On supercommittee, growing doubts about reaching a debt deal


From left, Rep. Jeb Hensarling (R-Texas), Sen. Patty Murray (D-Wash.), Sen. Jon Kyl (R-Ariz.), Sen. Max Baucus (D-Mont.), Sen. Rob Portman (R-Ohio), Sen. John Kerry (D-Mass.) and Sen. Pat Toomey (R-Pa.) participate in a Joint Deficit Reduction Committee hearing Oct. 26 in Washington, D.C. The special Joint Committee is tasked with finding $1.5 trillion in deficit reduction by Thanksgiving. (Mark Wilson/GETTY IMAGES)

With just 10 days left before a Thanksgiving deadline, members of the congressional “supercommittee” appear increasingly pessimistic about the odds of forging a debt-reduction deal, despite a new offer by Republicans to raise taxes.

The public debate has grown more divisive since both sides laid out their latest offers last week. Negotiators, already under attack from the left, are facing fresh pressure from the anti-tax right. And charges of betrayal are expected to intensify Monday when the House returns from a week-long break, fueling concerns that a deal could emerge from the supercommittee only to die in the House or the Senate.

On Sunday, Rep. Jeb Hensarling of Texas, the supercommittee’s GOP co-chairman, said he hasn’t “given up hope” that the panel can reach an agreement to reduce borrowing by at least $1.2 trillion over the next decade. But Hensarling also embraced the prospect of failure.

“Listen, it’s been a roller-coaster ride,” he said on CNN. “We haven’t given up hope. But if this was easy, the president of the United States and the speaker of the House would have gotten it done themselves” in talks during this summer’s debt-limit showdown.

Sen. Patrick J. Toomey (R-Pa.), a supercommittee member and the primary author of the latest GOP offer, was only somewhat more encouraging. Talks have reached “a difficult point,” he said on “Fox News Sunday.” “I think we’ve got a ways to go.”

Mathematically, the gap between the two sides on the supercommittee has narrowed. Republicans have offered a $1.2 trillion deficit-reduction package that would cut spending by about $750 billion over the next decade while raising about $500 billion in revenue, including about $300 billion in new taxes. Democrats have offered to trim borrowing by $2 trillion, with that sum equally divided between spending cuts and tax increases.

Hensarling acknowledged that the committee is considering punting some of the hardest details of tax reform into next year, a move that would keep the deficit debate alive through the 2012 election season. In recent days, negotiations have focused almost exclusively on the tax issue, with Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Chairman Dave Camp (R-Mich.), both supercommittee members, struggling to reach consensus on how much new revenue could be generated through an overhaul of the tax code and how to force their committees to achieve that goal.

After a long day of talks Sunday, the two sides were no closer to agreement, according to sources in both parties. Significant differences remained about both the size of the tax target and the form of an enforcement mechanism, with Democrats arguing for a trigger that would automatically raise taxes unless Congress acts.

While Baucus and Camp worked to bridge that divide, other panel members were standing by, waiting to resume broader negotiations. Several said they worry that a supercommittee impasse could destabilize financial markets and undermine the nation’s rickety economic recovery.

“I think that there will be further erosion of what little confidence remains in our federal government” if the supercommittee fails, Toomey said. “I think it’s really important that we be successful.”

‘The elephant in the room’

Financial analysts agree. When Congress created the supercommittee in August as part of legislation to raise the federal debt limit, global investors focused on the European debt crisis as their foremost concern. But with the formation of new governments in Greece and Italy, the U.S. stalemate threatens to once again draw investors’ attention.

The markets have been “ignoring the elephant in the room,” Steven Ricchiuto, chief economist of Mizuho Securities, wrote in a recent research note. Investors “have been focused like a laser beam on every twist and turn unfolding in the European sovereign debt crisis and have completely ignored the apparent lack of progress being made by the super committee.”

By itself, failure to reach agreement may not have severe consequences, analysts said. If the supercommittee cannot forge consensus, the law requires that $1.2 trillion in automatic, across-the-board cuts be made to agency budgets, including the Pentagon, starting in January 2013. As long as that trigger remains in effect, the government will be on track to significantly reduce future borrowing.

