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The Pileup Behind the Fiscal Slope, and the Consequences of Inaction

Say what you will about the 2010 deal to extend the Bush tax cuts, which helped to set up what we’re seeing this month. But there was definitely a virtue in getting it done by early December, allowing for a productive lame duck session that repealed Don’t Ask Don’t Tell, passed the New START arms reduction treaty, and several other measures. Because this entire lame duck has been consumed with fiscal slope negotiations, and really only the tax rate and social insurance part of it, bills that might have had a chance to pass through Congress if the pipeline were unclogged instead remain dormant. And unlike 2010, the bills in question in 2012 are more of the must-pass variety.

For example, the Violence Against Women Act hasn’t passed the House, and while I believe the appropriations associated with it extend into March (hey, good news, at the end of March Congress has to pass another budget), they could easily lapse, and so would all kinds of resources for victims of domestic abuse.

The doc fix ends in December, and the Center for Medicare and Medicaid Services has already begun a process which would lower Medicare reimbursement rates by 27%, under the “Sustainable Growth Rate” formula that Congress has never let go into effect.

The appropriation of emergency funds for response to Hurricane Sandy may be underway in the Senate, but it’s a shadow play until the House can put the fiscal turmoil behind them and focus. This is among the most unkind consequences, as millions suffering under the weight of that disaster will probably get no additional federal help in the coming weeks.

Oh yeah, and your milk prices will go up to as high as $8 a gallon in the event that Congress fails to pass a farm bill or an extension of some kind, and federal price supports revert back to 1949. Wheat prices are likely to soar as a result as well, and quite a few things get made with wheat, I reckon.

The wind energy sector is likely to collapse when the wind production tax credit, something litigated during the Presidential campaign, expires at the end of the year. The wind industry tried to broker a compromise of a phase-out of their tax credit after six years to provide certainty, but that’s an artifact of a fiscal slope deal.

Perhaps the most invisible consequence, the expiring tax measure that actually hits an area of strength in the economy, is the one I’ve been talking about since April, the expiration of the Mortgage Forgiveness Debt Relief Act. This would force borrowers receiving mortgage debt relief, in the form of a principal reduction or short sale, to pay taxes on the amount forgiven. The effect will be to completely end principal reductions and short sales, leading to more foreclosures and also taking a meat axe to the housing market, where as many as 35-40% of all home purchases in some distressed areas come from short sales.

None of these implications have anything to do with the common set of consequences most people would describe of going down the slope, like taxes rising for every American, or unemployment checks halting for 2 million Americans, or mass furloughs of federal workers and reductions in agency budgets as a result of the sequester. I think the economy can handle the consequences of the big things for a while, especially if the Administration takes smart action like freezing withholding rates or avoiding the worst near-term effects of the sequester through evasive action at OMB. But the rest of these consequences are going to be hard to avoid. You can safely blame this Congress, the worst in living memory, for allowing such a pileup.

Photo by ici et ailleurs under Creative Commons license.

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David Dayen

David Dayen