Tax fight freezes defense industry out of negotiations over ‘fiscal cliff’

The defense industry has $500 billion in pending Pentagon cuts at stake in the “fiscal cliff” talks, yet it finds itself largely sidelined in the heated debate. 

Defense firms desperately want to prevent those cuts, which could cost them contracts and jobs. But in a debate focused on taxes and entitlements, they’re finding themselves on the outside looking in — with great anxiety. 

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“We’re still hoping, but really it’s coming to the point where it’s out of our hands,” said one senior defense lobbyist.

“Most elected leaders in the House and Senate — on both sides — don’t want this to happen, and the president clearly doesn’t want it ... But this is really a debate over taxes and spending,” the lobbyist said.

Industry leaders say they are willing to do their part, and have called for lawmakers to do the same by accepting all options for reducing the deficit, including new tax revenues. 

“We’re prepared to be part of the solution, but where we’re probably least capable is weighing in on the tax debate,” said one senior defense industry official. “Most of us in the industry have stayed back and said, ‘That’s not our area of expertise; that’s somebody else’s area of expertise.’ ”

Some defense analysts see the industry’s fiscal-cliff hand weakened by measures taken before the election, when several defense firms threatened to send mass layoff notices to their employees over the threat of the across-the-board cuts. Industry studies forecast losses of more than 1 million jobs if sequestration took effect, and Republicans made those issues a key part of their campaigns in military-heavy states like Virginia.

“I think many people in industry had a strategy of using the election to convince the administration that it couldn’t ignore defense,” said Loren Thompson, a defense analyst with the Lexington Institute and industry consultant. “That’s not the lesson the election seems to be teaching, and now the industry needs to rethink its approach.”

Thompson said that the defense industry wants to have a special status in budget deliberations because of its role in protecting the nation, but that the public doesn’t appear worried by military threats right now, and so ends up sounding like any other interest group in the fiscal-cliff debate.

The Aerospace Industries Association, the defense industry’s largest trade group, told The Hill it’s planning a public campaign during the lame-duck session to ensure lawmakers understand the stakes for the defense industry.

AIA and other defense officials have warned for more than a year that the across-the-board cuts will lead to deep job losses and cause long-term damage to the industrial base.

AIA communications director Dan Stohr acknowledged it’s “a little disturbing” that talks so far have been focused on taxes. 

“That’s a big part of the puzzle, but to focus on that to the exclusion of sequestration really doesn’t get to the heart of the issue,” Stohr said. “The major problem that we’ve got is that while we need to cut, we need to do so strategically and thoughtfully — and sequestration is neither.”

Congressional aides argue industry officials and defense-minded lawmakers have been successful in convincing rank-and-file lawmakers that cuts to the Pentagon will not solve the deficit issues.

“I think everyone going into those negotiations understands there’s just not a lot of savings left that’s easily derived from the Pentagon,” said one GOP congressional aide.

“People in the room know you could cut the whole department [of Defense], and you’re still sitting around table trying to figure out the deficit,” the aide said. “They know the solution doesn’t flow through the Pentagon.”

Industry officials emphasize that defense spending is trending downward with the end of the two wars and last year’s Budget Control Act that implemented a 10-year cut of $487 billion to Pentagon spending.

Still, several defense analysts say that if a “grand bargain” is reached, there could easily be further cuts to defense spending in the range of $200 billion to $300 billion over 10 years.

Senate Armed Services Committee Chairman Carl Levin (D-Mich.) suggested earlier this year that an additional $100 billion cut to the Pentagon was achievable.

It’s still possible defense hawks in the House will have a key role in the fiscal-cliff endgame. They might have to convince other conservatives in the House to accept higher taxes in exchange for doing away with defense cuts.

For now, defense officials say the biggest thing they are pushing for in the lame duck — even if they face new cuts — is an end to the uncertainty that’s surrounded the Pentagon budget for more than a year.

“Nearly everything the defense industry touches will be affected, and it would happen just a few weeks from now — and we do not know whether it will,” said Todd Harrison, a defense analyst at the Center for Strategic and Budgetary Assessments.

“The timing here creates a tremendous amount of uncertainty for industry,” Harrison said. “How do you plan for the fact your future sales might be cut 10 percent across all programs?”