Initial Public Reaction Shows the Difficulty the National Commission on Fiscal Responsibility and Reform Will Have in Meeting its Presidential Mandate--and How Controversial and Painful Deficit Reduction Will Be

Background on Panel

President Obama created the National Commission on Fiscal Responsibility and Reform by executive order on February 18, 2010. The Commission has 18 members: six appointed by the President and 12 members of Congress (selected by the Speaker, House Minority Leader, Senate Majority Leader, and Senate Minority Leader, with each having three appointments). Click here for a list of Commission members.

The Commission is specifically charged with recommending proposals to balance the budget (excluding interest payments) by 2015 and proposing recommendations "that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government." The Commission is required to approve a final report by December 1, 2010, and approval of the final report requires support of at least 14 members of the Commission.

The Commission has held five meetings and a public forum. Its next two meetings are scheduled for November 30 and December 1, 2010.

Co-Chairs' Proposal

On November 10, 2010, Alan Simpson and Erskine Bowles, the two Co-Chairs of the Commission, presented Commission members with a proposal identifying spending and tax reforms that the Co-Chairs calculate to result in $4 trillion in deficit reduction in 2012 through 2020. Click here for a copy of the proposal.

The proposal states that the spending and tax changes would not begin to take effect until 2012 in order not to "disrupt a fragile economic recovery."

Here are highlights of the proposed spending and tax reforms:

  • Limit Discretionary Spending by Imposing Enforceable Spending Caps ($1.464 trillion in estimated deficit reduction 2012-2020)
    • FY 2012 discretionary spending is "rolled back" to the 2010 level
    • Discretionary budget authority is cut 1% in each of FYs 2013, 2014, and 2015
    • Discretionary budget authority is indexed to inflation in FY 2015 through FY 2020
    • Click here to see the Proposal's $200 billion in illustrative savings
  • Increase Revenue through Comprehensive Tax Reform
    • The proposal presents several options, each of which has lower rates than current law and fewer deductions and credits than current law ($751 billion in estimated deficit reduction 2012-2020)
      • Option 1: Reduce tax expenditures and lower income tax rates. Alternatives range from (a) eliminate all tax expenditures to achieve an 8%, 14%, 23% rate structure for individuals (capital gains taxed like ordinary income) and a 26% corporate tax rate to (b) retain certain tax expenditures and allow individual income tax rates to be as high as 13%, 21%, 28%, and adopt a "territorial system"
      • Option 2: Adopt tax reform like the Wyden-Gregg proposal (i.e., 15%, 25%, 35% rates for individuals; 26% corporate tax rate with a reduction in corporate tax incentives)
      • Option 3: "Tax Reform Trigger" (i.e., call for tax reform proposal by end of 2012, existing tax incentives to be reduced across-the-board until reform is enacted)
  • The proposal would also increase revenue by increasing the gasoline tax (to fund transportation spending) and using "chained CPI" as an inflation adjustment in the tax code ($210 billion in estimated deficit reduction 2012-2020)
  • Reform Mandatory Spending ($733 billion in estimated deficit reduction 2012-2020)
    • The proposal would adopt a variety of health care changes. Click here to see the health care changes.
    • The proposal would change inflation adjustments, reduce retirement benefits for federal workers, and make other mandatory spending changes. Click here to see the proposed changes.
    • The proposal also includes options to restore Social Security solvency. Click here to see the Social Security and payroll tax proposals.

Public Reaction to Proposal

Not surprisingly, the Co-Chairs' proposal has gathered little praise. It has generated significant criticism, both for its proposed spending reductions and its tax changes. Nancy Pelosi has been quoted as calling it "simply unacceptable." Others have criticized it as a giant tax increase. The President and some Commission members, such as Tom Coburn, have been circumspect, neither endorsing nor dismissing the proposal.

What's Next

The Commission members will meet on November 30 and December 1, 2010. Unless other Commission members present an alternative proposal, the only proposal before the Commission will be that of the Co-Chairs. Even with modifications, it is difficult to see 14 Commission members agreeing to the Co-Chairs' proposal. If no plan is acceptable to 14 members of the Commission, the Commission will have to choose between issuing no report (which would be a very public admission of failure) and issuing a limited "official" report and one or more "unofficial" documents to which some, but less than 14 Commission members, subscribe.

SNR Denton's Take

The combination of the Commission's supermajority requirement, bipartisan make-up, predominant membership of Senators and Representatives, and ambitious deficit reduction mandate, along with the political sensitivity of the only realistic options, will make it nearly impossible for the Commission to issue a fully-endorsed report that provides any significant detail or roadmap. The fact that the Co-Chairs decided to release their own proposal last Wednesday strongly suggests that they are unable to round up the 14 votes required to produce a Commission-endorsed proposal. If this assessment is accurate, the Commission will likely deal with its internal divisions by issuing both "official" and "unofficial" recommendations and options. Several other commissions have dealt with the inability to reach agreement in this way. See, e.g., the January 1995 report of the Bipartisan Commission on Entitlement and Tax Reform; the April 2000 report of the Advisory Commission on Electronic Commerce. Further, even if the Commission were able to buck the odds and issue a detailed official report, it is unclear why Congress would treat the Commission's findings any more seriously than it has treated other recent reports, such as the President's Advisory Panel on Tax Reform report issued Nov. 1, 2005.

Nonetheless, some or all of the Commission's official or unofficial recommendations could find their way into President Obama's FY 2012 Budget proposal. For that reason, those who would be negatively impacted by one or more aspects of the Co-Chairs' proposal may seek to influence the Commission's findings and recommendations, either directly or through the court of public opinion. The greatest short-term effect of the proposal may be, however, to harden partisan lines, making it even more difficult to resolve pending tax and spending issues in the lame duck session that started this week.