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Extension of Debt Limit Clears Congress Congress Passes Debt Bill as a $1 Trillion Ax Looms
(about 4 hours later)
WASHINGTON — The Senate on Thursday sent President Obama legislation suspending the government’s statutory borrowing limit until May, accepting a House Republican demand that Senate Democrats produce a budget plan this spring in exchange for a debt limit reprieve that included no spending cuts. WASHINGTON — The Senate gave final approval on Thursday to legislation suspending the statutory debt ceiling until May, officially turning Congress’s attention to the next budget showdown: $1 trillion in across-the-board military and domestic spending cuts set to begin on March 1.
The 64-to-34 vote ended for now a showdown that had threatened the full faith and credit of the United States government. The Treasury Department has been shuffling federal accounts for a month to make sure it could pay interest to its creditors even after the government officially breached its borrowing limit. By mid-February, the Obama administration warned, the Treasury would have exhausted such “extraordinary measures” and would have been forced to default for the first time. The 64-to-34 vote ended for now a clash that had threatened the full faith and credit of the United States government. But the next budget fight is just four weeks away. House Republican leaders insist that the across-the-board cuts, known as sequestration, are coming, even as senators in both parties scramble for short- and long-term remedies.
The deal “sets an important precedent,” said Senator Harry Reid of Nevada, the majority leader, “that the full faith and credit of the United States will no longer be used as a pawn to extract painful cuts to Medicare, Social Security or other initiatives that benefit the middle class. A clean debt ceiling increase that allows the United States to meet its existing obligations should be the standard.” Senate Democratic leaders hope to present legislation next week at a party retreat that would mix revenues and spending cuts to replace the first three months of indiscriminate cuts while longer-term negotiations continue.
The legislation, written by House Republican leaders, passed the House last week 285 to 144, with most Republicans voting for it. In the Senate, most Republicans — and Senator Joe Manchin III, Democrat of West Virginia — voted no. Senator Tom Coburn, Republican of Oklahoma, is assembling his own proposal to replace the across-the-board cuts with the elimination of duplicative efforts in the federal government in areas like the promotion of environmentally friendly construction, science and technology education, and work force training.
Mr. Reid’s hope for an end to such showdowns on the debt ceiling may prove to be optimistic. The next budget fight will come March 1, when across-the-board military and domestic spending cuts totaling $1 trillion over 10 years would begin to go into force. House Republicans say they would entertain proposals to shift those cuts to other programs but will not back down on the spending reduction. Senator Carl Levin, Democrat of Michigan and chairman of the Armed Services Committee, has drafted more ambitious legislation to raise nearly $200 billion for sequester replacement by closing off a variety of offshore tax shelters, ending preferential tax treatment for many private equity and hedge fund managers, and taxing the exercise of stock options more heavily.
On March 27, the current stopgap law financing the government will expire, raising the specter of an Easter government shutdown. Then on May 18, the debt ceiling will come back into force unless a broader deficit reduction deal can be reached before then. “The fiscal situation is grave enough, the threat of sequestration is so serious in terms of its impact on our domestic priorities and on our security, that I believe that if we can get this in front of the Congress, because it will have huge public support, it will pass,” Mr. Levin said in an interview.
“We’re going to be back here in a few months with the same impasse,” said Senator Patrick Toomey, Republican of Pennsylvania. But even the architects of such efforts are pessimistic that they have time to win passage.
The final vote on the debt limit deal came only after Mr. Reid and Senator Mitch McConnell of Kentucky, the Republican leader, reached agreement on an orchestrated path to passage. To get there, the Senate voted on four Republican amendments. One would have added spending cuts to the deal. One would have mandated that in the event of a debt ceiling impasse, the Treasury would wall off incoming tax receipts to pay interest on the federal debt, Social Security benefits, and active military pay. “I think sequester’s going to happen,” Mr. Coburn said. “I think people want it to happen.”
Senator Max Baucus of Montana, chairman of the Finance Committee, compared that to “The Hunger Games,” saying it would pit all other federal programs against one another, just as the fictional games pitted children against children in a fight to the death. Yet the economic recovery remains weak, and unemployment high. This week, Washington got one of the first signs of how the sequester might play out in the economy, when government figures showed that the economy had contracted in the final three months of 2012, largely a result of a 22 percent drop in military spending.
“It’d be total chaos,” he said. Economists cautioned that they did not expect such a precipitous decline to continue in the coming quarters. Moreover, the drop came after a surge in military spending in the third quarter, as offices rushed to spend money obligated to the 2012 fiscal year.
