In late 2010, Obama administration officials feared that the weak economy was about to take a big hit from scheduled tax increases on middle- and upper-class earners. Republicans had just seized control of the House in midterm elections, and it wasn’t clear whether a bipartisan deal could be reached to head off the tax increases before they took effect at the start of the new year.
The White House and lawmakers were furiously negotiating. Treasury Department lawyers examined whether Geithner could freeze the withholding tables, according to people familiar with the matter.
The lawyers didn’t agree on the circumstances under which Geithner could act. Some said he could act only if there was near-certainty that Congress would prevent rates from rising. Others argued that he could defer changes to the tables if there was simply a high probability that negotiators would strike a deal in the new year to extend the tax cuts. Geithner’s top advisers concluded that he could probably postpone changes to the tables under those somewhat looser circumstances, but a deal between the parties in December 2010 averted the need to make a final decision.
Spokeswomen for the White House and the Treasury Department declined to comment on what the administration would do this time around.
Although the administration could soften the immediate impact of higher income tax rates, there would be less latitude for the alternative minimum tax and the payroll tax cut. The payroll tax would be increased immediately, costing the average family about $80 per month. The AMT, which affects nearly 30 million upper-middle-income households, would become an issue for people as they begin to file their taxes, because it affects 2012 income.
The administration could also have power to shape the automatic spending cuts, known as sequestration, so the initial hit to the economy is not that great.
The law calls for $93 billion in cuts to defense and domestic spending in the fiscal year ending Sept. 30, 2013, but much of that spending, though technically allocated in 2013, would be carried out in later years. As a result, the government must cut only $45 billion through the end of the fiscal year.
And the government can postpone many of these cuts until later in the year, though not indefinitely.
“The government has a moderate amount of flexibility to mitigate the immediate effect of sequestration,” said Richard Kogan, a senior fellow with the Center on Budget and Policy Priorities and former Obama administration budget official. “But over the long run, there’s no getting around the fact that when funding is cut, you must do less.”
Kogan said federal agencies could move cash around at the beginning of the year, fully funding pressing needs by using money marked for spending later in the year, betting that a fiscal deal between the White House and Congress would eventually restore normal funding.
“The parts [of government] that have the most flexibility are those that engage in construction, procurement or research-type projects — projects where the timing isn’t critical but what really matters is that a multi-year plan is ultimately carried out,” he said. “Because the timing isn’t critical, they have the most flexibility to defer the effects of the cuts.”