Lame Ducks and Fiscal Cliffs (part 1)

Lame Ducks and Fiscal Cliffs (part 1)

This is the first of a few posts on the policy decisions stacking up for the end of this year.  In this post I will simply list the moving parts, deadlines and timeframes, and which election scenarios are most important to analyze.  To some extent this is just a setup post for strategic analysis to follow over the next few days.

Moving parts

  1. taxes;
  2. spending, including the sequesters;
  3. debt limit;
  4. repeal of all or part of the Affordable Care Act (aka ObamaCare);
  5. tax reform;
  6. a potential Grand Bargain on fiscal policy.

The first three categories will be dealt with between now and the end of Q1 of next year.  Deadlines under current law will force the Congress to make decisions on each, even if in some cases the decision is not to enact new legislation.  I label these must-do parts.

The last three categories may or may not come to a head over the next eight months.  Each has no fixed deadline forcing legislative action, and whether they are even priorities depends on who is elected President. I list them because they might, in some form, be included in legislation at the end of this year or the beginning of next, and because discussion about them can heavily influence the must-do items in the first three categories.

While the public tax battle is entirely about extending the top income tax rates, there are many other tax issues expiring at the end of 2012.  The tax category can be further broken down into buckets of tax issues:

  • extending income tax rates;
  • extending capital tax rates;
  • extending the President’s refundable tax credit (sometimes referred to as a payroll tax credit);
  • extending estate and gift taxes;
  • extending other changes from the 2001 and 2003 tax laws (e.g., child credit, education and retirement incentives);
  • “patching” the Alternative Minimum Tax again;
  • a collection of recurring tax extenders covering a wide range of policy areas.

The spending category also breaks down into several buckets important enough to be considered separately:

  • twelve regular FY13 appropriations bills and/or a Continuing Resolution[s];
  • the defense sequester;
  • the nondefense sequester;
  • the sequester on Medicare and other entitlements.

There are a lot of moving parts.  I won’t drill down into each subpart in this series, but I want you to get a sense of how substantively complex this will be.

There is nothing magic about the way I have grouped issues.  One could just as easily separate the sequester issues from other spending, or group all appropriations issues together, or combine the discussion of tax rate extensions and tax reform.  For now I just want to lay out all the moving parts and propose a reasonable categorization so that it’s not all jumbled together.

Deadlines and timeframes

There are three hard deadlines and two soft deadlines that matter.

Hard deadline 1:  Election day is Tuesday, November 6.

Hard deadline 2:  December 31, 2012 – Taxes increase, automatic spending cuts begin to take effect.  This is also the last day of the outgoing Congress, and maybe of the Senate Democratic majority.

Hard deadline 3:  January 20, 2013 is Inauguration Day if Governor Romney wins.  If President Obama wins this date doesn’t matter much legislatively.

Soft deadline 1:  Whenever short-term Continuing Resolutions expire.  Policymakers can set this date.

Soft deadline 2:  At some point Treasury will run out of cash and debt management tricks and need a debt limit increase. Treasury isn’t saying when this will occur, but it’s likely between December and March.

These deadlines create a few important legislative timeframes:

  • Campaign positioning window:  Between now and Election Day;
  • Lame duck sessions:  November 7 – December 31;
  • Pre-inaugural sessions:  January 1 – January 19;
  • 2013 really begins:  January 21 and later.

Nothing big legislatively will conclude between now and Election Day.  House and Senate votes in July and September are mostly attempts to influence the election and to preposition forces for lame duck session negotiations.  Congress recesses in August and will spend much of October home campaigning.

The pre-inaugural timeframe is usually dead and often Congress doesn’t even meet.  This makes the December 31 deadline separating the outgoing Congress from the incoming one the most important break point after Election Day.

When legislative decisions are made influences who makes them, which in turn determines the policy outcomes.  I’ll go into this in more depth in a future post.

Election scenarios

There are two big scenarios to consider, plus one important variant.

  1. Republican sweep:  Romney elected, Republicans keep the House and take the Senate majority;
  2. Status quo election:  Obama re-elected, House stays R majority, Senate stays D majority;
  3. Divided government:  Same as status quo except Republicans take the Senate majority.

There are plenty of other possible scenarios, the most notable of which is a Democratic sweep.  I think all scenarios other than the three I listed are remote enough that I’ll ignore them.  This is already more than sufficiently complicated.

Teaser

To get your gears spinning in anticipation of strategic analysis posts over the next few days, I’ll offer a few observations and questions.

  • Don’t fall into the trap of thinking this is straight R-vs-D. The intraparty conflicts and tensions are at least as important.
  • If President Obama loses, will he stick to his veto threat on taxes, knowing Congressional Republicans can wait him out? Or will he look for away around his veto threat and try to negotiate a deal during the lame duck so that he can extend some of his policies before he leaves?
  • Same scenario — Suppose lame duck President Obama offers Speaker Boehner and Leader McConnell a good but not great deal (from their perspective) during the lame duck session.  Should Congressional Republicans take the deal and lock in this bipartisan consensus, or wait for Romney to be sworn in so they can jettison the parts they don’t like?  How much of a substantive sacrifice is bipartisanship worth to Congressional Republicans?  To President-elect Romney?
  • Who would have the upper hand in a tax stalemate in which everyone’s tax rates increase on January 1?
  • The legislative dynamics on each part can be complex.  What makes this analysis challenging are the interactions among the components when you start legislatively combining them.  What makes it super challenging is when you realize that different people may get to make these packaging decisions during different timeframes.

More tomorrow.

(photo credit: jjjj56cp)

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