Congress is faced with the dual challenges of finalizing a 2012 budget and deciding whether to increase the federal debt ceiling. Several alternative budget plans have been released or are under consideration:

President Obama released his fiscal year 2012 budget on February 14, 2011. The President’s budget claims to reduce the federal deficit by approximately $1.1 trillion over the next decade. Nearly two-thirds of the reduction comes from spending cuts, including a five-year freeze on non-security discretionary spending and a $78 billion reduction in the spending requested by the Pentagon over the next five years. The President’s budget also limits certain tax deductions as well as proposes to improve America’s international competitiveness by reducing the corporate tax rate and eliminating special interest tax “loopholes.”

The House Republican Plan, known as the “Ryan Plan” after House Budget Committee Chairman Paul Ryan (R-WI), is the most aggressive in terms of cost cutting. Ryan proposes to reduce government spending by $6.2 trillion over ten years and reduce the federal deficit by $4.4 trillion over the next decade. Over $1 trillion of the proposed spending reduction comes from the assumption that the health care law passed in 2010 will be repealed. The plan reduces approximately $389 billion from Medicare, $735 billion from Medicaid and $923 billion in discretionary spending over the next decade. The Ryan Plan passed the House on April 15 on a largely party line vote of 235-193. Like the President’s plan, the Ryan Plan reduces the U.S. corporate tax rate and proposes the elimination of “special interest” tax breaks. Along these lines, Chairman Ryan (along with Speaker of the House, John Boehner), recently raised the possibility of reducing certain tax benefits for oil companies.

The so-called “Gang of Six” may also release a budget proposal in the near future.. Comprised of six members of the U.S. Senate – three Democrats and three Republicans – the Gang of Six budget is expected to closely track the recommendations from the National Commission on Fiscal Responsibility and Reform (the Bowles-Simpson Commission). Many expect the plan will, like the Ryan Plan, reduce the federal deficit by approximately $4 trillion over the next 10 years. However, whereas the Ryan Plan achieves its deficit reduction almost exclusively through spending cuts, the “Gang of Six” proposal is expected to include approximately $3 trillion in spending cuts and $1 trillion in revenue increases over ten years. The “Gang of Six” proposal may be in jeopardy, however, as Senator Colburn recently left negotiations, saying that the group was at an impasse.

Finally, President Obama recently established a bipartisan, bicameral working group, headed by Vice President Biden, that seeks to find a long-term solution to America’s budget deficit. The group has had several meetings, and the participants have described the discussions as generally positive although no formal proposals have been advanced yet.

Finding common ground between the House, Senate and White House will not be easy. Many believe that the Gang of Six budget, if they are able to come together and produce one, would represent the best opportunity to reach a compromise amongst the various parties. However, it is not clear any budget which contains tax increases will be able to pass the House. Likewise, it is not clear that a majority of the Democrat-controlled Senate will pass any budget that negatively impacts the major entitlement programs – Medicare, Medicaid and/or social security – without some sort of tax increase on “high income” earners – however that is ultimately defined.