The House Goes Home for Christmas: Its Top Priorities: Slash Health Care, Nutrition, and Federal Pay, Raise Taxes on Working Families, Preserve Pentagon Spending, and No Fingerprints on Tax Increases Even for the Very Rich
If you are reading this, the world did not come to an end on December 21. Congressional action did, though, at least through Christmas. Despite predictions by Speaker Boehner (R-OH) and Majority Leader Cantor (R-VA) that there would be enough Republican votes for Boehner’s plan to raise tax rates on income over $1 million, their caucus rebelled. Without enough votes for passage, Speaker Boehner cancelled the vote, and the House went home. They might come back before New Year’s, if a deal can be put together to avert the spending cuts, tax increases, and loss of unemployment benefits for 2 million long-term jobless people that will mark the start of 2013.
The House did cast votes on Thursday evening. They re-adopted a bill they had passed last spring, which replaced the $110 billion in automatic spending cuts scheduled to start January 1 with a large number of domestic cuts. That bill went nowhere last spring, and the President and Senate Majority Leader Reid (D-NV) confirmed its fate will be the same now. The new-old bill, The Spending Reduction Act of 2012 (H.R. 6684), passed 215-209, with no Democrats voting for it and 21 Republicans joining all 188 Democrats to oppose.
The bill was not originally part of Speaker Boehner’s plan for Thursday. He had hoped there would be enough support to pass an amendment he called “Plan B”, continuing the current tax rates for everybody except millionaires, whose income tax rates would rise to where they were before the Bush tax cuts were enacted. Because other favorable treatment for millionaires and multi-million dollar estates would remain, those with incomes over $1 million would still get tax cuts averaging $50,000 each. Treatment of 25 million low-income working families with children was not so favorable – they would see their taxes rise by an average of $1,000 each. (For more detail, see below.) Even Grover Norquist, originator of the anti-tax pledge that has a stranglehold on most Republicans, said that passing Boehner’s “Plan B” would be okay, because it would be preventing a tax increase on everybody else. But that wasn’t enough to gather the near-unanimity among Republicans necessary to pass Boehner’s bill with little or no Democratic support.
Republican House members either objected to raising any taxes on anyone, balked at passing something that did nothing to stop the looming Pentagon and domestic spending cuts, or both. To mollify enough of them, the Speaker agreed to let the House vote again on the bill to replace the “sequester,” or automatic spending cuts. In voting for this, the majority made its priorities clear. The bill would eliminate all the $55 billion in Pentagon sequestration cuts in 2013 and would replace about $38.5 billion in across-the-board cuts to domestic appropriations, in part by substituting $19.1 billion in spending reductions to be achieved by lowering the total cap on appropriations for FY 2013. Medicare cuts of about $16 billion that were originally included in sequestration would stay in place. The money lost by stopping the Pentagon cuts and some of the domestic reductions would be made up (and then some) by more than $217 billion in cuts over 10 years to SNAP/food stamps, Medicaid, premium subsidies and other funding for the new health care law, the Child Tax Credit, and several consumer protection measures. It also raised nearly $88 billion in revenues over 10 years by requiring federal employees to pay more of their retirement costs. (More details about these provisions below.)
But although the House passed these spending cuts, it did not win over enough Republicans to get a majority for the Plan B increase in millionaire tax rates.
So what’s next? Despite repeated assertions on the House floor by House Budget Committee Chair Ryan (R-WI) and others that President Obama has not come out with specific spending cut proposals in his deficit reduction plan, the President has put forth several offers in his negotiations with Speaker Boehner. The President’s most recent proposal includes tax cuts for everyone, but reduces the tax breaks at the top, for a new revenue total of $1.2 trillion over ten years, and cuts spending by $930 billion, plus another $290 billion in debt interest savings. Some of the savings are highly controversial among Democrats (see below). If a solution is to be found, either before or soon after the beginning of the new year, it appears less likely to be achieved by legislation that can draw majority Republican support in the House. Another option – passing a plan in the House with bipartisan support (lots of Democrats and some Republicans. It remains to be seen whether Speaker Boehner will exercise leadership in pressing for that, or leave it to others to work around him. In announcing the House’s departure, the Speaker did not seem to be signing up for a renewed battle to win over his caucus. Instead, he said “Now it is up to the president to work with Sen. Reid on legislation to avert the fiscal cliff.”
