The Debt Limit
On August 2, 2011 Congressed passed and the President signed the Budget Control Act of 2011. The main thrust of this act increases the Government’s debt limit by $2.1 Trillion, plus a possible $300 Billion additional increase depending on what Congress approves on deficit reductions and a Balanced Budget Amendment. The debt limit will be increased in stages: 1) An immediate $400 Billion increase in the debt limit; 2) An additional $500 Billion + increase in the debt limit and; 3) The remainder if Congress is successful in enacting further deficit reductions and passes the Balance Budget Amendment.
Spending Cuts, Tax Increases and Deficit Reduction
The bill requires that discretionary spending be cut and capped, and there is anticipated that the savings will be $917 Billion over 10 years; an amount in excess of the initial $900 Billion debt limit increase allowed by the President.
There is expected to be, through a complex process, an additional $1.2 to $1.5 Trillion additional deficit reduction over the next 10 years. These additional cuts are expected to result from either new laws enacted by Congress by the end of 2011 or by automatically triggered spending cuts that are part of the Budget Control Act of 2011, or by some combination of both.
It is uncertain how additional debt reductions, the third part of the process, will be achieved. The Bill creates a Joint Committee of 12 Members of Congress, six Republicans and six Democrats, who will be charged to produce a bill which would reduce the deficit by $1.5 Trillion over a 10 year period. 7 or more Members of the Committee must approve the bill by November 23, and Congress must approve the bill by December 23 in a procedure that will not allow any amendments or Senate filibuster.
The duty of the Joint Committee is to provide recommendations and legislative language that will significantly improve the short-term and long-term fiscal imbalance of the Federal Government. Not later than October 14, 2011 each committee of the House of Representatives and the Senate may transmit to the Joint Committee its resolutions for changes in law to reduce the deficit consistent with the goals of the Joint Committee.
The Budget Control Act requires two Co-Chairs of the Joint Committee—one appointed by the majority leader of the Senate and one appointed by the Speaker of the House of Representatives.
If the Joint Committee process fails, and no law is passed, there will be no new tax increases and $1.2 trillion of spending cuts will result. These cuts will affect discretionary spending, Medicare, subsidies and entitlements, including defense cuts.
The deficit reduction could include tax increases, but to do so will require the vote of at least 7 Members of the Joint Committee of Congress agrees to raise taxes, including at least 1 Republican Member of the Committee; and, a majority of both sections of Congress vote for the Committee’s recommendations; and, the President signs the bill.
My review of the law provides for four possible outcomes which would create a deficit reduction: These are 1) across the board cuts that occur in discretionary spending, Medicare, subsidies and entitlements, including defense cuts; 2) a bill becomes law that cuts spending only: 3) a bill that cuts spending and increases taxes; or, 4) some combination of the first three outcomes.
Balanced Budget Amendment
Between October1 and December 31, 2001 the House and Senate will each vote on a Balanced Budget Amendment. If the House passes a version of the Balanced Budget Amendment, then the Senate will consider the House version.
If the President vetoes the Joint Committee bill, the Act states that debate on the veto message will be 1 hour, equally divided between the majority and minority leaders or their designees.
It is certain that there will be considerable debate over the spending cuts and possible tax increases over the next few months. Many programs will be affected in some manner, and there could be possible tax increases.
Gerard J. Kassouf, CPA is a director at the Birmingham, Alabama firm of L. Paul Kassouf & Co. P. C., Certified Public Accountants and Advisors--representing privately-held and family-owned businesses. You can reach him at gkassouf@kassouf.com