President-elect Romney would be laser-focused on a blueprint for a long-term budget deal with congressional Democrats, so it unlikely that congressional Republicans would agree to any long-term deal until he takes office. Instead, a more likely scenario is for Congress to simply pass legislation to push back the sequestration trigger date and provide for a short-term extension of the Bush era tax cuts.
The Obama Administration has proposed to "decouple" the tax cuts so that only those individuals making under $250,000 would benefit, while every other American would see their taxes increase. That decoupling is even too much for many Democrats; in fact, Minority Leader Nancy Pelosi (D-CA) is seeking to raise the trigger income level to one million dollars. Republicans, for the most part, seek comprehensive tax reform and would simply extend the Bush tax cuts for one year in order to provide the new Congress with the necessary time to consider and pass tax reform without engendering additional uncertainty. Thus, it is important to note that a temporary extension following a Republican victory would include tax breaks for families making more than $250,000 per year.
That said, a Romney victory would likely preclude the possibility of a “grand bargain” to address the expiring Bush tax cuts and the looming sequestration during the lame duck session. However, there is every reason to expect Congress to reach a short-term agreement to deal with the approaching “fiscal cliff.”
Despite calls from some progressive Democrats and conservative Republicans to allow the Bush era tax cuts to expire and sequestration to be triggered, there is growing sentiment on Capitol Hill that neither will occur. Without congressional action by the end of the year, automatic tax increases will hit every American and the cuts enacted during the Bush Administration that reduced rates for every tax bracket will revert back to 2001 levels.
Similarly, the defense portion of the sequestration that was part of last year’s deal to avert a debt ceiling crisis will eviscerate the U.S. military with massive, automatic cuts. In all, $560 billion in tax hikes and spending cuts are on auto- pilot unless action is taken. The Congressional Budget Office estimated that if those policies aren’t changed the gross domestic product will fall four percentage points, hurling the U.S. economy into another recession. Economists are virtually unanimous in saying that unless Congress changes course before December 31st, the country will be driven over an economic "cliff" and into a new recession.
Other Legislation Pending Resolution
Although the expiring Bush tax cuts and budget sequestration will dominate the lame duck legislative agenda, the following issues/bills could also be in play:
- Defense Authorization Bill: Congress has passed a Defense Authorization bill every year for the past 50 years, yet there is a very real possibility that the streak could come to an end this year. Given the limited floor time available during the lame duck session and the large number of unresolved defense policy issues in play, congressional defense authorizers could be faced with having to offer a severely scaled-back bill. Nevertheless, Senate Armed Services Committee Chairman Carl Levin (D-MI) recently stated, "We’ll consider anything to get it done.”
- Farm Bill Reauthorization: Like the Defense Authorization bill, unresolved policy disputes prevented Congress from passing a five-year farm program reauthorization bill before Congress’ adjournment in September. With a continuing standoff between Republicans and Democrats in the House over funding levels for the federal food stamp program nowhere near resolution, it is likely that Congress will pass a short-term extension, rather than a multi-year farm bill. Given the associated policy and timing issues, a Romney victory is unlikely to have a significant impact on how the bill is handled in the lame duck session.
- Financial Reform (Dodd-Frank Repeal) Bills: One of the signature legislative achievements of the Obama Administration is the "Dodd-Frank Wall Street Reform and Consumer Protection Act," though that measure never addressed the root causes of the financial crisis - federal housing policy and the GSEs - and has effectively stifled the U.S. economic recovery through unprecedented regulation of the financial services sector. Since its enactment two years ago, the Democratic majority on the Senate Banking Committee has steadfastly refused to hold meaningful hearings on Dodd-Frank, much less provide corrective relief. At the same time, the Republican-led House Financial Services Committee has held more than 65 hearings on the law and heard testimony from 370 public and private sectors witnesses. In addition, the Committee reported 18 bills to the full House that would repeal, reform or fix Dodd-Frank provisions that harm the economy, and the House of Representatives has passed seven of those bills. While Congress is not expected to consider any major financial services legislation during the remainder of 2012, a Republican victory in November would encourage Congress to move forward with a number of narrower, rifle-shot amendments during the upcoming lame duck session. And if Mitt Romney is elected President, he has promised to repeal much of Dodd-Frank, while putting in place “sensible regulations.”
- Energy Tax Extenders: Whatever happens on Election Day, members of the current Congress will have a full slate of legislative business to complete before the year is over, including deciding whether to extend a suite of renewable energy tax breaks that are now scheduled to disappear after December 31st. The political composition of the White House and the Congress beginning in 2013 will undoubtedly have some bearing on how members comport themselves during the lame duck session. A variety of expiring tax provisions, such as the production tax credit for wind, are likely to attract the most attention on a crowded lame duck agenda. The wind industry has spent much of this year arguing that an extension of its 2.2-cent-per-kilowatt-hour credit is vital to avoid layoffs by developers and turbine manufacturers. Biofuels producers have also been urging Congress to extend two key tax breaks for their industry. Complicating the lame duck picture is the expectation that at least the first half of next year will be dedicated to a broader push to reform the tax code and while that effort is expected to decide the long-term fate of benefits energy producers receive, lawmakers are cognizant of the desire to avoid disrupting the industry with a sudden end to the breaks come January.
Moving beyond the lame duck session, a Republican victory in November will lead to a comprehensive effort to fix the nation’s tax code to focus on jobs and growth. A Romney Administration would seek to make permanent across-the-board 20 percent cuts in marginal rates; maintain current tax rates on interest, dividends, and capital gains; eliminate taxes on interest, dividends, and capital gains for those with an adjusted gross income (AGI) below $200,000; eliminate the death tax and repeal the Alternative Minimum Tax (AMT). In addition, a Romney Administration would cut the corporate tax rate to 25 percent; strengthen and make permanent the research and development (R&D) tax credit; switch to a territorial tax system; and repeal the corporate AMT.
At stake are two vital concerns for America’s future: How will we generate sufficient revenue to balance our budget without discouraging economic activity, and will the burden of taxation fall equitably on all Americans?