Bloomberg News

McCain Says Revenue Increase Possible to Stop Defense Cut

June 21, 2012

McCain Says Revenue Increase Possible to Avoid Pentagon Cuts

Senator John McCain, a Republican from Arizona and ranking member on the Senate Armed Services Committee, speaks during the Bloomberg Government Defense Conference today at the Newseum in Washington, D.C. The conference gathers military leaders, defense contractors, members of Congress, defense analysts, and investors. Photo: Andrew Harrer/Bloomberg

Senator John McCain, the senior Republican on the Senate Armed Services Committee, said a revenue increase may be possible to avoid the threat of automatic cuts known as sequestration.

A previous proposal to reduce spending and raise revenue “could serve as a blueprint for further action,” McCain of Arizona said today at a Bloomberg Government defense conference in Washington.

The threat of automatic defense cuts “is so devastating that the secretary of defense will not even contemplate the plans necessary to implement sequestration,” said McCain, who cited elimination of tax breaks for ethanol as part of a potential compromise.

Automatic, across-the-board cuts of $1.2 trillion to both domestic and national-security programs will take place over a decade, beginning in January, if Congress and President Barack Obama don’t agree this year to make adjustments. The cuts were imposed after talks failed last year on a bipartisan plan to curb the nation’s soaring debt.

Efforts to forge a compromise have been frustrated by Republican lawmakers opposed to any revenue increase and Democrats who have said revenue must be part of the package.

The likeliest outcome is that Congress will avoid facing the fiscal challenge and pass a continuing resolution that would only postpone cuts, according to Dov Zakheim, senior adviser at the Center for Strategic and International Studies and a former Pentagon comptroller.

Failure Predicted

“I don’t think this Congress can cut the deal,” Zakheim said at the conference.

If the automatic cuts do occur, gross domestic product will decline about 0.5 percent, Zakheim said. “It’s going to hit us immediately,” he said.

The Pentagon already plans to cut about $487 billion through fiscal 2021, and it would face more than $500 billion in additional reductions if Congress and the White House don’t agree by year’s end on a plan to shrink the U.S. deficit.

Representative Norm Dicks, a Democrat from Washington, said he’d like to see “positive steps taken” on a legislative fix before the November election.

“We will lose a million defense jobs if we allow sequestration to go forward,” he said on a conference panel. “This is all about trying to improve the economy of the United States and reduce the deficit.”

Notifying Workers

Dicks said in an interview after the panel that he’s “willing to consider” an accord that would reduce the Pentagon budget by about $10 billion a year, instead of more than $50 billion a year under the automatic cuts.

Senator Carl Levin, a Michigan Democrat and chairman of the Senate Armed Services panel, said reductions at that level wouldn’t harm national security.

Defense contractors are required by law to notify employees in advance if they are likely to lose their jobs, Zakheim said.

The notification requirement is 60 days in most states, he said. With sequestration scheduled to take effect Jan. 2, the 60-day notices may come just days “before some of these folks are going to have to get re-elected,” he said of lawmakers.

“You’re going to see pink slips flying in October from contractors across the country” unless action is taken by then, said Representative Randy Forbes, a Republican from Virginia.

Hurting Subcontractors

A significant number of U.S. military personnel might also lose their jobs due to sequestration, Forbes said.

“We could be giving pink slips to 150,000 active-duty” military members,’’ he said. “That’s like doing away with the entire Marine Corps.”

The Pentagon’s biggest contractors, such as Bethesda, Maryland-based Lockheed Martin Corp. (LMT:US) and Chicago-based Boeing Co. (BA:US), “will survive,” Forbes said. The reductions are “going to hit dramatically on subcontractors,” he said.

Potential job losses under sequestration would rise when taking into account cuts to domestic spending, according to Marion Blakey, chief executive officer of the Aerospace Industries Association, a trade group that represents defense contractors.

“We have several million jobs that are at stake,” she said at the conference.

Boeing’s Exports

While Boeing’s defense exports have tripled over the past eight years, the sales won’t be enough to offset U.S. budget reductions, according to Chris Raymond, vice president of business development and strategy for the world’s largest aerospace company.

“This part of our business is a helpful component,” he said at the conference. “I don’t think it’s the complete rescue.”

Separately, Senator Marco Rubio, a Florida Republican, said today that a bipartisan consensus has emerged in recent weeks that any long-term solution to the nation’s economic problems would have to include a mix of spending cuts and revenue increases.

“You can’t only cut your way out of this, and you can’t only tax your way out of this,” Rubio told reporters at a Christian Science Monitor breakfast.

While Pentagon budget reductions totaling almost $1 trillion during the next decade may be painful, they are also manageable, Gordon Adams, a professor at American University in Washington, said at the Bloomberg Government conference.

“It’s not the end of the world,” said Adams, who oversaw national-security budgets at the Office of Management and Budget under President Bill Clinton.

To contact the reporter on this story: Brendan McGarry in Washington at bmcgarry2@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $180.74 USD
    • 1.17
    • 0.65%
  • BA
    (Boeing Co/The)
    • $129.35 USD
    • 0.77
    • 0.6%
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