Negotiations on measures to avoid the fiscal cliff proceeded during the week of November 26, with President Barack Obama releasing the first proposal of the Congressional lame duck session. The President proposes to reach $4 trillion in deficit reduction through a two-stage approach. Stage one would reduce the deficit by nearly $1 trillion through changes to marginal tax rates and capital gains and dividends. This phase also includes a one year postponement of the sequester, and a multi-year $50 billion stimulus package. The second stage would achieve over $1.5 trillion in tax increases through tax reform and $400 billion in Medicare and other entitlement reforms. The threat of sequestration at the end of 2014 would serve as impetus to pass comprehensive tax reform. The President’s plan takes into account $1 trillion in the discretionary spending reductions already enacted through the BCA.
The term fiscal cliff encapsulates the potential economic decline the nation could face if a solution is not found to the end-of-year expiration of the Bush-era tax cuts, the start of sequestration in 2013 and the simultaneous expiration of other tax provisions and benefits at the end of 2012. The Center on Budget and Policy Priorities (CBPP) argues that the nation actually faces a fiscal slope, not a cliff, and that lawmakers should not make hasty decisions to solve a problem that could be avoided with gradual efforts (see Memo, 10/26). The Budget Control Act of 2011 (BCA) requires the sequestration of discretionary funds in FY13, which means making across-the-board cuts, to achieve a $1.2 trillion reduction in the deficit over a 10-year period (see Memo, 11/16). The BCA caps discretionary spending for 10 years.
Senate Majority Leader Harry Reid (D-NV) and House Minority Leader Nancy Pelosi (D-CA) have backed the President’s plan; it was met with immediate objection from House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY). Republican leaders do not agree with the ratio of revenue to spending cuts, or sources of revenue, included in the President’s plan.
This immediate rejection of the Administration’s plan comes just two weeks after the President initiated negotiations with these House and Senate leaders, and all parties spoke optimistically about agreeing to a resolution to the fiscal challenges facing the nation at the end of the year.
The President’s plan offers a framework that Congress can now debate, but to reach agreement and avert sequestration, compromise on how to raise revenue must be reached. Pessimism about the potential for compromise mounted as the week wore on.
If sequestration is allowed to take effect on January 2, 2013, affordable housing programs in HUD and the USDA Rural Housing Service would be cut by 8.2%. In a November 26 report, CBPP says that without new revenues, housing and community development programs could still be cut significantly under a replacement sequestration plan. The report includes state-by-state cuts to select HUD rental assistance and block grant programs, and includes tables comparing the impact of various budget proposals on the Housing Choice Voucher program.
A copy of the President’s plan is attached to this page.
View the CBPP report at http://bit.ly/U8bpHt (PDF).