Bloomberg News

Democrats’ Plan Keeps Divide on U.S. Taxes as Cuts Near

February 15, 2013

Senate Democrats Offer $110 Billion to Delay Spending Cuts

Senate Appropriations Committee Chairwoman Barbara Mikulski questions witnesses during a committee hearing about the potential impacts of "the sequester" on Capitol Hill on Feb. 14, 2013. Photographer: Chip Somodevilla/Getty Images

Senate Democrats unveiled a $110 billion plan to delay federal spending cuts that includes tax increases Republicans already say they won’t accept.

The plan announced yesterday would postpone the scheduled March 1 start of more than $1 trillion in cuts until 2014. The automatic reductions, known as sequestration, would be replaced with defense spending cuts, a halt in direct payments to farmers and a tax increase imposing a minimum 30 percent rate on top earners.

“No one takes it seriously,” said Senator Bob Corker, a Tennessee Republican. “It is my guess that sequester is going to kick in on March 1.”

Republicans control the House and can block Democratic proposals in the Senate. The stalemate means that the across- the-board cuts are set to start as scheduled. Under current law, they would stay in effect for the next nine years.

The spending-cut deadline marks another fiscal feud between President Barack Obama and congressional Republicans over whether efforts to reduce the budget deficit should include more revenue or be limited to spending cuts. The debate is the latest in a series of last-minute fiscal showdowns since Republicans won House control in November 2010.

House Armed Services Committee Chairman Buck McKeon, a California Republican, predicted at a meeting with reporters today that the spending cuts will take effect for at least a short time before lawmakers are able to reach a compromise.

‘Past the Politics’

“We just have not been able to get past the politics of it,” McKeon said. After the reductions take effect, “I’m hopeful it’s weeks and not months before we get this fixed.”

Senators have agreed to allow consideration of the Democratic proposal or a Republican alternative to begin as soon as Feb. 25.

“Certainly, there is a lot of heavy lifting to go,” said Senator Ron Wyden, an Oregon Democrat. “The challenge is to try and get beyond these roaming fiscal cliffs.”

Lawmakers in each party describe the other as intransigent as they attempt to assign political blame before defense and domestic spending cuts begin.

“Republicans in Congress face a simple choice,” Jay Carney, the White House press secretary, said in a statement. “Do they protect investments in education, health care and national defense or do they continue to prioritize and protect tax loopholes that benefit the very few at the expense of middle and working class Americans?”

$630 Billion

Republicans pointed to $630 billion in tax increases enacted last month and said they won’t accept more.

“I don’t see any support for a tax increase from our side,” Representative James Lankford, an Oklahoma Republican, told reporters. “Why are we doing another tax increase when we’re looking at the largest revenue we’ve ever had?”

In dollar terms, the $2.7 trillion the government will collect in fiscal 2013 will be a record. As a share of the economy, it’s not.

The automatic cuts are split between domestic programs and defense. Leaving them in place would shave U.S. economic growth this year by 0.6 percent and cost 750,000 jobs by the fourth quarter, according to the Congressional Budget Office.

The largest tax increase in the Senate Democratic plan is the so-called Buffett rule, named for billionaire investor Warren Buffett, who supports the idea. By setting a minimum tax rate, it would limit the benefit that high-income investors can receive from preferential rates for capital gains and dividends.

Adjusted Income

The proposal would affect taxpayers with annual incomes exceeding $1 million and require those with incomes of more than $2 million to pay the full 30 percent of their adjusted gross incomes. Those taxpayers would still be able to take deductions for charitable contributions.

Including the Buffett rule, which would raise $54 billion over the next decade, undermines attempts to rewrite the U.S. tax code, said Representative Dave Camp, chairman of the House Ways and Means Committee.

“We want to look at this in a comprehensive way,” said Camp, a Michigan Republican. “It’s not about one or two items to get us through the next nine months.”

The rest of the money would come from two other provisions. One would raise less than $1 billion by preventing companies from taking advantage of tax deductions for the cost of moving operations out of the U.S.

Oil Tax

An additional $2 billion would be raised by requiring oil extracted or imported from tar sands to be subject to the 8 cents per-barrel tax that goes to the Oil Spill Liability Trust Fund. Crude oil is already subject to the tax.

Senator Mark Begich of Alaska said he and other oil-state Democrats prevented the party from including Obama’s other proposed changes that would raise taxes on oil and gas companies.

The defense cuts, totaling $27.5 billion, would be phased in to coincide with the reduction of troops in Afghanistan, according to a summary distributed by Senate Democrats. The reduction would be about $3 billion in fiscal years 2015 and 2016 and rise to almost $5 billion in fiscal 2021.

The end of direct payments to farmers would save $27.5 billion over 10 years, the summary said.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said that while he supports the plan, he is concerned that eliminating direct payments to farmers might “undermine our ability down the road to do a farm bill.”

Several Alternatives

Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell of Kentucky, said Republicans were looking at several possible alternatives.

He disputed Democrats’ contention that the public would back their proposal.

“I would respectfully disagree that the American people would demand more tax hikes,” Stewart told reporters.

The House last year passed legislation that would have replaced automatic cuts to defense spending with reductions in other areas. The House hasn’t assembled or passed a plan of its own this year to avoid or delay the cuts.

“The sequester will be in effect until there are cuts and reforms that put us on a path to balancing the budget over the next 10 years, period,” House Speaker John Boehner, an Ohio Republican, told reporters.

If the Senate passes a plan, he said, the House would be “happy to take a look.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Roxana Tiron in Washington at rtiron@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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