Analysts, however, said the United States could risk another downgrade of its credit rating and do further damage to business and consumer confidence if the supercommittee process implodes in a chaotic display of partisan rancor — for example, if a deal is approved by the supercommittee but is killed on the House floor. And analysts are deeply concerned that lawmakers could “de-trigger” the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt.

Policymakers have sought to ease those worries. On Friday, President Obama said he would oppose any attempt to “turn off” the trigger.

But every day that passes without news of progress in the secretive supercommittee leaves the trigger looming larger. In 2013 alone, the Pentagon would lose $54.7 billion, a reduction that many people in both parties view as devastating to national security. Medicare providers would take an $11 billion hit. Another $38 billion would be struck from other agency budgets, potentially forcing mass federal layoffs.

On Sunday, Hensarling said he is “committed to ensuring that . . . America gets that $1.2 trillion in deficit reduction” one way or the other, though he said he expects lawmakers to try to implement the cuts in a “smarter fashion.”

Asked about the trigger, Toomey said he’s “not giving up on” the supercommittee reaching agreement. But “in the very, very unfortunate event that we don’t,” he said, “I think it’s very likely that Congress would reconsider the configuration.”

A larger divide

Conservative analysts were stunned by the GOP decision to retreat from its hard-line stance against raising taxes above current levels. “I actually think the Republicans appear to be caving,” said Michael Tanner, a senior fellow at the Cato Institute. “There’s more of a likelihood of a deal today than there was a week ago.”

But the numbers obscure a larger ideological divide. Democrats are willing to trim spending on health and retirement programs in exchange for an overhaul of the tax code that would generate significantly more revenue, with most of the burden borne by the nation’s wealthiest households.

Republicans want to overhaul the tax code but lower the top rate from 35 percent to 28 percent and leave preferential rates untouched for capital gains and dividends. Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, said that approach would almost certainly guarantee lower taxes for the wealthy.

The GOP offer would reduce many lucrative tax breaks for upper-income households. But it would dedicate only a small portion of the proceeds to deficit reduction. In that regard, Robert Greenstein and Jim Horney of the left-leaning Center on Budget and Policy Priorities argue that the GOP plan “appears designed to heighten the chances” that future rounds of deficit reduction “will focus almost entirely on spending cuts” — ultimately forcing lawmakers to decimate Medicare and Social Security.

Another issue that divides the parties is whether to take action to bolster the economy. Economists are particularly focused on the need to extend cuts in the payroll tax that were enacted at the beginning of 2011 and scheduled to expire at the end of the year, as well as extending emergency unemployment insurance benefits.

In theory, those extensions could be enacted outside of the supercommittee process. But, said Goldman Sachs economist Alec Phillips in a research note, “addressing these issues would be much harder outside of the supercommittee.”

“It would be very difficult to find the $160 billion in deficit reduction necessary to offset the cost of a one-year payroll tax cut and unemployment benefit extension,” Phillips said.

Economists at J.P. Morgan Chase estimate that if the payroll tax cut and unemployment benefits are not extended, it will subtract 1.5 to two percentage points from economic growth next year.

Even as supercommittee members struggle toward compromise, factions of both parties are turning against them. Sen. Jim DeMint (R-S.C.), a leading conservative, said he is “very uncomfortable” with the GOP offer. Many House Republicans are also dead set against higher taxes.

“A tax increase would be disastrous for Republicans at any time, but particularly going into 2012,” said Tim Phillips, president of the tea-party-affiliated Americans for Prosperity. “To vote for a tax increase — something that drives up revenue — a lot of people will say, ‘We’re washing our hands of these guys.’ ”

Liberals, likewise, are speaking out against cuts to Medicare and Social Security spending. Labor leaders and AARP have been particularly vocal, threatening retribution at the polls.

Moderates hope to counter the criticism with a bipartisan news conference Tuesday encouraging the supercommittee to act. But budget analysts are not optimistic.

“It’s a pretty ugly moment,” said Douglas Holtz-Eakin, a former director of the nonpartisan Congressional Budget Office who now serves as president of the conservative American Action Forum. “We’ve asked politicians who understand how to get reelected by cutting taxes and raising spending to raise taxes and cut spending. And they have no idea how do that.”

Staff writer Neil Irwin contributed to this report.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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