First published on December 7, 2012 via newletter 'Fiscal Cliff Notes.'

 

In keeping with the castaway analogy of last week, this week’s developments, particularly among Republicans in the US House regarding a Fiscal Cliff deal reached by the end of the year is akin to a sail on the horizon. This begs the question of how big a sail; skiff or schooner?

 

All sources indicate that Speaker Boehner (R-OH) wants to negotiate a settlement by year end and floated the Rep. Cole (R-OK) trial balloon to socialize within his caucus an income tax hike. Sen. Schumer (D-NY) has pressed for a compromise at $1 million, but that’s too high for the White House and would give Schumer too much credit. Meanwhile, Republicans in the House are getting comfortable with a $500,000 threshold and that’s likely where the tax negotiation will begin to gel at between current and Clinton rates.

 

If the morose demeanor among some GOP Senate staffs when discussing the Fiscal Cliff is any indication, the sense is House Republicans cave on tax hikes before the White House does so on entitlements. A bipartisan letter this week from 80 House Members urging a settlement that includes new revenue, spending reductions and entitlement reform is significant only because 40 GOPers signed (two of the letter’s instigators are not returning in 2013). It is safe to assume Boehner’s socialization efforts are working. Boehner’s purge of Tea Party Republicans from key committees was a clear sign that his caucus best get in line or lose assignments and seniority – and that includes a Fiscal Cliff deal when it comes. Boehner is setting a tone to avoid a 113th Congress being like the 112th when the tail (GOP freshman) wagged the dog (GOP leadership).

 

The White House is more likely to concede on raising Medicare’s eligibility age than adjusting Social Security’s annual inflation: assume Social Security is off the table and a non-starter just as Boehner’s effort to link the Affordable Care Act to negotiations went nowhere. To get these concessions House Republicans will also be pressed by the White House to agree to a debt ceiling increase, further complicating an accord.

 

If Washington takes the country over the Fiscal Cliff, the sectors hardest hit by sequestration ($1.2 trillion in spending cuts over the next decade) are defense, higher education, healthcare and US municipalities.

 

The week ended with Speaker Boehner reporting there’d be no progress until President Obama makes a counteroffer to Republican’s proffer of Erskine Bowles’ spit-balled plan from 2011 testimony before the Joint Select Committee on Deficit Reduction that succeeded the Simpson Bowles Committee report. A public White House counteroffer is unlikely as the WH maintains and continues to press the advantage.

Filibuster Reform: Senate Minority Leader McConnell (R-KY) does not think Majority Leader Reid (R-NV) will reform Senate rules – and he’s mistaken. Reid has been personally whipping his caucus to eliminate the ability to filibuster certain procedures (motion to proceed is the most likely to be reformed) with 51 votes (the constitutional option – versus the nuclear option which applies if done mid-session, not at the opening of the session). What this means is it will be more difficult for the Senate GOP to derail Democratic job legislation (potentially stimulus funding but also bills specific to the private sector). Look for attempts to reform Reverse Morris Trusts with the intent to tax those transactions and prevent a merger in the guise of a tax free transfer. Also look for a Financial Speculation Tax (0.03% of all trades on stocks, bonds, derivatives and others) per Sen. Harkin’s (D-IA) bill.

First published on November 30, 2012 via email newsletter 'Fiscal Cliff Notes.'

Republican House Leadership this week took the temperature of newly elected GOP House Members and realized the prospect for a fiscal cliff solution being reached in the 113th Congress appears dimmer than a deal made before the Dec. 31s t deadline. The '12 Republican freshman class is no less forgiving on compromise than their '10 predecessors, mostly coming from the reddest of congressional districts.

 

This means the 113th Congress portends to be a redux of the 112th, making it difficult for Speaker Boehner (R-OH) to persuade at least 218 Members of his caucus to agree to any compromise that includes tax increases even if there are Democratic concessions on spending, Social Security and Medicare. If Dec. 31s t comes and goes without a deal the only path to a compromise will require Minority Leader Pelosi (D-CA) to deliver the winning margin as at least 60-80 Republicans will vote nay.

 

With this dynamic in mind, Republican House leadership dispatched Rep. Tom Cole (R-OK) to float the tax increase balloon (on those earning more than $250,000). The purpose of the trial was a two-fold acknowledgment: 1) the attempt by Boehner to inject Obamacare into the negotiation fell flat, and b) that a deal prior to the end of the year that includes tax increases may be necessary given the dim prospects of any resolution in the 113th Congress in context of a debt ceiling call in February, 2013. The messenger is as significant; Cole is not in leadership and so provides Boehner the deniability needed to back out if a deal proves detrimental to his caucus influence. The trial brought out the harshest critics to give Boehner an opportunity to assess the opposition and begin to socialize a compromise. That in itself does not guarantee a deal but does indicate Boehner's willingness to make the New Year deadline.

