“Emerging” House Republican Offer Could Spell More Trouble on Shutdown, Default

The nation may be in for more trouble on the government shutdown and debt limit than many commentators realize — if Robert Costa’s recent National Review piece accurately reflects House Republicans’ thinking on their next steps.  In “The Emerging Offer,” Costa describes the “offer” that House Republican leaders are assembling, which suggests that what House Republicans will portray as a reasonable, middle-ground compromise is anything but.

The offer largely represents yet another effort to push — as ransom for President Obama and Congress to pay in exchange for House Republican agreement to reopen the government and raise the debt limit — a set of highly unbalanced policies that are favored by one end of the political spectrum.  The offer, Costa reports, will likely include:

• A mechanism for “revenue-neutral” tax reform.

• Cuts in Social Security and various other benefits through the “chained CPI.”

• Medicare changes affecting beneficiaries.

• Other entitlement program cuts.

• Repeal of the medical device tax, which helps finance an expansion of insurance coverage under health reform.

So, Republicans get lots of budget cuts, a repeal of the medical device tax, and revenue-neutral tax reform that devotes all savings from politically achievable curbs on tax deductions, credits, and other preferences (known as “tax expenditures”) solely to lowering tax rates, with none for deficit reduction?  As we’ve explained, this would effectively take any revenue contribution to deficit reduction off the table for years to come, virtually ensuring that future deficit reduction must come entirely from budget cuts.

And for … what?  In return for all of these concessions, and for enshrining the use of threats of massive harm to the government and the economy as a legitimate political tool, House Republicans would agree to let the government do its job — to resume normal operations and pay its bills on time.

And if the President and congressional Democrats do not accept this deeply unbalanced package, then what?  Do House Republicans keep the government shut down and even let the government default later this month?

As our readers know, we believe that policymakers should consider the chained CPI (with protections for low-income or very old Americans), increases in Medicare premiums for affluent beneficiaries, and various other entitlement changes — but only as part of a larger deficit-reduction package in which Republicans agree to substantial revenue increases from curbs on ineffective or low-priority tax expenditures, address sequestration, and set adequate domestic discretionary funding levels.  But the formulation that Costa reports is very different.  It should be unacceptable for two basic reasons.

First, the President and Congress should make no concessions in return for re-opening the government or raising the debt limit, or else hostage-taking — in which congressional factions threaten to shut down the government or default (or actually force one or the other) — will become a regular feature of the American political landscape.  That’s a prescription for a great nation’s decline.

Second, carefully designed savings in entitlement programs and well-designed increases in revenues must go hand in hand.

Adding to concerns about the “offer,” I suspect that House Republicans will craft their framework for “revenue-neutral” tax reform so that, in fact, it opens the door to substantial revenue losses that would worsen deficits in future decades.  We’ve explained that corporate tax reform that’s revenue neutral in the first ten years would likely lose substantial revenue in subsequent decades.  (Key reductions in corporate tax expenditures now under discussion would raise much less money after the first ten years than in the initial decade; as a result, the White House has called for corporate tax reform that’s deficit neutral in subsequent decades as well as in the first ten years so it doesn’t swell long-term deficits.)

In addition, it’s widely understood that the tax-reform package that House Ways and Means Committee chair Dave Camp is assembling will use timing gimmicks on the individual side of tax reform as well in order to make revenue measures that would lose money on an ongoing basis appear revenue neutral in the initial ten years.  One way to do that, for example, is to change the tax treatment of various types of retirement savings so that taxpayers pay, in the first decade, tens of billions of dollars in taxes they are now scheduled to pay in future decades.  Such timing gimmicks can make a tax-cut package look revenue neutral in the first ten years while creating a big revenue hole after that, deepening our longer-term fiscal challenges.

Observers will need to look carefully at the tax-reform instructions or framework, if and when House Republicans unveil the offer that Costa writes about.  They will need to see whether it includes measures to assure real revenue neutrality over time or, instead, requires neutrality only in the initial decade and fails to bar the widespread use of timing gimmicks that would swell deficits in future decades.

All in all, what’s very troubling is that House Republican leaders, with the shutdown continuing and default drawing ever closer, are thinking that somehow they can present this “emerging offer” as something that passes for major progress and a reasonable offer.