In my “Poised on the Edge of the Fiscal Cliff” blog post of December 18, 2012, I bemoaned the fact that 13 days before the end of the year, Congress had yet to decide what to do about the upcoming fiscal trifecta—the end of the Bush-era tax cuts, the threat of the sequestration, and the breaching of the debt limit. On top of these issues, the perennially recurring challenge we know as the “doc fix” remained unsettled. I had assumed that resolving these issues would involve at least a down payment on deficit reduction that combined more tax revenues with less spending. What I wouldn’t have guessed is that the decisions made in the first days of January would have resulted in both increased taxes and increased spending—but that’s what the Taxpayer Relief Act of 2012 (enacted January 2, 2013) ended up doing.
The primary focus of the agreement was to allow taxes to go up for the wealthiest Americans. The income level that triggers the higher bracket varies depending on the type of tax. The highest marginal tax rate in 2013 for federal income tax returns to 39.6% for individuals earning more than $400 000 and for couples earning more than $450 000. Capital gains taxes and taxes on dividends have been increased from 15% to 20% for the same group. For individuals earning at least $250 000 and couples earning at least $300 000, itemized deductions have been capped and exemptions phased out. The highest rate on the estate tax increased from 35% to 40%, but the exemption of $5 million per person remained.
Several provisions of the act increased spending, such as the extension of jobless benefits for 1 year for the long-term unemployed and the extension and expansion of the child tax credit, the earned income tax credit, and a tax credit for tuition. The payroll tax reduction, which had been in place for 2 years, was allowed to expire, returning to its previous rate of 6.2%.
The Debt Limit
The debt limit has proven equally ineffective thus far as a motivator of change. Contrary to what occurred with the 2011 debt limit crisis, House Republicans decided not to try to force spending cuts in exchange for raising the debt ceiling, agreeing instead to increase the debt ceiling to cover existing spending obligations until late May.
As part of the January agreement, the House also required that the Senate pass a budget before late May, suspending pay for senators if they did not. However, because it is unconstitutional to change congressional pay during an ongoing session, in practical terms, senators would still receive their pay, although they might have to wait until the end of the congressional session for that to happen. The Senate Democrats have been saying they expect to release a budget in March, something that has not happened since 2009.
The House is currently considering a debt ceiling extension that would last through the end of the fiscal year but at a spending rate that assumes the sequester cuts remain in place. Senate Democrats have not yet indicated whether that provision would be acceptable.
The January agreement also postponed the onset of sequestration until March 1. This set of spending cuts—which are split evenly between reductions in Defense Department spending and in discretionary “other spending” (but exclude Social Security, Medicaid, and Veterans Affairs services and limit Medicare cuts to a 2% reduction in reimbursement for health care services by physicians and hospitals)—had been described, until the past few months, as so unpalatable that it couldn’t possibly be allowed to occur. However, sequestration spending reductions are now in place, and despite dire predictions of the consequences of sequestration, at the moment at least, little effect is being felt, aside perhaps from the White House canceling its tours.
No one disputes that the rigidity associated with the sequestration-directed spending reductions will cause more problems than might occur with comparable but targeted spending reductions. But it is unclear whether Congress and the White House will be able to agree on a replacement spending bill.
Once again, the large reductions in physician payments scheduled to occur under Medicare were postponed—this time until the end of 2013. The cost of postponing the 27% reduction in Medicare payments was paid for by reducing Medicaid payments to hospitals, a decision that did not please the hospitals. And once again, various physician groups as well as individual members of Congress have been complaining about their collective inability to find a way to replace the current provisions that keep resulting in unacceptable across-the-board payment reductions for physicians.
Because the Congressional Budget Office has recently estimated the 10-year cost of repealing the mandated annual fee adjustment to be $138 billion rather than the almost $300 billion associated with earlier estimates, there is some thought that maybe Congress will permanently repeal the provision. But that would still require Congress to come up with a substantial amount of new revenue or savings from existing programs and also to decide what type of reimbursement system for physicians to put in place of the current one, a payment system widely agreed as paying for volume rather than value.
So Many Missed Opportunities…
It is unhelpful that the increased taxes and the reductions in discretionary spending that are now going into effect are occurring in a piecemeal fashion, which could end up making a comprehensive restructuring of the country’s fiscal position even more difficult. And although sequestration does reduce spending, it only reduces discretionary spending, which was already subjected to spending caps in 2011, and ignores the real drivers of future spending—entitlement programs.
Republicans have indicated a strong interest in tax reform, by which they mean broadening the base to remove some of the current distortions in the tax system. Tax reform can be done on a budget-neutral basis, or it can be used to raise additional revenue without having to raise rates. If tax reform were done as part of a larger strategy, that would make entitlement programs fiscally viable after the baby boomers reach retirement.
Maybe there could be a “grand bargain” in our future after all—or at least a more rational fiscal result than we’ve seen to date. At this point, however, the likelihood of that happening is looking pretty slim.
About the author: Gail Wilensky, PhD, is an economist and Senior Fellow at Project HOPE, an international health foundation. She directed the Medicare and Medicaid programs, served as a senior adviser on health and welfare issues to President George H. W. Bush, and was the first chair of the Medicare Payment Advisory Commission. She is an elected member of the Institute of Medicine.
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