This Week In Washington: Fiscal Cliff Closing in, Hurricane Aid Package Request, and Wind Subsidies Set to Expire

Republican Speaker of the House John Boehner (AP Photo) 

With only 9 days left until Christmas, Boehner and Obama are on the precipice of striking a deal that will raise taxes and lock in the current spending levels in perpetuity.  Conservatives must reassert our control over the party lords and demand a no vote on any such deal that is negotiated in secret.  Additionally, we must be prepared for any other last minute special interest deals that are inserted into the final “fiscal cliff” bill before the end of the session.

Fiscal Cliff – With just two weeks to go until the expiration of the Bush tax rates, it is very likely that a deal will be struck this week. As much as the media likes to give the impression that there is a wide gulf between the two sides, they actually agree on all the fundamentals. Obama has not budged from his position, while Republicans continue to agree to more and more tax increases without a parallel demand for immediate, non-baseline spending cuts and real free market entitlement reform (not just austerity cuts to the current system).

Obama is sticking to his demands to raise the marginal tax rates in the top two tax brackets from 33% to 36% and from 35% to 39.6%.  He also wants to raise the Death Tax to the 2009 levels of a 45 percent top rate and a $3.5 million exempt amount, raise the capital gains top rate to 20% and let the tax rate on dividends revert to 39.6 percent for people in the top two brackets. He has lowered his target revenue for 10 years from $1.6 trillion to $1.4 trillion, but has remained committed to blocking all non-baseline cuts.

Republicans have agreed to the premise of raising taxes without a transformational reduction in the size of government.  They have also failed to make any parallel demands from Obama to avert the Obamacare fiscal cliff, which will result in middle class tax increases beginning January 1. That is the bottom line. Everything else is just minutia.

John Boehner has publically floated two offers to Obama. One plan is to raise $800 billion in taxes by eliminating and/or capping deductions for upper-income earners.  His plan calls for $1.4 trillion in vague cuts to entitlements, but lacks the specificity and vision that is needed for any serious proposal.  Moreover, Boehner’s plan (and presumably, Obama’s plan as well) would replace the $1.2 trillion sequester, thereby neutralizing any baseline cuts to begin with.  His second offer would include a direct increase in the top marginal rate for those earning more than $1 million in return for steeper entitlement cuts. Aside for the obvious conservative concern about raising taxes, this plan would not even result in free market entitlement reform, such as devolving Medicaid back to the states, offering private choices for Social Security, and premium support of private plans for Medicare. It would merely preserve the current unsustainable, single-payer Medicare system, albeit with some austerity measures, such as cuts to health care providers and raising the eligibility age.

However, in private, many Republicans are beginning to prepare for a wholesale capitulation on all of Obama’s tax increases.  Senator McConnell and several of his confidantes in the Senate want House Republicans to vote on a proposal that will ultimately let the top marginal rates on income and dividends expire, while employing a stratagem to shield them from a direct vote.  They would vote on a bill that extends all the Bush tax rates, while having the Rules Committee attach a provision that splits up the bill upon passage, and ships off to the Senate only the components of the tax rates that Obama will sign into law. This is Washington at its worst. If Republicans are determined to raise taxes, they should have the moxie to do so in public. Instead, this will place conservatives in an awkward position of having to vote against the Bush taxes for fear that their votes would be used to divide up the bill and actually raise taxes.

What is even more disturbing is that Boehner is now willing to forego his one leverage point – the debt ceiling. He is offering to raise the debt ceiling for another year.

The proper course of action for conservatives is to vote on a full extension for all Americans. In order to outflank Obama on his class warfare, Republicans should add in two more provisions A) an extension of the payroll tax cut B) a repeal of the pernicious Obamacare tax hikes. Then they should leave town for Christmas. This will change the narrative and momentum of the entire debate.

