May 3, 2010
NAIFA’s Unique Franchise…voters, taxpayers, job creators in every state and district.

Deficit Reduction Commission Takes Shape

On April 27, the President’s deficit reduction commission (the National Commission on Fiscal Responsibility and Reform) held its first meeting.  With “everything on the table,” the 18-member commission, chaired by former Clinton White House Chief of Staff Erskine Bowles and former Senate Republican Whip Alan Simpson (R-WY), is supposed to report back by December 1 its recommendations designed to shrink future budget deficits. Cynics note the deadline occurs four weeks after the November elections. 

The meeting was open to the public but since it was held in the Roosevelt Room of the White House—a few steps from the Oval Office—few outsiders (if any) actually attended. President Obama opened the nearly three hour session by reviewing the effect the recession has had on increasing the federal deficit, the size of the deficit when he took office ($1.3 trillion), the additions to the deficit from the stimulus measures adopted over the last year, and the steps taken so far to reduce the deficit, including the adoption of pay-as-you-go legislation that will require future tax cuts or spending increases to be offset by spending cuts or tax increases.  However, the President reiterated that past deficit reduction steps, while significant, are not sufficient to address our nation’s fundamental fiscal problem (i.e., the growing gap between what the government spends and what the government raises in revenue).

President Obama stated that in order to allow the commission to do its job, “Everything has to be on the table.”  The President said this means that he will not respond to expected media questions about whether particular options have been ruled out or ruled in.  An example the President may have had in mind was the recent controversy over the possibility of adopting a value-added tax (VAT): Obama economic advisor and former Federal Reserve Chairman Paul Volcker spoke publicly about the benefits of such a tax; the press picked up on his remarks; Senator John McCain (R-AZ) offered an anti-VAT resolution on the Senate floor that passed 85-13; Senate Majority Leader Harry Reid (D-NV) dismissed VAT discussion as something generated by Republicans; White House officials said the President has not proposed and is not considering a VAT; and then finally, the President in an interview positioned himself as open to considering a VAT among other options.

Among those testifying at the meeting was current Federal Reserve Chairman Ben Bernanke, who said that without further policy actions, “the federal budget appears set to remain on an unsustainable path.”  Bernanke pointed to rapidly rising health-care costs and the aging U.S. population as being among the primary forces putting upward pressure on the deficit, and said that “controlling healthcare costs … will be critical….” 

Bernanke also focused on the need to address tax revenues.  He said that, for fiscal sustainability, whatever level of federal spending is chosen, revenues must be sufficient to match it in the long run.   He said that, “economic vitality is enhanced when taxes are not excessive and are collected through a system that is economically efficient, equitable, and transparent,” but added that “a broad consensus exists that the U.S. tax code does not satisfy these criteria and is in need of reform.”

Bernanke’s cautionary comments on the difficulty of achieving long-term fiscal stability and the consequences of failing to do so came on the same day that ratings agencies downgraded the bonds of Portugal and reduced the bonds of Greece to junk status. Predictably, financial markets around the world reacted badly to that news.

Other speakers talked about the need to consider the impact of so-called “tax expenditures” on the ability of the tax law to produce necessary revenue. (The term “tax expenditure” is what tax policymakers call anything that could be taxed but isn’t—such as life insurance and annuity inside build-up or death proceeds.) They recommended a review of various ongoing tax credits and deductions (citing as examples the employer-provided health insurance exclusion and home mortgage interest deduction) that while popular, are extremely expensive.  A significant portion of items on the current list of tax expenditures relate to life insurance industry products and services. It is entirely possible that these tax expenditures could be considered by the deficit commission. 

NAIFA will keep members up-to-date with commission activities.

NAIFA Staff Contact: Michael Kerley, Senior Vice President – Federal Government Relations, at (703) 770-8155; or Timothy Hanford, NAIFA Outside Counsel.