Do Democrats have a plan for dealing with the fiscal “cliff”? Based on interviews I conducted at Netroots Nation with four members of the Senate Democratic caucus — Senators Sheldon Whitehouse, Ben Cardin, Jeff Merkley and Sherrod Brown — it seems they have far more than one.
The end-of-the-year fiscal measures, totaling up to $7 trillion in deficit reduction, but which could cause a near-term fiscal shock that sends the economy into recession in 2013, show a contrast between the parties. We know exactly what Republicans want out of the so-called “fiscal slope”: they want to extend the Bush tax cuts permanently and replace the automatic cuts to defense with deeper cuts on the domestic side. It would both blow up the long-term deficit and create a fiscal drag, making it approximately the worst of both worlds. But it’s a plan. So where are the Democrats?
Of all the Senators, Rhode Island’s Sheldon Whitehouse had the clearest imperatives: end the Bush tax cuts above $250,000 in income, and hold harmless important safety net benefits like Social Security, Medicare and Pell grants. “All of those are the hold fast that which is good stuff,” Whitehouse said.
But this doesn’t completely address all the elements of the fiscal slope. You still have the other trigger cuts, which will drag on economic growth (only Sen. Jeff Merkley of Oregon said anything about this, that he would be willing to let the defense cuts get triggered). You also have the payroll tax cut, which expires in December. You have a series of other tax issues, like corporate tax extenders and the alternative minimum tax. And you have unemployment benefits for millions of long-term jobless.
“I think the payroll tax is gone,” said Sen. Ben Cardin (D-MD), confirming an open secret in Washington. “Nobody’s asking about it.” Nobody’s really asking about unemployment benefits either, but Cardin believed the President would make that a priority as part of an overall deal.
Among the many unanswered questions for Democrats are how they deal with the Bush tax cuts and what dividing line they use for their expiration. House Minority Leader Nancy Pelosi raised some eyebrows last month when she asked Speaker John Boehner to extend “middle class” tax cuts up to $1 million in income. All four Senate Democrats interviewed, Whitehouse, Cardin, Merkley and Sherrod Brown (D-OH) expressed a preference for drawing the line at $250,000. Cardin called it a “clear division.” Brown basically kicked the issue upstairs to President Obama, saying that he needed to stand strong on the issue. To his credit, the President reiterated his commitment at $250,000 last week.
Whitehouse broached the subject of a compromise at $500,000. But he said that could be coupled with something like lifting the payroll tax cap for Social Security, which would get at a more progressive distribution of taxes while closing the long-term social insurance funding gap. He added that his version of the Buffett rule, which would set a millionaire’s minimum tax at an effective rate of 30%, would also move in that direction. “We’ve got a real opportunity there because the traditional alternative minimum tax has become kind of a thorn in everybody’s side and frankly isn’t working for huge income earners,” Whitehouse said. “There’s an opportunity for the Republicans to say, ‘we got rid of the AMT,’ and for us to say ‘we got an effective Buffett rule.'”
Then there’s the question of how to sequence the expiration of the tax cuts. There was some sympathy, more than in previous years, for allowing all the tax cuts to expire, then coming back with “Democratic tax cuts” afterwards, daring Republicans to vote against them. Senators Merkley and Brown felt that had to be included as an option. “You can’t give up your leverage in advance,” Merkley said. Brown added that he would rather handle the tax situation before they expire, but the caucus “needs to do what we need to do. I’m not so willing to compromise this time.” Even Cardin, who seemed the most interested in a grand bargain (saying “our spending is too high and our revenue is too low”), and who wanted a simple message on the tax cuts rather than a high-stakes expiration strategy, agreed that Democrats would have to walk away if Republicans were unyielding and wouldn’t allow any split of the Bush-era tax rates.
“After January 1 creates a real benchmark moment for the Republicans who are sworn to Grover Norquist,” Whitehouse said. “Because once January 1 happens, his theory that the Bush tax cuts are going to be extended indefinitely begins to look pretty foolish when they’re actually not there… What was a god-awful tax increase becomes a wonderful tax decrease, and it’s the same thing.”
Whitehouse was perhaps the most creative about the situation, which he thought offered unique opportunities because of the must-pass nature. “When there’s a lot of big stuff moving around, interesting opportunities can present themselves, and I think coalitions can emerge,” he said. For example, he wants to try to get something done on pricing carbon in the midst of this discussion. While this seems fanciful, he said that a bloc of 15 or so Senators on the progressive side could hold out for something of value if they were needed for the deal to pass.
Merkley in particular expressed concern over a backroom deal negotiated by the leadership, without input from committees or the public. “The American people deserve not to have decisions made in back rooms during the holidays,” he said, in remarks I covered earlier. Merkley wants whatever set of solutions emerges to come out of the committees of jurisdiction. However, Whitehouse said that the committee process would be challenging given the narrow timing of the lame duck. Nevertheless, Whitehouse expected positions to be laid out in the light of day. “The President’s going to have one position, Boehner’s going to have another, the Senate will be a little bit more in play, and the public’s going to know exactly what those are.”
Cardin said the most likely scenario was an extension of everything, save the payroll tax cut, for a period of time, perhaps six months, while everyone regroups. Clearly there are a bounty of options on order here, ranging from a broad deficit deal that could harm the economy in the near term, to an extension that tries to expand growth while keeping the deficit steady.
I’m not seeing a lot of unanimity of thought, but Brown said that’s likely to change when the time comes. “We are prepared to be unified and strong next year. The President needs to lead, and I think he will.”