Bloomberg News

Democrats Offer $2.3 Trillion Plan as Tax Rancor Persists

November 17, 2011

(Updates with Camp comment in 17th paragraph.)

Nov. 10 (Bloomberg) -- Some Democrats on the congressional supercommittee are proposing a $2.3 trillion deficit-reduction plan with equal amounts of spending cuts and tax increases, an effort unlikely to break the group’s stalemate.

Texas Representative Jeb Hensarling, the Republican co- chairman of the panel, rejected the plan today.

“What we still haven’t seen from the Democrats is a plan that deals with our structural debt crisis, that actually solves the problem,” he said. Still, he said, discussions are continuing and “I haven’t given up hope.”

Democratic supercommittee member Max Baucus, a Montana senator, said, “Things are moving well. There are ongoing talks.”

The Democratic proposal includes a so-called trigger that would raise $650 billion if the U.S. tax code isn’t revamped by Jan. 1, 2013, according to a document offered to supercommittee members. Tax writers would receive instructions to cap individual tax rates at 35 percent, overhaul corporate taxation and maintain the code’s current progressivity.

Democrats presented the offer to Republicans on Nov. 7 at a meeting at which Republican Senator Pat Toomey of Pennsylvania outlined a proposal that included some net tax increases, according to a Republican aide and a Democratic aide familiar with the plans.

Hundreds of Billions

The six Democrats and six Republicans on the panel remain hundreds of billions of dollars apart on tax revenue with less than two weeks until the Nov. 23 deadline to come up with a plan.

“We are at a bit of an impasse at the moment,” Senator Jon Kyl, an Arizona Republican, said yesterday.

Dick Durbin of Illinois, the second-ranking Senate Democrat, said today his party may ultimately have to accept a deal with less revenue than spending cuts. “We’re likely to have something different” than what his party has been seeking, he said, calling the Republican plan “some progress.”

Democrats rejected Toomey’s proposal, which would reduce the top individual tax rate to 28 percent, saying that it would shift the tax burden away from high-income taxpayers.

A Big Gap

“We have a big gap with respect to where we are on revenues,” supercommittee member Senator John Kerry, a Massachusetts Democrat, said yesterday.

The Republicans’ proposal “will not work; we’ve told them that very directly,” Kerry said. “This is not complicated: They’ve got to put real revenue on the table in a way that helps us get the job done.”

At the same time, Republicans and some Democrats described the Toomey proposal as a significant step toward breaking Republicans’ no-tax-increase stance.

“Republicans have put revenues on the table,” said Senator Lamar Alexander of Tennessee, the No. 3 Republican in the chamber. “Democrats have put entitlements on the table. We need to put more of each on the table and get a result.”

Michael Steel, spokesman for House Speaker John Boehner, an Ohio Republican, referred to earlier comments made by Durbin suggesting that the “core” of an agreement is emerging.

“Right now we are waiting for a response to what the second-ranking Democratic leader in the Senate called a breakthrough, and we’ve seen nothing,” Steel said yesterday.

Representative David Camp, a Michigan Republican, said “it is incumbent” on Democrats to “come forward with something.”

Reducing Deficit

Under the outline of the Democratic document, the supercommittee would cut the federal budget deficit by $2.3 trillion over the next decade, with $1 trillion each coming from spending cuts and revenue and $300 billion from interest savings.

The Democrats say the plan is a working draft, and it shows that Democrats and Republicans may be moving closer on revenue. In another proposal Democrats offered late last month, they had insisted on $1.3 trillion in additional tax revenue.

The revenue increases would start with what the document described as a $350 billion “down payment” of “miscellaneous revenue provisions.”

If Congress doesn’t agree to a tax-code overhaul, the trigger would generate $325 billion by limiting itemized deductions for top earners. The proposal refers to an idea floated by Harvard University economics professor Martin Feldstein, who said individuals shouldn’t be able to claim itemized deductions that provide benefits of more than 2 percent of their adjusted gross income.

The remaining $325 billion would come from a surcharge on individual income tax liability before credits. Details of the surtax weren’t included in the document.

Medicare Cuts

The Democratic plan also would include $350 billion in cuts to Medicare, with $250 billion from providers and $100 billion from beneficiaries. An additional $200 billion in cuts would come from other mandatory programs. The plan would include $400 billion in cuts to discretionary programs, with $200 billion from defense and $200 billion from non-defense programs.

The Democratic aide said the plan doesn’t include a proposal disliked by many Democrats that would change the formula used to adjust Social Security benefits for inflation and cause them to grow less quickly.

According to the document, the cuts in entitlement programs would take effect only upon enactment of a tax-code overhaul or implementation of the trigger.

Republicans have proposed reducing the budget deficit by revamping the tax code. Lawmakers are trying to break a partisan impasse over tax increases in exchange for spending cuts as the supercommittee seeks to cut at least $1.2 trillion from the budget deficit.

Additional Revenue

Toomey’s proposal would generate about $300 billion in additional tax revenue when compared with the revenue that would be raised by extending tax cuts scheduled to expire in 2012. In addition, Republicans propose generating several hundred billion dollars from non-tax-revenue sources, such as asset sales.

A Republican aide said that the Democratic proposal was a sign that the two sides aren’t close and that it wouldn’t generate enough economic growth.

According to Republicans, their proposal would cut about $1.2 trillion from the budget deficit over 10 years, with about $700 billion of that amount coming from spending reductions.

Congress set up the bipartisan panel in August in legislation that resolved a standoff over raising the federal debt limit. If the panel can reach an agreement, its proposal would be subject to up-or-down votes in the House and Senate. The law requires automatic across-the-board spending cuts in 2013 if Congress doesn’t approve the plan by Dec. 23.

--With assistance from Steven Sloan, James Rowley, Brian Faler, Kathleen Hunter and Peter Cook in Washington. Editors: Jodi Schneider, Laurie Asseo

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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