Taxing Matters for the New Year

Two lawmakers struck a two-year budget deal in mid-December, just days shy of the budget conference committee’s Dec. 13 deadline to find a way to keep the government running beyond the expiration of the current continuing resolution (CR) on Jan. 15.

The budget deal reached by Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash., called The Bipartisan Budget Act of 2013, appeared to have the support of both parties. However, Sen. Ben Cardin, D-Md., who spoke at an event on Capitol Hill held by the Insured Retirement Institute the day after the budget deal was made late on Dec. 10, said there won’t be a “grand bargain.” Both he and Sen. Rob Portman, R-Ohio, who were both honored by IRI with the Champion of Retirement Security Award, agreed on the need for tax reform.

Cardin said that while the nation desperately needed tax reform, “it will be challenging to get tax reform [legislation] without a major budget agreement.” He encouraged attendees to “get involved” in the budget and tax debate “as it will only be intensified as we move forward toward the midterm elections.” Portman agreed, saying, “As we move forward, we will have to have tax reform and move every rock for revenue.”

The next macro issue facing Congress in the new year will be the debt limit, and analysts at Washington Analysis said in mid-December that they believe lawmakers will act by the mid-March deadline. However, they said, “this date could slip until June or July, depending on government receipts, making a crisis less likely so close to the midterm elections.”

Ryan and Murray’s Bipartisan Budget Act of 2013 would set overall discretionary spending for the current fiscal year at $1.012 trillion—about halfway between the Senate budget level of $1.058 trillion and the House budget level of $967 billion. The agreement would provide $63 billion in sequester relief over two years, split evenly between defense and non-defense programs. In fiscal year 2014, defense discretionary spending would be set at $520.5 billion, and non-defense discretionary spending would be set at $491.8 billion.

The sequester relief is fully offset by savings elsewhere in the budget. The agreement includes dozens of specific deficit-reduction provisions, with mandatory savings and non-tax revenue totaling approximately $85 billion. The agreement would reduce the deficit by between $20 billion and $23 billion.

The Washington Analysis analysts predicted a government shutdown was unlikely, and noted that the Fed would likely start tapering soon following the positive jobs report on November.

But the analysts expected the final budget agreement to be more noteworthy for what it didn’t include, rather than what it did include.

“The bill is unlikely to include an extension of emergency unemployment benefits, which would cost more than $20 billion in 2014. While Democrats are trying to get an extension in the bill, we doubt Republicans will acquiesce,” the analysts said. “Some compromise on this issue is possible, but unlikely.

“The bill also likely won’t include an extension of Section 179 expensing and bonus depreciation. Both of these provisions expired on Dec. 31, and there is little chance that they will be extended in this agreement. While they are likely to be addressed retroactively next year, that maybe [won’t occur] until the lame-duck session. Also, the list of dozens of tax extenders (e.g., R&D tax credit, short-line rail tax credit, production tax credit) will also expire at the end of [2013] and are unlikely to be included in a budget agreement. As with Section 179 expensing and bonus depreciation, the extenders are likely to be dealt with retroactively to Jan. 1, 2014, during a lame-duck session.”

If Ryan and Murray’s agreement falls apart, the House was expected to pass a mostly “clean” continuing resolution before leaving for the year on Dec. 13, the analysts said.