The Issues: What to Expect in Obama's Second Term

Budget

By Catherine Hollander

The talks aimed at preventing the fiscal cliff, the year-end threat of tax hikes and spending cuts, will likely provide a framework for attempts to reach a longer-term budget deal in 2013, one that could include tax reform. But with Obama still in office and Congress still divided, the prospects of finding common ground remain uncertain at best.

In the speech Obama delivered in Chicago early on Wednesday morning, the president pledged to focus in the coming months on working with lawmakers across the aisle to reduce the deficit and reform the tax code. In October, he set the goal of a “grand bargain” on the deficit, one that would probably involve some reform of entitlements such as Medicare and Social Security.

The administration has declined to call for steep spending cuts while the economy struggles; instead, it is focusing on deficit reduction through higher taxes on the wealthiest Americans, an idea that has little GOP support. Obama has also proposed to reduce the corporate tax rate to 28 percent from 35 percent, an area where he is more likely to find Republican backers.

But the president has struggled to work with the 112th Congress, even when the rapidly approaching debt limit and looming credit-ratings downgrade pressured lawmakers to act in 2011, and he’ll be facing many of the same forces in the 113th that made striking a deal last year so difficult. Among them is Americans for Tax Reform President Grover Norquist, whose pledge not to raise taxes was signed by 279 lawmakers in the 112th Congress.

What was fought bitterly over in this Congress—raising the nation’s debt limit—pales in comparison to what members of the 113th Congress have said they will attempt. But some analysts are encouraged by the potential for a slight change in tone that could lead to progress. Senate Minority Leader Mitch McConnell said in 2010 that Republicans’ top priority should be making Obama a one-term president; if you believe that has, indeed, been the GOP goal, says Philip Wallach, a fellow in governance studies at the Brookings Institution, the cause no longer exists. And Obama could be more willing to compromise than he was over the past two years, so that he can avoid having his final term bogged down in deficit and tax negotiations.

Obama can send a signal about his willingness to go big on tax reform through his appointment of the next Treasury secretary (Timothy Geithner, who holds the post, has said he won’t stay for a second term.) Naming Erskine Bowles, former chief of staff to President Clinton and cochair of the National Commission on Fiscal Responsibility and Reform, to the position could indicate a readiness to strike a bipartisan compromise on taxes, Republican congressional staffers and lobbyists say.

No matter what, time may be an obstacle to large-scale reform, experts warn. The window for a fiscal agreement might close around the beginning of the 2014 midterm campaign. Ratings agencies and international capital markets won’t look too kindly on drawn-out negotiations—with markets paying the price for congressional gridlock.

Energy

By Coral Davenport

Energy: Smokestacks in Texas. (AP Photo/David J. Phillip)

The president hopes to use his second term to fight global warming. By signing a law to cut fossil-fuel pollution and decisively turn the nation toward clean, renewable-energy sources, Obama could make a profound difference in the economic, environmental, health, and national-security future of the United States—and the rest of the world. And it’s the kind of sweeping achievement that historians say he craves for his own legacy.

Obama’s last, best chance to do this will come as part of a nuts-and-bolts effort to reform the corporate tax code.

Here’s why: Economists and environmentalists have long agreed that the most effective way to stop climate change and drive markets toward clean energy is to put a price tag on carbon pollution. It’s a time-tested and effective policy. Raise the price of the thing you want less of—pollution from coal and oil—and market forces will drive consumers and businesses to buy low-polluting sources of energy instead. The increased market demand for those sources drives up production scale and lowers the down price.

In his first term, Obama tried and failed to push such a cap-and-trade bill through Congress. Cosponsored by liberal Democrats from California and Massachusetts, championed by green advocacy groups, and reviled by most Republicans, the measure ran aground in the Senate, and “cap-and-trade” became a politically toxic catchphrase. The administration was instead reduced to using the Environmental Protection Agency to push through a slate of antipollution regulations. 

Over the next two years, the president will have one more chance to push carbon-pricing legislation through Congress—this time, however, with a distinctly different political profile. As early as next year, Congress is expected to take up a sweeping tax-reform package that would lower corporate rates and eliminate loopholes in the tax code. As part of that process, support is growing for a carbon tax, to be paired with a cut in the payroll or income tax. The strongest supporters of the idea are conservative economists—including Gregory Mankiw, Mitt Romney’s economic adviser; Douglas Holtz-Eakin, who advised Sen. John McCain’s 2008 presidential campaign; and Art Laffer, President Reagan’s chief economic adviser. Republicans want to find a way to cut taxes on work or income—and many, at least, don’t oppose the idea of moving that tax over to carbon pollution.