Congress will return on January 5th to battle over the budget for much of the year. The new House Republican majority (242R-193D) won’t wait for the normal budget process to send the Senate weekly spending cuts, which the Senate won’t take up. President Obama’s State of the Union address (expected on January 25th) will be the next focal point, as will his FY12 Budget to be presented February 14th. The Budget Committees will produce resolutions that might pass their respective houses, but a compromise seems unlikely. The government is funded only through March 4th, so another continuing resolution will be required. The ultimate showdown will occur over extending the $14.294 trillion debt limit, probably by early March.
House Republicans will do away with the Gephardt rule that automatically passed a debt limit increase as part of the budget resolution. From now on, the House will have to explicitly vote on every debt limit increase. Since many Republicans and a few Democrats have long campaigned on never voting for a debt limit increase, passing one will be very difficult indeed. With the pre-Christmas $856 b. extension of the Bush tax cuts and extended unemployment benefits, a debt limit increase will be required in March or so according to an informal CBO estimate. Speaker John Boehner (R-OH) will face a big challenge coming up with enough spending cuts or other sweeteners to pass a debt limit increase or more likely a series of short-term debt limit increases that could prove disruptive to the Treasury market, as was the case leading up to the debt limit increases of 6/28/02, 3/29/96, 10/28/90, 8/10/87, 8/21/86, 12/12/85, 11/14/85, 10/13/84, 7/6/84, and 5/25/84. The Senate (53D-47R) will probably have an easier, but still difficult time passing a debt limit increase. Looking to the 2012 election, 23 Senate Democrats will defend their seats with three rated by Charlie Cook as toss-ups and four as leaning versus only 10 Republicans up for reelection with only two rated as toss-ups and none as leaning. Some vulnerable Senate Democrats may not vote for a debt limit increase.
“CUTGO” will replace of “PAYGO.” The current “pay-as-you-go” limit on mandatory (entitlement) spending would be replaced with “cut-as-you go,” so tax increases could not pay for increased entitlement spending. Reconciliation could not be used to increase direct spending. A point of order would be established against any bill, amendment, or conference report that raises mandatory spending by more than $5 b.
Other House rules changes would require that all bills and resolutions contain a statement citing the specific authority in the Constitution authorizing their enactment and would increase transparency by establishing a point of order against consideration of any bill or resolution not available for three calendar days, a 3-day minimum notice for committee meetings, a 24-hour minimum electronic posting of mark-up language and amendments and 48 hours for posting votes.
Weekly Republican House spending cuts will be ignored by Senate Democrats. House Republicans have vowed not to wait for the normal budget process to start sending the Senate weekly spending cut bills to reduce federal spending by $100 b. in the first year. Senate Majority Leader Harry Reid (D-NV) is unlikely to take them up.
President Obama’s State of the Union address and FY12 Budget. Although no date has been set yet, 8 PM Tuesday, January 25th is likely for President Obama to address Congress and the nation. Any new budget initiatives would be described, and some of them will probably be leaked to the media shortly before. He has consistently proposed significant spending cuts in both his FY10 and FY11 budgets, but nothing near what Republicans will demand. The biggest question is my mind is whether he will venture a tax reform proposal. Treasury is working on options.
Tax reform is a top priority for House Republicans. Ways and Means Chair Dave Camp (R-MI) wants to dramatically lower income and payroll tax rates and pay for it by eliminating loopholes as detailed in this December 23rd George Will column. It will be quite a challenge to overcome all the opposition that would generate from charities, real estate, health care, retirees, and many more, especially on a revenue neutral basis. Recall that the Tax Reform Act of 1986 depended crucially on large business tax increases. If President Obama surprises us with his own tax reform proposal, which Treasury is reportedly working on, there’s a chance it could pass the House this year. Getting anything like the House bill through the Senate within the next two years would be very difficult. U.S. multinationals are very intent on lowering the 35% top corporate tax rate and moving toward a territorial tax regime, but achieving that without losing revenue will probably leave too many net losers to pass Congress.
Health reform repeal will pass the House, but not the Senate. Spending cuts to cripple the implementation of health reform won’t pass the Senate either. There are changes that both sides might agree upon, but passing such a bill would be quite difficult because killer amendments would be hard to ward off.
Health reform future is also in the hands of the Supreme Court. It’s not clear whether the Supreme Court will expedite its consideration of conflicting district court health reform rulings that have yet to wind their way through the appeals process. Normally, it would take at least a year or two for a case to reach the Supreme Court. Many, but hardly all, constitutional scholars think the Supreme Court would not strike down the mandate for individuals to buy health insurance, but that’s not much reassurance given how massive an undertaking health reform implementation is.