The congressional committee tasked with reducing the federal deficit is poised to admit defeat as soon as Monday, and its unfinished business will set up a year-end battle over emergency jobless benefits and an expiring payroll tax holiday.
Those provisions are among a host of measures set to lapse at the end of December. During nearly three months of negotiations, the “supercommittee” had been weighing whether to extend at least some of them as part of a broader plan to shave a minimum of $1.2 trillion over the next decade.
Democrats and many economists consider particularly urgent the need to extend jobless benefits and the one-year payroll tax cut. With national unemployment stuck at 9 percent, and the ranks of the long-term unemployed at record levels, the government is providing up to 99 weeks of support to about 3.5 million people.
Meanwhile, the payroll tax cut, enacted last December, allows most American workers to keep an additional 2 percent of their earnings, a boon to tight household budgets as well as the economic recovery. Economists at J.P. Morgan Chase recently estimated that if Congress does not extend the two measures, economic growth next year could take a hit of as much as two percentage points — enough to revive fears of a recession.
Time is also running out for doctors who see Medicare patients. These physicians are scheduled to absorb a 30 percent cut in government reimbursements in January. A long list of tax breaks, including an inflation adjustment that protects more than 30 million families from paying the alternative minimum tax, also will be eliminated unless Congress acts.
Although many of the expiring provisions have received bipartisan support in the past, this year they face a welter of political obstacles, none more important than cost. Extending them all through 2012 threatens to add nearly $300 billion to annual budget deficits — and therefore to future borrowing — darkening the nation’s fiscal outlook at the very moment lawmakers had hoped to reassure financial markets with fresh savings.
Sen. Jeff Sessions (Ala.), the ranking Republican on the Senate Budget Committee, said he was uneasy about extending the payroll tax holiday, calling the national debt “a greater threat to us” than the weak economy.
“If the supercommittee fails, I think there will be a stark realization by every member of the U.S. Senate that we’re at the end of the year and these complex challenges have not been dealt with,” Sessions said. “It’s likely to be a really difficult period.”
The policy battle comes as the parties are gearing up for a high-stakes election season dominated by economic concerns, with both the White House and Congress in play. The political pressure that has helped keep the 12-member supercommittee from compromising on hot-button issues such as taxes is sure to grow more intense.
The panel remained gridlocked Saturday with the clock ticking toward a deadline of midnight Monday. Although the official deadline is midnight Wednesday, the committee is legally barred from voting on any plan that was not made public at least 48 hours in advance.
Republicans on the supercommittee held a conference call Saturday morning, and aides said members from both parties continued to talk by phone. But neither side was predicting a last-minute breakthrough. Instead, seven panel members booked appearances on the Sunday talk shows, as both sides readied their best arguments for why the other is at fault.
Sen. Jon Kyl (R-Ariz.), a panel member, spent the day in his Capitol office. “The hope was that even at this late date, they could take things that had been scored [by the Congressional Budget Office] and put them together,” he told reporters as he left for the evening. “That gets pretty doubtful at this point,” he said.
If the supercommittee does not finish on time, it would lose special procedural powers to push a tax-and-spending plan through a bitterly divided House and Senate, leaving congressional leaders without an easy path to compromise on the expiring provisions — and a potentially nasty holiday-season fight on their hands.
“We don’t have the answers,” Sen. Richard J. Durbin (Ill.), the No. 2 Democrat in the Senate, conceded recently as it became evident that the panel’s effort had stalled. “The supercommittee was put in place” to develop “a strategy to take us through the election” by resolving the toughest outstanding budget problems, he said. “If they don’t succeed, then we have to address these issues.”
Durbin said he is “prepared to add to the deficit at this moment” to extend the economic measures and “bring us out of this recession, to put people to work.” But many Democrats have conflicting emotions about the measures, especially the one-year payroll tax cut.
In addition to adding more than $100 billion to budget deficits, the tax cut would reduce Social Security’s dedicated financing stream, making the program dependent on congressional appropriations at a critical moment.
“There are a lot of other casualties that will be collateral damage with the failure of the supercommittee,” said Rep. Gerald E. Connolly (D-Va.), a key House moderate, adding that the payroll tax cut would be a particularly “heavy lift.”
“You don’t want to do anything at this juncture to retard what seems like it’s an uptick in the economic growth,” Connolly said. “But on the other hand, we’re worried about Social Security. Do we really want to be starving it of revenue?”
Republicans are also divided. Rep. Nan A.S. Hayworth (N.Y.) said she is “extremely sympathetic to extending” the payroll tax holiday, but Rep. Jason Chaffetz (Utah) said he would have trouble supporting it without matching cuts in spending.
“I’m in favor of lower taxes. But, when you don’t couple it with a spending decrease, it’s a real problem,” Chaffetz said. “And we don’t seem to be able to cut anything around here.”
President Obama has demanded a more ambitious economic package that would, among other things, expand the payroll tax cut to employers as well as workers and overhaul the unemployment insurance system. In September, he called on the supercommittee to come up with a way to cover the $447 billion cost so the package wouldn’t increase budget deficits. Obama suggested raising taxes on corporations and the wealthy.
Democrats on the supercommittee pressed to use savings from the drawdown of troops in Iraq and Afghanistan to cover the cost of economic measures. But Republicans on the panel wanted to use the war savings to cover the cost of fixing the alternative minimum tax (AMT) and protecting payments to doctors who see Medicare patients.
Without the political cover of a supercommittee deal to reduce borrowing by the $1.2 trillion target, aides in both parties say it would be difficult to claim savings for any purpose from what some lawmakers have taken to calling “the overseas contingency account.” Because the decision has been made to bring the troops home, many budget analysts argue that the money — as much as $900 billion over the next decade — was never going to be spent anyway. Using war savings to “pay for” other priorities is therefore widely considered an accounting gimmick that is unlikely to pass muster in the House or the Senate.
While December is shaping up as a critical month, lobbyists and senior aides say they expect lawmakers to put off some decisions until next year. For example, although the inflation adjustment for the AMT is set to expire on Dec. 31, most people would not have to pay the higher tax until April 2013. That leaves plenty of time for Congress to fix it.
Dozens of expiring tax breaks for businesses and individuals, collectively known as the “tax extenders,” also could be revived retroactively.
Lawmakers may want to delay debate on the tax extenders for another reason, said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan watchdog group. Many of the breaks are designed to benefit narrow home-state interests, such as NASCAR racetracks, racehorse breeders and ethanol producers. Those are precisely the sorts of provisions that have been excoriated throughout this year’s debate over the debt. Both parties are now firmly on record as being in favor of a simpler tax code, stripped of such items.
Said Ellis: “To have gone through this whole wailing and rending of garments and gnashing of teeth that the supercommittee process has elicited and then to turn around and increase the deficit by extending a bunch of tax breaks — many of which are for special interests — would just look terrible.”