Debt Limit Showdown in March and More

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.

Here’s a summary of the proposed rules changes, and here’s the legislative language.

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.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

2 Comments on Debt Limit Showdown in March and More

  1. Subject: Raising the Federal Debt Ceiling

    We now have the new Speaker of the House talking about possibly refusing to raise the debt ceiling if the Republican Party does not get its’ way.

    The Republican Party spent seven years putting members of the Armed Forces into a very difficult and expensive war in two foreign with thousands of U.S. of our finest fighting men and women losing their lives, and tens of thousands coming home with a wide array of very serious injuries.

    The Republicans borrowed the entire costs of combat operations for almost seven years and refused to put them into the proposed annual Federal budgets because they said they did not know what it would cost. They covered the costs at the end of each fiscal year in a pork-laden emergency appropriation bill.

    The Republicans opposing increasing the debt limit are members of the political party that reduced taxes in 2001 and 2003 while fighting two wars, resulting in reduced Federal tax revenues of approximately $4 Trillion Dollars through FY 2010. The Republicans opposing increasing the debt limit diligently worked with the President to extend the expiring tax cuts for another two years which will reduce estimated Federal tax revenues by another $950 Billion Dollars.

    Republicans now propose to offset the $5 Trillion Dollars of lost tax revenues because they deliberately cut taxes below what they were actually spending on the backs of retirees, veterans, and members of the Armed Forces. The Republicans now tell America’s retirees that Social Security and Medicare benefits should be means tested, reduced, and possibly eliminated. They ignore the Trillions of Dollars that America’s employees and their employers paid in FICA payroll taxes for the employees’ entire working careers.

    The Republicans who allowed our nation to fight unfunded wars are now proposing reducing the retirement pay and medical benefits for members of the Armed Forces.

    I consider it a privilege to be able to pay Federal income taxes for more than 50 years in order to live in a country that represents a beacon of Liberty to the entire world and works vigorously to provide everyone with the opportunity to reach their goals. I also considered it a privilege to serve as a member of the Armed Forces.

    The refusal by Speaker Boehner and the Republicans to raise the debt ceiling is difficult to understand since the Republicans are responsible for $5 Trillion Dollars of popular, but unfunded, $1.5 Trillion for two wars being fought with borrowed money, an estimated $400 Billion for an unfunded Medicare Rx plan, $700-800 Billion Dollars for the bank bailouts, plus paying Medicare Advantage plans 13% per person than Medicare Parts A and B spend per person.

    The Federal debt was approximately $2 Trillion when President Bush came into office. The Republican Party appears to be directly responsible for an additional $7 Trillion Dollars for unfunded tax cuts, unfunded military operations, unfunded Medicare Rx plan, unfunded Medicare Advantage outlays, and unfunded bank bailouts. Pres. Obama is responsible for approximately 2 Trillion Dollars. In short, the pyromaniac is blaming the fire department for not arriving promptly.

    If Rep. Boehner and the Republicans feel they should not increase the deficit to pay for the Federal government services legislated, but not adequately funded by Congress, then perhaps I and every other retiree, along with every veteran, and every employee and employer should simply adjust their withholding amounts for Federal income tax and Quarterly Estimated Payments (for taxes) and FICA payroll taxes down to zero until we get Mr. Boehner’s undivided attention.

  2. The Republican idea of reducing the retirement pay and medical benefits for members of the Armed Forces seems really like a paradox and it only shows the irresponsible approach they have promoted thus far ignoring the needs of ordinary people while devoting all their energy to gain back their political power.

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