Debt New Taxes, Spending Cuts Lead to Strife Over Debt Commission Proposals

Nov. 10: Erskine Bowles, left, and former Wyoming Sen. Alan Simpson, co-chairmen of President Obama's bipartisan deficit commission, speaks on Capitol Hill. (AP)

WASHINGTON -- A tough new cost-cutting playbook submitted by the co-chairmen of President Barack Obama's deficit commission has been embraced by Sens. Kent Conrad and Judd Gregg, the first two elected officials to endorse it.

As the commission convened Wednesday to discuss the cochairmen's call for raising the Social Security retirement age, slashing spending and increasing the motor fuel tax, Conrad, D-N.D., and Gregg, R-N.H., said that despite their reservations, they feel the fiscal course of the country requires their support.

"There are no easy fixes here, so while I do not agree with all parts of the cochairmen's final proposal, I will support it because it represents a step forward that we urgently need," said Judd Gregg, who's retiring from the Senate. "Inaction on our debt crisis is not an option at this point."

Panel co-chairman Erskine Bowles said: "The era of debt denial and the denial of its consequences is over," adding, "we have started an adult conversation that will dominate the debate until the elected leadership in Washington does something real."

Many divisions lingered on the commission, even as Bowles and co-chair Alan Simpson, R-Wyo., unveiled a revised version.

Democratic members Alice Rivlin, a budget director in the Clinton administration, said she would support the plan, although with some reservation, as did Honeywell International's chief executive, David Cote, a Republican.

But Rep. Jan Schakowsky, a liberal Democrat from Illinois, told the panel she could not support the plan, claiming it proposed disproportionate cuts in social programs, particularly slashing at federal programs for seniors. She said the plan should have paved the way toward "a more robust Social Security."

Also, Rep. Paul Ryan, R-Wis., a sponsor of a competing deficit-reduction plan, signaled he would oppose the plan, saying it "doesn't sufficiently fix the health care problem." He said the plan embraces implementation of Obama's health care overhaul bill and raise taxes by a total of $1 trillion over the upcoming decade.

And Rep. Jeb Hensarling, R-Texas, praised the co-chairmen for "simply putting a plan on the table," but indicated he could not support the plan, citing concerns about parts that would result in higher taxes.

Simpson said he understands the predicament of lawmakers facing tough decisions, saying they must be ready to confront groups "waiting out there in temples around the city to shred this baby to bits." The Wyoming Republican told congressional members of the commission "there may be less cash in your Christmas stocking for the next election."

Resistance to the commission's austere deficit-reduction recommendations is certain, not only because of the idea of raising the Social Security retirement age, but also because of proposed cuts to Medicare, curtailment of tax breaks and a doubling of the federal tax on a gallon of gasoline.

Obama named the commission in hopes of bringing a deficit-fighting plan up for a vote in Congress this year, but it appears to be falling well short of the 14-vote bipartisan supermajority needed.

A new version of the plan makes mostly minor changes to a draft that whipped up enormous controversy when unveiled earlier this month. Some domestic spending cuts are modestly higher than previously proposed, and health care savings from overhauling the medical malpractice system would reap less than proposed earlier this month.

Even with all of the sacrifices, the plan would fail to balance the budget -- leaving a deficit of $421 billion in 2015 -- but would stabilize the national debt at a economically sustainable level compared to the size of the economy.

Unlike their original proposal, Bowles and Simpson stop short of calling for caps on medical malpractice awards. Instead they recommend changes in how awards are made.

But other proposals remain the same. Among them are a gradual increase in the Social Security retirement age to 68 by 2050 and 69 by 2075, using a less generous cost-of-living adjustment for the programs and increasing the cap on income subject to Social Security taxes. The early retirement age would increase from 62 to 64 along the same timetable.

The plan also retains a 15-cent-a-gallon increase on gasoline, a three-year freeze on federal worker pay and the elimination of 200,000 workers from the federal payroll through attrition.

Other recommendations:

-- Impose tight "caps" on the agency budgets adopted by Congress each year, including a near-freeze on the Pentagon's budget.

-- Eliminate congressional pet spending projects known as "earmarks."

-- Reduce the corporate income tax rate to 28 percent from 35 percent and stop taxing the overseas profits of U.S.-based multinational corporations.

-- Overhaul individual income taxes and corporate taxes, giving Congress the choice of reducing the top rate to as low as 23 percent and no higher than 29 percent. The lower the rate, the fewer the tax credits and deductions that would be available to taxpayers.

Under one scenario proposed by Bowles and Simpson, taxpayers would face three tax brackets of 12 percent, 21 percent and 28 percent. Taxpayers would still be able to claim an earned income tax credit and child tax credit as well as all standard deductions and exemptions. Capital gains and dividends would be taxed at ordinary income tax rates. Taxpayers could claim a mortgage interest deduction up to $500,000, but only on their primary residence.

If Congress does not undertake a comprehensive overhaul of the tax system by 2013, the plan calls for a "fail-safe" provision that would trigger across-the-board reductions in tax breaks, designed to raise revenue by $80 billion in 2015 and $180 billion in 2020.

Bowles was White House chief of staff when former President Bill Clinton negotiated a balanced budget plan in 1997; Simpson is a former GOP senator from Wyoming. Republican senators seem more likely to vote for the plan than their rigidly anti-tax increase House counterparts.

A supermajority of 14 of the 18 panel members would have to approve recommendations for a possible vote in the lame-duck session of Congress. That seems out of reach, but Bowles says it's just as important to have jump-started a national debate on what it'll really take to bring the deficit under control.