Paul Schulenburg/Illustration Source

Heading for a cliff

Economy | Unless the House and the Senate can iron out their differences by the end of the year, a series of automatic tax hikes and spending cuts could bring the economy into recession

Issue: "Dead heat," Sept. 22, 2012

WASHINGTON - Vice presidential nominee Paul Ryan revved up the crowd with budget talk during his address at the Republican National Convention. The financial picture is dire, he said, but solutions are within reach: "These times demand the best of us-all of us, but we can do this. Together, we can do this."

Ryan's optimism about the long term drew cheers from the crowd in Tampa, but the scene on Capitol Hill is much more grim about the short term. The Congressional Budget Office has predicted a "fiscal cliff" if Congress can't come to agreement on key issues before automatic changes hit in January.

To complicate matters, lawmakers are scheduled to work only eight days in September and five days in October as election season reaches its peak. The 2012 calendar closes out with eight days of work each in November and December. That gives lawmakers a total of 29 working days to solve issues with large implications.

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Here are some of the most pressing issues:

Budget sequester

Part of last year's debt ceiling negotiations - which culminated in the Budget Control Act of 2011 - included a provision that would slash defense and non-defense spending by $1.2 trillion over 10 years. The deal was supposed to force policy makers to craft a strategic deficit reduction plan. If they don't act, $110 billion in across-the-board cuts will take effect on Jan. 2, 2013.

Both parties agree that massive, indiscriminate budget cuts are not the answer, but they disagree on how to stop them. Democrats say any agreement to avoid the sequester must include tax increases for high income earners. Ryan, who voted for the sequester last year, has said a Romney administration would retroactively undo the military portion of the cuts, which are disproportionately large because domestic programs like Social Security are exempted from the cuts.

Bush tax cuts

Passed in 2001 and 2003, the tax relief package collectively known as the Bush tax cuts is set to expire at the end of the year. If the cuts are allowed to expire, tens of millions of Americans would have to pay about $1,300 to $5,700 in additional taxes.

Republicans want to continue the cuts for all Americans, and the House passed a one-year extension with 19 Democrats joining the majority vote (256-171). Senate Democrats say they will not extend the cuts for families making more than $250,000 annually, or individuals making more than $200,000 annually.

Extenders package

A package of tax breaks known as "extenders" includes a continuation of the alternative minimum tax patch and deductions for specific causes ranging from NASCAR track construction to wind energy production. The bill passed the Senate Finance Committee by a 19-5 vote in August, but its road to getting through the full House or Senate will be tougher.

Deficit hawk Sen. Tom Coburn, R-Okla., says the package is simply an alternative form of spending and filed 61 amendments to either eliminate or limit many of the extensions. The final version of the bill whittled the breaks from 73 to 54 - a victory, according to ranking member Sen. Orrin Hatch, R-Utah. But the $205 billion price tag means it will have a hard time passing the House.

Postal reform

The United States Postal Service announced a $5.2 billion loss for this year's third quarter, pushing Congress to address long-debated legislation to help the embattled agency. The Postal Service has asked for permission to eliminate Saturday delivery and reduce yearly $5 billion health payments to future retirees.

The Senate in April passed a bipartisan bill that would initially save six-day delivery with a number of other cost-cutting measures, but the House has yet to take up the legislation.

Farm Bill

The House passed a bill aimed at providing livestock owners with drought relief before lawmakers left for a five-week recess in August. The Democrat-controlled Senate balked, however, saying it wouldn't settle for less than a renewal of the 2008 Farm Bill.

Vince Smith, an agriculture economist with the American Enterprise Institute, said the "elephant in the room" is that the Farm Bill is 80 percent food welfare programs, including food stamps. "The Senate isn't going to vote for a bill with significant cuts to nutrition programs, and the House isn't going to pass a bill without large cuts," Smith said.

The Farm Bill expiring Sept. 30 also includes $5 billion a year in "direct payments," government subsidies paid to farmers whether they plant crops or not. Both parties agree direct payments need to go, but farm lobbies are pushing to replace them with a "shallow loss" program that would lock in high consumer food prices and cost taxpayers between $8 billion and $14 billion over the next five years, according to Smith's estimates.


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