Tuesday, December 26, 2017

What Next? The Fiscal Agenda for 2018

David Super

The enactment of the Republican tax legislation is clearly a watershed substantively, politically, fiscally, and procedurally.  It puts an end to the “noxious but ineffective” characterization of the new Administration and Congress, a myth that already had little credibility with anyone who follows health care, the environment, financial regulation, judicial appointments, or other fields.  It also cuts a huge hole in the federal budget at a time in the economic cycle when consolidation and shrinking deficits are more in order.  And it dashes the fairy-tale fantasies of those that imagined that Republican “moderates” would save us from the new regime’s worst excesses.

     With the tax legislation’s enactment coinciding with the end of the calendar year, this seemed like a good time to look forward.  This post addresses the immediate future:  what 2018 is likely to bring us in Congress.  A subsequent post will ponder how the extraordinary enactment of the tax legislation could, and should, change the legislative process.  

     The Republican leadership did an impressive job of postponing potentially distracting issues so that they could move the tax bill.  A great many of those will now reassert themselves with a vengeance, driven either by the exigencies of governance or the demands of one or another part of the Republican coalition.  For example, a range of industries have been quietly advancing extreme anti-environmental legislation that could irreversibly transform this country.

     Fiscal policy again figures to be important.  Before leaving for Christmas, Congress passed another continuing resolution, extending appropriations for government functions lacking permanent funding forward through January 19, 2018.  The idea is that Congress and the Administration will negotiate full-year funding levels by then, allowing enactment of an omnibus appropriations bill for the fiscal year that started October 1.  In theory, this omnibus appropriations bill could become the vehicle for moving legislation on several other pending issues, including relaxation of the “sequestration” caps on discretionary spending, the reauthorization of the Child Health Insurance Program (CHIP), and protection of “Dreamers” left exposed to deportation by President Trump’s rescission of the Deferred Action for Childhood Arrivals (DACA).  In practice, these plans may well fall apart.

     Republican and Democratic negotiators reportedly have reached a tentative agreement on the amount by which they would raise the caps on domestic and defense discretionary funding this year and next.  Since the sequester first struck in 2013 under the Budget Control Act of 2011, a widespread recognition that the caps it imposes are unworkable has driven repeated bipartisan agreements that raised those caps and offset the costs with cuts in mandatory, or entitlement, spending. 

     The problem this year is that negotiators remain far apart on what those mandatory offsets would be.  The relatively painless cuts have long-since been enacted.  With Republicans seeing this as the year to radically reduce entitlement programs and Democrats preparing for a broad campaign to defend those programs, agreement on offsets may prove elusive.  If so, Congress may simply pass a year-long continuing resolution that continues each program’s funding at last year’s levels with a substantial across-the-board reduction to bring the totals under the sequester caps.  Widespread budget cuts coming so shortly after the tax legislation seem unlikely to improve the latter’s popularity even if they are technically unrelated.

     Finding spending offsets also appears likely to be an obstacle to extending CHIP.  Although its cost pales relative to that of the tax law, congressional Republicans have insisted that it cannot be renewed without offsets in other domestic spending. 

     Finally, offsets – in addition to the Administration’s hostility toward immigration – will be a major obstacle to granting legal status to Dreamers.  On December 15, the Congressional Budget Office (CBO) estimated that providing legislative relief for the Dreamers would cost $26.8 billion over ten years, overwhelmingly in health insurance subsidies and the earned income tax credit (EITC).  The Administration and Republicans in Congress will surely demand offsetting domestic spending cuts for these costs – in addition to whatever policy concessions, such as expanding the border wall, they extract.  Finding domestic spending offsets for both DACA restoration and an expensive border wall will be extremely difficult, all the more so if this is on top of spending cuts to pay for sequester relief and CHIP reauthorization.

     On any or all of these issues, Democrats could try to reject the framework that domestic spending – even continuations of existing programs – requires offsets but that massive upper-income tax cuts do not (and that the Pentagon’s budget is off-limits in any event).  Doing so, however, would likely require a willingness trigger a partial government shut-down and the political skills to persuade the electorate to blame Republicans for that shut-down.  Congressional Republicans have repeatedly burned themselves in similar maneuvers and many Democrats are on record opposing government shut-downs for any reason.