Hurricane Sandy Aid Package – Democrats operate by the dictum “never let a good crisis go to waste.”  To that end, Obama has submitted a $60.4 billion dollar aid request for recovery of damage from Hurricane Sandy.  His proposal is chock full of items from his campaign wish list, and will be considered before the Senate on Monday. The Senate is using an old appropriations bill, H.R. 1, as the vehicle for the relief package.

Conservative Concerns:

  • The Cost: CBO projects that 64% of the funds will not be spent until FY 2015.  The entire rationale of an emergency bill is that the aid money is desperately needed now. The fact that much of the funds will not be spent for several years reveals this as a liberal stimulus bill.  Here are some of the items on Obama’s Santa list.
    • There are several requests for studying global warming in this bill
    • The bill requests another $9.7 billion for the National Flood Insurance Program, a 47% increase. This is after the program has already received billions in taxpayer bailout money.
    • Other wasteful spending includes, $9 million to replace vehicles, $24.1 million to plant trees, and $32 million for Amtrak, $17 billion to the Community Development Fund, $500 million for Social Services Block Grants, $1 million for the Legal Services Corporation, and $150 million for fishery disasters as far away from the impact zone as American Samoa!
    • Transparency: The Senate is attaching the Sandy relief bill to H.R. 1 – the Military Construction appropriations bill, which already passed the House.  Why are they not passing a standalone bill?  They know that the House will never agree to pass this $60 billion package full of waste.  To that end, they are attaching it to a bill that already passed the House, even though they are larding it up with extraneous and non-germane spending.  This will allow liberals in both parties to bypass the House rank-and-file and head straight to a conference committee.

The irony is that were Obama to get his way on raising marginal tax rates and CapGains and dividends taxes on the rich, it would bring in roughly $50 billion in revenue the first year.  That would be wiped out entirely by this aid/pork package.  The bottom line is that Republicans in the Senate must resist the temptation to vote for something simply because of the mellifluous sounding title placed on the top of the bill.

Farm Bill – The big spenders in both parties are working assiduously to slip in a 5-year farm bill (the previous one expired October 1) into the final tax deal.  Both the Senate-passed bill (S.3240) and the House Agriculture Committee bill (H.R. 6083) dramatically raise spending by locking in Obama-era food stamp spending.  The Senate bill will cost $969 billion over 10 years while the House bill will cost $957 billion.  This is a huge increase from the 2008 Farm bill, which totaled $604 billion.  Yet, the politicians consider this a spending cut because the CBO baseline projects new spending of $995 billion.

Although the new farm bills eliminate some form of direct subsidies, they create new programs that perpetuate dependency. The Senate bill would create a new shallow loss program, which would guarantee farmers 90% of their annual income.  The House bill actually reinstates some form of direct subsidies to rice and peanut farmers (they were eliminated in the Senate bill), while only offering minor reforms to the new crop insurance program created in the Senate bill.  The house bill sets target prices for wheat, barely, peanuts, rice, and corn. When commodity prices dip below those targets, farmers are entitled to recover the loss in the form of a taxpayer subsidy.  What about the shallow loss program in the Senate?  Instead of guaranteeing farmers 90% of their income as established in the Senate bill, the House bill “only” guarantees 85%!

Members of the House and Senate Agriculture committees are negotiating a final deal in secret along with leadership. Once again, the full House never voted on a farm bill, so any deal would be inserted into the tax bill without ever having gone through regular order.

Wind SubsidiesThere is one aspect of the tax cliff that is good. Among the provisions that are slated to expire at the end of the year is the special interest Production Tax Credit (PTC) for wind. This carve out for wind is not a universal tax deduction, it is a refundable tax credit of  2.2 cent/per kilowatt-hour.  Depending on the time of year, wind producers can actually make money off this tax credit by selling their product to grid owners at below cost.  Hence, it is nothing more than a subsidy, and we would welcome its expiration come 2013.

The wind lobby is floating a proposal that would gradually reduce the amount of the subsidy, albeit with no clear end game.  Conservatives should be wary of any late push to insert this provision into the final tax deal.  If politicians are committed to eliminating universal deductions, they should not preserve special interest refundable tax credits.

 

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