Bush tax cuts: The real endgame

@CNNMoney November 28, 2011: 5:45 AM ET
Congress is likely to face some of the biggest fiscal decisions, including those on Bush tax cuts, it will ever make at the end of 2012.

Congress is likely to face some of the biggest fiscal decisions it will ever make at the end of 2012.

NEW YORK (CNNMoney) -- Congress has a way of waiting to the very last minute to resolve big issues, so December is usually a busy month on Capitol Hill. This year will be no exception. But next year? Next year will be no exception on steroids.

This December, for example, lawmakers will have to decide, among other things, whether to extend the payroll tax cut, long-term unemployment benefits, the Medicare "doc fix," Alternative Minimum Tax relief and a bevy of business tax breaks.

But that list -- worth less than $1 trillion -- will pale in comparison to the $5 trillion of fiscal decisions likely to be left for a lame-duck Congress during the seven weeks between the Nov. 6 election and New Year's Eve.

The biggest items on the agenda? The expiration of the Bush tax cuts and the impending enactment of the automatic spending cuts that many want to replace.

Coloring these decisions, of course, will be two unpredictable factors: The state of the economy and who wins control of the House, the Senate and, of course, the White House.

And the decisions Congress makes this year about whether to extend various expiring provisions may add to 2012's end-of-year to-do list for lawmakers.

"[T]he amount of expiring policies and spending cuts set to take effect over the next few years is large [and] the risk from a political impasse is not only that Congress fails to enact long-term fiscal reforms, but also that it fails to extend current policies and in doing so adds to the drag on growth from fiscal policy," Goldman Sachs wrote in a research note.

Debt committee calls it quits without a deal

Bush-era tax cuts: If Congress does nothing, the 2001, 2003 and 2006 tax cuts will expire at the end of December 2012.

If they do expire, most Americans' tax bills would go up and the surge of additional revenue into federal coffers would greatly improve the deficit picture over the next decade.

But many worry the overnight jump in taxes could hurt the economy if it's still weak. And others say higher rates across the board is not the most efficient way of reducing deficits.

In any case, most Republicans want to make the tax cuts permanent while many Democrats want to make them permanent for everyone except high-income households.

If all the cuts are extended, they could reduce revenues by an estimated $3.7 trillion over a decade. If only most of them are extended, that would reduce revenues by about $3 trillion.

In theory, Congress could use 2012 to hammer out a deal on tax reform -- which, done right, would make the Bush tax cut issue null and void. But most tax policy experts don't expect lawmakers to lock arms on a complete tax code overhaul before 2013 at the earliest.

Indeed, given how the partisan divide over the Bush tax cuts helped derail the super committee, the road to real tax reform might take awhile.

Automatic spending cuts: Since the super committee failed to strike a deal on anything, the Budget Control Act passed in August calls for automatic spending cuts starting on Jan. 2, 2013 to reduce deficits by $1.2 trillion over nine years.

Those cuts would be divided evenly between defense and nondefense spending, although key programs for low-income Americans would be exempt.

The debt committee called it quits last week. That gives lawmakers 13 months to ward off the cuts if they want to. And many do, particularly Republicans and some Democrats who worry about the effect the cuts might have on U.S. defense.

But ratings agencies have made clear it would be a negative for the U.S. credit rating if lawmakers simply canceled some of the cuts and didn't offset them with other budget cuts.

Of course, Congress could choose to use the next 13 months to hammer out a bipartisan debt reduction plan worth $1.2 trillion or more.

It is likely, in any case, that President Obama may push for a "grand bargain" deal when he proffers his 2013 budget proposal to lawmakers in February.

"I expect a go-big, $3 trillion to $4 trillion deficit reduction plan," said long-term budget expert Stan Collender.

As with most presidential budget proposals, however, Congress won't adopt it in whole, or even necessarily in part.  To top of page

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