Virginian Pilot - Is Another Government/Financial Meltdown on Horizon?

News Article

By Bill Bartel

As Washington grows more preoccupied with elections and less interested in compromise, the economy is headed for a train wreck at the end of the year that will affect just about everyone.

Popular tax breaks for families, temporary cuts in Social Security and income taxes, and an array of other tax breaks will expire Dec. 31. At the same time, the government will be required to cut tens of billions a year, taking a particularly deep swipe at defense spending vital to the Hampton Roads economy.

In all, more than $7 trillion in tax increases and spending cuts spread across 10 years will begin to take effect Jan. 1.

If Congress and President Barack Obama fail to act, all of these changes will happen automatically. Most were locked in place by federal legislators and the president in separate bills that at various times were passed to temporarily cut taxes, help the unemployed, pump more money into the economy or - as was the case last summer - set up as a doomsday threat to provoke legislative action.

To stop the changes or lessen their impact, Democrats and Republicans in Congress, along with the White House, will have to do something that has proved difficult for most of the past three years - find common ground.
Doing nothing is fiscally dangerous, the nonpartisan Congressional Budget Office warned last week. The collision of tax increases and spending cuts will be too big and too sudden a jolt to the economy, and could trigger a new recession, according to a CBO report released Tuesday.

"The increases in taxes and decreases in government benefits will lead households to cut back their purchases of goods and services, and the decline in government programs will lead to further cuts in services," according to the report. "The drop in demand will, in turn, lead businesses to lower their production, employment and investment."

But as the presidential and congressional election campaigns grow more intense, elected officials are less willing to reach any compromises that might help their political opponents.

The consensus among many legislators and expert observers is that - barring some cataclysmic economic emergency - Congress won't make a meaningful attempt to avert the cuts or tax increases until after the Nov. 6 elections.
"The sad political reality is that politicians think that they can take the year off," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan think tank that lobbies for spending and deficit reforms.
If they wait until after the polls close, lawmakers will have eight weeks to work out a deal before these changes automatically take effect:
Higher payroll taxes. Workers' share of the Social Security tax, which was temporarily reduced for two years to stimulate consumer spending, will increase by 2 percentage points, to 6.2 percent. This means, for example, that someone with a taxable income of $50,000 will pay $19 more a week.

The end of Bush tax cuts. An array of tax breaks, first passed during President George W. Bush's administration, will expire. For starters, income tax rates will rise. The lowest rate will be 15 percent instead of 10 percent. All other tax brackets will rise 3 percentage points. In addition, many married people filing jointly will pay higher taxes. Taxes on capital gains will increase. Lower-income people will have to start paying a 10 percent tax on capital gains, and all others will see their capital gains tax rise to 20 percent from 15 percent.

The popular $1,000 annual tax credit given to parents for every qualified child under age 17 will be cut to $500.

$1 trillion in budget cuts. Under terms of legislation approved last summer, the mandatory spending cuts spread over 10 years will begin with roughly half taken from defense and half from discretionary spending.

Several other changes, including significantly smaller Medicare payments for doctors and a shortening of unemployment benefits, also will begin in January.
If all this weren't enough, Congress is expected to be asked to approve raising the government debt ceiling. Until recent years, such debt increases were not controversial.

That view has changed with the ballooning of deficit spending due in part to the 10 years of war in Iraq and Afghanistan, unfunded tax breaks such as the Bush tax cuts, the rising cost of entitlements, and stimulus spending intended to soften the effect of the recent recession.

The debt limit - now $16.4 trillion - is expected to top out later this year or early in 2013 as Washington continues to borrow substantial amounts every year to pay its bills.

The desire to reduce the national debt - or at least halt its rise - has become intertwined with the ideological debate about what government should be providing and who should be paying the bills.

Many legislators, most recently House Speaker John Boehner, have said they won't consider raising the limit again without linking it to deep spending cuts.
This year, the federal government will spend $3.63 trillion dollars, with about 21 percent of the money going to defense, according to the Committee for a Responsible Federal Budget.

Washington will borrow a third of that money - $1.17 trillion - because it's not taking in enough revenue to cover its obligations. As a result, the government accumulates about $3.2 billion in new debt every day.

