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Policy / Analysis

Don't Despair (Yet) Over Next Fiscal Cliff

There are a few reasons for hopeless optimism as the next precipice approaches.

(AP Photo/Dan Nephin)()

photo of Jill Lawrence
January 3, 2013

The next fiscal cliff will be "much more terrifying." There are "bigger battles" ahead. The groundwork is laid for "more combustible struggles."

The tenor of analysis in the wake of Fiscal Cliff Deal #1 could be summarized as "woe is us." But here’s a radical thought: Maybe the next round of Capital Hill strife won’t be as bad as what we’ve just endured at the precipice of the Dec. 31 cliff.

I’m not predicting a harmonious glide to an agreement over the next two months, and there’s probably a limit to the number of deals Mitch McConnell can negotiate before a flock of Paulesque anti-establishmentarians descends to challenge him next year in the Republican Senate primary in Kentucky.

 

Still, there are a few reasons for hopeless optimism, as President Obama might put it.

First, the most intractable obstacle to moving forward is now gone. That would be Republican resistance to raising tax rates on anyone, reinforced by the no-tax pledge signed by almost all GOP lawmakers. It's no surprise that Obama's first priority, before weighing other steps to tame the debt, would be making good on his longest-running, most central campaign promise. The fiscal cliff agreement assures that wealthy Americans will share the burden of debt reduction, so now Democrats can move on – though not without friction – to broader steps.

Obama has already signaled he would consider “chained CPI,” a new way of calculating cost of living adjustments to Social Security and other programs, which could cut spending by $145 billion through 2021. Other possibilities include lifting the cap on income subject to the payroll tax (currently it doesn’t apply to income above $113,700), or means testing Medicare benefits so that wealthier people pay more for them. Obama has said explicitly that he is open to Medicare reforms and eliminating “further unnecessary spending in government.”

On the GOP side, many Republicans have signaled they would be receptive to closing tax loopholes, limiting deductions and ending some corporate subsidies -- all of this in the context of reform that simplifies the tax code and lowers the corporate rate. One of them is Pennsylvania Sen. Pat Toomey, former president of the vehemently anti-tax Club for Growth. He has supported ending subsidies for sugar and ethanol and, in a sign of the times, voted in favor of this week's cliff agreement raising tax rates for the nation's most affluent.

Another is Chris Chocola, the former GOP congressman and current president of the Club for Growth. Chocola told me Toomey and others won't necessarily be penalized for voting yes on the cliff deal, one of about 25 votes the group is using for its report cards om the 112th Congress ("they were in a tough spot"). Looking ahead to votes on the next deal, Chocola said the Club for Growth is “all for” tax reform and closing loopholes. He specifically mentioned “things like the ethanol credit, the wind tax credit.” What about eliminating oil subsidies? “We would look at it and likely support it.”

The big question, of course, is whether enough Republicans would back tax reform designed to bring in more revenue than current projections – in other words, changes that would likely require some people or entities to pay more. Obama, who so far has only secured about half of the $1.2 billion in new tax revenues he says are needed to achieve “balanced” debt reduction, has warned several times in the last few days that he’ll go after the rest in the next round. Chocola, asked if his group could support tax reform that brought in more revenue as opposed to keeping it flat, said that “we would not necessarily be opposed … if we view it as pro-growth.”

There have been many predictions of doom for the next fiscal cliff, coming in March. At that point a two-month postponement of severe defense and domestic spending cuts ends and they will automatically take effect if Congress has not settled on a different approach. That is also around the time the country will reach its debt limit and will default on its loans if Congress doesn’t raise the debt ceiling. Obama has already said he won’t negotiate on the debt ceiling and McConnell has already called it “an opportunity to curb out-of-control Washington spending.” Yet there’s common ground and, to some extent, common goals, beneath the posturing.

In a way the complexity of the next round of negotiations is an advantage. The more moving parts there are, the more bargaining chips are available to leaders on both sides. The decibel level of the left, the right, the special interests and all who represent them will be deafening. But struggles over which entitlement program or tax break is trimmed, and by how much, are business as usual in Washington. If we’re lucky, that’s what’s on tap, as opposed to ideological warfare over core party identities and principles.

 

 

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