Budget conference could cast wide net

The prospects for the House and Senate to reach a new budget deal appear to be increasing in the days leading up to Wednesday’s first meeting of the House-Senate budget conference committee created by this month’s debt-ceiling deal. 

Both Republicans and Democrats are making efforts to appear reasonable, and the focus has shifted to a small deal that would replace some or all of the $91 billion in automatic sequester cuts that have hit the 2014 budget.

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The House-Senate budget conference will have six weeks to come up with a plan by its Dec. 13 deadline. After that, each chamber will have until Jan. 15 to deal with any recommendations before the federal government’s funding comes to a halt again.

The conference could conceivably focus on the problematic deficit “grand bargain” that has eluded a divided Washington since 2010.

Such a $2 trillion to $6 trillion debt-cutting plan would remake the government and implicate most — if not all — of the major federal entitlements and the entire tax code.

But achieving even a $1.2 trillion deal stymied the 2011 debt “supercommittee” that failed just before Thanksgiving two years ago.

Members appear to be leaning toward playing small ball this time.

Senate Majority Leader Harry Reid (D-Nev.) said Friday that the budget conference committee convening next week should focus on a replacement for sequestration and forget “happy talk” about a grand bargain.

“We are not going to have a grand bargain in the near future,” he said in a KNPR interview.

House Budget Committee Chairman Paul Ryan (R-Wis.) told reporters last week that the conference should focus on what’s “achievable.”

The hang-up for any sequester achievement has been revenue: Democrats have demanded tax increases in exchange for any changes to entitlements like Social Security and Medicare, but Republicans have balked.

In a speech on the budget conference, Treasury Secretary Jack Lew on Thursday downplayed the need for taxes and only once mentioned them, saying it was “crucial that we close wasteful tax loopholes” to reduce the deficit.

He said House and Senate budget negotiators should replace the sequester with other spending cuts.

House Budget conferee Rep. Tom Cole (R-Okla.) also called on the GOP to compromise with the administration and put revenue on the table, although he later clarified that he was not talking about tax increases.

Even if the budget agreement is small, it still has the potential to affect a wide swath of economic sectors and interest groups. This is as true for what will be in the deal as for what will be left out.

Here’s a look at some of the specifics by sector:

DEFENSE
The defense industry has the most riding on the budget conference.

If no deal is reached, an additional $19 billion is slated to come out of the Pentagon’s budget in January on top of the sequester cuts already in effect.

Analysts say that contracting is the area that is easiest to cut.

Underscoring the importance of the budget conference to defense, Republicans on the House Armed Services Committee wrote to Ryan and Senate Budget Committee Chairwoman Patty Murray (D-Wash.) on Oct. 23 to urge a deal.

“Continued sequestration would lead to the reduction of an additional 100,000 soldiers, sailors, Marines, and airmen from our Armed Forces, and cancellation of important programs providing key technologies and capabilities that allow our military to stay ahead of the threat,” the letter said.

One possible outcome to the conference could be a deal that simply allows Defense Secretary Chuck Hagel to have more flexibility in implementing the sequester.
 
AGRICULTURE
The surest way to enact a 2013 farm bill could be to wrap it into a year-end budget deal, agriculture lobbyists say. The House farm bill contains a total of $53 billion in deficit savings over 10 years, enough to replace more than half of this year’s sequester cuts.

A farm bill conference committee begins the same day as the budget conference. The primary stumbling block to the deal will be reconciling the $40 billion in food stamp cuts in the House farm bill and the $4.5 billion in the Senate version.

Both farm bills also have less savings from agriculture subsidies than either Ryan or President Obama have sought. While both get rid of the direct payment subsidies based on historical planting, they use the savings to bolster crop insurance and create a new form of revenue protection.

The situation could give the farm bill negotiators added motivation to come to a deal before Ryan and Murray do.

TAX
A budget agreement offers the tantalizing possibility of bypassing Senate filibuster rules through a process known as reconciliation.
Budget reconciliation has been used in the past to enact major controversial legislation, including the Bush-era tax rates and ObamaCare.

Groups interested in tax reform, including the National Association of Manufacturing, have been advocating that the budget conference committee recommend instructions to the tax-writing committees to complete a tax code overhaul early next year. Such instructions could be vague but they could also include a revenue target and describe what the final individual rates would look like.

Given the increased talk of a small deal and de-emphasis of the need for revenue by the White House, tax reform instructions for now appear to be unlikely.

ENERGY
House Democrats have repeatedly sought to close tax breaks favored by the oil and gas industry in their approach to replacing the sequester.

For this reason it is considered possible but unlikely that large energy tax increases could come out of the budget deal.

In formulating their approach to the debt-ceiling this fall, House Republicans pushed a provision that would force the administration to permit the controversial Keystone XL oil pipeline.

An early draft GOP proposal from September included a grab-bag of legislation including less regulation on coal ash, increased offshore drilling permits and a law giving Congress greater ability to block regulations with major economic impact.

The final debt-ceiling deal with the Senate and White House contained none of these demands, and the GOP was only able to save face by winning a small certification that the incomes of those receiving ObamaCare subsidies are verified.

For these reasons, the chances of major changes to the energy sector coming out of the budget deal are not considered great.

HEALTHCARE
A major healthcare deadline looms at the end of the year, making it possible that major changes will be included in any Dec. 13 budget agreement.

Under current law, physician payments from Medicare are slated to rise sharply unless Congress once again passes a “doc fix.”

The problem for the doc fix remains  how to offset reduction elsewhere. Once Congress starts looking for offsets in healthcare spending, it could be motivated to use some savings for a sequester replacement.

A large or medium-sized deficit deal would likely need to include changes to the major health entitlements. Obama’s budget this year had greater means testing for Medicare and a change in the way inflation is calculated for all benefits and tax brackets known as a “chained” consumer price index (CPI).

Given Reid’s hard line on a grand bargain and Ryan’s talk of playing small ball, changes to Medicare appear less likely at this time.