Fiscal Cliff Talks Continue but Action Still Delayed

December 12, 2012

Talks on a budget deal continue this week, as House Speaker John Boehner (R-Ohio) and President Barack Obama are exclusively working through their differences as a way to avert a fiscal crisis. Obama and Boehner met on Sunday, Dec. 9, for the first time in 23 days to discuss the fiscal cliff, but it still seems a deal has not been reached. Both sides are trying to find a mutual agreement in order to prevent $600 billion in automatic tax increases and spending cuts scheduled to take effect at the beginning of January if no deal is reached.

The two major elements of the fiscal cliff are automatic spending reductions (sequestration) set to start on Jan. 1 and tax cuts that expire at the end of the year. Further complicating these discussions is the fact that government is expected to hit its borrowing limit in late January or early February and some Republicans are fearful of further spending cuts before the debt ceiling is lifted. President Obama has said that any deal on taxes and spending must ensure there will not be another crisis over the debt ceiling early next year.

Boehner’s proposal, as outlined in a letter on Dec. 3, called for $2.2 trillion in deficit reduction over ten years, with $800 billion coming from new revenue generated through tax reform that closes special interest loopholes and deduction while lowering rates. The remaining $1.4 trillion would come from cuts to mandatory and discretionary spending programs—including Medicare—on top of those already enacted in the Budget Control Act of 2011.

Obama rejected the speaker’s proposal citing that it “does not meet the test of balance” and has subsequently argued that the Republican plan lacked specifics and would generate insufficient revenue. He also continued to insist that a final deal would have to include a rate increase for high-income taxpayers.

Instead, the president supports $1.6 trillion in new tax revenue over ten years, plus $400 billion in cuts to federal spending. Democrats, including Obama, want the reduced tax rates extended for married taxpayers earning less than $250,000 a year and single filers earning less than $200,000, while Republicans want them continued for all brackets.

Obama is confident that Republicans may be able to accept some rate increases as long as it is combined with serious entitlement reform and additional spending cuts. Once Republican leadership takes that framework, the president feels a balanced plan will be achievable.

Speaker Boehner has called for the president to put forward a revised offer of his own, and argues that he’s got an obligation to send one to Congress that can pass both chambers.

House Majority Leader Eric Cantor (R-Va.), who controls the schedule for that chamber, has indicated that the House will not adjourn the 112th Congress until a credible solution to the fiscal cliff has been found.

Please click here for NSBA’s Tax Checklist, to which any serious tax reform proposal ought to adhere.