If that number is too large to grasp, consider that in the time it takes to read this sentence, the government is borrowing about $370,000, which is $180,000 more than the median price of a home in Hampton Roads.
Political leaders and economists agree that this level of debt growth is not sustainable. It is analogous to a family paying its bills year after year by putting a third of what it spends on credit cards. Rather than paying down the balance, the family simply raises its credit limit.

In last summer's debate to raise the debt ceiling, Republicans and Democrats agreed to a larger limit but struck a bargain. The deal included setting up a congressional "super committee" that was to find at least $1.2 trillion in budget cuts or new revenues over 10 years to reduce debt growth.

To force the agreement, Congress put in a poison pill: If the panel couldn't make a deal by late fall, $1 trillion dollars was to be cut - roughly half coming from defense - during a 10-year period that will begin in January. The super committee failed, and big cuts are coming.

Members of Congress, particularly those from defense-rich regions such as Hampton Roads and Northern Virginia, are sounding the alarm that deep cuts will brutalize the local economy - particularly when they come at the same time the Obama administration is pushing for a separate $487 billion in Pentagon cuts over a decade.

Professor Stephen Fuller of George Mason University calculated that defense spending accounts for 900,000 jobs in Virginia - or 19 percent of the state's workforce.

U.S. Rep. Scott Rigell, a Virginia Beach Republican, said he's frustrated that Congress and the Obama administration aren't focusing more intensely this summer on finding common ground.

"There's no reason for us to wait," said Rigell, who has urged Congress to stay in session in August rather than take a monthlong recess.

He and Hampton Roads' other two GOP congressmen, who are all members of the House Armed Services Committee, argue that the House, where their party has a majority, has offered a budget plan. It's a proposal that cuts many social programs to avoid the deep defense cuts and does not raise taxes.

The plan isn't perfect, but it's a good start, said U.S. Rep. Rob Wittman, R-Westmoreland County.

U.S. Rep. Randy Forbes, a Republican from Chesapeake, said Democrats who control the Senate have to pass their own plan.

"Until they put some legislation out there, there's no vehicle to get to the table to talk through this," Forbes said, adding that raising taxes is not an option.
Rigell said it's a matter of determining what's most important.

"Here are the priorities in order. First, provide for the national defense," Rigell said. "And then meet the obligations that we have to Social Security and Medicare, and then you back into everything else."

Rigell said in January that he no longer stands by a pledge to never raise taxes, particularly if it's necessary as part of federal budget and tax reforms.
He said recently he won't know whether he would support raising new revenues until he can judge a specific plan - "something I can hold in my hand."

However, U.S. Rep. Bobby Scott, D-Newport News, argues that new revenues are necessary. He favors a Congressional Black Caucus proposal that keeps intact many social programs and expands spending on infrastructure improvements and education. The proposal also keeps in place the Bush tax cuts for all but wealthy Americans.

The caucus' budget proposes to raise more money by levying more taxes on vacation homes, stock transactions and capital gains, and by closing many corporate tax loopholes.

Waiting in the wings, should some unforeseen economic crisis provoke early congressional action, are U.S. Sen. Mark Warner and a bipartisan group of colleagues.

"We are ready with Plan B," said Warner, a Virginia Democrat.
Along with a legislative group known as the Gang of Six, Warner has long pushed for a major deficit/budget reform package that would cut the deficit by a combination of spending cuts - including to defense - rewriting tax codes to broaden the tax base and overhauling entitlement programs.

Warner expects there will be attempts to find quick fixes near year's end that would temporarily hold off tax increases and avoid the automatic $1 trillion in cuts for a year or more without making an effort to address the deeper deficit spending problem.

"I'm going to oppose all those," he said.

Warner said it may be possible to at least begin reforms if legislators commit themselves to reaching a compromise in November and December. The key, he said, will be ensuring that the economic pain is shared by everyone, not just certain groups.

"Both sides are going to have to be willing to get out of their foxholes," he said.
MacGuineas said it'll be tough to get anything substantial accomplished during the lame-duck session when Congress is a mix of lawmakers who will be back in January and others who either didn't run for another term or lost their re-election bids.

"I think it's too big for the lame duck," she said. "It's hard to imagine how they could do it."

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