Taxmageddon sparks rising anxiety
By Lori Montgomery and Rosalind S. Helderman,
Defense contractors have slowed hiring. Tax advisers are warning firms not to count on favorite breaks. And hospitals are scouring their books for ways to cut costs.
Across the U.S. economy, anxiety is rising about the potential for widespread disruptions after the November election, when a lame-duck Congress will have barely two months to resolve a grinding standoff over taxes and spending.
The halls of the U.S. Capitol are already teeming with people warning of disaster if lawmakers fail to defuse a New Year’s budget bomb scheduled to raise taxes for every American taxpayer and slash spending at the Pentagon and most other federal agencies.
Last week, hospital executives came to complain about big scheduled cuts in Medicare payments. Next month, university presidents plan to raise the alarm about big scheduled cuts in federal research grants. And the chief executives of Lockheed Martin and other aerospace giants last Wednesday passed out digital countdown clocks ticking off the seconds until “over 1 million American jobs” will be lost to big scheduled cuts in defense.
“How do you plan for chaos?” Marion Blakey, president of the Aerospace Industries Association, sighed during a break between meetings with lawmakers, who could provide little assurance that the spending cuts would be averted. “It’s almost a unique moment in government because there’s so much at stake. And there’s nothing that inspires confidence that this will get done.”
The uncertainty is already prompting some firms to take action. Many more say they will be forced to contemplate layoffs and other cost-cutting measures long before the end of the year unless the Republican House and the Democratic Senate come up with an alternative path to tame deficits. But with control of the White House and both chambers of Congress in play on Nov. 6, aides say it is impossible to begin mapping a strategy for compromise until they know who wins the election, by how much and on which issues.
In the meantime, political leaders are focused less on finding solutions than on drawing lines in the sand. In a speech Tuesday, House Speaker John A. Boehner (R-Ohio) plans to address the issue of national debt, which will once again be nearing its legal limit in January, just as the tax hikes and spending cuts are due to hit.
According to advance remarks provided to The Post, Boehner will insist that any increase in the debt limit be accompanied by spending “cuts and reforms greater than the debt limit increase” — the same demand that pushed the Treasury to the brink of default during last summer’s debt-limit standoff.
“This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance,” Boehner plans to say at the Peter G. Peterson Foundation fiscal summit. “If that means we have to do a series of stop-gap measures, so be it.”
Last week, the House approved a plan to protect the Pentagon in January by reconfiguring $110 billion in across-the-board spending cuts — known as “sequestration” — so they would fall exclusively on domestic programs, such as food stamps and health care for the poor.
But one aerospace lobbyist glumly noted that the House bill will be “dead on arrival” in the Senate, where Majority Leader Harry Reid (D-Nev.) has vowed to block any effort to undo the defense cuts unless Republicans drop their opposition to higher taxes for the wealthy.
“The answer is very simple to our Republican colleagues who want to help with defense: Revenues,” said Sen. Charles E. Schumer (D-N.Y.). “The way to deal with sequestration is put revenues on the table.”
As lawmakers bicker, the approaching deadline has taken on the nightmarish “aspect of a slow-motion train wreck,” said Ajay Rajadhyaksha of Barclays Capital, with onlookers helpless either to prevent the carnage or to get out of the way.
“I feel like we’re really in uncharted waters,” said Robert Greenstein, president of the left-leaning Center on Budget and Policy Priorities. “On the one hand, you say: ‘We’re a functioning country. Somehow, we’re going to work this out.’ But then you ask: ‘What’s the scenario for a potential solution?’ And you can’t come up with anything that you can see actually passing Congress.”
The impending upheaval is the result of multiple policy changes all set to hit at the same time. The George W. Bush-era tax cuts are scheduled to expire in December, along with a temporary payroll-tax holiday sought by President Obama. Meanwhile, Congress last summer paired a debt-limit increase with $1.2 trillion in across-the-board spending cuts over the next decade that almost no one wants to see happen.
For the moment, most economic forecasters are taking a sanguine view. Mark Zandi of Moody’s Analytics predicts that the lame-duck Congress will make a deal to rescind half the spending cuts and raise taxes for the wealthiest 2 or 3 percent of households — but leave everyone else alone.
“There’s a lot of room for compromise,” Zandi said, noting that Boehner and Obama came close to agreement last summer.
But others are skeptical that lawmakers, fresh from the combat of the campaign trail, will be able to agree on anything. Federal Reserve Chairman Ben S. Bernanke recently warned that the Fed would have “absolutely no . . . ability whatsoever” to cushion the shock to the economy if the nation sails over what he calls the “fiscal cliff” in January. And many analysts worry that the uncertainty will itself begin to dampen economic growth long before New Year’s Day.
Kaman Corporation chief executive Neal Keating said his firm is already scaling back hiring in Jacksonville, Fla., where the company builds cockpits for Blackhawk helicopters. He was hoping for new contracts to refit the nation’s aging fleet of A-10 Warthog attack planes.
“So many of those things are now uncertain,” Keating said, adding that plans to hire 200 workers have been put on hold. Without further clarity, Keating said, he could be forced to start ramping down purchases and cancelling shifts sometime this summer.
“One of the most frustrating things is [that] people in Washington say, ‘Well, we don’t think sequestration is going to happen,’ ” he said. “But we’re responsible for planning and running a business.”
Nicholas Wolter, chief executive of the Billings Clinic, a chain of nonprofit medical facilities in Montana, said a scheduled 2 percent cut in Medicare payments would hammer his finances. But options being circulated to replace those cuts could also hurt, he said. In addition, a formula that maintains Medicare rates for doctors is also set to expire.
“You’re not sure which of them might end up in legislation,” Wolter said. “They’re all potentially real.”
Tax policy is also causing heartburn. Kate Barton of Ernst & Young said she is advising clients not to count on the renewal of a slew of popular business tax breaks that expired in December. Even incentives for research and development, which are revered in both parties, could get caught in the year-end logjam.
“We’re not trying to be alarmist. But it’s a time when the telescope and the crystal ball are really foggy,” Barton said. “You talk to one person and you hear one thing; you talk to another and you hear something else.”
This month, about 120 university lobbyists gathered near Metro Center in hopes that top aides to Reid and Boehner would shed light on the fiscal end game. They didn’t. Instead, Reid’s deputy chief of staff for policy, Bill Dauster, cited a “good, if dour,” independent analysis that “many election outcomes would produce dynamics not conducive to getting a deal” at all before the new Congress takes office in January.
“You just don’t get the sense that there’s even a secret plan yet. It’s scary,” said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, who has been meeting with corporate leaders in an effort to build support for a comprehensive deficit-reduction plan.
During a recent dinner in Washington, Lawrence H. Summers and Robert Rubin mulled the situation. Both men led the Treasury Department during the Clinton administration, and Summers was Obama’s top economic adviser in 2009 and 2010. They concluded that, whatever happens on Election Day, exhausted lawmakers are likely to resort to a short-term deal that extends all the tax cuts, postpones the spending cuts and pushes the deadline for fiscal calamity into the spring of 2013.
But even that move would be risky, Rubin argued, potentially inviting another downgrade of the U.S. credit rating, roiling financial markets and shattering confidence that the United States will ever get its debt problem under control.
Solutions are easy to come by “when you’re sitting at the Council on Foreign Relations in New York,” said Rubin, the council’s co-chairman. “It’s a lot harder to do it when you’re sitting in Washington and it’s one minute of midnight.”