 

More seasoned House Republicans appear ready for a compromise but face the difficulty of doing so if the Tea Party-esque members of their caucus revolt en masse. In that scenario the assumption is a compromise vote that raises taxes will draw a heightened contrast and likelihood of primary election opponents in 2014; this means those House Members most ready to compromise won't in order to preserve their political futures without proper cover from GOP House leadership.

Meanwhile, the impression given by Republican Senate staff is that if a deal is to be done it will be at the leadership level and senators will be asked to vote for a bake-n-vote agreement. Senate Democrats are busy floating parameters to assist Senate Majority Leader Reid's (D-NV) negotiating posture (i.e. Sen. Durbin (D-IL) declaring Medicare and Social Security off limits). Watch for filibuster reform to cloud the fiscal cliff negotiations on the Senate side as Reid is dedicated to this cause and whipping his caucus.

Over the last weekend Senators from both parties got into the Fiscal Cliff conversation as expected. Sen. Baucus (D-MT) is insistent on preserving the Bush estate tax rates in the name of his state's farmers and ranchers - this has to do with his re-election prospects in 2014. Senators Saxby Chambliss (R-GA) and Lindsey Graham (R-SC) signaled a willingness to consider tax hikes in exchange for entitlement reform; this positioning is intended to define Democrats as the spoilers over Medicare and Social Security.

Next week look for more public contention between House Republicans and the White House while behind closed doors staffers continue to hammer out the contours of an agreement. All the pay-fors are on the table but those will be kept confidential to keep the lobbyist in abeyance.

Continued tough talk from the White House is meant to push up against the year-end deadline to maximize pressure on House Republicans to expand a perceived GOP fissure on tax increases. Republican House rank and file will come to grips that the White House is unlikely to cave on taxes as previously assumed and this will cause much public consternation about White House motives as the same fissure entrenches and widens.

The tough talk from both sides will continue to provide the cover needed to get a deal in line that creates a ledge off the fiscal cliff; potentially a one year solution to provide the time for the tax code overhaul both parties want to tackle. Despite complaints over trustiness from both sides this week, the outlook for compromise is more optimistic, akin to a castaway seeing contrails in the sky.

First published on November 23, 2012 via newsletter 'Fiscal Cliff Notes.'

 

At this moment the only reason for optimism on a fiscal cliff solution before the end of the year is the conciliatory feel to the opening round of negotiations. Regardless, it still doesn’t look like one can get there from here; there remains significant distance between all parties involved. This suggests that a deal by December 31st remains unlikely, but there is room for an agreement that allows negotiations to extend into 2013.

 

However, President Obama loses leverage over Republicans the further negotiations go into 2013. Democrats want Obama to use this leverage to savage Republicans on tax revenue. Senator Chuck Schumer (D-NY) is the leading Democrat voicing a splitting the baby solution that raises taxes on millionaires (the Buffett Rule) and cuts spending. The Buffett Rule alone would not raise enough revenue to get to where debt would not grow faster than the economy, but invoking it makes for good politics.

 

Pressing for the Buffett Rule raises a worthy opportunity for the White House as talks could develop into an extension of the Bush tax cuts but with a new millionaire tax, closing some corporate and taxpayer loopholes (this includes the bucket approach on deductions by $250,000+ income earners), spending cuts and entitlement reform (i.e. raise the Medicare retirement age and either raise or abolish the Social Security cap on taxable earnings). This is the deal that makes most everybody unhappy – so maybe it’s the best deal to cut. Obama would be reneging on a campaign pledge over taxes above the $250,000 mark, but in return gets the millionaire tax, loophole revenue and a Social Security revenue increase on incomes greater than $250,000 – being term limited has its advantages. For now the upper hand rests with the White House as it continues to press for the higher revenues that make GOPers wince.

 

The Republican right flank is showing signs of crumbling evident from House GOP grumblings over the restrictive Americans for Tax Reform’s no tax pledge; the necessity for a deal is sinking in. If this debate is framed around a millionaires’ tax then Republicans will need to agree for the sake of political expediency as polling shows the public will blame going over the fiscal cliff on the GOP.

 

Meanwhile the left flank of the Democratic Party is not going to play nicely with the White House. Much of this gets down to baseline; revenue derived from a millionaires tax with, or without the Bush tax cuts. House Minority Leader Nancy Pelosi (D-CA) has signaled stridency on allowing the Bush tax cuts on income over $250,000 to expire and can count on progressive support, particularly labor unions that are already airing ads to press Democratic Senators up in ‘14 to hold the line on education, healthcare and Social Security. All this will play out against a lingering doubt as to President Obama’s rigidity on taxes, Medicare and Social Security. Republicans still think he will cave and Democrats fear he will agree to politically unpalatable entitlement reform.

