With the 2012 elections over, lawmakers and the administration will now turn all of their attention to addressing the major fiscal decisions ahead, including whether or not to extend the expiring Bush-era tax cuts and how to avoid the impending sequester of discretionary funds in January 2013. The Budget Control Act of 2011 (BCA) requires the sequestration of discretionary funds in FY13, which means making across-the-board cuts, to achieve a $1.2 trillion reduction in the deficit over a 10-year period.
Congress reconvened on November 13, 2012 for the “lame duck” session and is expected to immediately address alternative proposals avoiding sequestration and addressing the deficit.
There is bipartisan agreement that sequestration is not the appropriate way to achieve deficit reduction; however, there is no consensus on how to achieve the desired $1.2 trillion in savings.
The President is expected to release an alternative deficit reduction framework very shortly that would replace sequestration. On November 9, 2012, the President made a public statement that he believes taxes should be raised for individuals earning above $200,000 and families earning above $250,000 annually.
The president also said that he is pleased that Speaker Boehner now agrees with him that revenue will need to be part of the fiscal solution. The president’s position is supported by Senate Democrats but is in contrast to the position of many House Republicans, who hold that there should be no tax increases.
In addition to the administration’s proposal, Congressional sequestration replacement plans are also expected during the lame duck session. A group of senators known as the Gang of Eight met throughout fall recess to develop a framework for deficit reduction, and other senators are developing proposals of their own.
Congress and the administration have a short period of time to devise a set of solutions to these fiscal challenges. Congress is only scheduled to be in session through the week of December 10, 2012, tax cuts expire at the end of 2012 and sequestration cuts are scheduled to take effect January 2, 2012. It is not clear that Congress will succeed in devising a passable plan before the end of the 2012.
Private organizations and Members of Congress have characterized the combination of sequestration and expiring tax cuts as a “fiscal cliff” that would cause the nation to plunge into immediate financial distress. The Congressional Budget Office (CBO) issued a report November 8, 2012 saying that the fiscal tightening that could occur at the end of the year would cause gross domestic product (GDP) to decline by .05% in 2013 and cause unemployment to increase to 9.1%.
One analysis suggests that even if sequestration takes place, there will be time for Congress to take action. The Center on Budget and Policy Priorities (CBPP) believes that the country is heading not to a fiscal cliff, but a “fiscal slope,” in January 2013. CBPP claims that even if lawmakers have not created a plan by the end of the year that they would still have time to devise a comprehensive plan in order to avoid economic hardship. This would be preferable, says CBPP, to simply extending tax cuts in order to prevent a perceived cliff effect which would not in actuality occur immediately