Nothing will get done. There is no deal without tax hikes. Those sentiments, echoed by Democrats on and off the Hill, pass these days for conventional wisdom. However, there is a newly optimistic group of Republicans in the House and Senate who see the potential for some mini-deals.
Ideas floating around include a Medicaid reform — more flexibility akin to block grants for states in exchange for more expanded coverage — and a much-discussed swap for flexibility on the sequester caps for some small tweaks on entitlements that may result in big savings in the long run. The latter makes policy sense given the decline in the annual deficit (because of discretionary spending caps) while the debt (driven mostly by entitlements) climbs. One GOP senator described this as “billions for trillions.”
The reason the sequester deal might work, despite Democrats holding out for a tax hike, is that Democrats seem bound and determined to lighten up on the caps. That gives Republicans what they incorrectly thought they had in the shutdown: leverage. They are sanguine with keeping the sequester in place; Dems are not. The issue then is how badly the Dems want to ease up on the caps and what they will give in trade.
House Budget Committee chairman Rep. Paul Ryan (Wis.) in his opening remarks at the first budget confab made the additional point that “the Federal Reserve is keeping interest rates unusually low. If we lock in structural reforms now, we will help keep interest rates low, which will boost our economy. But this opportunity won’t last forever. Once interest rates rise, debt payments will eat up a bigger slice of the federal budget. In fact, those payments might grow so large that they bankrupt us. Structural reforms are crucial to economic growth, and we should act now to get a down payment.”
Republican lawmakers in the House and Senate with whom I have spoken are not favorably disposed toward a tax reform involving only corporate taxes, even though it is generally accepted that lower rates would generate more economic activity and revenue. The prospect of lowering corporate but not individual tax rates is not inviting because the of the politics (favoring big business!) and the policy implications (e.g., people will game the system by incorporating to get lower rates). However, there is something more discrete that has potential.
Republicans, businesses and labor unions have long favored either a repatriation amnesty or an incentive to bring overseas profits back to the United States. This would be billions in new revenue and potential capital for new plants, investment and jobs. Republicans may be willing to earmark some of that revenue for infrastructure spending that Dems want. The “infrastructure bank” is viewed by the GOP as a top-down government boondoggle, but if Dems could give up their attachment to that idea, a deal might be had. Interestingly, in his speech this week, Sen. Mike Lee (R-Utah) suggested an infrastructure plan, but one run by the states.
Factors favoring a deal along one or more of the ideas outlined above include the ailing economy, a White House in need of a deal and newly empowered moderate deal-makers who can avoid a replay of the shutdown and help focus Congress on achievable gains. However, weighing against all that is a recalcitrant Sen. Harry Reid (D-Nev.), who seems to be at the beck and call of the most liberal senators; a significant disruptive element in the House; and the mistaken belief among conservatives that they need to do only one thing: harp on Obamacare’s debacle. My sense is that the factors favoring a deal only slightly outweigh the negative side of the ledger. From my vantage point, a very small deal on just a couple items may be doable.
Beyond that there is some new optimism about immigration reform. Pro-immigration Senate Republicans are willing to look at a piecemeal approach and think a partial deal (maybe on DREAM candidates and/or on high-skilled visas) might be in the offing. They think the recent “fly-in” lobbying effort this week by business and other home-state constituents did register with lawmakers. On this I am less optimistic, only because it entails opening divisions within the GOP that Republicans would like to get past.
And that leaves domestic energy development. This, for many Republicans and for red-state Dems from energy-producing states, seems like a no-brainer. It is certainly an easier lift than immigration reform. The problem there may simply be a matter of time on the calendar for the remainder of the year.
All, then, is not gloomy on the Hill. The spectacular defeat of the shutdown squad may have opened the door to some constructive legislating. That would be a change for the better.