As a result of the Budget Control Act of 2011 passed following the heated debt ceiling debate, Congress created the Joint Select Committee on Deficit Reduction, a temporary committee charged with making recommendations on specific ways to reduce the Federal budget by at least $1.2 trillion over the next 10 years. The Committee on Deficit Reduction, which has been holding meetings since early September, is required to deliver a proposal to Congress to turn into legislation by November 23.
The bipartisan committee is made up of 12 Members of Congress with three Democrats and three Republicans from each chamber, who were appointed by the leaders of each party in the Senate and House of Representatives. The committee is mostly made up of senior Members who hold high-ranking positions within their party, such as Chairman or Ranking Member of a major congressional committee. Reuters provides an excellent guide to the 12 members of the Debt Committee.
The committee’s nickname, the “Supercommittee” speaks to the importance and the difficulty of the task with which it has been charged. While $1.2 trillion over 10 years doesn’t seem like a lot, it’s worth noting that Congress has already grabbed the low hanging fruit with regard to deficit reduction. Non-defense discretionary spending, which only makes up about 18% of federal spending has already been combed through for savings. And while the committee could hit the magic number with a combination of minor cuts, accounting gimmicks and fiscal short cuts, this would be a cop out. The committee was put in place to deal with a serious issue. Elected officials, business interests, and the average citizen are looking for an equally serious result that will reduce the United States’ long term deficit and help bring the nation back to fiscal stability.
Thus, in order to make a significant impact on the nation’s debt, the Committee will have to look at ways of reducing the deficit that are considered politically difficult for both parties–cutting defense spending; reforming entitlement programs; raising taxes; and addressing tax reform. With that, let’s take a closer look at potential sources of revenue.
Defense, which is projected to account for $707.5 billion in spending in 2012, is naturally a target of the Supercommittee. After 9/11, spending at the Department of Defense took off because of the wars in Afghanistan and Iraq and investment in new military technologies. However, defense is a tricky issue, not only because of security, but also because defense spending supports a vast number of American jobs and creates investment; therefore, it has a great deal of political influence. Sen. John Kyl (R-AZ), a member of the Supercommittee, has publicly stated that he would walk should the committee seek too much in cuts from defense. Aside from looking for inefficiencies, and encouraging more standardized financial practices so that the DoD can pass its first audit ever, it is unlikely any significant structural cuts will play a role in the committee’s recommendations.
Entitlement programs are the greatest source of government spending, with over 50% of the federal budget being spent on programs such as Social Security, Medicare, Medicaid, food stamps, etc. However, these programs are extremely popular. The conflict thus becomes how to reform these programs so as to reduce the collective debt but not burden those who truly rely on them. A number of proposals have been put forward including raising the eligibility age of Medicare from 65 to 67 and increasing Medicare premiums among other options. Recently a number of officials and organizations have proposed moving these universal programs to a means-testing system. According to an article in the Washington Post, Budget Chairman Rep. Paul Ryan (R-WI) has proposed means testing these programs by scaling back benefits for the wealthy.
An issue area where there is widespread support for doing something is tax reform. The tax code is overly complex and the corporate tax rate is 35%, the second highest among developed countries leading many analysts to argue that it discourages investment contributes to slow economic growth. However, this only tells part of the story. The U.S. tax code contains a significant amount of tax provisions known as tax expenditures. According to Subsidy Scope, a website run by the think tank Pew Charitable Trusts which tracks government subsidies, tax expenditures are “provisions in the tax code that allow people or businesses to reduce their tax burden by taking certain deductions, exemptions, exclusions, preferential rates, deferrals or credits.” Thus, some businesses pay the full 35% tax rate while other firms, such as General Electric, pay nothing in taxes because they’re eligible for multiple deductions. In total it is estimated that tax expenditures amount to $1 trillion in lost revenue for the Federal Government.
The argument in Congress has generally been on how to reform the tax code–whether to change the system entirely or to lower the tax rate while closing a significant portion of the tax expenditures, with the latter being much more likely. The battle in this case would be over which expenditures to get rid of and which to keep.
The complexity of the issue means that it is highly unlikely that the Debt Committee will be able to deal with tax reform in full. I predict that the Committee will punt on tax reform, meaning that it will close a few of the more obscene loopholes and make a promise to have the two tax-writing committees – The House Ways and Means Committee and the Senate Finance Committee – (the chairs of both sit on the Debt Committee) overhaul the tax code.
The precedent from temporary committees of this sort has not been one of success. Most recently, the Bowles-Simpson commission, like the Supercommittee, was charged with coming up with ways to reduce the nation’s long-term debt. In December 2010 the commission made a number of moderate and sweeping proposals but failed to receive the 14 out of 18 votes required to pass it along to Congress.
Conversely, for the Debt Committee, a number of mechanisms are in place to encourage success. For example only a majority of the members must approve recommendations for them to reach Congress. Even more importantly, should the Committee fail to reach an agreement by November 23, $1.2 trillion in automatic cuts will take place across defense and discretionary spending providing greater incentive to compromise on a debt-reduction strategy. Finally, the legislation created on behalf of the recommendation is given “fast-track status” meaning it is not subject to most procedural gimmicks often used to block votes, and will be voted on by a basic up and down vote (as opposed to a supermajority). All of these factors increases the likelihood that the Committee will come up with a recommendation for debt reduction and that it will pass Congress.
I have invested my last shred of optimism in the success of this committee and I am confident that I will not be disappointed. I believe that along with all the incentives for success, that the members of the Supercommittee feel a sense of obligation to the nation that will lead them to produce meaningful legislation.