When President Obama’s bipartisan Commission on Fiscal Regulation and Reform released its report last month, it was widely pronounced dead on arrival. After all, it couldn’t even command the 14 out of 18 votes needed from its members to send it in legislative form to Congress for action in 2011.
Worse yet, it called for a combination of radical federal spending cuts and the elimination of $1 trillion a year of tax code subsidies – including long-time benefits for housing such as the mortgage interest deduction – that seemed exquisitely calibrated to offend just about every major interest group in Washington.
On the other hand, it did focus attention on undeniably sobering fiscal facts: Left on its current trajectory, the federal debt will exceed 90 percent of the country’s annual Gross Domestic Product by 2020, and 100 percent two to three years later. Tax revenues at that point will only be enough to pay the interest on the federal debt – primarily to global competitors with unpredictable agendas such as China – plus pay the ongoing bills for Medicare, Medicaid and Social Security. The rest of the federal budget, including all currently funded programs, services and tax breaks, will require additional borrowings.
The commission essentially told Congress and the White House: You can play ostrich and continue to ignore this fundamental dysfunction – “keep kicking the can down the road, spilling soup all over our own grandchildren,” in the words of Senator Tom Coburn, a conservative Republican commission member from Oklahoma. But it will eventually wreck the U.S. economy.
With Republicans now in control of the House, and a slimmed-down Democratic majority in the Senate, is the commission’s plan as moribund as even some of its most ardent proponents assume? For example, William Gale, co-chairman of the nonpartisan Tax Policy Center, told me, “it’s hard to see how this goes anywhere this year or next, given the political realities. The Republicans didn’t storm in here to compromise.” Most op-ed pundits appear to agree.
But could this be too dark a view? I think that it is, particularly if you see the commission’s report as something other than a strict architectural blueprint that needs to be followed in every detail. Its true significance is that it’s a broad thematic plan with multiple options to get to deficit reduction over time.
Even if the 212th Congress manages to include just pieces of the recommendations in its budget and tax legislation this year and next, the commission will have left important marks. And that is why some of the most senior officials and staff at special interest groups will tell you in private discussions that at some point, prized tax benefits and largesse from federal spending programs will have to be reined in – limited in some way as part of larger congressional negotiations requiring every interest group to contribute something to a solution.
“Obviously I can’t say this publicly,” said one high-ranking trade group official, “but somewhere along the way, we are probably going to have to hold our noses and participate.”
Consider some of these still-developing factors that might shed light on where tax and spending reforms affecting the deficit could be heading in the 212th Congress:
- On January 25, President Obama will deliver his State of the Union message, followed shortly in February with a new budget proposal. Though no authoritative details have leaked out on the content of either, it’s likely that in the State of the Union he will praise the deficit commission’s bold, bipartisan recommendations and use his bully pulpit to call for corporate and individual tax reform, reduction of tax expenditures plus federal spending restraints.
- Republicans in Congress already are on board with major portions of the commission’s deficit reduction plan – especially its call for significant cuts in federal spending, freezing salaries, eliminating government jobs and moving ahead on corporate tax reforms. Republican-sponsored bills already are on the conveyor belt that would slash the budgets of most agencies, and – stunning though it sounds – cut congressional and executive branch paychecks by 15 percent. As part of a strategic move to the political center in advance of the 2012 elections, Obama is likely to pursue negotiations with business community leaders early in the new session to map out “revenue neutral” corporate tax changes, including lower rate brackets.
- Two of the most influential House Republican members of Obama’s deficit commission – Paul Ryan of Wisconsin and Jeb Hensarling of Texas – say they support “80 to 85 percent” of the commission’s recommendations, but felt they had to vote no on the remainder. And don’t assume that liberal Democrats will be unwilling to go along with spending reductions. The senior Democratic senator from the president’s home state, Dick Durbin, was under heavy political pressure from unions and other groups on the left to vote against the drastic spending cuts in federal program budgets called for by the commission. But he held his nose and voted for the report. The point here: There just may be something to build on in Congress that’s being missed by the pundits – especially if the issue is framed forcefully by the President as a once-in-a-lifetime opportunity to get the country back on track.
So where does that leave real estate tax breaks – not just the mortgage interest deduction but capital gains exclusions and property tax writeoffs? For the short term, probably pretty safe. In his new budget set for February, Obama may well renew his “chipping away” strategy of limits on writeoffs for home owners with high incomes, or might even endorse the deficit commission’s concept of phasing in a $500,000 limit on total mortgage debt eligible for deductions.
But the fact remains: Housing sales and construction are still a leaden weight on the national economic recovery. Cutting homeowners’ tax benefits is a tough sell at any point in the economic cycle, but pushing Democrats and Republicans to agree to anything substantial in a down market heading into an election season would be an exercise in political self-immolation.
Down the line, however, everything will be on the table for paring, including housing’s most sacrosanct tax subsidies.