If Congress does nothing, a lot will happen at the beginning of 2013.  The Bush-era tax cuts and subsequent improvements will expire, with everyone paying higher income taxes. Close to $110 billion in spending cuts will be triggered, split evenly across the Pentagon and domestic and international programs.  Simply allowing all of this to take place and letting it continue for a year or more would likely push the country back into a recession. No one in Congress wants this.
President Obama and the Senate leadership want to continue the tax cuts on income up to $250,000, but to discontinue extra breaks on income above this amount.  This means everyone with income will continue to get a tax cut, including millionaires (they get it on their first $250,000 in income).  In addition, the Obama and Senate proposals would continue low-income tax credit improvements enacted in 2009, to prevent low-income workers with children from seeing a large increase in their taxes.  Republicans in the House and Senate have opposed allowing any of the tax cuts to expire – except for the low-income credit improvements.  In the tax cut bill (S. 3401) introduced in the Senate by Senators Hatch (R-UT) and McConnell (R-KY), millionaires will each average $164,000in tax reductions in FY 2013, but a full-time minimum wage earner with two children would see their Child Tax Credit reduced from $1,725 to $218.

Senate Majority Leader Reid (D-NV) has introduced the Middle Class Tax Cut Act (S. 3393), which would continue the tax cuts on income below $250,000 and maintain current law for the low-income tax credits.  Leader Reid is seeking an agreement with Minority Leader McConnell to bring both bills to the floor, with only a simple majority needed for passage, instead of 60 votes needed to shut off debate.  It is highly unlikely that McConnell will agree, since the Democrats will have at least 51 votes for Reid’s bill.  Without such an agreement, the Democrats will try to cut off debate on their bill, most likely on or about July 25.  They will not have the 60 votes needed for cloture (cut off debate), and the bill will not be able to move forward.

Will the Senate remain at loggerheads over the tax cuts until they expire at the end of this year?  Senator Murray (D-WA) gave a speech at the Brookings Institution on July 16 firmly stating that “…if we can’t get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle class families under the bus.”  Senator Murray is part of the Democratic party leadership in the Senate, and she is reflecting the stance of her party in the Senate and of President Obama.  They are willing to see the tax cuts expire, with the expectation that soon after the beginning of the year there will be further negotiations.  Instead of being accused of raising taxes, the action before Congress will then be to restore tax cuts for the vast majority of Americans.  Democrats hope that it will be easier at that point to avoid reinstating the upper-income tax cuts.

Those who wish to let the tax cuts for the top 2 percent expire have additional leverage.  They are insisting that the automatic across-the-board spending cuts scheduled to begin in January (called “sequestration”) should only be replaced by a balanced plan that includes fair sources of revenue.  It is estimated that allowing the tax cuts for the highest 2 percent to expire will bring in $70 – $80 billion in 2013.  That alone is not sufficient to replace the sequestration cuts, but it is a good start.

Some have begun speculating on the way back from the edge of the cliff.  Senator Lindsey Graham (R-SC) suggested that sequestration could be delayed for a year by replacing it with a combination of revenues and spending cuts similar to a “mini-Bowles-Simpson” (the bipartisan deficit reduction plan created by the co-chairs of the not too “Supercommittee,” which failed to convince Congress to go along with its plan, thus triggering the impending set of automatic cuts to military and domestic appropriations).  “Let’s take the concept for one year and apply it on the defense side,” Graham was quoted in CQ.  Only replacing the military cuts would be a non-starter for many Democrats.  Senator Murray, in her Brookings speech, said “We are also not going to allow just the defense cuts to be replaced without addressing the domestic spending cuts that would be devastating to the middle class.”  The Obama Administration was also reported to be floating a proposal to delay the across-the-board cuts for six months, paid for by letting the tax cuts for the top 2 percent expire while everyone else’s tax cuts would be extended for a year.

Senator Murray co-sponsored with Senator McCain (R-AZ) a successful amendment added to the Senate farm bill that called for the Administration to report on the consequences of all the sequestration cuts, not just those to the Pentagon.  The House followed suit on July 18 with H.R. 5872, the Sequester Transparency Act, which calls for simpler reporting from the Administration on the impact of the sequester.  It passed 414-2. Whether or not Congress works out the differences to enact these reporting requirements into law, the Administration has been gradually supplying some estimates of sequestration’s impact.  In response to a request by Rep. Edward Markey (D-MA), HHS sent a letter with the number of people affected in a few programs.  For example, 100,000 children would lose Head Start; 80,000 fewer children would receive child care assistance; 169,000 fewer individuals would be admitted to substance abuse treatment; and 14,200 fewer homeless people would receive assistance.  In addition, Secretary of Education Arne Duncan is scheduled to testify on July 25 in a Senate Labor-HHS-Ed Appropriations subcommittee hearing to probe the impact on education.

While powerful players including defense contractors and former Vice President Cheney have been making the rounds on the Hill to urge Congress to prevent the sequester’s $55 billion in military cuts from taking effect, advocates for domestic priorities have also been speaking out.  Nearly 3,000 organizations nationwide signed aletter to Congress opposing the domestic and international cuts.  The letter was circulated by a coalition called the NDD (non-defense discretionary) Summit; this coalition, which includes groups concerned with health, education, the environment, consumer protection, scientific research, housing, and many more areas with federal appropriations, has scheduled a rally featuring Senate Appropriations Chair Tom Harkin (D-IA) at the capitol on July 25.

As the deadlines close in for the tax and spending cuts, Congress knows what it doesn’t like.  But agreement to prevent those bad outcomes remains elusive, at least for now.

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