NAIFA GovWatch

Congress Approves Debt Limit Agreement

Issue: Tax Reform

Date: August 2, 2011

Action Taken: On July 31, after two days of white-knuckle negotiations between President Obama, Vice President Biden, and GOP and Democratic leadership in both the House and Senate, an agreement to raise the debt ceiling and reduce the deficit has emerged.

On Monday evening the House passed a bill (S. 365) to raise the debt ceiling by a vote of 269 to 161. Today, the Senate approved the debt limit increase bill – by a vote of 74-26. The bill now goes to the President for signature.

The plan has significant implications for tax reform, and thus for issues of critical importance to NAIFA members and their clients.

The agreement contains several parts, including:

A combined increase in the debt limit that will total at least $2.1 trillion, enough to allow government borrowing until 2013. This provision delinks the debt ceiling from deficit reduction, thus removing the threat of default from deficit reduction initiatives
Spending cuts of approximately $1 trillion over a 10-year period that take effect immediately. The spending cuts do not affect Social Security, Medicare or Medicaid
A process for identifying and enacting an additional $1.5 trillion in deficit reduction measures, including tax and entitlement reform. It is this process that contains the issues of concern to us. The process involves creation of a special joint Congressional committee that will identify and recommend (by November 23) additional deficit reduction measures—including tax reform. Then, Congress will vote on the joint committee recommendations under a fast-track, procedurally-protected process. Congress would have to vote on the joint committee report by December 23, 2011.

Joint Committee of Congress—Implications for Tax Reform:

Congressional leadership will appoint 12 sitting lawmakers to the special joint Congressional committee, three Republicans and three Democrats from both the House and the Senate. The committee will craft a deficit reduction plan that is not limited in what it can consider—i.e., taxes, entitlement reforms, defense spending and discretionary spending are all fair game.

Many lawmakers expect the joint committee to recommend a tax reform plan that will reduce rates and broaden the base by repealing or reforming tax expenditures. Restrictions on Medigap insurance (prohibition against first dollar coverage and limits on benefits covering the first several thousand dollars of expenses, likely) are also expected to be among the issues the joint committee will consider. Another issue likely to be addressed by the joint committee is the potential for repeal of the CLASS Act. The plan will require the votes of seven of the committee’s 12 members, and a simple majority vote by both the House and Senate will be enough to pass (or defeat) the committee-recommended plan.

Should the committee fail to craft a plan, or should Congress defeat the plan recommended by the committee, the debt/deficit agreement contains “enforcement triggers.” They include:

Automatic across-the-board spending cuts that would take effect in 2013. The cuts would be split evenly between domestic and defense spending, including entitlements (although Medicare cuts would apply to providers only, not beneficiaries), OR
A process for considering/enacting a Constitutional amendment requiring a balanced budget, AND/OR
The potential for expiration of the “Bush tax cuts”—especially the top two rate brackets—that expire at the end of 2012 (income, capital gains, and dividends tax rates).

Additional information can be found in a section-by-section House Rules analysis of the bill.

Next Steps: Once Congress enacts this agreement, leadership will appoint the 12 members of the joint committee quickly. That committee will have just three and a half months to put together their $1.2+ trillion deficit reduction plan. Among their first decisions will be whether to include new tax revenues (whether or not in the context of tax reform). If they do decide to use tax revenue, they will need to decide how much, and whether to include their own tax reform plan or whether instead to instruct the tax-writing committees to fashion the plan—probably with a deadline. All of these decisions will have a profound impact on NAIFA’s mission to prevent adverse tax changes to life insurance, annuities, health and long-term care insurance, pensions and employer-provided benefits.

NAIFA Staff Contact: Diane Boyle, Vice President - Federal Government Relations; or Lillian Vogl, , Esq., Director - Federal Government Relations or Dani Kehoe, Of Counsel.

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