Does the debt deal include tax policies? Step One of the plan includes $917 billion in spending cuts only. But Step Two calls on a special “Joint Committee” to develop an additional package of deficit reduction that could include revenue provisions. Here are the details.

Under the plan, the new Joint Committee would be made up of six members each from the House and Senate, evenly divided between Republicans and Democrats. This Joint Committee would be asked to develop a package of deficit reductions equal to $1.2 trillion or more, and to report that package out by November 23rd. It would take a simple majority of Committee members to successfully report out a plan.

If the Joint Committee succeeds, then both the House and the Senate would have until December 23rd to vote on the plan. Under special rules, neither body would be allowed to delay or to amend the plan while a simple majority would be sufficient to adopt it.

If the Joint Committee fails in its task, or either the House or the Senate defeats the plan, then $1.2 trillion in across-the-board additional deficit reduction would be triggered. This sequester is spending reductions only, equally divided between defense and non-defense spending, with no revenues included.

Those are the details. What do we think? Based on our experience, the expedited procedures and sequestration rules included here are real and likely to result in additional deficit reduction of $1.2 trillion or more.

Will it include revenues? Both the White House and other Democrats have made it clear that revenues are “on the table” and that they expect to press for tax provisions as part of the Joint Committee’s product. In a blog post yesterday, National Economic Council Director Gene Sperling made the case for additional revenues:

The Joint Committee is tasked with deficit reduction, and the Committee can reduce the deficit by cutting spending and getting rid of tax loopholes and expenditures. Everything is on the table, as it should be.

First, the Committee can consider getting rid of tax expenditures like subsidies for oil and gas companies or corporate jet owners. These types of tax changes have been a major part of the recent deficit reduction conversation and would be a smart part of an overall balanced plan. No one on any side can dispute that the Joint Committee could consider them.

Second, the Committee can consider the kind of revenue raising tax reform that has broad and growing bipartisan support.

Director Sperling is correct that the Joint Committee can include tax hikes in the plan it presents to Congress if a majority of the Committee members vote to do so. But House and Senate Republican leaders have insisted that they would not nominate anyone to the Joint Committee who would support tax increases. Further, even if a Republican appointee does support a tax hike as part of the Joint Committee plan, that plan would have to pass both the House and the Senate. Why would House Republicans change their position to date and support higher taxes?

Remember, the alternative to the Joint Committee plan is an automatic, across-the-board cut of $1.2 trillion divided between defense and non-defense spending. Certainly, those defense cuts will be difficult for many conservatives in the House to stomach, but so much that they would embrace tax increases instead? We don’t think so. We believe the House will stick to its no tax hikes position and the Joint Committee will need to craft a package that avoids tax hikes if it wants the plan to pass Congress.

But what about budget neutral tax reform? Finance Committee Chairman Max Baucus (D-MT) is considering presenting a broad overhaul of the tax code to the Joint Committee for its consideration.

Again, although tax reform will definitely be part of the conversation during the Joint Committee’s tenure, we believe action is highly unlikely for two reasons. First, there’s simply not time. Tax reform is extremely complicated, and the Joint Committee has less than four months to complete its work. Chairman Baucus earlier indicated that it would take until the end of 2012 to write a comprehensive tax reform bill.

Second, tax reform in theory always enjoys broad support, but tax reform in particular means picking winners and losers. For every dollar of rate reduction, somebody loses a dollar of tax benefit. So tax reform would likely cost the Joint Committee votes it can ill-afford to lose.

So while the pass-thru community will need to be ready to defend Main Street businesses beginning this September, we don’t expect significant tax hikes or comprehensive tax reform to make it into the Joint Committee’s plan. That plan may include some offset tax provisions —  don’t forget, there’s a large package of tax provisions set to expire at the end of this year — but the broader fight over the direction of tax policy will have to wait for another vehicle.

What’s In a Baseline?

Behind the scenes of the debt limit compromise is a fight is brewing over the Joint Committee’s choice of budget baselines and what it means for tax policy.

While this might seem too trivial even for tax geeks, it could make a difference in the outcome of this process, and taxpayers should pay attention.

The question is, which baseline will the Joint Committee use to score its deficit savings — a current law baseline or a current policy baseline? Here’s the difference.

Under the current law baseline, the expiration of the Bush tax cuts in 2013 is considered the base case, so any effort to extend some or all of them would be seen as reducing revenue and increasing the deficit. Under this baseline, the Obama Administration’s proposal to extend just a portion of the Bush tax cuts would be seen as increasing the deficit.

Under the current policy baseline, those same tax cuts are expected to continue into the future, so any effort to roll them back would be seen as a tax hike but it would reduce the deficit. Under this baseline, the Joint Committee could vote to extend all of the Bush tax cuts except those affecting higher income taxpayers, and claim the resulting “savings” as part of their deficit reduction target.

Again, here’s Gene Sperling in his post:

The “baseline” is what deficit reduction is measured against. Reports have suggested that the Committee would have to use a “current law” baseline – a baseline that assumes that all of the 2001 and 2003 tax cuts expire along with relief from the Alternative Minimum tax. That would mean that any tax reform effort that raised less revenue than allowing all those tax cuts to expire would be scored as increasing the deficit. Even conservative Republican proposals for “revenue neutral” tax reform would be scored under this approach as increasing the deficit by more than $3 trillion.

However the claim that the Committee is required to follow this approach is simply false.

Is it? Here’s what the Budget Control Act says:

ESTIMATES.The Congressional Budget Office shall provide estimates of the legislation (as described in paragraph (3)(B)) in accordance with sections 308(a) and 201(f) of the Congressional Budget Act of 1974 (2 U.S.C. 639(a) and 23 601(f))(including estimates of the effect of 24 interest payment on the debt).

And here’s section 308(a) of the Congressional Budget Act:


(1) Whenever a committee of either House reports to its House a bill or joint resolution, or committee amendment thereto, providing new budget authority (other than continuing appropriations) or providing an increase or decrease in revenues or tax expenditures for a fiscal year (or fiscal years), the report accompanying that bill or joint resolution shall contain a statement, or the committee shall make available such a statement in the case of an approved committee amendment which is not reported to its House, prepared after consultation with the Director of the Congressional Budget Office.

(A) comparing the levels in such measure to the appropriate allocations in the reports submitted under section 302(b) for the most recently agreed to concurrent resolution on the budget for such fiscal year (or fiscal years);

(B) containing a projection by the Congressional Budget Office of how such measure will affect the levels of such budget authority, budget outlays, revenues, or tax expenditures under existing law for such fiscal year (or fiscal years) and each of the four ensuing fiscal years, if timely submitted before such report is filed;

So, our reading of the just-passed bill suggests the savings that will count for purposes of meeting the Joint Committee’s deficit target are savings measured against a current law baseline.

Just for fun, consider the alternative. Say the Joint Committee used a current policy baseline and proposed to extend two-thirds of the Bush tax cuts. If the revenue impact of extending all the tax cuts was $3 trillion, then extending two-thirds would score as $1 trillion in deficit reduction for the Committee.

But the CBO uses the current law baseline for all its major budget reports, including its annual estimates of spending, revenues, and deficits. Under that baseline, extending two-thirds of the Bush tax cuts would increase the deficit by $2 trillion. So, the Joint Committee would have been tasked with deficit reduction, but by picking a more favorable baseline, its work would end up being scored as a deficit increase instead when the CBO updates its baseline next January.

Given the amount of scrutiny the CBO and Congress are under, it’s very unlikely the Joint Committee will choose to do anything but use the same baseline that Congress almost always uses “current law” and score any budget savings from there.