President Obama, Members of Congress offer deficit reduction proposals as Supercommittee continues its own review process leading to the 23 November 2011 deadline to submit its proposal to Congress for up-or-down votes in both Houses
The Joint Select Committee on Deficit Reduction, or "Supercommittee" was established to substantially reduce the long-term U.S. federal budget deficit. The "Supercommittee" process is unprecedented – at least in recent history – in its potential size and breadth of impact across the federal budget within a very limited time to act.
Many industries are likely to be affected by cuts in federal spending and in tax incentives
- Under the Act, the Supercommittee must report legislation by 23 November 2011, implementing US$1.2 trillion or more in budget savings over a 10-year period. This savings can be generated from budget cuts and policy changes in any area: entitlement programs, such as Medicare and other health spending, defense and domestic discretionary spending, and "tax expenditures" which are tax deductions and tax credits available under current law and often targeted to specific industries. (President Obama and congressional Democrats in particular, as well as some Republicans, have proposed to eliminate U.S. "tax loopholes," covering a broad swath of U.S. tax provisions.)
As almost any federal program or U.S. tax benefit is potentially at risk under a very rapid timeline for congressional action, we are advising all clients to pay very close attention to developments in this process (which is only a prelude to additional spending cuts and tax reform to come), and to get engaged immediately where important interests are at stake.
For example, initial proposals from the Administration and House Democrats would target:
- Healthcare providers, including hospitals and other providers, pharmaceuticals, and medical device companies that would be impacted by President Obama's proposal to cut $320 billion from Medicare and Medicaid;
- U.S. multinationals with valuable intangibles or significant U.S. debt;
- Investment partnership managers;
- Financial services businesses;
- Oil, gas, and coal producers;
- Life insurers;
- Retailers and other companies with significant inventories and rising costs;
- Businesses that rely heavily on independent contractors; and
- Agriculture businesses.
- Congressional Republicans have generally promoted spending cuts to achieve the Act's deficit reduction target, and have criticized many of President Obama's tax increase proposals.
- There may be some agreement, however, with regard to eliminating what are perceived as "tax loopholes." Speaker of the House John Boehner (OH) for instance, recently suggested that the Supercommittee should "develop principles for broad-based tax reform that will lower rates for individuals and corporations while closing deductions, credits, and special carveouts in our tax code."
Several key elements should be kept in mind for any company/entity with U.S. interests:
- 14 October and 23 November are critical deadlines for congressional action. Any client affected by these changes should put a plan in action immediately to engage in this process in advance of these dates.
- Cuts and tax changes are not likely to be just short term. They are more likely to affect U.S. policy for the next decade and beyond.
- Although we do not expect comprehensive U.S. tax reform this year, the Supercommittee may well lay the foundation for the broad outlines of the shape of tax reform to be developed over the next 1-2 years.
Supercommittee – The Way Ahead
- The 12 members of bicameral, bipartisan Supercommittee, appointed in August by their respective party leaders, are:
Click here to see table.
- Between now and 14 October 2011, the congressional committees with jurisdiction over spending programs and tax provisions will submit recommendations for budget cuts to the Supercommittee. The Supercommittee is not obligated to adopt the recommendations of these other congressional committees.
- By 23 November 2011, the Supercommittee must report legislation providing for US$1.2 trillion or more in additional budget savings over 10 years, which can be drawn from cutbacks in government operations spending, healthcare entitlement programs (Medicare and Medicaid), and the Social Security retirement programs, and possible cutbacks in current tax deductions and credits and other tax increases.
- By 23 December 2011, Congress must vote on the Special Committee's plan. Both the House and Senate will be allowed up-and-down votes only, without amendments.
- If the Special Committee's plan does not pass the Congress, or if the plan results in less than US$1.2 trillion in savings, the Act calls for automatic spending cuts to go into effect, which would ensure cuts of US$1.2 trillion in federal spending over 10 years. These automatic cuts would be divided equally between defense programs and non-defense programs, and will include cuts to healthcare providers under Medicare. Social Security and Medicaid would be excluded from cuts. The severity of these across-the-board U.S. budget cuts, particularly on the defense side, is seen as providing strong leverage upon the evenly-split Supercommittee to reach agreement upon a deficit reduction plan.