Super Committee Fails but Tax Reform Issues Continue

On November 21, the Joint Select Committee on Deficit Reduction (the Super Committee) announced it could not reach agreement by its statutory November 23 deadline. Thus, the Super Committee failed to present to Congress a procedurally protected deficit reduction plan that would avoid $1.2 trillion in automatic spending cuts that take effect in 2013.

Congress now has until the end of 2012 to repeal the law that triggers those automatic cuts—half of which come from defense spending and the other half primarily from discretionary spending. Insiders believe repeal is possible only if Congress crafts an alternative way to reduce the deficit by $1.2 trillion. President Obama has already promised to veto any attempt to repeal the automatic cuts unless Congress enacts a substitute for them.

Congress may try to repeal the sequester (the automatic spending cuts that are the result of the Super Committee’s failure) prior to year-end. In addition, lawmakers have to deal with: 

• Social Security Payroll Tax Cut: The 2011 Social Security payroll tax cut expires December 31. To fail to extend it would result in a tax increase for lower and middle income Americans. There is bipartisan support for extending the tax cut (and potentially expanding it to include relief for employers), but no apparent agreement on how to offset the cost.

• Funding the Government: The government is funded only through December 18, 2011. Congress must agree on funding authority for the rest of fiscal year 2012 before midnight December 18.

• Tax Extenders: More than 100 tax rules expire at the end of this year. Congress will have to decide whether and how to extend them, and how to offset the cost of extension.

• NFIP, FAA, Highway Fund, “Doc Fix:” Prior to January 1, Congress must reauthorize the National Flood Insurance Program, the Federal Aviation Administration, transportation taxes, and the formula by which doctors are paid for treating Medicare patients. Revenue is as much a part of the problem of crafting enactable legislation as the underlying substance of each issue.

• Extended Unemployment Benefits: A decision on whether to extend unemployment benefits that go beyond 26 weeks must also be reached by year-end. Again, whether and how to offset the cost of such an extension is controversial.

It doesn’t get easier next year. In addition to the sequester, by 12/31/12 Congress is either likely to or must deal with:

• Tax Reform: Many lawmakers—among them key tax writers and House and Senate leaders—believe fundamental tax reform is a key to solving the problem of managing the deficit. They view tax reform as necessary for economic growth, for jobs creation, for fairness, and for dealing with the current income, capital gains and dividends tax rate structure that expires at year-end. Consequently, tax reform is likely to top the Congressional agenda next year, even though it no longer has the procedural (filibuster and amendments) protections it would have had if it had been part of a Super Committee plan.

• “Bush” Tax Cuts: Without legislative intervention, income, capital gains and dividend tax rates revert to their pre-EGTRRA 2001 levels as of January 1, 2013. That would mean a 20 percent capital gains rate, a top income tax rate of 39.6 percent, and dividends taxed at ordinary income tax rates—i.e., potentially increasing from the current 15 percent rate to 39.6 percent for top-bracket taxpayers.

• Debt Ceiling: The nightmare of last summer’s debt ceiling debate—which resulted in the Budget Control Act which created the Super Committee that just failed—could repeat. Current authority to increase the debt ceiling is likely to run out before 2012 ends.

• AMT: The alternative minimum tax once again needs “patching” (or reforming) to avoid entrapping millions more middle income taxpayers.

The partisan divide that doomed the Super Committee—and the Obama-Boehner negotiation, the Biden Group, the Gang of Six, and the President’s Deficit Reduction Commission—will make each of the remaining 2011 issues and the 2012 issues just as difficult. And, because lawmakers widely view a reformed tax code as a big part of the solution, tax reform will permeate all these debates, adding ever more pressure to re-craft the U.S. system of taxation.

Adding to the intensity of the upcoming year is the belief—held by both parties—that ultimately the key issue—taxes—will be decided by the voters in the November 2012 elections. Tax reform, deficit reduction, spending restraint, entitlement reform, and all other issues will be battled out against the backdrop of a presidential as well as Congressional election year.

Despite the Super Committee’s failure—or perhaps because of it—from now through November, 2012 will be increasingly intense.

NAIFA Staff Contact: Diane Boyle, Vice President – Federal Government Relations, at (703) 770-8252; or Lillian Vogl, Director – Federal Government Relations, at (703) 770-8155.