Taxes were a major issue during the Presidential campaign with a focus on the ’01 and ’03 Bush-era income tax rates set to expire at the end of this year. On November 14, newly off an election victory where he campaigned for higher taxes on incomes over $250,000 and with opinion polls solidly favoring his position, the President at his first post-election news conference reiterated his position on income tax rates and pressed for $1.6 trillion in revenue as part of a comprehensive deficit reduction deal. Democrats were buoyed by the President’s approach. Republicans had strongly resisted any increase in personal income tax rates but some conceded that the election results would likely mean rates for high-income taxpayers would go up. Others pressed for no rate increases and instead talked in vague terms about tax reform that included closing unspecified tax loopholes and ending some tax deductions. In return they also wanted deep cuts in spending.
The President presented a more detailed deficit reduction plan on November 29, outlining nearly $1.6 trillion in addition tax revenue over 10 years. Tax rates for income of less than $250,000 would remain the same while the two top rates of 33 and 35 percent would revert back to 36 and 39.6 percent; the rate on capital gains would increase from 15 percent to 20 percent and dividends from 15 percent to the ordinary income tax rate; the maximum value of tax deductions would be lowered to 28 percent (someone in the 35 percent tax bracket can currently deduct up to 35 cents for every dollar in deductions) and additional limits would be placed on itemized deductions for higher-income taxpayers; and the estate tax would revert back from its current $5 million exemption level and maximum rate of 35 percent to its 2009 exemption level of $3.5 million and 45 percent maximum rate . The tax package would also continue the expansions made in the 2009 economic recovery act to the refundable Child Tax Credit and Earned Income Tax Credit (EITC) for low-income working families; extend for one year the 2 percent payroll tax cut for individuals; provide a one-year fix to the Alternative Minimum Tax (ATM), keeping new taxpayers from being hit with an average income tax increase of $2,250 according to the Tax Policy Center; and extend a number of business tax breaks.
In response to the President’s plan Speaker Boehner, the Republicans’ lead negotiator in deficit reduction talks with the President, offered $800 billion in revenue through limiting tax expenditures in tax reform that would occur next year. His plan did not specify which tax expenditures would be limited. Many of the most costly expenditures in terms of lost revenue are very popular and have powerful lobby shops supporting them, for example the home mortgage interest deduction, making them politically difficult to reduce significantly.
Under earlier House Republican tax proposals and plans proposed by Speaker Boehner, the 2009 improvements in the Child Tax Credit and EITC would be allowed to expire. This means that 12 million families benefiting from the Child Tax Credit would see their taxes go up by $800, on average. Six million families would pay an average $500 tax increase because of cuts to the EITC.
In early December deficit reduction talks between Speaker Boehner and the President continued. On December 17, the President presented a new proposal containing both new savings on the spending side and a reduction in revenue. The proposal reduced revenue by increasing from $250,000 to $400,000 the income threshold at which the lower tax rates would be extended. The 33 percent income tax rate would be extended rather than reverting back to 36 percent.
Speaker Boehner seemed to be making a significant move toward the President on revenue when he indicated that he would let tax rates on income over $1 million expire. However, coupled with extending the Bush-era tax rates on income up to $1 million, extending limits on certain tax deductions set to end on January 1, taxing dividends at 20 percent rather than at the rate of regular income, and continuing the current generous estate tax provisions, people with incomes of over $1 million would receive an average tax cut of $108,500 according to the Tax Policy Center.
In a high-risk strategy Speaker Boehner decided to take this so-called “Plan B” to floor of the House for a vote on December 20. When conservative Republicans revolted, Speaker Boehner pulled the bill knowing that it would not pass. It is not yet clear what the impact of his failure to pass the bill will have on future talks with the President. Democrats and the White House are urging him to return to the negotiating table with the President.