     One add-on that does seem likely to appear in any appropriations legislation for the rest of the year is a cancellation of the mandatory spending sequestration that the tax legislation triggered.  The pay-as-you-go provisions in federal budget process law require automatic cuts in certain entitlement programs if Congress cuts taxes, or raises mandatory spending, beyond levels in current law without adequate offsets.  The tax legislation runs radically afoul of these rules, meaning that the Office of Management and Budget (OMB) is required to order automatic cuts.  Although many low-income programs are exempt from this sequestration, Medicare would be cut 4% and some other programs, like administration of Pell Grants, would be zeroed out completely.  (This sequester of mandatory programs for pay-as-you-go violations is distinct from the sequester of discretionary spending that the Budget Control Act imposed in 2013.)  Democrats do not want these cuts on the merits, and Republicans do not want to be blamed for them, so legislation waiving this sequestration should face little difficulty.

     Looking farther ahead, House Republicans have made clear that they now intend to pursue entitlement cuts to offset some of the cost of the tax legislation.  They often frame this as “welfare reform”, which would purge millions from Medicaid, SNAP (food stamps), housing assistance, and other anti-poverty programs in part with phony “work requirements.”  Speaker Paul Ryan would like to move these measures as another reconciliation bill, immune from filibuster and requiring only a bare majority in the Senate.  The tax legislation was enacted as the reconciliation bill for the current fiscal year, 2018.  Congressional Republicans can pass a budget resolution for fiscal year 2019 to provide reconciliation protection for entitlement-cutting legislation.  Remaining to be seen is whether Senate Republicans share their House counterparts’ enthusiasm for attacking Medicaid, SNAP, disability benefits, and even Medicare in the wake of passing unpopular upper-income tax cuts.   

     Although the news media is abuzz about the Trump Administration’s supposed populist turn in proposing infrastructure legislation, this is difficult to take seriously.  Although the President’s proposal apparently depends heavily on funding from state and local governments and the private sector, it would still carry a substantial price-tag.  Congressional Republicans will not move such legislation without offsets for the cost and staunchly oppose revenue measures.  Congressional Democrats seem unlikely to support Medicare or food stamp cuts to pay for an infrastructure proposal that includes selling off public assets to private investors at bargain prices.  And most congressional Republicans appear to prefer to allocate any entitlement savings they can extract to deficit reduction or financing tax cuts (which increasingly appear indistinguishable). 

     Fitting in here somewhere will be attention to the statutory debt limit.  CBO estimates that it will need to be raised by late March or early April.  Historically, many Republicans (who happily vote for budget-busting tax legislation) turn deficit-hawk when it comes time to raise the debt limits, forcing Republican leaders to pass measures primarily with Democratic votes.  This fall, Democrats repeatedly warned Republicans not to assume that Democrats would blithely vote for the mammoth debt limit increases to accommodate the tax bill.  If Democrats stand their ground, Republicans may have great trouble rounding up enough votes to pass a debt limit measure on their own; if they can, it would only be through stacking the measure with entitlement cuts (which could cause Senate Democrats to prevent the measure from coming to a vote).  The bruising effort to secure far-right Republican votes for a bill that can pass the Senate could well exhaust the political capital of House Speaker Ryan just as it did that of his predecessor, John Boehner. 

     Optimists can hope that this dilemma will drive our radically non-conformist president to do what President Obama could not bring himself to do:  declare the debt limit unconstitutional and direct the Treasury to ignore it.  As we have just seen, the debt limit provides absolutely no traction against budget-busting legislation, but it does cause a great deal of mischief:  distracting the public from the true sources of fiscal problems, empowering irresponsible lawmakers willing to gamble with the nation’s economic health, and unjustly embarrassing those willing to cast the hard but necessary votes to raise the limit and prevent a crisis. 

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