May 5th, 2011

Tax policy is again dividing Democrats and Republicans as they begin negotiations Thursday on what budget process reforms to attach to legislation raising the $14.3 trillion debt ceiling.

Rather than focusing on making specific spending cuts or tax increases now, the talks are shaping up to be about how to require such choices down the road.

While Democrats back a White House approach that would force automatic tax increases or spending cuts to ensure the government hits thresholds for reducing the debt, Republicans want a hard cap on spending that would not force tax increases of any kind.

The divide on discussing taxes appears to be one of the central obstacles in talks that will convene Thursday between Vice President Joe Biden and representatives from both parties.

President Obama announced the talks in April after lawmakers struck an eleventh-hour deal to avoid a shutdown and fund the government for the remainder of the fiscal year. He called on lawmakers to reach a “final agreement on a plan to reduce the deficit” before the borrowing limit is reached.

Republicans were initially skeptical of what they mockingly called a “Biden commission,” but have expressed more optimism in recent weeks.

“Those talks are beginning Thursday and will, in my view, lead to some kind of conclusion because, as you know, the clock is ticking,” Senate Minority Leader Mitch McConnell (R-Ky.) said Tuesday.

The Treasury Department said the government will reach the debt limit in mid-May and has begun “extraordinary measures” to keep the U.S. from defaulting. Treasury has set a final deadline of Aug. 2 for raising the debt ceiling.

The two Republicans participating in the deficit talks, House Majority Leader Eric Cantor (R-Va.) and Senate Minority Whip Jon Kyl (R-Ariz.), made the opening move in the talks Tuesday night in a letter to the White House, asking the administration to put forward a debt-reduction proposal that could be scored by the Congressional Budget Office. They said the Biden talks would not be “productive” until a specific plan is on the table.

House Republicans have been frustrated that they have passed a full-scale, scored budget while the president has only vaguely outlined a deficit plan.

Although the White House continues to call for a “clean” increase of the debt limit, Democrats in practice are looking to strike a deal with Republicans that would pair an increase in the borrowing limit with fiscal reforms.

In addition to Kyl, Cantor and Biden, the talks beginning Thursday at Blair House will include Senate Finance Committee Chairman Max Baucus (D-Mont.), Senate Appropriations Chairman Daniel Inouye (D-Hawaii), Assistant House Minority Leader James Clyburn (D-S.C.) and House Budget Committee ranking member Chris Van Hollen (D-Md.).

Tax increases aren’t the only sticking point in the talks — the parties are also divided on when the budget enforcement should start. Republicans want the reforms to begin immediately, while Democrats fear quick cuts in spending would slow the economic recovery.

Democrats do appear to be moving toward the House Republican goal of $4 trillion in deficit reduction over 10 years. The House-passed 2012 budget would accomplish this only through spending cuts, to the tune of $5.8 trillion over 10 years.

Baucus and Clyburn indicated support Wednesday for the “debt failsafe trigger” that has been proposed by the White House.

The trigger would force spending cuts or tax increases if the debt is not declining as a percentage of gross domestic products after 2014.

Baucus said such a trigger offers “more tools” to deal with fiscal ills than a spending cap, and argued that automatic tax increases have been tried before by President Reagan.

Clyburn said Wednesday that a debt failsafe trigger is a “good starting point” for a compromise on the debt ceiling.

“It would lay out targets, and I would hope that this committee that I am a member of would work out ways that the target can be reached,” he said, referring to the Biden talks.

Clyburn said he wants to see $4 trillion in deficit reduction over 10 years, which is $1 trillion more than Obama called for in an April speech on the budget.

Clyburn said $1 trillion of the savings could come from returning tax rates on the wealthy to levels that were in place during the Clinton administration.

Baucus said it is time to craft legislation that “stabilizes” the debt by 2014 or 2015 and decreases it thereafter, something that the Obama debt trigger would accomplish. Stabilizing the debt would not balance the budget, but would lower annual deficits so that revenues are equal to spending minus interest payments.

Baucus said a hard spending cap would pose “significant challenges.”

Kyl, the Senate GOP’s representative in the Biden talks, said Wednesday that he is strongly in favor of a proposal put forth by Sens. Bob Corker (R-Tenn.) and Claire McCaskill (D-Mo.) to cap spending at 20.6 percent of gross domestic product by the end of the decade. He said he is looking at ways to make that plan stronger.

Kyl said the White House trigger option was “the worst possible outcome” because it opens the door to automatic tax increases.

Baucus argued the Corker-McCaskill proposal is flawed because it would encourage Congress to offer more and more tax breaks in order to advance social policy without spending. That could vastly complicate the tax code, he said.

He also said it would hurt seniors and the disabled by cutting Medicare and Medicaid. If these programs are exempted, however, discretionary spending cuts would be far too large to be acceptable.

Kyl is studying suggestions put forward by former Sen. Phil Gramm (R-Texas) at a Wednesday hearing on how to strengthen budget enforcement.

Gramm, the sponsor of the budget-cutting 1985 Gramm-Rudman act, outlined its flaws. He said its greatest weakness was emergency exemptions, by which Congress was able to avoid the deficit-reduction targets in the bill. Recessions and wars allowed Congress to avoid the reduction targets.

“The process was completely perverted,” Gramm said. “It did produce bipartisanship, and that was in cheating the system.”

He said Congress should approve rules requiring a supermajority 60 percent vote in both chambers to allow spending to exceed preset targets.

Gramm also argued against any debt trigger that could automatically result in tax increases because he said it is a “non-starter” with the public. He also said such a trigger could induce some legislators to “do nothing” in order to allow a tax increase to go into effect.