Unfinished Business after the Debt Deal

By :: August 3rd, 2011

Congress headed off for its summer vacation yesterday, exhausted after the protracted wrangling over the debt limit that ended with a whimper when President Obama signed the bill that lets the government continue to pay its bills. Few people were happy with the result—the best you can say for it is that we won’t have another tussle over the debt limit until 2013. But while both sides used up political capital on what used to be a pro forma exercise, plenty of importance just didn’t get done.

Here’s an incomplete list, roughly in order of their immediacy.

The Economy. Congress fought over whether to pay the bills it had already authorized while 9 percent of the workforce remains unemployed and millions more sit on the sidelines, too discouraged to look for work. The 2009-2010 stimulus is winding down and Congress seems in no mood for more. And the debt deal will only make the dismal economic picture worse, forcing cuts in government spending starting next year that will likely trigger more layoffs in both the private sector and state and local governments.

Funding the FAA. The House and the Senate disagreed on subsidies for small airports and unionization rules and so refused to reauthorize the Federal Aviation Administration. Air traffic controllers continue to work but airport construction and modernization are on hold, nearly 75,000 workers are temporarily (we hope) laid off, and air travelers pay no tax to fund that work. (Many still pay the cost but now what used to be revenues goes to airlines that raised fares. But that’s a story for another day.) Unemployment goes up and federal revenues go down because Congress hasn’t acted.

Reforming the Income Tax. Virtually everyone agrees that our income tax is a mess, filled with tax breaks that often do little more than give away much needed revenue. The tax distorts economic activity, imposes huge compliance costs, and isn’t fair. Barring congressional action, the broad array of tax cuts enacted over the past decade will disappear in 2013, hiking the tax bills of virtually all Americans—including, by the way, many of that maligned and misunderstood 46 percent who the Tax Policy Center estimates will pay no income tax this year. Congress and the president fought over last year’s temporary extension and will fight just as hard next year. CBO says that making the cuts permanent will boost the national debt by $4.6 trillion over the coming decade (counting the consequent added debt service). Letting them expire will impose an enormous tax hike on what may still be a weak economy. Reprising the kind of reforms enacted in 1986—eliminating tax expenditures and cutting rates (as proposed by both the president’s fiscal commission and the Bipartisan Policy Center)—could both improve the tax code and generate needed revenues. But the 1986 act was three years in the making; the country can’t wait that long.

Taming the Debt. Despite the past month’s anguish over the debt limit, the end result was just a trim, not a solution. Before “the deal,” CBO projected that deficits would total $6.7 trillion between now and 2021. The deal would cut that by less than a third, just $2.1 trillion. But CBO’s estimate assumed that all temporary tax cuts—the 2001-2003 cuts, the 2009-2010 stimulus, the AMT patch, and all of the perennial “extenders”—will expire as scheduled. Extend them all and the cumulative deficit balloons to more than $12 trillion. The deal also left unspecified how to accomplish nearly 60 percent of the savings; an evenly split bipartisan (read “likely-to-be-deadlocked”) committee gets to fight over specific cuts.

Dealing with Healthcare and Entitlements. Every budget analyst knows that both the budget problem and its solution are inextricably tied to healthcare costs and associated entitlements. CBO projections show exploding government outlays, almost all because of soaring medical costs associated with advancing technology and our aging population. But it’s impossible even to start a conversation about taming those costs without cries of anguish and warnings about “death panels” drowning out reasoned voices. Everyone knows we have to deal with the issues but few are brave enough to lead and those that do suffer immediate attack.

Many other issues clog the docket; this is only a tasting menu. If an issue as straightforward as raising the debt limit cost so much time and energy, it’s hard to imagine how Congress and the president will deal with the many remaining issues, particularly in an election year. Maybe five weeks away from Washington will recharge members’ batteries. But we’ll need more than that—another crisis, anyone?—to get them to face up to their unfinished business this fall.