The Debt Ceiling Legislation: Preparing for Federal Program Cuts and Possible Tax Reform Now

IMPLICATIONS FOR BUSINESSES

The debt ceiling legislation, known as the Budget Control Act of 2011, S. 365 (the Act), was adopted by the House of Representatives last night and the Senate today, and was signed into law this afternoon by the President.  This legislation is likely to set the agenda and frame the fiscal debates for the remainder of this Congress and is expected to have significant implications for businesses operating in the fields of energy, the environment and natural resources.  Federally funded programs, loan guarantees and tax benefits for these businesses, as well as entitlements, are “on the table” for modification, repeal or defunding, under the terms of the Act.

INITIAL REDUCTIONS OF $917 BILLION

In addition to raising the debt ceiling by $900 billion, the Act initially mandates $917 billion in reductions in discretionary spending between 2012 and 2021 by reducing and capping annual appropriations.  The specific programs that will be affected by this $917 billion in spending cuts will be determined each year through the budget process of the Congress.  If your business benefits from federal funding, whether through a tax benefit, grant or loan guarantee, we encourage you to be aware of these potential changes and prepare a strategy to deal with the new federal fiscal reality created by this Act.

ADDITIONAL SPENDING REDUCTIONS OR REVENUE ENHANCEMENTS

The Act establishes a process for Congress to achieve at least $1.2 trillion in additional deficit reduction between 2012 and 2021.  These cuts will lead to a further increase in the debt ceiling of at least $1.2 trillion. The total increase in the debt ceiling of at least $2.1 trillion is expected to carry the nation into 2013.

TWO WAYS FOR CONGRESS TO ACHIEVE THE ADDITIONAL SPENDING REDUCTIONS OR REVENUE ENHANCEMENTS

The Act provides two ways for Congress to achieve the additional cuts.  First, a Joint Select Committee on Deficit Reduction is established with a goal of recommending to Congress by November 23, 2011, $1.5 trillion in additional spending cuts or “revenue enhancements.” Both Houses of Congress must vote on the recommendations of the Joint Select Committee by December 23, 2011. If Congress enacts the Joint Select Committee’s legislation that achieves at least $1.2 trillion in additional deficit reduction, these additional reductions will occur between 2012 and 2021.  Second, if Congress fails to enact legislation by January 15, 2012 that contains greater than $1.2 trillion in additional deficit reduction, then $1.2 trillion in “automatic” spending cuts will occur through a “sequestration” process.  Approximately half of these reductions will occur from defense spending and half from non-defense spending, with a few federal programs protected from these reductions.

BALANCED BUDGET AMENDMENT

The Act requires a vote in both the House and Senate by the end of 2011 on a Balanced Budget Amendment.  Article V of the United States Constitution requires a two thirds vote of both Houses of Congress to approve a constitutional amendment for submission to the states for ratification.   If a Balanced Budget Amendment passes both the House and Senate and is submitted to the states for ratification, the debt ceiling would be increased by $1.5 trillion for a total debt ceiling increase of $2.4 trillion.  Approval of a Balanced Budget Amendment does not change the Joint Select Committee’s goal of $1.5 trillion in deficit reduction or eliminate the automatic sequestration of $1.2 trillion in spending.

SPENDING REDUCTIONS V. REVENUE ENHANCEMENTS

It is important to understand that the Joint Select Committee, whose operations are explained in more detail below, could achieve its goal of $1.5 trillion in deficit reduction through spending cuts and/or tax increases.  Any proposed increase in tax, however will require the support of at least 7 members of the Joint Select Committee.  This means that the tax policy debate, which many thought would not begin until after the 2012 elections, could possibly be in play with the establishment of this Joint Select Committee. 

Importantly, the Congressional Budget Office has scored the nation’s projected debt with the assumption that the Bush tax cuts, which were extended for two years shortly after the 2010 elections, will expire at the end of 2012.  The resulting revenue increases from the expiration of these tax cuts cannot be counted toward the deficit reduction required by this Act. Therefore, any tax reforms included in the recommendations of the Joint Select Committee must be new, such as changes to the tax treatment of carried interest, taxation of publically traded partnerships as corporations, eliminating existing energy tax incentives or the repeal of other such tax benefits.

BOTTOM LINE

Democrats and Republicans could use the Joint Select Committee platform to try to engage in “tax reform” in 2011.  A tax reform debate could also occur in 2012 that is linked less to the Budget Control Act of 2011 and more to the impending expiration of the Bush tax cuts at the end of 2012.  Or, the two parties could set the tax reform debate aside until after the November, 2012 national elections.

We therefore encourage all of our clients and friends to identify now both the current federal programs as well as the current tax provisions that benefit their businesses, quantify the importance of these provisions to your businesses and contact us about developing a strategy to protect these provisions or find alternatives to these provisions.  We know that reductions are coming for federally funded programs and we believe that the tax reform debate could occur sooner than many of us have anticipated.

JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

The Joint Select Committee process provides opportunities for our clients and friends to make the case to avoid reductions in federal programs of importance to them and to protect their current tax benefits.  Therefore, some details about the composition and operation of the Joint Select Committee may be of particular interest.

COMPOSITION OF THE JOINT SELECT COMMITEE

The Joint Select Committee will consist of twelve members, to be selected within 14 calendar days of August 2nd.  The Senate Majority and Minority Leader and the Speaker of the House and House Minority Leader will each appoint 3 Members of Congress to the Joint Select Committee.  The Speaker and the Majority Leader of the Senate will each appoint a Co-Chair from among the Joint Select Committee members.

The Joint Select Committee is authorized to hold hearings, require the attendance of witnesses and the production of documents, receive testimony, gather evidence, administer oaths and hire committee staff.  Upon written request by the Co-Chairs, federal agencies must provide technical assistance to the Joint Select Committee.

RECOMMENDATIONS OF THE STANDING COMMITTEES OF CONGRESS

The standing committees of the House and Senate may make recommendations to the Joint Select Committee until October 14, 2011 regarding the reductions or revenue enhancements that should be included in the Joint Select Committee report to Congress.

THE REPORT OF THE JOINT SELECT COMMITTEE

The Joint Select Committee must report its deficit reduction recommendations to the House and Senate by November 23, 2011.  A majority vote of the members of the Joint Select Committee (7 of 12) will be required for approval of the Committee report.  Any member of the Joint Select Committee may file additional views on the report within three calendar days if that member provides notice of his or her intention at the time of the vote. 

PRIVILEGED CONSIDERATION OF THE JOINT SELECT COMMITTEE REPORT

The Joint Select Committee must deliver its report to the President, Vice President, the Speaker of the House, and the Majority and Minority Leaders of the House and Senate by December 2, 2011.  The legislative recommendations of the Joint Select Committee must be introduced in the House on its next legislative day and in the Senate on the next day the Senate is in session.

The Joint Select Committee recommendations will not be subject to amendment in either the House or the Senate.  Each House must vote on the recommendations by December 23, 2011.  In the House, the legislation will be debatable for 2 hours with one motion to limit debate available and with no other motions available to delay the vote on final passage.  In the Senate, the legislation will be debatable for up to 30 hours with one non-debatable motion to limit debate and no opportunity to filibuster the motion to proceed to consideration of the recommendations.  Final passage of the legislation in the Senate will require only a majority (51) vote.

TERMINATION OF THE JOINT SELECT COMMITTEE      

The Joint Select Committee will terminate on January 31, 2012.