,” said Ryan Alexander, president of Taxpayers for Common Sense, a budget watchdog group. “But ask me in two weeks and I may say something different.”