The Hill was all atwitter last evening with rumors that some sort of deal had been reached over raising the debt ceiling and the deficit reduction package that needs to accompany that legislation.
In moments like these, the question we ask is: A deal between whom? Certainly not the President and House Republicans, which is the ”deal” that matters most at this moment. Nonetheless, the news yesterday gives us some additional insight into where negotiations stand.
The three moving parts behind the rumor were: 1) the pending meeting today between the President and Hill leadership; 2) the President’s concession that both Social Security and Medicare reforms should be considered, as well as his suggestion that the deficit reduction package should be much larger — $4 trillion — than others had suggested to date; and 3) House Majority Whip Eric Cantor’s comments that they would accept certain tax provisions if they were fully offset with tax cuts elsewhere. Let’s take these items in reverse order.
Congressman Cantor’s comments struck us as a reiteration of the obvious. The Republican position, as we understand it, is an opposition either to raising overall tax revenues or to raising marginal tax rates as part of the debt ceiling fight. Replacing one tax provision raising tax revenue with one reducing tax revenue by a similar amount does not violate either of these concerns.
On the other hand, the long list of tax provisions floated by the Administration in the last couple weeks does cross the line. As described by the President, “The tax cuts I’m proposing we get rid of are tax breaks for millionaires and billionaires, tax breaks for oil companies and hedge fund companies and jet owners,” he said. “That’s not radical.” That said, the package as we have seen reported also includes eliminating LIFO inventory accounting rules, reducing the deductibility of charitable contributions, and using a less generous measure of CPI.
As we’ve commented in previous Washington Wires, raising taxes on businesses using LIFO accounting is a bad idea, even if it is fully offset. Without an offset, it’s a very large tax hike on a substantial segment of employers across the country. We fail to see any way House Leadership could sell a package including this provision or the others mentioned to its membership.
So, to us, Cantor’s comments don’t appear to have shown any movement.
The second item from yesterday — the President opening the door to entitlements — is the real news. To date, both the Administration and House Democrats have resisted changes to entitlements, and have singled out Social Security in particular as off-limits. The President’s comments yesterday signaled a significant change in their negotiating posture. As the National Journal reports:
With less than a month until the U.S. defaults on its debt, President Obama is offering cuts to Social Security as part of a deficit-reduction deal to also raise the debt ceiling, The Washington Post is reporting. Obama will meet with congressional leaders on Thursday morning at the White House in the hopes of negotiating a deal. Citing people from both parties privy to the proposal, the Post reports that Obama will propose significant reductions in Medicare spending along with cuts to Social Security, which has been ruled off-limits by many Democrats.
Finally, the meeting today with Hill leadership (item three) initially looked like a response to the pressure building on the White House to demonstrate some sort of movement after demanding Congress stay in town, but, by opening the door on entitlement reforms and showing some real movement in the discussions, today’s meeting takes on a whole new dimension.
What’s our take on all this? From a policy perspective, this idea that we can materially improve the fiscal picture by eliminating tax expenditures and loopholes is a dead end. The President’s FY 2012 budget projected deficits of over nine trillion dollars in the next decade, or about three thousand times more than what would be raised by changing the depreciation treatment of corporate jets.
Despite the math, it’s apparent the President believes it would be more damaging to the economy to reduce government spending than to hike taxes. Hence their focus on revenue. Testifying a couple weeks ago, Treasury Secretary Geithner has made this point clear:
“If you don’t touch revenues and you leave in place the tax cuts for the top 2 percent that were put in place by President Bush, if you leave those in place and you’re trying to bring our deficits down over time, then you have to do exceptionally deep cuts in benefits for middle-class Americans and you have to shrink the overall size of government programs, things like education, to levels that we could not accept as a country.”
We are confident our members and allies don’t share this view. From their perspective, the massive increase in federal spending in the past couple years is holding back economic growth, not encouraging it. We are also confident that this is going to be the real sticking point in negotiations moving forward. The House can’t accept revenue hikes, and the White House says it won’t move forward without them. Despite the President’s movement on Social Security yesterday, there remains a huge gulf between negotiators on the contents of a possible package.