Saturday, July 2, 2011

Deficit battle shaping up as GOP victory

Credit: Reuters/Jim Young

Regardless of any tax concessions President Obama achieves, the end result would favor Republican goals of cutting spending and government services.

Even as the political battle mounts over federal spending, the end result for federal policy is already visible — and clearly favors Republican goals of deep spending cuts and drastically fewer government services.

President Obama entered the fray last week to insist that federal deficits can't be reduced through spending reductions alone. Federal tax revenue also must rise as part of whatever deficit reduction package Congress approves this summer, he said. Obama has been pushing to end a series of what he calls tax loopholes and tax breaks for the rich.

But even if Obama were to gain all the tax-law changes he wants, new revenue would make up only about 15 cents of each dollar in deficit reduction in the package. An agreement by the Republicans to accept new revenue would be a political victory for Obama because "no new taxes" has been such an article of faith for the GOP.

But substantively, budget experts note, the plan would still be dominated by cuts to government programs, many of them longtime Democratic priorities, such as Medicaid and federal employee pensions.

Acquiescing to GOP demands would be the third major compromise for Democrats in the past year — a point of considerable frustration for the party's liberal base. Despite Democratic opposition, Congress voted in December to extend the Bush-era tax breaks for the wealthiest Americans and agreed this spring to steep budget reductions to avert a federal government shutdown.

Some Democrats believe Obama set the stage for the current situation by opening negotiations on deficit reduction this spring with a proposal that contained a 3-to-1 ratio between spending reductions and tax increases. Administration officials defend that move, saying the president began discussions at what one senior official called a "realistic starting point," not one designed to maximize his bargaining position.

The current debate involves two issues: As of Aug. 2, the Treasury Department says, the government will hit its statutory ceiling for borrowing money. Administration officials and congressional leaders agree that a failure to raise the ceiling could cause economic chaos by undermining faith in the government's creditworthiness.

Republicans have insisted they will not approve a debt-ceiling increase without agreement on a major reduction in the government's long-term deficit, although their spending plan would also require raising the debt ceiling. They have demanded that deficit cuts match the new borrowing authority, dollar-for-dollar, and have vowed to oppose any increase in tax revenue. About $2.4 trillion in new borrowing capacity would be needed through 2012, Treasury officials say.

Obama has intensified his efforts in recent days, campaigning for what he terms a more "balanced" approach as negotiations enter their final weeks. The White House wants an agreement well before the Aug. 2 deadline.

"This is not just a numbers debate," Obama said Thursday in Philadelphia. "This is a values debate."

GOP leaders have seized on the unpopular debt ceiling vote as an opportunity to further their goal of reducing the size and scope of government.

Democrats have largely accepted more than $1 trillion in spending reductions as a signal that they are willing to make difficult choices — including, a Democratic official said, $200 billion in cuts to Medicare and Medicaid.

Details of such cuts are still unknown, but they will slice across every domestic agency, reducing funds for education, transportation, health and welfare. The Pentagon may be spared under the GOP plan.

Even some Republicans worry about the scope of reductions, which could affect up to $35 billion in agricultural subsidies in farm states, and billions more in infrastructure projects or social services in home districts.

However, few Republicans have spoken out, many fearing potential primary election challenges by conservative organizations and "tea party" activists.

The White House is seeking about $300 billion in new revenue over the decade, less than half the amount it sought when Obama first outlined his goals last spring, based on the proposals in negotiations.

Obama once targeted the wealthiest Americans, the top 2% who earn beyond $200,000 a year, proposing to cap their income tax deductions.

But weeks of closed-door talks have diminished that goal. Now, even a deduction cap on those Americans earning beyond $500,000 a year — just 1.3 million Americans, fewer than 1% of all taxpayers — has been dashed. The latest offer on the table would be a more limited cap, to generate an additional $130 billion.

With just a few weeks remaining to reach an agreement, Democrats now are fighting mainly for the most populist tax reforms: ending tax subsidies for oil and gas companies, eliminating a tax break for hedge fund managers, closing an ethanol loophole and changing the way businesses write off inventory, according to those familiar with the talks.

In an appeal to the sensibilities of ordinary Americans, Democrats have gone after notable tax loopholes: tax breaks for owners of corporate jets or thoroughbred race horses. Such reforms produce only modest revenue — $3 billion in the case of corporate jets — but Democrats believe they carry political value.

House Speaker John A. Boehner (R-Ohio) is aware that he will probably need Democratic votes to pass a deal, much as he did earlier this year to avert a government shutdown. That would require adding sweeteners.

The White House view is that all sides have a lot at stake over the next few days. Polls show that slightly more Americans would be inclined to blame Republicans than Democrats for the impasse. But many would blame both sides.

"At this point, you shouldn't even call it a debt ceiling debate," said Stan Collender, an author and expert on the federal budget who now blogs about the topic. "It's an impasse. And if it stays that way, it hurts everybody to some degree."

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