Practitioner's Corner

Revenue Needs in 2012


By Keith Smith

The failure of the Joint Committee on Deficit Reduction to reach agreement on deficit reduction measures last November along with the very short two-month extension of the payroll tax holiday, unemployment benefits and the Medicare Doc Fix in December, signals another very difficult year of fiscal challenges facing the Administration and the Congress. 

The need to extend the payroll tax holiday (some $100 Billion), unemployment benefits (approximately $26 Billion) and the Medicare Doc Fix (about $35 Billion) for an additional 10 months beyond February 29th will bring into focus the need for substantial payfors if these provisions are to survive in 2012.  If Congress wants to try and include the general package of business tax extenders (some $35 Billion), or an extension of “bonus” depreciation ($5 Billion), costs and necessary payfors will escalate.  The grand total of all these items comes to $201 Billion in needed revenue.

Add to this the “trifecta” of sequestration of budget accounts in 2013 ($1.2 Trillion/10 yr.), the expiration of the 2001-2003 tax cuts for 2013 (some $ 2.8 Trillion/10 yr.) and the need for the debt limit to be increased again ($1 Trillion minimum/1 yr.) late this year, and you have the makings of a perfect partisan storm in a presidential election year.  The Congress and the Administration will have to create the political will to find the solution.  We believe that tax reform will be part of that solution, eventually.  In the meantime, payfors will be necessary throughout 2012 in order to achieve passage of some or all of these provisions.

By the end of February, Congress will have to find some $160 billion in new spending cuts or new revenues for a 10-month extension of the payroll tax holiday, unemployment benefits and the Doc Fix.  This figure is based on the House passed version from late last year that includes a two-year Doc Fix.  At this juncture almost any payfor is very controversial.  Some of the “payfors” that have recently been floated include; a federal employee pay freeze for civilians (House bill), spectrum auctions (House bill); a millionaires surtax (Democratic Leader Nancy Pelosi recently offered this as a payfor); repeal of oil and gas tax benefits for energy companies (President Obama’s State of the Union address); repeal of all or parts of the new health care law (House passed measures). During the opening session of the Conference Committee this week, all 20 members asked their colleagues to step up to the challenge and work out a bipartisan deal.  Some believe that the scope of payfors for this exercise will be narrower than the range of options listed above.  We believe that it is likely some balance of spending reductions and revenue increases will be necessary to achieve passage.