Was the Budget Control Act, which Congress passed last August, mostly a convenient exit from the impasse over raising the debt limit? Or was it a genuine attempt to bring spending and revenues into balance?
The answer will come within days as the 12 members of the deficit reduction committee struggle toward their Nov. 23 deadline. Their target: $1.2 trillion in deficit reductions over ten years.
While many on Capitol Hill suspect that the committee won’t be able to design a plan to hit that target, a rare meeting Tuesday between House Speaker John Boehner and Senate Majority Leader Harry Reid indicated a new urgency.
But the problem remains the same: while there is bipartisan agreement to reduce deficits, there’s also bipartisan agreement that the ways to do so are too risky and too painful.
Defense spending and the tax exemption for health care provide clear illustrations.
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If the deficit reduction committee doesn’t come up with a plan, or if Congress rejects it that plan, then automatic cuts, called "sequesters," will take effect.
Impact of defense cuts
For the Pentagon, that would mean about $50 billion a year in less defense spending from fiscal year 2013 to FY2021, according to the Congressional Budget Office. The CBO baseline already assumes roughly $450 billion in reduced defense outlays, coming from provisions of the Budget Control Act.
Defense Secretary Leon Panetta has warned against the automatic cuts, telling the leaders of the Senate Armed Services Committee in a letter released Tuesday that “the impacts of these cuts would be devastating for the Department.”
Republicans on the Armed Services Committee say if that sequesters take effect they will try to pass a bill rescinding them.
“I’ll fight it with every ounce of my being,” said Sen. Lindsey Graham, R.-S.C., of the sequester idea.
Just because Congress can’t manage to reduce future deficits by $1.2 trillion, he said, “It’s no good excuse to destroy the Defense Department. The $600 billion coming out of defense will gut the Defense Department, on top of the $400 billion we’re already cutting." Citing figures used by Panetta, Graham said, "You’d have a Navy at 1915 levels, an Army at 1940 levels, that’s just totally unacceptable”
Ranking Republican member Sen. John McCain, R Ariz., told reporters Tuesday he didn’t know if he could round up the votes to rescind the automatic defense cuts.
McCain argues against defense cuts
McCain said the alternative to those defense cuts is to “cut (non-defense) spending; reform entitlements; we can reform the tax code…. We’ve always agreed that if we simplify the tax code, eliminate a lot of the loopholes ... it will increase revenues over time.”
Another Armed Services Committee member, Sen. Kelly Ayotte, R -N.H. said of Panetta, “He’s someone who in the past has had to be in a position in the Clinton administration to recommend cuts to the defense area. So I don’t think he’s someone who’s prone to hyperbole.”
Like McCain, Ayotte pointed to cuts or reforms in entitlements program such as Medicare and Social Security as the alternative to the defense cuts.
Ayotte’s noting that Panetta once served as chief of staff to President Clinton and as director of the Office of Management and Budget was also a reminder that during thta time, from 1991 to 1999, defense spending, in fact, declined by 14 percent. But under the sequesters, defense spending would actually continue to increase, according to the CBO forecast.
Today’s deficit and debt is partly the result of the money Congress spent on the Iraq invasion and the events that followed from that. Panetta spent Tuesday morning testifying about the U.S. role in Iraq after all U.S. combat troops exit in six weeks. Senate Armed Services Committee chairman Sen. Carl Levin, D-Mich., reminded the hearing that Operation Iraqi Freedom cost $800 billion.
But if the war in Iraq is over and all U.S. combat troops are out six weeks from now, why are we still spending roughly $700 billion a year on the military?
Graham had an answer: “I have heard from people after every engagement: ‘why do you need this military?’ only to have to ramp up, go to war without the equipment, send the (National) Guard off with a shell of a force. What happens if China gets bolder, Iran gets a nuclear weapon, (or) we have to go into Yemen?”
Curb tax exemption for health insurance?
If cutting defense seems too risky, then so, too, is one proposal floated as a way to avoid the sequesters.
When members of Congress talk in general terms about “eliminating a lot of the loopholes” a prime target would have to be one of the biggest loopholes: the tax exemption for employer-provided health insurance.
According to the Joint Committee on Taxation that’s worth $130 billion in the current fiscal year — the largest single tax preference for individuals and families. The Simpson-Bowles fiscal commission has urged Congress to limit the exemption, as has the Rivlin-Domenici Bipartisan Policy Center report.
"This open-ended tax subsidy encourages overly comprehensive insurance with fewer provisions to contain health care costs" and "benefits high-income people more than low-income people," said the Rivilin-Domenici report.
That didn't convince a bipartisan, but mostly Democratic, coalition of 160 House members who said in a letter last week that ending or limiting the tax exemption would impose an undue burden on some workers.
The chief sponsor of that letter, Rep. Joe Courtney, D-Conn., said Tuesday that the American Academy of Actuaries had shown that health insurance premiums are based on region, age, and occupation.
Phasing out the tax break for employer-provided insurance would impose a tax increase on specific people: “older Americans in living in higher-cost regions like the Northeast who are engaged in occupations with higher risks.”
Courtney said, “The classic profile would be a 50-year old firefighter in New York City or Boston, (he) would be far more likely to be subject to taxable income than a guy in Nebraska who is 30 years old working in an office.” He said the tax increase would not “land evenly or fairly. It’s subject to factors people by and large have no control over.”
But Courtney sees some hopeful signs in the deficit reduction drama: “The sequestration really doesn’t go into effect until calendar year 2013, the Bush tax cuts expire in that intervening period, there’s an election, there’s some exemptions (from the automatic cuts) for safety-net programs like Medicaid and food stamps.”
For Democrats such as Courtney, the best scenario may be that Obama is re-elected in November 2012 and the 2001/2003 Bush tax rates expire six weeks later.
Those two things would make the deficit reduction arithmetic easier for Democrats.