 

Democrats have more moving parts in this negotiation as Republicans get another crack at winning Senate control in 2014 where there are more vulnerable Democratic Senators who will be reluctant to vote for any fiscal cliff deal that imperils their re-election (such as Senator Mary Landrieu (D-LA) who has voiced her opposition to raising the estate tax or targeting of the energy industry for more revenue).

 

Next week look for ranking Democratic Senators to chime in, fearful that the fiscal cliff negotiations will pass them by (e.g. Sen. Max Baucus, Chairman of the Senate Finance Committee). Also, keep watch for what President Obama has to say leading to his barnstorming the country in support of raising taxes on those making more than $250,000 – this would trigger GOP defensiveness and retreat to their anti-tax doctrine, hampering potential for a deal before December 31st.

 

Take Note! Due to the amendment earlier in ’12 of the Railway Labor Act requiring a showing of interest by least 50% of employees for a union seeking representative status (an increase from 35%), Democrats will seek to pass ECRA (card check) arguing that elections are won with 50% plus one and the revised showing of interest threshold meets that requirement (the 50% was a Republican demand). Related to this is American Airlines’ filing of an application seeking a stay from the SCOTUS in the Passenger Service Agent union certification election to begin Dec. 4th, a successful certification will pose bankruptcy problems for AA moving forward who claims irreparable damage in their SCOTUS application for a writ of certiorari.

First published on November 16, 2012 via email newsletter 'Fiscal Cliff Notes'

Publicly in Washington the discussion is about how an agreement must be reached prior to December 31st to avoid the fiscal cliff. Privately there is acknowledgement that an agreement between party leaders is unlikely given the entrenched positions.

The week began with House Speaker John Boehner (R-OH) signaling a willingness to explore compromise with the White House. This signal coincided with Boehner whipping his caucus into line with a message that drama with the White House would be avoided in the 113th Congress. This was Boehner asserting control over his caucus to avoid the raucousness that defined the GOP House in the 112th so he can better maintain leadership in the face of emboldened Senate Democrats and President Obama’s 332 electoral vote victory (as often is the case with new majorities these wins will be construed by Democrats as a mandate, most likely resulting in an overreach).

Boehner’s remarks were accompanied by Senate Minority Leader Mitch McConnell’s (R-KY) insistence that tax increases are off the table in the Senate. McConnell’s positioning has as much to do with principle as it does with his 2014 re-election campaign; he faces the potential of a Tea Party primary due to his endorsement of Senator Rand Paul’s 2010 primary opponent.

President Obama is clear that he will not consider an extension of the Bush tax cuts. In meeting with labor union leaders he stressed the same, publicly saying that the previous extension was a “one time proposition.” Democrats in both chambers of Congress have parroted the President’s resolve, with Senator Patty Murray (D-WA) saying that if Republicans insist on opposing tax increases for incomes over $250,000 then “all the Bush tax cuts expire and (we) start over.”

Senate and House Republicans appear to see matters differently, believing that President Obama will again cave on the Bush tax cuts to avoid across the board tax increases and the sequester and agree to kick the problem down the road for six to eight months. If the President’s resolve is to be taken at face value then Senate and House Republicans are as misguided on their expectation on this as they were on the outcome of the 2012 general election.

If a deal is to be made it will be of the variety where it is baked by the leaders and then presented for an up or down vote without debate. This is a problem for Boehner who attempted this approach for a grand bargain with Obama only to have his caucus rebel. While Boehner is asserting himself on his caucus, it is doubtful he will be able whip House Tea Party Republicans who see their election victories as a mandate and will refuse to agree to a deal sight unseen. Boehner can still cut a bake-n-vote deal with Obama but will need to rely on House Minority Leader Nancy Pelosi (D-CA) to deliver the victory, which presents complications that speak for themselves.

Next week look for the debate between Democrats to be whether the approach should be a 1:1 of revenue to spending cuts, versus Obama’s election assertion of 1:2.5 of the same. The 1:1 proposal from Senator Jay Rockefeller (D-WV) is a left flank maneuver for negotiating purposes. For now Republicans will hold firm on no taxes increases, favoring loophole reform. The loophole solution will trigger a wider review of the bucket approach (floated by Mitt Romney during the ‘12 campaign) which caps deductions and tax benefits a person may claim.

Further complicating the fiscal cliff picture moving forward will be the Petraeus and Benghazi scandals and the prospect for Senate rules reform at the launch of the 113th Congress in January 2013 when Rule XXII (filibuster) reform will be pursued by Democratic Senators with Majority Leader Harry Reid’s (R-NV) blessing.

Take Note! Labor is emboldened from the ‘12 election results and with 55 Senators in the Democratic caucus will take another go at passing EFCA (card check). Also look for Senator Tom Harkin’s (D-IA) Financial Speculation Tax (0.03% on stock, bond and derivative trades) to be revived in the 113th Congress.