A volatile stock market and a federal debt downgrade — not to mention plummeting congressional approval ratings — may spur a newly formed special congressional committee to achieve a far-reaching deal on deficit reduction.
The bicameral panel, comprising six Republicans and six Democrats, was created by legislation that allowed President Barack Obama to raise the federal debt ceiling by between $2.1 trillion and $2.4 trillion. The committee has until Thanksgiving to find at least $1.5 trillion in deficit savings over the next 10 years to complement the $917 billion that was included in the bill.
Although observers initially said that the tight time frame and a lack of recent congressional bipartisanship made it unlikely that the committee would make much progress, last week's credit downgrade by Standard & Poor's and the subsequent market decline have put its prospects in a new light.
“It will incentivize them at the start to try to put the big deal together,” said former Rep. Bart Gordon, D-Tenn., who is now a partner at K&L Gates LLP.
“There's a tremendous amount of pressure,” said one financial industry lobbyist who didn't want to be identified speculating about the committee.
Congressional approval ratings are at an all-time low, with only 17% of Americans in a recent Washington Post poll saying they would be inclined to re-elect their representatives, down from 30% last month.
“They're in a situation where failure would be devastating for everybody, and that gives a lean toward getting a deal done. It could end up being something quite dramatic,” the lobbyist said.
But in order to change the deficit trajectory, lawmakers will have to address both tax and entitlement policy, according to experts. That would mean Republicans would have to give on taxes, while Democrats would have to consider cutting Medicaid, Medicare and Social Security.
The panel, formally called the Joint Select Committee on Deficit Reduction, took shape late last week after House Minority Leader Nancy Pelosi, D-Calif., made the final three appointments. She tapped Rep. Xavier Becerra, D-Calif., Rep. James Clyburn, D-S.C., and Rep. Chris Van Hollen, D-Md.
Those three join their Democratic counterparts from the other side of Capitol Hill: Sen. Max Baucus of Montana, chairman of the Senate Finance Committee; Sen. John Kerry of Massachusetts, chairman of the Senate Foreign Relations Committee; and Sen. Patty Murray of Washington, a member of the Senate Budget and Appropriations committees.
UPCOMING DEADLINES
The three House Republicans are Rep. Dave Camp of Michigan, chairman of the Ways and Means Committee; Rep. Jeb Hensarling of Texas; and Rep. Fred Upton of Michigan, chairman of the House Energy and Commerce Committee. The Senate GOP members are Sen. Jon Kyl of Arizona, Sen. Rob Portman of Ohio and Sen. Patrick Toomey of Pennsylvania.
They have until Nov. 23 to come up with a proposal. The House and Senate have until Dec. 23 to pass the measure by simple majorities. Failure to do so would trigger $1.2 trillion in spending cuts — equally divided between domestic and defense programs — that go into effect in 2013.
The committee roster is a mixture of partisan stalwarts and lawmakers who serve in key policy positions.
For instance, Ms. Murray, co-chairwoman of the committee, is the head of the Democratic Senate campaign organization. Mr. Van Hollen was chairman of the House Democrats' campaign committee in 2010.
The GOP co-chairman, Mr. Hensarling, is the chairman of the House Republican Conference. Mr. Kyl is the Senate GOP whip.
Two of the most important figures on revenue and spending policies will serve on the panel: Mr. Baucus and Mr. Camp, whose committees will be the starting points for tax and entitlement reform. “This is a group, especially with the market tumult, [that] is going to approach its responsibilities in a serious way,” said John Stanton, senior legislative partner at Hogan Lovells U.S. LLP.
The key, he and others agree, is for the group to come together on a way to raise revenue without violating the Republican vow not to increase taxes. Once this hurdle is cleared, Democrats may consider reductions to entitlement programs.
“The ability to reach an agreement on an overall package will hinge on the meaning of what a tax increase is,” Mr. Stanton said.
Dedicating most revenue increases to lowering individual tax rates and using the rest for deficit reduction might offer a way through the tax thicket, Mr. Gordon said.
“That's something that could be sold” to the panel's Capitol Hill colleagues, he said.
Advantageous tax treatments likely to be on the table include carried interest for private-fund managers, payroll levies, oil and gas subsidies, ethanol preferences and corporate jet depreciation. Curbing these tax benefits could then fund other tax relief, such as reducing the alternative minimum tax.
Rifle-shot tax changes are more likely than a sweeping overhaul, given the tight time frame under which the select committee is operating.
Eliminating or curbing major deductions and deferrals were highlighted in a deficit reduction proposal by the Senate Gang of Six. But none of those lawmakers was tapped for the select committee.
Nonetheless, broad tax changes aren't being ruled out.
“The complexity of tax reform certainly makes it difficult to complete by the Nov. 23 deadline for the select committee to issue a recommendation, but we think it is possible that the committee can establish an outline or a framework that Congress can finish in early 2012,” Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods Inc., wrote in an Aug. 9 analysis.
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