June 30 (Reuters) - President Barack Obama and Senate Democrats are weighing a scaled-back budget deal that would avert a looming U.S. default but force Congress to tackle the politically toxic issue again before the 2012 elections, a Senate Democratic aide told Reuters on Thursday.
The Treasury Department has warned that it will run out of money to cover the country’s bills if Congress does not raise the $14.3 trillion debt ceiling by Aug. 2.
Though Democrats and Republicans have made some progress toward a goal of roughly $2.4 trillion in savings, they remain at loggerheads over many elements of the deal.
Following is a summary of the debate:
The two sides have tentatively agreed to limit the growth of the annual spending that covers everything from law enforcement to airport security and military operations.
Republican Senator Jon Kyl, who has participated in the talks, said the two sides had discussed savings of between $1 trillion and $1.5 trillion trillion from such “discretionary” spending over the coming 10 years, though other sources say that figure could be as high as $1.7 trillion.
One key area of disagreement: Democrats want a guaranteed portion of those cuts to come from military spending, an idea Republicans don’t like.
“The first obligation of the federal government is the national security of the people. If it takes a certain amount of money to ensure that, then that’s how much money we need to come up with,” Kyl told reporters.
Democrats with knowledge of the talks say some Republicans have been more open to including cuts in defense than in the past, but there was no agreement on an actual number.
The two sides have tentatively agreed to a number of cuts in benefit programs, which continue automatically from year to year unless Congress changes them. These changes could save between $500 billion and $1 trillion, according to Kyl.
Among the possible cuts:
- Change the way inflation is measured to slow the growth of retirement benefits and tax deductions which are linked to the inflation rate, which could save up to $300 billion.
- Scale back retirement benefits for federal workers.
- Charge higher premiums to unstable companies whose benefits are backed by a federal insurance program.
- Reduce farm subsidies.
- Limit awards in medical malpractice lawsuits.
- Require graduate students to pay interest on their federal student loans.
- Auction off underused frequencies of the electromagnetic spectrum.
- Sell excess property no longer needed by the government.
This issue is shaping up to be the most contentious area of the debate. Democrats insist that a deficit deal can’t rely on spending cuts alone, while Republicans insist that tax increases must be off the table. Still, some wiggle room may be possible after Senate Republicans voted twice to end a tax break that benefits ethanol producers.
Democrats have targeted a menu of other tax breaks that benefit specific industries or taxpayers totaling roughly $400 billion in savings. Republicans are reluctant to include these in the deficit-reduction deal as they would like to save them for a broader tax-code rewrite that would lower rates.
- Limiting itemized deductions for the wealthy, which could bring in $290 billion in extra revenue over 10 years.
- Repealing tax breaks for big oil companies. Republicans defeated this proposal in the Senate, but Democrats say they will push to include it in the deficit-reduction plan, saving $45 billion over 10 years, according to Obama’s proposal.
- Imposing normal income-tax rates of up to 35 percent on hedge fund managers, who now pay the 15 percent capital-gains rate on their compensation, which they claim as “carried interest.” This would yield $20 billion over 10 years.
- Repeal the “last in, first out” accounting method, which the White House says is used by oil companies and other commodities firms to shield trading profits. Republicans say it would hurt hiring. This would raise $60 billion over 10 years.
- Eliminating preferential tax treatment of corporate jets, which enjoy a quicker depreciation path than commercial airlines. This saves a more modest $3 billion over 10 years but gives Obama an excellent punch bag when he wants to highlight the sort of extravagance that Republicans are protecting.
The cost of the government’s healthcare bill to the deficit is projected to nearly double over the coming 10 years, driven by an aging population and medical costs that are outpacing inflation. Republicans have proposed dramatic changes to both the Medicare program for the elderly and the Medicaid program for the poor. Democrats won’t agree to major changes in this hot-button area, but relatively modest savings could be possible. A Democratic official said there was probably agreement over savings in Medicare and Medicaid of around $200 billion over 10 years. Among them:
- Better coordinate coverage of “dual eligibles,” people who qualify for both the Medicare plan for the elderly and the Medicaid plan for the poor, who account for a disproportionate amount of the government’s health spending.
- Reduce Medicare benefits for wealthy retirees who can afford their own health coverage. Many Democrats worry this could lead to an erosion of public support for the program.
- Change the way the federal government provides Medicaid money to states that administer the program, rewarding those that spend the money more efficiently.
- Reduce medical fraud and overpayments.
Senate Democratic leaders want to include measures to perk up the sluggish economy and bring down the unemployment rate, which remains at a stubbornly high 9.1 percent. These measures would add to budget deficits in the short term and Republicans have shown no willingness to include them in the deal.
Among the Democrats’ proposals:
- Extend a payroll tax cut for employees that expires at the end of this year. This would deliver an additional $110 billion in economic stimulus if it was extended another year.
- Increase spending on highway repair and other transportation projects.
- Give subsidies to emerging “clean energy” industries. (Reporting by Andy Sullivan and Alister Bull; Editing by Paul Simao)