"Do-Nothing" the Best Prescription for Deficit Reduction, but a Bad Approach for the Country

Congress was busy in the days leading up to the winter holidays. At the 11th hour, the fiscal year (FY) 2012 budget finally passed, three months late, along with an extension of the payroll tax cut and a package of other assorted cuts and credits. The only real substantive legislative change coming out of the session was the death of the ethanol tax credit – because Congress failed to pass it. In the year ahead, this might be a theme: change only happens when Congress does nothing.

Some commentators claim that a coalition of fiscal conservatives and liberal environmentalists joined forces to deliberately kill the ethanol credit, but the reality seems to be that the two parties could simply not agree how to move forward. The tax credit was created 30 years ago to spur production of ethanol, when the fuel was viewed as a possible alternative to fossil fuels (ethanol is produced from agricultural products such as sugar cane, potatoes, and corn). The credit provided a subsidy of between 45 and 55 cents per gallon of fuel blended with ethanol and gave producers of a certain kind of ethanol one dollar per gallon in subsidies. In recent years, the credit cost the government $6 billion annually, helping to make the United States the number one producer of ethanol (the U.S. produces almost 60 percent of the world’s supply of ethanol).

As ethanol production grew rapidly, the tax credit became controversial, pitting the farm industry, which found the credit incredibly lucrative, against hardcore fiscal hawks, who found it wasteful, and environmentalists, who charge it is actually a less efficient of use of energy resources than traditional fossil fuels. This impasse could not be overcome in last-minute negotiations, when congressional negotiators were finishing a package of “extenders,” or temporary tax subsidies. Earlier in 2011, Congress tried to pass legislation repealing the ethanol credit, but failed to move it through both houses. (As Kevin Drum of Mother Jones points out, however, there are still plenty of biofuel subsidies in the U.S.)

2011 was one of the most polarized legislative sessions in recent memory, and it produced little in the way of meaningful legislation. The upcoming 2012 session is not likely to be much different, with an election looming at the end of the year. Neither party wants to give the other a legislative victory, despite declining congressional poll rankings, so last year’s paralysis and gridlock will only get worse.

Partisan gridlock imperils a host of other time-sensitive provisions. The payroll tax cut, which Congress temporarily extended in December 2011, will come up for a vote again in March, and its extension is far from assured. The Bush tax cuts, including those targeted at upper-income households, will expire at the end of 2012 if the two parties do nothing. The debt ceiling will be raised this year because, thanks to the convoluted process set up by last summer’s agreement, Congress has to pass a law to prevent an increase of the debt ceiling, which is a higher bar than blocking legislation. Also, the government faces another shut-down threat in the fall, when Congress has to reauthorize more than a trillion dollars in yearly spending in the heat of a campaign season.

By doing nothing, Congress would actually reduce the deficit by trillions of dollars. Letting the Bush tax cuts and the Alternative Minimum Tax (AMT) “fix” expire will save about $4.7 trillion over ten years; allowing an assortment of other tax provisions to expire will net about $920 billion; and allowing a cut to Medicare doctor payments to kick in would save about $350 billion. This $6 trillion in combined savings is $2 trillion more than the amount even the most vigilant fiscal hawks have called for in their most ambitious plan. However, deficit reduction of this magnitude would come at a huge cost.

Medicare doctors would see their pay cut by 27 percent, the AMT would hit more of the middle class, and the child tax credit would shrink. A do-nothing Congress would succeed in significantly reducing the deficit, but it would fail to preserve the social safety net at a time when many American families desperately need it.

With the two parties at each other’s throats over relatively small-scale and uncontroversial polices like the payroll tax cut, comprehensive tax reform – long called for – and thoughtful policies geared toward funding key national priorities are extremely remote possibilities in the year ahead.

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