November 22, 2011

Yesterday evening, the Joint Select Committee on Deficit Reduction, or “Super Committee,” issued a statement saying it had "come to the conclusion...that it will not be possible to make any bipartisan agreement available to the public before the Committee’s deadline."  The rules governing the Committee required it to submit its proposal to the Congressional Budget Office (CBO) 48 hours before its formal deadline on November 23.  As had been the issue in previous deficit reduction negotiations, Democrats and Republicans were unable to agree on the amount of entitlement cuts versus revenue increases to include in a deficit reduction package.

According to the Budget Control Act of 2011, which created the Committee, if the Committee fails to produce a plan achieving deficit reduction of at least $1.2 trillion over 10 years, automatic spending cuts, or sequestration, to achieve the same level of savings is triggered in 2013.  The cuts would be divided equally between defense spending and nondefense spending, including both discretionary and mandatory, and would be spread over fiscal years 2013 through 2021.  A number of mandatory programs, such as Social Security and the Supplemental Nutrition Assistance Program, are exempt from sequestration. 

CBO estimates that cuts to nondefense discretionary spending will range from 7.8 percent in 2013 to 5.5 percent in 2021 and that cuts to defense discretionary spending will range from 10 percent in 2013 to 8.5 percent in 2021.  Most Medicare spending will be reduced by 2 percent in each of the years 2013 through 2021.

Numerous members of Congress have begun voicing their concern about the level of cuts to defense spending required by sequestration and are looking for a way to prevent the full impact of the cuts.  Because cuts do not take effect until 2013, Congress has just over a year to debate alternative deficit reduction measures.  However, in a speech following the Super Committee’s statement, President Obama stated, “I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending…The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion.”

Sequestration does not directly affect the revenue side of the budget and therefore will not impact the Low Income Housing Tax Credit (Housing Credit) or Housing Bonds.  Tax writers may, however, continue to look at a number of revenue-raising proposals as potential offsets to the cost of extending tax provisions that expire at the end of the year, including a payroll tax cut and the deferral of the application of the alternative minimum tax to many additional middle-income taxpayers.  In addition, the congressional tax-writing committees will continue considering comprehensive tax reform proposals during the upcoming year.