Newsletter

February 19, 2010 - Obama Creates Deficit Reduction Commission, GOP Warns Against Tax Hikes

President Obama this week signed an executive order creating a bipartisan deficit reduction commission that is expected to focus on both spending cuts and tax increases in accomplishing its mission to recommend ways to close the deficit. Many economists have said the only revenue source that could meet the requirement of closing the gap between projected revenues and expenditures is a value-added tax.

“For far too long, Washington has avoided the tough choices necessary to solve our fiscal problems, and they won’t be solved overnight,” Obama said Thursday. “I’m confident that the commission I’m establishing today will build a bipartisan consensus to put America on the path toward fiscal reform and responsibility.”

The 18-member National Commission on Fiscal Responsibility and Reform will be headed by former Republican Senator Alan Simpson of Wyoming and Democrat Erskine Bowles, President Clinton’s former chief of staff. The panel will consist of 12 members of the House and Senate chosen by the leadership of each party and six chosen by Obama, with no more than four of his six appointees of the same party.

The commission is charged with finding ways to balance the federal budget, excluding interest payments on the debt, by 2015, and must make its recommendations by December 1 of this year. Congress will not be required to vote on the recommendations, but House and Senate Democratic leaders have pledged to do so.

The panel was given wide latitude to find ways “to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the federal government” – a mandate most experts say would be difficult to meet without the imposition of a VAT in addition to spending cuts.

Senator Minority Leader Mitch McConnell, R-Ky., said Senate Republicans would participate in the commission, but that the panel should concentrate on cutting spending.

“After trillions in new and proposed spending, Americans know our problem is not that we tax too little but that Washington spends too much,” McConnell said. “That should be the focus of this commission.”

House Minority Leader John Boehner, R-Ohio, hasn’t decided whether to fill his three positions on the commission, spokesman Michael Steel said.

“We still haven’t heard from the president on our proposal to start cutting spending,” Steel said. “That doesn’t mean we won’t participate in this commission, but it does indicate that Washington Democrats aren’t serious yet about shutting down their spending binge.”

House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., have not said how soon they will name members.

Plans for a deficit commission have been closely linked to proposals for a VAT in recent months.

Senate Budget Committee Chairman Kent Conrad, D-N.D., and Ranking Member Judd Gregg, R-N.H., introduced legislation to create a deficit commission, with Conrad suggesting that a VAT should be one of the options the panel should consider. But the proposal was defeated in the Senate last month, falling seven votes short of the 60 needed to approve a procedural motion despite the support of 36 Democrats and 16 Republicans.

With the deficit at $1.4 trillion – 10 percent of gross domestic product and its largest share of the economy since World War II – Conrad has been joined by Pelosi and former tax advisors to Presidents George W. Bush, Bill Clinton and George H.W. Bush in saying that a VAT should be considered. Eliminating the deficit without a major new source of revenue would be extremely difficult because the vast majority of federal spending is in defense, interest on the debt and entitlement programs such as Social Security, Medicare and Medicaid.

NRF told President Obama’s tax reform panel in November that the higher prices consumers would pay under a VAT would further damage the nation’s already-weakened economy. Economic models show that if a VAT were enacted in addition to the income tax to address deficit reduction it would cause GDP to decline for many years.

For more information, contact NRF Vice President and Tax Counsel Rachelle Bernstein at (202) 626-8168.