See Citizens for Tax Justice report from December 20 comparing Speaker Boehner’s “Plan B” and the President’s original and December 17 proposals at: http://www.ctj.org/pdf/latestfiscalcliff.pdf.
The Real Cliff: Unemployment Insurance About to Expire, Leaving 2 Million With No Help
The House spectacle before the abrupt departure was remarkable both in showing what the majority wanted to do and what it didn’t care to tackle. Although 4 in 10 of the unemployed today have been out of work for more than six months (most for more than a year), and have run out of state unemployment benefits, the House took no action to continue the federal Emergency Unemployment Compensation program for the long-term jobless. It will expire at the end of December. Two million will be denied unemployment benefits right away, followed by another million by the end of the March in 2013. The proportion of the long-term unemployed has risen dramatically over the years. After the 1980’s recession, 26 percent of the unemployed were out of work six months or more. The President’s plan includes the extension of unemployment benefits for a year, at a cost of $33 billion.
Shrinking the Adjustment for Inflation: “The Chained CPI”
One of the most controversial provisions in President Obama’s deficit reduction package is a change in the way the Consumer Price Index (CPI) would be calculated for purposes of calculating benefits for Social Security, and also affecting many other low-income programs that rely on annual inflation adjustments for eligibility or benefit levels. In what ultimately turned out to be abortive negotiations with Speaker Boehner, the President responded to the demand that benefits to entitlement programs be cut by agreeing to this change, which is called the “chained CPI.” It reduces the inflation rate by assuming that when certain prices go up, consumers are likely to switch to other comparable but cheaper products. Some research questions whether the elderly, or low-income people generally are able to make such substitutions as easily as the population as a whole. According to the Center for Economic and Policy Research, after 10 years, the Chained CPI would result in a 3 percent cut in Social Security benefits, about 6 percent after 20 years, and nearly 9 percent after 30 years. For an average worker retiring at 65, this reduced measure of inflation would result in benefits being cut $1,130 a year at age 85. Women would be disproportionately affected, because they live longer and are more likely to be poor. The Administration’s Chained CPI proposal, which is estimated to save $130 billion over 10 years, does provide exemptions for low-income elderly and disabled making use of Supplemental Security Income (SSI), but that alone does not offer adequate protection to low-income people. If the revised calculation is applied to the federal poverty guidelines, it will lower the annual increases in the poverty line, which would be likely to reduce benefits or shrink eligibility for means-tested programs. Many progressive groups, including labor, have strenuously opposed making use of the Chained CPI.
SNAP in Farm Bill and House Bill
Prospects for a 5-year reauthorization of a farm bill including the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) before this Congress ends on January 2 has all but disappeared. There is not time for action on a separate bill and prospects for attaching it to the elusive larger deficit reduction package are fading. The full Senate passed a 5- year farm bill extension in June with $23 billion in savings over 10 years, including $4.5 billion in cuts to SNAP. In July the House Agriculture Committee approved bipartisan farm bill legislation with $35 billion in savings over 10 years, including $16 billion in cuts to SNAP. The House Republican leadership has refused to allow a floor vote to happen because some Republicans want deeper cuts to SNAP while many Democrats do not support any cuts to the program. The commodities provisions in the two bills that subsidize farmers also split members, more along geographic than party lines. The Senate bill tends to favor northern commodities like corn and soybeans and the House bill rice, peanuts and wheat grown in the southern states.
Absent a full reauthorization, there is faint hope that a shorter-term extension of the current farm bill might pass. The SNAP program will continue to operate uninterrupted without an extension of the full bill because the rules governing the program will not expire and funding was included in the continuing resolution through March 2013. However, some programs would be affected. Dairy subsidies would revert back to a 1949 law, likely doubling milk prices. Dairy products are a large portion of the Women, Infants and Children (WIC) federally-funded nutrition program, and the price increase would lessen the buying power of WIC recipients.
