In Lame-Duck Session, Emboldened Republicans Face Tough Fiscal Choices
While the 2010 midterm elections swept in a significant Republican majority in the House and a larger Republican minority in the Senate, Congress will face a great deal of important fiscal legislation that it must address before the newly elected members begin their terms in 2011. With annual appropriations bills and the expiration of the Bush tax cuts pending in the upcoming lame-duck session, the focus will be on the Republican minority in the Senate and whether it decides to block key legislation or work with Democrats to address unfinished business.
One of the most pressing fiscal issues before Congress is the set of Fiscal Year (FY) 2011 appropriations bills. Congress has yet to pass any of the 12 spending bills, a poor showing considering the Democrats have controlled both houses of Congress and the presidency for the past two years. FY 2011 began Oct. 1, meaning Congress is now more than a month late in passing spending bills. Operations of the federal government are currently funded by a continuing resolution (CR), a stop-gap funding measure that will expire Dec. 3. At this point, an omnibus appropriations bill, which will wrap all twelve spending bills into a single, large bill, seems to be the only feasible way of approving all the provisions necessary to fund the federal government for the current fiscal year. This means members will be forced to vote for one giant bill with an enormous price tag, probably about $1.2 trillion – a cut in discretionary spending from FY 2010's $1.4 trillion.
The question is whether Republicans, especially in the Senate, will decide to support the likely package of spending bills. The FY 2011 budget will be the Democrats' last chance to fully shape a budget, since the next two years will involve a lot of compromising between the Democratic Senate and the Republican House if any spending bills are to be completed. At the same time, Republicans in the Senate may choose to stall by passing another CR to fund the government until January, when Republicans take control of the House and there are more Republicans in the Senate. Democrats will have little reason to agree to a CR, knowing that doing so will allow Republicans to significantly reshape FY 2011 spending levels, setting the stage for a potential budget stalemate in the coming weeks. On the other hand, if a stalemate develops, Democrats will have no reason not to accept a CR, given that the Republicans, once they take over in the House, plan on offering bills to rescind current spending anyway.
If both sides cannot agree on a course of action before Dec. 3, when the current CR runs out, the federal government will be forced to shut down. The last time this happened was in the mid-1990s, when Republicans also found themselves in a strengthened position, and the resulting government shutdown rebounded against the party badly. This time, Republicans must decide if gaining more influence over the FY 2011 appropriations bills is worth a possible shutdown. The current sentiment, at least among Senate Republican leadership, seems to be leaning toward letting the FY 2011 bills go through and instead focusing their budget-cutting efforts on the FY 2012 budget process. It remains to be seen how the incoming class of fiscal conservatives feels about postponing a fiscal reckoning, but it is likely they will not be happy.
A less politically risky option for Republicans looking to take a fiscal stand is the Bush tax cuts, although they are possibly more politically charged. Originally passed in 2001 and 2003, the Bush tax cuts lowered taxes for large swaths of the population but predominately helped higher-income taxpayers. The cuts are set to expire at the end of 2010, and Congress is locked in a struggle over which aspects to extend. Many, but certainly far from all, Democrats are pushing to extend the cuts for families earning less than $250,000, and Republicans are pushing to keep all of the cuts, leaving the two parties fighting over the tax rates for the wealthiest two percent of the nation. The difference is important, since fully extending all the Bush tax cuts could cost more than $5 trillion over ten years, once associated costs such as debt servicing are factored in.
Similarly, thanks to the Bush tax cuts, the estate tax has been slowly cut, from a rate of 55 percent on bequeathed assets above what would have been $1 million if past law had continued, to 45 percent with a $3.5 million exemption, culminating in full repeal for the 2010 tax year. In 2011, however, the tax returns to 2001 levels with a $1 million exemption. With the potential for billions of dollars in revenue to be collected from the wealthiest 1.76 percent of decedents, many Republicans and Democrats are fervently calling for some sort of resolution.
Although some congressional Republicans are calling for permanent repeal of the estate tax, the almost $600 billion cost over the next ten years has made that proposition untenable. Instead, members of Congress from both sides of the aisle have been trying to find a compromise. Support is strong for simply setting the estate tax at its 2009 levels – a $3.5 million ($7 million for couples) exemption at a 45 percent rate, but soon-to-be-departing Democratic Sen. Blanche Lincoln (D-AR) and Republican Jon Kyl (R-AZ) have aggressively pushed a far more generous estate tax with a $5 million ($10 million per couple) exemption at a 35 percent rate. Inaction will cause the estate tax to affect less than the wealthiest two percent of estates, up from its current impact on no estates (and one quarter of one percent of estates in 2009), yet attention from members of both parties is inexplicably and intensely focused on this issue, likely resulting in some action during the lame-duck session.
Fighting to extend the Bush tax cuts and repeal the estate tax are far less risky battles for congressional Republicans, since the worst-case scenario is a tax hike, not a government shutdown. While a tax hike would likely rankle the Republicans' voting base, a government shutdown would anger a large swatch of independent voters, potentially giving them pause in 2012. Therefore, Republicans may choose to wage a high-profile fight for the tax cuts while quietly passing the FY 2011 budget bills, gaining the limelight and placating their supporters but avoiding a potentially harmful political debacle.
Another possibility being discussed is simply extending all the Bush tax cuts for one or two years, letting the new Congress deal with the issue. President Barack Obama has indirectly suggested this approach as a possible compromise during the lame-duck session. Sen. Orrin Hatch (R-UT), likely the new ranking Republican on the tax writing committee, has said he could support an extension as long as all the tax cuts – for wealthy and middle-income individuals and families – are treated the same. This, of course, raises a question for the estate tax: Would an extension be based on 2010 when there was no tax, or would it be based on 2009 when there was?
These three issues – the budget, the Bush tax cuts, and the estate tax – are only part of the fiscal challenges facing the lame-duck session. Congress must also pass a patch for the Alternative Minimum Tax (AMT), a package of miscellaneous tax provisions often referred to as “extenders,” and a "doc fix," which would postpone a planned payment cut for Medicare physicians, all of which are annual occurrences. Congress has yet to address any of these measures because, yet again, Congress dragged its feet and failed to pass any of them in a timely fashion. The result could be a hectic lame-duck session, with trillions of dollars in spending on the table, which will produce legislation motivated more by political expediency than sound fiscal policy. Alternatively, lawmakers could take a "kick-the-can" approach and leave many of these issues for the next Congress to tackle.