On December 1, the co-chairs of the President’s National Commission on Fiscal Responsibility and Reform released its final report on reducing the federal debt, titled The Moment of Truth. The report’s proposals include spending cuts, entitlement reform, and elimination of all tax expenditures to reduce tax rates significantly for all taxpayers.
President Obama created the Commission by executive order in February of this year. The order specified that issuance of a final report requires 14 of the 18 Commission members to support its recommendations. An agreement among the White House, Speaker of the House Nancy Pelosi, and Senate Majority Leader Harry Reid stipulated that the Senate, followed by the House, would conduct an up-or-down vote on the full report if it achieved 14 votes in the Commission. The agreement was included as a sense of the House in its Budget Enforcement Resolution. With 11 members supporting the report, the Commission co-chairs, Erskine Bowles and Alan Simpson, adjourned the Commission’s final meeting without conducting an official vote on its report.
Commission members in support of the report included Senate Budget Committee Chairman Kent Conrad (D-ND); Senate Transportation-HUD Appropriations Subcommittee Member and Senate Majority Whip Dick Durbin (D-IL); and Senate Finance and Banking, Housing, and Urban Affairs Committee Member Mike Crapo (R-ID). Commission members in opposition to the report included Senate Finance Committee Chairman Max Baucus (D-MT), incoming Ways and Means Committee Chairman Dave Camp (R-MI), incoming House Budget Committee Chairman Paul Ryan (R-WI), and House Chief Deputy Whip Jan Schakowsky (D-IL).
The final report is similar to a draft released by the Commission’s co-chairs on November 10. The plan includes discretionary spending caps, tax reform, and entitlement program changes to raise revenue and reduce spending.
The report’s spending-related proposals include:
- Capping discretionary spending through 2020 by holding FY 2012 spending at the same level as FY 2011; returning to pre-crisis 2008 spending levels, adjusted for inflation, in FY 2013; and limiting spending growth to one-half the projected inflation rate through 2020.
- Cutting security and non-security spending by the same percentage.
- Establishing a bipartisan cut-and-invest committee to cut 2 percent of the discretionary budget and invest half of the cut, or 1 percent, in high-priority investment opportunities and consolidate duplicative federal programs.
- Eliminating all congressional earmarks.
The report’s tax-related proposals include:
- Eliminating all income tax expenditures, and then using the revenue to lower rates and reduce deficits. Additional tax expenditures could be added to the revised tax code under the proposal, but they must be paid for with higher rates.
- Eliminating the current six individual income rates that range up to 35 percent, and replacing them with rates of only 12, 22, and 28 percent. Similarly, the top corporate tax rate would be cut from 35 percent to 28 percent. Taxes on capital gains and dividends would be taxed as ordinary income under the plan (with a top rate of 28 percent), a substantial tax increase from current rates. In addition, the proposal suggests permanently repealing the Alternative Minimum Tax (AMT).
- Reforming the congressional budget scoring process.
Though the proposal does not mention the Housing Credit or Housing Bonds specifically, it advances an “illustrative tax reform proposal” based on Commission member input that explicitly recommends eliminating tax-exempt interest on all newly issued municipal bonds and implies the Housing Credit would be eliminated by proposing the elimination of all existing tax expenditures, except for a short list of them that would be preserved in some form. For example, the illustrative proposal recommends replacing the current mortgage interest deduction with a 12 percent non-refundable tax credit for principal residences that would be available to all taxpayers on mortgages capped at $500,000.
Although Congress will not have to vote on this report, President Obama and several Commission members said the report’s recommendations may inform future Administration budgets and congressional proposals.
More information on the Commission can be found at fiscalcommission.gov.