The unprecedented, recession-related deficits of the past few years have solidified support across the political spectrum for adopting a long-range plan to balance the federal budget and lower the nation’s debt burden. But, because of the tough political and economic decisions required to formulate a deficit reduction plan, a consensus has not yet emerged in Congress concerning the principal elements of such a plan.

Debt Reduction Plans

In late 2009, the House approved a measure establishing a national commission to recommend steps necessary to stabilize federal expenditures and revenues over the long term. The commission’s recommendations were to go into effect unless Congress adopted an alternative plan for reducing the deficit. The measure died in the Senate after proponents were unable to muster the super majority (60 votes) necessary to break a filibuster in January 2010.

In an attempt to revive efforts to forge a compromise plan, President Obama established by Executive Order a bipartisan National Commission on Fiscal Responsibility and Reform on February 2, 2010, and appointed as co-chairs of the commission former Senator Allan Simpson (R-WY) and former White House Chief of Staff Erskine Bowles.65 

The Simpson-Bowles commission issued its consensus findings and recommendations on December 1, 2010. The report called for reducing deficit spending by almost $4 trillion over 18 years (by the end of FY 2020) by (1) sharply reducing tax rates, eliminating the Alternative Minimum Tax (AMT), and cutting backdoor spending through the tax code; (2) capping federal revenue at 21 percent of GDP and reducing spending to 22 percent (and eventually 21%) of GDP; (3) ensuring the long-range solvency of the Social Security trust funds; and (4) stabilizing the debt by 2014 and reducing it to 60 percent of GDP by 2023 and to 40 percent of GDP by 2035.66 

Eleven of the 18 members of the commission voted to approve the plan, but because the vote fell three votes short of the required three-quarters majority, Congress was not required to approve the commission’s plan or adopt an alternative plan of its own with at an equal amount of deficit reduction over the 18-year period.

During the same general timeframe of the Simpson-Bowles commission, a number of other deficit reduction plans were unveiled, including proposals by President Obama; Congressman Paul Ryan (R-WI), chairman of the House Budget Committee; and a debt reduction task force headed by Dr. Alice Rivlin and former U.S. Senator Pete Domenici (R-NM). These plans laid out competing approaches to slicing federal spending and generating additional revenues by revising the existing tax code. As summarized in Table A, all of these plans included proposals to limit federal Medicaid spending to varying degrees and in varying ways.

Table A. Medicaid Proposals: Major Debt Reduction Plans

Sources:

The Moment of Truth: Report of the National Commission on Fiscal Responsibility, December 2010; "FACT SHEET: The President’s Framework for Shared Prosperity and Shared Responsibility," The White House, April 13, 2011;  The Path to Prosperity: Restoring America’s Prosperity - Fiscal Year 2012 Budget Resolution, House Budget Committee, April 5, 2011; Letter from Douglas W. Elmendorf, Director of the Congressional Budget Office, to the Honorable Paul Ryan, Chairman, House Budget Committee, April 5, 2011; Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System, The Debt Reduction Task Force, November 2010.

The Fiscal Cliff

Despite multiple proposals, attempts to solve the debt crisis stalled in Congress, with Republicans staunchly committed to reducing the deficit almost exclusively through spending cuts and Democrats insisting on a mixture of spending reductions and increased taxes on wealthy Americans. The political impasse reached crisis proportions during the summer of 2011 when House Republicans refused to approve an increase in the debt ceiling until a long-range deficit reduction plan was adopted. With the Federal Government teetering on the brink of defaulting on billions of dollars in outstanding debt, President Obama and Congressional leaders reached a last-minute agreement calling for slightly under $1 trillion in spending cuts spread over 10 years and the appointment of a bipartisan congressional panel to prepare a long-range deficit reduction plan to present to Congress. If the joint congressional committee was unable to reach consensus on a plan to reduce the deficit by an additional $1.2 trillion over 10 years, the authorizing legislation, titled the Budget Control Act of 2011 (P.L. 112-25), directed the President to impose $1.2 trillion in automatic, across-the-board spending cuts over a 10-year period. Initially, half of the reductions were to be applied to national security programs and half to nonsecurity (mainly domestic assistance) programs and were to go into effective on January 1, 2012.67  Medicaid and Social Security expenditures were exempted from the second round of spending reductions and Medicare cuts were to be limited to 2 percent of program outlays.

This back-up plan, called "sequestration," was intended to drive congressional Republicans and Democrats toward a compromise solution. The assumption was that both liberals and conservatives would prefer to craft a compromise deficit reduction plan instead of having across-the-board cuts indiscriminately applied to virtually all areas of the federal budget. But, as it turns out, the Joint Select Committee on Deficit Reduction (commonly referred to as the "Super Committee") was unable to reach agreement on an alternative deficit reduction plan by the statutory deadline (November 23, 2011) and it disbanded. As a result, automatic, across-the-board spending reductions will go into effect on January 1, 2013, unless Congress enacts a substitute plan in the interim.68

In addition to sequestration, several other critical tax and spending provisions are scheduled to expire at the end of 2012. First, the Bush-era tax cuts, which were extended for two years under legislation signed into law by President Obama on December 17, 2010,69  will revert to prior levels after December 31 unless Congress extends or revises applicable provisions of the tax code before then. The 2012 tax liability of virtually all individuals and corporations will increase if existing tax rates are not extended. Second, unless Congress extends AMT exemptions by the end of the year, millions of middle-income tax payers will pay higher—in some cases, significantly higher—2012 taxes.70  Originally enacted in 1969 and revised in 1982, the AMT was intended to prevent millionaires from avoiding tax liability. But, because the law does not adjust AMT rates for inflation, each year Congress has had to enact a "patch" to prevent middle-income tax payers from paying higher alternative tax rates. Finally, unless Congress again delays application of the Sustainable Growth Rate (SGR) adjustment factor, Medicare payments to physicians will be reduced by 27.4 percent effective January 1, 2013. The SGR is an alternative method of calculating physician fees that was adopted as part of the Balanced Budget Act of 1997. CMS is required by law to calculate the annual adjustment factor, but for the past 15 years, Congress has postponed the effective date of the SGR formula.

The combined impact of sequestration, expiration of the Bush tax cuts, and the deadline for AMT and SGR legislative fixes has come to be known in Washington as "the fiscal cliff." Unless Congress and the White House take actions to avert the fiscal cliff, CBO predicts that the nation will experience another recession, with GDP declining by 1.3 percent during the first half of 2013.72

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