Senator Rand Paul, Republican of Kentucky, was given a vote to stop the sale of F-16 fighter jets and Abrams tanks to Egypt, the most recent of a series of votes Mr. Paul has forced to cut off aid to Egypt in the wake of the rise of the Muslim Brotherhood. Senators of both parties said the amendment would cut off all military assistance and end American leverage in Egypt. Still, the automatic cuts have the potential to derail the recovery. Macroeconomic Advisers, a forecasting firm in St. Louis, estimated that if the sequester came into full effect starting in March, it would knock 0.7 percentage points from economic growth in 2013, dropping it to 1.9 percent. Economists say hundreds of thousands of jobs could be lost, if not more.
Under the Reid-McConnell agreement, all of those amendments would have required 60 votes, and all failed by design. With half of the sequester hitting military spending, the worst effects would be felt by the Pentagon and military contractors. Congress already cut half a trillion dollars from military spending in the 2011 Budget Control Act, and the sequester would cut a further half-trillion.
Mr. McConnell expressed Republican hopes that passage would begin tough but fruitful negotiations on the deficit that would include proposals to control the growth of entitlement programs like Social Security and Medicare, which are being propelled by an aging population. Defense companies have been engaged in an extensive behind-the-scenes effort to sway lawmakers, and they have warned that the cuts might lead to serious job losses, while also threatening the country’s security. “We’re sounding a full-throated alarm about this,” said Marion Blakey, the president of the Aerospace Industries Association, a lobbying group. “It was never intended to take place. It is terribly bad public policy. And it would have a very negative effect on our economy.” 
“The president and his allies have had four years to put their ideas into practice. Those policies have failed,” Mr. McConnell said. “It’s time for a new approach. And, if Democrats are ready to finally get serious — to end the blame game and pursue real pro-growth policies — then Republicans are here to show them the way forward.” Concerns about the sequester cast a shadow over corporate earnings season in January. Many businesses said they expected Congress to delay or reduce the cuts, but warned of a bleak outlook if they took full effect. “While we recognize that both parties are strongly opposed to allowing sequestration to happen, we remain deeply concerned that sequestration could occur as the default outcome if negotiations fail,” Marillyn A. Hewson, the chief executive of Lockheed Martin, told investors in January. “Sequestration not only puts at risk our defense industrial base, it also harms military readiness.” 
But with just four weeks to go, the search for any replacement for the across-the-board cuts seems to be stumbling out of the gate.
Senator Barbara Mikulski, Democrat of Maryland and chairwoman of the House Appropriations Committee, said Thursday that she would try to enlist the White House to help stop her own leadership’s three-month bill. She wants any legislation to last at least a year.
“I hope the White House is not colluding with the 90-day reprieve,” she said. “This is like appeals on death row.”
Mr. Levin’s tax bill effectively pits the defense industry against other heavyweights, especially high-tech companies like Hewlett-Packard, Microsoft and Facebook, all of which are singled out by the Levin bill as abusers of the tax code. Dan Stohr, a spokesman for the Aerospace Industries Association, said military contractors were not going to be drawn into that fight.
With the price of failure so high, Mr. Levin and Mr. Coburn said this week that their longstanding quests to cull the tax code of egregious loopholes and cut overlapping government programs could finally succeed. Mr. Levin pointed to two cases in particular. Microsoft develops software in the United States, sells intellectual property rights to subsidiaries in low-tax jurisdictions offshore, then shifts the bulk of its profits from product sales to those tax havens by paying its own subsidiaries royalties. Hewlett-Packard, like many companies, pays no taxes on overseas profits until they are brought back to the United States, but it has been able to keep cash flowing home through a series of tax-free loans from its offshore subsidiaries to its California headquarters.
In testimony in September to Mr. Levin’s Permanent Subcommittee on Investigations, Microsoft and Hewlett-Packard executives said they were following the letter of United States tax law, but also said that the law was putting their companies at a disadvantage with competitors from other countries. Mr. Levin conceded that that argument had been persuasive with colleagues for years, as he sought to tighten tax loopholes.
In lieu of a deal, Republican senators are drafting legislation at least to give agencies the flexibility to make the cuts more selectively, Mr. Coburn said.
“Necessity becomes the mother of invention,” he said. “We’ve got smart people in these agencies. They will do what’s most important and least expensive.”