The Spending Reduction Act passed by the House on Thursday night included $32.3 billion in cuts to SNAP/food stamps. The House majority would return SNAP benefits to their old level of about $1.30 per meal, an amount judged by nutrition experts to be inadequate. While current law would have started that reduction in November of 2013, this bill moves it up to February. Recent analysis estimates that this cut will result in a loss of $8 – $10 per person per month. The House will also deny SNAP to 2 million people who now get benefits because their low incomes qualify them for programs such as Temporary Assistance for Needy Families. This change will also result in 280,000 low-income children losing free school meals. In addition, the House agreed to make it harder to streamline eligibility for SNAP benefits, which now can be received without additional documentation if certain households already qualify for Temporary Assistance for Needy Families (expected to cut assistance to 1.8 million individuals). This change will also result in 280,000 low-income children losing free school meals. These restrictions were estimated last spring to save $11.7 billion over 10 years. Further, this bill would reduce SNAP benefits to people who now receive a small benefit from the Low Income Home Energy Assistance Program, said last spring to reduce SNAP spending by over $14 billion. Despite this time of high unemployment, the House would drop certain federal spending for SNAP employment and training programs (saving about $3.1 billion over 10 years) and would end federal bonus payments to states to encourage good performance in administering SNAP.
Health Care Spending Reductions
The President’s most recent offer calls for $400 billion in savings in health care programs over 10 years, said to come mainly from Medicare, with relatively little from Medicaid (although details were not available). The House Spending Reduction Act keeps the $16 billion in Medicare cuts scheduled to take place as part of the automatic FY 2013 cuts imposed by the Budget Control Act ( 2011 legislation that set up the “sequestration” cuts to start in January 2013 if Congress could not agree on a deficit reduction plan). In addition, the House bill slashes health care premium subsidies under the Affordable Care Act for 350,000 people, and cut Medicaid funding to Puerto Rico and other territories even though Puerto Rico, despite its disproportionate poverty, receives far lower federal Medicaid payments than any state (a high of 35 percent in 2010; states receive no less than 50 percent of Medicaid costs). The amendment also allows states to make cuts in their Medicaid programs below the levels in place when the Affordable Care Act passed, which could reduce eligibility or benefits for millions of people. Further, it includes a number of funding cuts aimed at undermining the Affordable Care Act (the major new health care legislation now being implemented). These savings are estimated at $47.3 billion over ten years by the Congressional Budget Office.
The President’s plan is said to assume at least one-year funding for continued higher payment levels to physicians under Medicare. Their payments were supposed to be cut by Sustainable Growth Rate (SGR) reductions passed by Congress some years ago, but Congress has not been willing to implement these cuts.
President Obama has been emphatic in not wanting to undergo another crisis negotiation in which Republicans insist on spending reductions commensurate with increases in the debt ceiling. The debt ceiling is expected to be reached within the next month or two. If Congress does not authorize continued borrowing, the crisis would stall spending, spook federal bond-holders, with threats of catastrophe for our economy, according to people like Federal Reserve Chair Ben Bernanke. Holding spending on domestic priorities hostage to deeper and deeper cuts to get the debt ceiling increased would be very dangerous to human needs programs. Obama’s position initially would have reduced Congress’ role in debt ceiling increases permanently; more recent proposals have called for a two-year debt ceiling increase.
The President’s most recent offer called for cuts of $100 billion to defense and $100 billion to non-defense appropriations over 10 years, beyond the $1.5 trillion in cuts to these programs already set in motion over the next decade. These cuts are much lower than the approximately $1 trillion in additional Pentagon, domestic, and international program cuts that are now scheduled to start in January and continue over 10 years. Still, domestic appropriations are being cut deeply already, affecting education, housing, child care, WIC, Head Start, home energy assistance, and much more, and many groups oppose any further cuts. On the other hand, many military spending experts believe that much more could be cut from military spending than the $100 billion called for in the President’s plan.
As noted above, the House spending reduction bill cuts appropriations by another $19.1 billion in FY 2013 by lowering the appropriations cap by that amount. The bill also prohibits further military cuts.