What the Lame Duck Will Look Like if Democrats Retain the White House

by King & Spalding

[authors: Thomas J. Spulak, George C. Crawford, Lloyd N. Hand, Allison F. Kassir, William C. Talmadge]

If President Obama is reelected, expect Democrats to argue that they have a mandate to extend certain of the tax breaks for those making under $250,000 while letting the tax cuts expire for those on the upper income end. In addition, the President will argue for the continuation of the 2 percent reduction in Social Security payroll taxes that is set to expire. Making the argument is one thing. Translating it into action in the face of continued Republican opposition is another.

A seemingly intractable problem, regardless of the post-election configuration, is what to do with the looming sequester. Economists, think tanks, as well as various government departments, have been sounding the alarm over the devastating impact of the scheduled sequester. Members of Congress waiting for information from the Administration on how the sequester would fall on specific programs were disappointed by the required report issued by the Administration early this month, which didn’t get into specifics on the impact of sequestration on individual programs.

While most Members say that they want to avoid a sequester, there are minorities in both parties that argue a sequester should be allowed to take place. (Conservatives want the budget cuts to occur to help balance the budget and reduce government spending. Liberals may rather have no sequestration at all, but if it is to occur, they want it to fall on defense spending as well as discretionary domestic spending.) Others believe that regardless of the approach, it should not be done by the current 112th Congress in a lame duck session but rather by the 113th Congress that begins in January 2013. That is not the view of the leadership of both parties, but absent an agreement on how to avoid the sequester, it may become the reality.

Leaders of both parties in the Senate are preparing comprehensive plans to address the budget deficit in lieu of the sequestration that would include changes to Medicare and Social Security and an overhaul of the tax code. One such plan would include using the recommendations of the Bowles-Simpson Commission as the basis. And while both parties believe that there could be a reduction in most tax rates funded by an elimination of numerous tax deductions, Democrats are adamant that the tax rates on high income-earners must be increased. To that end, look for a newly-reelected President Obama to argue that the price to pay for avoiding the sequestration is an increase in the income tax on those making over $250,000. And he has the leverage to do so. The tax rates on upper income earners will go up and the sequestration will take effect if the stalemate that is ever present in Washington rears its head. In one of the few instances in recent history, failing to act is not an option.

As for the timing of any deals, some believe that there will not be enough time in the lame duck to address the backlog of legislative issues and that the Congress will be in session for only 10 days and leave, pushing all issues into 2013; others recognize the growing concerns of the public, and the market, and see the need to act in this calendar year to avoid a disaster. Bolstering this viewpoint, an Obama win will be taken as a mandate to increase revenues as a part of addressing the debt issue. Some Republican leaders have indicated that if the President wins they will support increased revenues, which would be indispensable for a solution. An alternative to completing action on a total plan during the lame duck would be a “downpayment” of budget cuts that would take effect immediately and an outline for a package of tax provisions and additional budget cuts that would have to be addressed in six months.

Other Legislation Awaiting Consideration

Another item on the lame duck agenda is an expired farm program. The Congress was unable to agree to a five-year farm bill prior to adjourning in September. The bill would overhaul crop safety net programs and fund the food stamp program. The disputes that sidelined the bill in September will remain regardless of the outcome of the election - the level of nutrition cuts in the farm bill as well as the reduced funding in commodity programs and possibly in crop insurance. In some ways the greatest risk to the farm bill is that it will be competing for attention and floor time with other looming issues.

Facing the same time crunch are several perennial issues. These include the so-called “tax extenders” and the “doc fix.” These issues have their own dynamic and create their own momentum and could be driven to conclusion regardless of the election results. While the Senate Finance Committee passed its version of tax extenders in a bipartisan fashion, they have come under increased scrutiny in the House. For instance, the wind energy production tax credit, due to expire at the end of this year, has broad bipartisan and bicameral support yet faces mounting opposition from conservatives who believe it distorts energy markets. Regardless of who wins the White House, the extenders and the doc fix will be pushed over until sometime next year. At that time, the extenders may well get a fresh look as part of comprehensive tax reform, which has a modest chance of being seriously considered in the next two years.

If President Obama is re-elected, with all these issues that require action, he may well have the chance and desire to make the mark on government that many expected him to do in his first term.


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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