Behind the Scenes of the Deficit Negotiations: $400B in Tax Hikes, $1T in Spending Cuts

President Obama has proposed possible tax increases that all together total more than $400 billion over the next decade, Democratic officials with knowledge of the deficit negotiations said today, with a goal of roughly $2 trillion in total reductions, most of which would be obtained by spending cuts.

But last week, Republicans participating in the talks – Rep. Eric Cantor, R-Va., and Sen. Jon Kyl, R-Ariz. – indicated that “we are now getting down to the crunch time” and “this would have to be kicked upstairs to the leaders” of their respective caucuses, House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Kentucky.

“There had been real progress” before that, the officials said, arguing that a framework would need to be agreed upon by mid-July in order to have the bill passed and the debt ceiling raised by August 2. The officials expressed chagrin that Congress is planning on leaving on July 3rd or 4 th for a three-week recess.

They nonetheless said they were “very confident a deal will get done,” as one said. The US government “will not default,” he said, insisting that CNBC would not be airing live a congressional vote at the last minute on the deficit package as happened with the Greek Parliament yesterday. The talks have been difficult, with negotiators continuously doing “vote balancing” trying to get to 218 votes in the House and 60 votes in the Senate.

“Both caucuses with have trouble – if it’s the right deal – getting 100% of their caucuses,” one of the Democratic officials said. These talks have been different from dealing with the House Republicans over the continuing resolution to fund the government, they said. The goal for Republicans then “was to pass it with as few Democratic votes as possible…and for our side to be as unhappy as possible.” For this vote, “they know they can’t pass it without our help.”

The officials said the American people see a president willing to put everything on the table and Republicans saying “my way or the highway,” which will hurt Congress.

Increasing general tax rates was never on the table, the Democratic officials said.

Some of the proposed tax increases included:

  • $3 billion over ten years by eliminating a tax break for corporate jet owners (which, officials noted, is not the same thing as the incentive in the stimulus bill for businesses to buy assets such as planes)*;
  • $20 billion from treating as regular earned income the “carried interest” hedge fund managers make;
  • $45 billion by eliminating oil and gas company subsidies;
  • $60 billion from eliminating a business tax break known as LIFO (last in/first out accounting); and
  • $290 billion from capping at 28% the amount Americans who earn more than $200,000 ($250,000 for a family) can make deductions for all itemized deductions, such as for charitable contributions or mortgages.

Have Republican negotiators ever agreed to any of these tax hikes?

No, Democrats said, though “there have been on different occasions a receptivity to a discussion – but not a decision.”

The Democratic officials underlined that nothing had been agreed to, but outlined parts of a basic framework for spending cuts: over the next ten years the agreement would shed roughly $200 billion from Medicare and Medicaid, roughly $200 billion from other mandatory federal spending such as farm subsidies and federal pensions, and roughly $1 trillion in discretionary spending including from the Pentagon budget.

The $2 trillion in deficit reduction would be a “down payment” that at the very least would show the bond ratings agencies such as Moody’s that despite their skepticism there was, in fact, the political will for progress in reducing the deficit. The Democratic officials said no one in the talks has seriously broached the notion of a temporary debt ceiling increase – for seven months or so -- since among other problems, that would send the wrong message to the bond rating agencies.

During his press conference yesterday, President Obama took an aggressive tone, saying that his daughters were better than Congress in doing their homework before the last minute. But the officials rejected the idea that somehow President Obama’s tone is an issue.

“Every single day they’re banging the shit out of him (the president), Boehner and McConnell,” the official said, then they complain about the president’s tone. “I think it’s bullshit, it’s all a ruse.”

-Jake Tapper

*There are two different corporate jet tax items. In the deficit talks, White House officials say, the President has proposed eliminating the preference for corporate jets allowing them to depreciate in 5 years versus 7 years for commercial aviation. This proposal is longstanding. In its current form, it has been in place since 1987. We have never supported it and obviously didn’t sign it into law. In the stimulus bill, there was a separate provision called bonus depreciation. The current round started in 2008, signed into law under President Bush, was continued in the stimulus bill. A White House official says that “bonus depreciation—and this year 100 percent expensing—allows people to write off their property faster than they would otherwise— and is a broad provision that helps millions of companies from many sectors of the economy. To be eligible, you do have to meet certain criteria. One of those criteria is the date by which your property is placed into service. And, here’s where there’s a special provision for aviation (signed by President Bush)—both commercial airlines and private jets get an additional year (beyond the normal) to place in service. This same provision also applied to other capital goods that take a long time to contract and build. In short, bonus depreciation applies very broadly; and the small special provision in that for aviation applies to both commercial and private jets as well as other capital goods that take a long time to contract and build—not preferencing one over the other (and this special provision was first signed into law by President Bush).”

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