As shutdown week 2 approaches, 4 subtle signs of a possible deal

by DLA Piper

Congressional sources indicate, however, that a deal might not come together politically until very close to the October 17 - 18 deadline at which Treasury Secretary Jack Lew has warned Congress that, absent additional borrowing authority, the United States could default on some of its obligations.

These elements involve the following:

  1. There are indications that House Republicans may be prepared to drop their insistence that any deal involve major changes to the Affordable Care Act.  Among the signs that support for this demand may be dropping is an op-ed in the Wall Street Journal by House Budget Committee Chairman Paul Ryan in which he sets up conditions for a deal but does not include ACA.
  2. Various Presidential spokespersons have indicated that the White House might accept short-term extensions of the debt ceiling and the continuing resolution to fund the government, potentially allowing all sides in this dispute to buy some time for further discussions.
  3. The House has adopted legislation to create a 20-member Congressional commission to recommend proposals to deal with the nation’s fiscal challenges, and, while the President and Democrats generally rejected the proposal, there was some positive reaction among Democrats to the fact that this approach may signal a shift away from the ACA and towards a  process to discuss fiscal issues in a more traditional setting.
  4. Over the past day or so, there has been an increasing amount of public discussion over what the parameters might be in budget talks (i.e., would the talks involve tax reform?) suggesting some comfort with the concept among policymakers.  In that regard, Republican priorities include entitlement program cuts and reforms, revenue neutral tax reform, and adjustments to the spending sequester for defense. Democratic priorities appear to include protecting the Affordable Care Act, raising revenue through some aspect of tax reform, and sequester changes in social service programs.

The President has reiterated that he will not negotiate as a precondition to the adoption of spending and debt ceiling legislation, but he has indicated that once those are adopted, he will negotiate fiscal matters with Congressional Republicans.  Speaker John Boehner (R-Ohio), for his part, has indicated that he will not walk away from the current dispute empty handed. A short-term spending extension and debt ceiling increase followed by fiscal talks could provide both the President and the Speaker respectively with an outcome that could be characterized as a victory of sorts; the debt increase and spending bills would be adopted without conditions, but, because they are short term, policy changes would have to be considered before further extensions later in the year.

Major challenges exist in crafting a fiscal deal.  For one thing this is the very approach that was tried two years ago during the last major debt ceiling debate and which essentially failed. Instead of a negotiated spending reduction plan, Congress defaulted under that agreement to the across-the-board budget cuts known as the “sequester” and which many Congressional Republicans and Democrats would like modify to protect different spending priorities from being cut further.   As a result, an initial question being asked is whether a new budget process can be undertaken with agreed-upon enforcement mechanisms to avoid the type of failure that occurred in 2011.  Otherwise, if negotiations are premised on short-term spending and debt ceiling extensions, the government could be in an impasse again in a matter of weeks.

There are disagreements over whether a fiscal deal should, or even could, involve some form of down payment in the form of immediate spending cuts as a way to provide greater enforcement  of a deal and win greater support of conservatives who might be skeptical of ever reaching a long-term spending deal with Democrats.   A number of spending cut provisions have been circulating over the past few years on the Hill and within  the Administration, including the use of so-called “chained CPI” to compute increases in federal support payments and savings in federal health programs, which could end up in discussions.

A major challenge to including spending down payments is the fact that Democratic support for spending cuts has generally been premised on their inclusion in a larger fiscal deal that also increases spending in some areas and that raises additional revenues through the tax system, possibly as part of tax reform.  The Republican model for tax reform in the House, however, is revenue neutral, i.e., the tax system would not raise additional net revenues, while Senate Democrats approved a budget plan that called for almost US$1 trillion in new revenues through tax reform.

The chairmen of the tax writing committees have been working intensively throughout the year on comprehensive tax reform and reportedly are hoping that any fiscal deal reached will incorporate a set of instructions mandating their committees to approve tax reform proposals by a date certain.  However, neither committee appears ready at this time to consider and quickly approve comprehensive tax reform and the disagreement over the revenue neutrality issue has not been resolved. As a result, the inclusion of tax reform in a near-term budget deal would in all likelihood have to be based on future Committee action. Because Democratic support for spending cuts may be premised on raising additional revenues, it may be difficult to achieve a political agreement at this time that would include a “down payment” of spending cuts; broad instructions both for spending cuts and revenues may the best possible deal that could be achieved over the next week.

As the second weekend in the shutdown approaches, followed shortly thereafter by  the deadline which Treasury Secretary Lew has pointed to for an extension of the debt ceiling, pressure from both political and economic leaders will grow for Congress to act to avoid a potential default and reopen the government.  Despite the seemingly inflexible public statements from the principals in this debate, there is a growing sense that there are elements for a “deal to deal” to fall into place.  While political considerations appear to stand in the way of reaching a deal today, the hope among many policymakers is that as the next deadline approaches the President and Congressional leaders will find a way to move forward, even if that essentially means buying some more time to try and resolve their differences while avoiding the risk of a fiscal default.  However, even if a deal is struck to buy some time, deep divisions continue to separate the parties, making the negotiations ahead no easier than they have been over the past several years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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