The House and Senate have passed and the President has signed the Budget Control Act, which will significantly alter the context in which deficit reduction, spending restraint and tax reform will be fought out during the 112th Congress. The House approved the bill by a bipartisan vote of 269-161 and the Senate by a margin of 74-26.
The Budget Control Act will:
- Institute immediate spending cuts and cap future discretionary spending to save $917 billion,
- Enable a debt limit increase of $900 billion (through February 2012),
- Require the House and Senate to vote on a balanced budget amendment by the end of 2011,
- Establish a joint congressional committee and expedited legislative process to achieve $1.2 to $1.5 trillion in additional deficit reduction,
- Enable the President to request up to an additional $1.5 trillion debt limit increase (through early 2013) if the joint committee’s framework is implemented or the constitutional amendment is sent to the states for ratification and
- In the event the joint committee’s framework is not adopted, enable the President to alternatively request a $1.2 trillion debt limit increase that would happen along with $1.2 trillion in across-the-board spending cuts equally split between defense and non-defense programs (including Medicare)
With regard to revenue, Republican leaders noted the lack of any tax increases in the package and argued that the design of the joint committee ensures that future tax increases will not result either. CBO uses a current law baseline, which assumes that the 2010 Tax Act will expire at the end of 2012. As a result, any changes to affected expiring tax policy, such as extending the tax cuts for the middle class or instituting a 45% estate tax rate, would actually be viewed as increasing the deficit. Consequently, many congressional Republicans believe the joint committee will have no choice but to ignore tax policy altogether and only cut spending.
However, White House Press Secretary Jay Carney and Republican Presidential Candidate Mitt Romney argued that the deal could allow for revenue increases, which is technically true. Nothing would stop the joint committee from counting other changes in tax policy unaffected by expiration of the 2010 Tax Act as deficit reduction, such as eliminating valuation discounts, restricting grantor-retained annuity trusts, targeting carried interest or challenging corporate LIFO accounting methods. Congressional Republicans counter that the makeup of the committee – an equal number from each party – will enable them to stop tax increases in any form. House Republicans further state that the Republican-controlled House will not pass legislation that includes tax increases.
As the joint committee begins its work, it is likely that Democrats will continue to insist upon and Republicans continue to oppose revenue increases as part of the next phase of deficit reduction. While it is less likely that the questions of estate tax rate, exemption, state deductibility and portability would be affected by the joint committee because of the current law baseline, other priorities like valuation discounts and GRATs are probably at higher risk.
With the new process outlined in the bill, here are some important deadlines as Congress looks to achieve $1.2 to $1.5 trillion in additional deficit reduction in the months ahead:
- August 16 – Appointment of twelve members of the joint committee (three from each chamber legislative caucus)
- Mid-September – First meeting of the joint committee
- October 14 – House and Senate committee recommendations for consideration by the joint committee (Senate Finance and House Ways and Means Committees will be important influencers on tax policy)
- November 23 – Joint committee vote on deficit reduction package
- December 23 – House and Senate votes on deficit reduction package
- December 31 – House and Senate votes on balanced budget amendment to the Constitution
- With action on the Budget Control Act complete, Congress has adjourned for the August recess.