Federal Deficit Reduction
20 December 2011
Subject
Deficit Reduction Proposals
Current Status
On August 2, 2011, President Obama signed legislation to raise the nation's $14.3 trillion debt ceiling. The Budget Control Act of 2011 also created a twelve-member committee with a goal of reducing the deficit by $1.5 trillion from 2012-2021.
The Joint Select Committee on Deficit Reduction failed to draft a plan to reduce the federal deficit, so automatic across-the-board cuts are scheduled to kick in on January 1, 2013.
Background
The Budget Control Act of 2011 is a $2 trillion deal to raise the federal borrowing limit and cut spending. It, immediately cuts discretionary spending by $900 billion over ten years, and raises the debt ceiling in two steps, each time allowing Congress to vote to disapprove the increases (but those votes would be subject to presidential vetoes that are unlikely to be overridden). The agreement also created a twelve-member bi-partisan, bi-cameral super-committee to determine the details of an additional $1.2 trillion to $1.5 trillion in deficit reduction (which can be in spending cuts, entitlement reforms, and/or increased taxes). If Congress fails to reduce the deficit by at least $1.2 trillion more, the agreement calls for automatic across-the-board spending cuts: $600 billion from defense programs and $600 billion from domestic programs, with the exception of programs for the poor including Medicaid and Social Security.
Discussion
Democrats and Republicans on the Joint Select Committee on Deficit Reduction exchanged proposals to reduce the federal deficit. Each side’s proposal reportedly called for limiting the value of some or all itemized deductions, such as the charitable giving incentive. The negotiators appeared to be focusing on a proposal by economist Martin Feldstein, former chief economic advisor to president Ronald Reagan, and a deficit hawk, to cap the value of all itemized deductions (e.g., for charitable giving, mortgage interest, and state and local sales taxes) at 2 percent of adjusted gross income (AGI). If adopted, that would mean that someone earning $100,000 could only take a total of $2,000 in itemized deductions, which for most people who currently itemize would be consumed entirely by their mortgage interest and/or their state and local taxes – thus eliminating any incentive for them to give to charity.
Although some of Feldstein’s writings have suggested that Congress may want to exempt charitable giving from the cap, the limited details released so far about the parties’ two proposals do not mention this option, thus increasing concern nonprofits. The National Journal reported that “Republicans said that tax deductions for second homes and charitable deductions could be slashed or eliminated as part of the agreement, as long as Bush tax cuts were permanently extended and corporate tax rates reduced.” In other words, the very policies that put our nation into the financial morass we are in would be extended permanently.
The panel members had until November 23 to come up with a plan; if unable to present a plan that will be approved by Congress, automatic trigger of $1.2 trillion in cuts will be imposed on federal domestic spending and defense spending under the Budget Control Act passed in August.
President Obama called on Congress to “not shirk its responsibilities,” while Senate Majority Leader Harry Reid warned that “sequestration [the automatic spending reductions] is going to go forward,” stating that Congress must live up to the steep spending cuts if the Super Committee is unable to reach a deal.
The Committee on Deficit Reduction was unable to agree to a plan to reduce the deficit, so across-the-board budget cuts are due to occur on January 1, 2013. These cuts are expected to place additional burdens on the nonprofit sector, especially those organizations within the sector reliant on government contracts and grants, and those providing services that government revenues provide directly.
Conclusion
The federal budget could be a valuable economic stimulus tool. Nonprofits serve a vital role in our communities as employers, community partners, and service providers. Deficit reduction efforts must be careful of unintended consequences, such as reducing resources for state and local governments, which would shift the burden to the nonprofit sector. Relying only on cuts to the budget would also directly reduce resources for nonprofits to fulfill their vital community services at a time when more people will need them.
Alliance FOR Nonprofits Washington encourages you to ask Congress and the Administration to protect nonprofit organizations' abilities to provide services by maintaining resources, including financial resources. If the charitable deduction must be changed, it can be a tool to increase nonprofit revenue and government revenue. This would be the common-senses approach, not the short-term thinking of elimination of the charitable deduction incentive.
