By Katy O'Donnell, Jim Tankersley, and Clifford Marks
December 1, 2010
Adding detail - but no fundamental policy shifts - to a draft plan floated last month by its chairmen, President Obama's fiscal commission called this morning for "America's leaders to put up or shut up" and adopt a massive overhaul of taxation, government spending and the social safety net, in order to reduce the nation's mounting national debt.
The commission's final proposal was dubbed The Moment of Truth and officially released at 9:30 a.m., but posted earlier on several websites. It includes cuts to both defense and non-defense discretionary spending; comprehensive tax reform; Social Security reform; and health care cost containment.
Appearing on Capitol Hill following the release, commission co-chairs Alan Simpson, a Republican, and Erskine Bowles, a Democrat, expressed little hope that Congress will act on the plan's recommendations immediately, or even that the plan would gather the 14 votes on the commission required to guarantee the proposal a Senate vote. But the chairmen warned Washington would be forced to deal with the issue in short order.
"Whether we get two votes or 18" on the commission, Simpson said, "this baby ain't going away. Oh sure, it may be buried in an unmarked grave, and soon, but when the votes for the budget and extending the debt limit and debate on that comes up in the spring, this cadaver will rise from the crypt."
Bowles said the commission had "fundamentally changed the debate in America. We've put the debt issue on the map." And he conceded that "I don't like every aspect of this plan. To vote for this plan, each of us will need to tolerate provisions we oppose or previously opposed to reach a compromise."
The report scored an early endorsement from Sen. Kent Conrad , D-N.D., a commission member, who declared that after reading it three times, he concluded "while there are things that I dislike intensely - and I do - there are also things in this plan there are grand slam home runs for the American economy." He said he would support the plan strongly "because I don't see another alternative. I just don't."
Another commission member, Sen. Judd Gregg , R-N.H., also said he would back the plan. Sen. Dick Durbin , D-Ill., said he was studying the proposal and would not commit either way.
The most important reactions will come from congressional leaders and the president. When Simpson and Bowles released a draft document three weeks ago, they were met with indignation and outrage. House Speaker Rep. Nancy Pelosi, D-Calif., called the plan "simply unacceptable."
The final plan offers little real change from that proposal, other than more details and some flexibility in rates.
Perhaps most importantly, the final proposal adds emphasis on the importance of economic growth to deficit reduction. It pledges to delay major spending cuts until 2012 to allow the economy more time to recover, and it floats an idea to further spur growth: asking Congress to consider a temporary payroll tax holiday, originally proposed by the Bipartisan Policy Center's unrelated Domenici-Rivlin commission, to encourage consumer spending.
Still, the basic concept of the plan's attack on the deficit remains the same. It begins with a modest increase in the overall tax burden, softened by a broad tax reform that knocks out most tax breaks and reduces tax rates at every level. It then calls for an increase in the retirement age for Social Security -- which would save tens of billions of dollars over the next decade alone -- and more changes aimed at slowing the growth in health care costs.
The commission goes further than the president's stated goal of reducing the deficit to 3 percent of gross domestic product, instead whittling it down to 2.3 percent of GDP by 2015. It caps revenue and spending, meanwhile, at 21 percent of GDP each.
The plan recommends the immediate implementation of fundamental tax reform and the elimination of nearly all of the 150-plus tax expenditures, with a few exceptions: the earned income tax credit, the child credit, mortgage interest deductions (but only for primary homes), employer-provided health insurance credits, retirement savings and pensions credits, and charitable giving deductions. Itemized deductions would be eliminated, and capital gains and dividends would be taxed at ordinary rates.
The plan cuts tax rates across the board, reducing the top rate to between 23 percent and 29 percent. Originally, the co-chairs recommended establishing three rates -- 15 percent, 25 percent, and 35 percent. Their proposal to implement a 15 cent-per-gallon fuel tax hike within the next five years remains unchanged.
The corporate tax rate would be streamlined, with the rate necessarily falling between 23 percent and 29 percent, down from the current top rate of 35 percent. The plan suggests a 28 percent rate in its illustrative proposal, a 2-point increase over the chairmen's mark proposal. Meanwhile, a territorial system would be established for foreign-owned companies with U.S. subsidiaries, allowing them to keep foreign profits. All tax deductions and expenditures for businesses would be eliminated.
The plan calls for discretionary spending to return to pre-crisis 2008 levels in 2013, while freezing spending in 2012 at 2011 levels and constraining spending growth to half the rate of inflation through 2020. It would cut non-war defense spending at the same rate as non-defense spending, while war spending would fall under the responsibility of the president, who would be required to propose annual limits.
The plan adds details on how to reduce federal health care spending, which were noticeably absent in the initial Simpson-Bowles proposal. They include changing how Medicare pays doctors, scrapping a long-term care insurance plan created by President Obama's signature health care bill, overhauling medical malpractice litigation, and chipping away at Medicare and Medicaid costs through a variety of measures.
But the final proposal still lacks specifics on how to control upward-spiraling health care cost increases throughout the economy - the biggest driver of long-term budget deficits, according to the Congressional Budget Office.
The commission's boldest attempt to control those costs is by eliminating the tax exemption for employer-paid health benefits, which many economists say would help reduce costs by forcing individuals to shoulder more of the burden of their health-care choices.
The retirement age would be raised to 69 from 65 in order to rein in Social Security spending to ensure the program's solvency.
More generally, the plan proposes budget process reforms to encourage accountability in the budgeting process.
The plan faces opposition from both liberals and conservatives. Republicans remain implacably opposed to any increase in the overall tax burden. Rep. Paul Ryan , R-Wis., the author of a long-term fiscal plan that includes no tax increases, signaled earlier this week that he was unlikely to support the co-chairs' plan. Democrats, meanwhile, oppose cuts in domestic programs and are even more militant about imminent cuts in Medicare. Rep. Jan Schakowsky, D-Ill., one of the panel's most outspoken liberals, has served notice that she will vote against cuts to either Medicare or Social Security.
People close to the commission told National Journal that at least 10 of the panel's 18 members support the plan. Under the panel's charter, any recommendation to Congress needs the support of at least 14 members. But that threshold has always been viewed as unrealistic, given the intense party polarization in Congress. Current House and Senate lawmakers make up 12 of the panel's members.
By Katy O'Donnell, Jim Tankersley, and Clifford Marks
December 1, 2010