A Wild Ride in the Lame Duck Congress

After spending the fall on the campaign circuit, Congress will return to work with an economy-killing challenge before it. Priority one for the lame-duck Congress will be to avoid the so-called fiscal cliff, a set of eight statutory tax increases and spending cuts that collectively would shrink the economy by $600 billion and could tip the country back into recession.

While the strategies Congress will xpursue to meet this challenge won’t be clear until the dust settles from the election, some common themes are already coming into view.

While the extreme ends of both parties have flirted with the idea of letting the country go over the cliff, both leadership and the vast majority of members appear committed to forestalling at least the worst elements of the cliff, most notably the expiration of Bush-era tax cuts and the imposition of $550 billion in sequester-driven defense cuts.

The real question is this: Will Congress punt the ball on first down or attempt a Hail Mary pass? The most likely scenario is that the lame-duck Congress will pass a short-term extension of the Bush-era tax rates and delay the sequestration cuts. That would give the new Congress a few extra months to come up with a new long-term fiscal solution encompassing both revenue-generating tax reform and a set of spending cuts more evenly divided between discretionary spending programs, like defense and education, and entitlement programs, like Medicaid and food stamps.

Some other elements of the fiscal cliff—such as scheduled reductions of Medicare doctors’ payments and an extension of higher minimum income levels for the Alternative Minimum Tax—also could be folded into a short-term deal. But there appears to be a consensus on both sides of the aisle to allow the 2010 payroll tax cut to expire. The short-term punt scenario is favored by leadership and offers the clearest pathway around the cliff in the few short weeks Congress will have to act.

Montana Sen. Max Baucus, however, has been working behind the scenes with a small group of fellow senators to explore scenarios for passing comprehensive legislation to deal with both tax reform and long-term fiscal challenges. Such a deal would likely incorporate many of the ideas for tax reform discussed by both parties on the campaign trail, such as reducing corporate tax rates, with a new set of more palatable spending cuts.

While the failure of the supercommittee last fall demonstrates the limits of this type of approach, Baucus appears to be banking on both his personal track record of working across party lines and on the unique dynamics of a lame-duck session where many of the members casting votes will be weeks away from leaving office and arguably more free to cross party lines.

Whether Baucus succeeds in his Hail Mary pass or Congress chooses to punt, the decisions made in the lame-duck session will have a direct impact on state budgets for years to come. If sequestration is triggered, it’s not just defense spending that will be on the chopping block; 28 separate state grant-in-aid accounts, covering everything from education to low-income heating assistance, will be cut by about 8 percent.

At the same time, any effort to foster a grand compromise to achieve long-term savings and forestall the cuts likely would involve shaving as much as $100 billion off Medicaid over the next 10 years by blending and reducing the reimbursement percentages for Medicaid and the Children’s Health Insurance Program, or CHIP.

Finally, the team of insiders working with Baucus already has begun putting out feelers to the state community to gauge what the reaction might be if the state income and sales tax exemptions, which cost the federal government $70 billion per year, were reduced or eliminated.

No matter what happens on Election Day, December will be a wild ride.

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