CQ TODAY ONLINE NEWS
July 21, 2011 – 10:42 p.m.
Debt Talks May Come Down to Taxes
By Joseph J. Schatz and Sam Goldfarb, CQ Staff
Taxes have always looked as if they would probably be the key to reaching a deal to raise the debt ceiling and trim the budget deficit.
And taxes now appear to be the driving issue as President Obama and House Speaker
Aides familiar with the talks said Thursday that the negotiations are zeroing in on a package intended to reduce deficit spending by $3 trillion over 10 years through spending cuts and a promised revenue-increasing tax code overhaul next year.
But serious political and procedural questions remain about how such a deal could be implemented.
Devising a mechanism that would guarantee action on a tax overhaul could be difficult. And a 2012 tax rewrite would likely involve eliminating some taxpayers’ cherished credits and deductions during an election year.
In seeking a so-called grand bargain, Obama and Boehner find themselves about where they were a few weeks ago. Before an earlier arrangement similar to the outline floated Thursday could gain traction, liberals revolted and House GOP conservatives said they would not entertain tax hikes.
But now the president and Speaker have been driven to try again by the threat of a government default in less than two weeks. They have few other viable options for raising the $14.3 trillion debt ceiling by Aug. 2.
Given the legislative difficulties such an agreement could face, one influential House Republican — who demanded anonymity — cautioned that the final deal may be less bold than some have recently speculated. Forecasting a “get me through the night” outcome, he said the agreement would likely include neither tax overhaul nor significant cuts from entitlements.
Some House Republicans have been suggesting that lawmakers may have to settle for a smaller package of about $1 trillion in cuts and a debt limit increase that will be sufficient only until early next year.
The Search for Middle Ground
Boehner and other Republican leaders will meet with rank-and-file House GOP lawmakers Friday morning. The Speaker has already signaled that his caucus must be willing to compromise, given that their favored option — the “cut, cap and balance” bill (
Senate Majority Leader
For his part, Obama appears to have ceded ground in recent days in his talks with Boehner, agreeing to consider up-front discretionary and entitlement spending cuts while delaying the prospect of new revenues until a tax code overhaul in 2012.
Debt Talks May Come Down to Taxes
The president also expressed a willingness to drop his demand for “decoupling” the George W. Bush administration tax cuts, according to a congressional leadership aide. The administration had wanted to extend current tax rates for lower and middle-income brackets but remained silent on the fate of upper-bracket rates. All tax rates are scheduled to increase at the end of next year when the 2001 and 2003 tax cuts expire.
But Republicans remain wary of committing to a future tax overhaul that would bring in more revenue than the government would collect if current tax rates were extended.
Democrats are also wary, saying it would be impossible to ensure that a tax overhaul will be enacted. Their fear is that spending cuts would be made without the guarantee of new revenue that would come by addressing the Bush tax cuts.
Taxes have repeatedly been the major stumbling block in debt negotiations. Deficit talks led by Vice President
Devising and passing a deficit deal that Republicans could claim is revenue-neutral but that Democrats would accept as a revenue-raiser could prove difficult.
In bipartisan Senate deficit talks, the so-called Gang of Six tried to finesse that question, producing a proposal that advocates argue would raise $1 trillion in additional revenue through a tax code overhaul but provide a net $1.5 trillion tax cut. House Budget Committee Republicans analyzed that proposal as a $2.8 trillion tax increase, likely making it a non-starter in the House.
A tax overhaul is generally understood to mean reducing tax rates for individuals and corporations while eliminating or curbing many tax breaks, including those popular with both Democrats and Republicans.
In earlier talks, Boehner and Obama had largely agreed that a revised tax code should generate revenue equal to at least 19 percent of the gross domestic product (GDP) by 2021, according to those familiar with the discussions. That would produce more revenue than permanently extending the Bush tax cuts and other tax policies favored by Republicans. Under that scenario, government revenues would be closer to 18.4 percent of GDP in 10 years, according to the latest estimates.
Any deficit reduction deal that includes a tax overhaul could be at least partially implemented through a budget resolution, a bill or a combination of the two, according to lawmakers and analysts from both parties.
Senate Budget Chairman
Although fiscal year 2012 begins Oct. 1, committees would arguably have until next spring to complete the process of overhauling the tax code and making changes to entitlement programs if they were required to by reconciliation instructions, according to a senior GOP aide familiar with the budget process.
The aide said budget reconciliation instructions do not expire until they have been put into effect or until a new budget resolution is adopted. By statute, Congress is supposed to adopt the next year’s budget resolution in April.
Senate Finance Chairman
Debt Talks May Come Down to Taxes
Democrats Air Grievances
During a luncheon with Senate Democrats, White House budget director
“This can’t be all cuts, there has to be a balance,” Reid said after the meeting. “There has to be some revenue.”
Several other Senate Democrats said they prefer to support a fallback measure being crafted by Reid and Minority Leader
But the fate of the McConnell-Reid plan seemed in doubt Thursday, given opposition from House Republicans who have been discussing other backup plans, including the potential for a debt ceiling increase totaling no more than $1 trillion, linked to an equivalent level of spending cuts.
Paul M. Krawzak and Richard E. Cohen contributed to this story.