Debt Ceiling Legislation: The Budget Control Act of 2011

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1 Debt Ceiling Legislation: The Budget Control Act of 2011 September 16, 2011 Enacted on August 2 as Public Law , the Budget Control Act of 2011 (the BCA or the Act), also referred to as the debt ceiling legislation, increased the federal debt limit and established a process for mandatory reductions in federal spending over the next ten years. Specifically, the Budget Control Act: Establishes limits, or caps, on discretionary spending through 2021; Allows for certain amounts of additional spending for "program integrity" initiatives aimed at reducing the amount of improper benefit payments; Requires the House and Senate to vote on a joint resolution proposing a balanced budget amendment to the Constitution; Establishes procedures to increase the debt limit by $400 billion initially and to raise it further in two additional steps for a cumulative increase of between $2.1 and $2.4 trillion; Creates a Congressional Joint Select Committee on Deficit Reduction to propose further deficit reductions, with a stated goal of achieving at least $1.5 trillion in budgetary savings over 10 years; and Establishes automatic procedures to reduce spending by as much as $1.2 trillion if legislation originating with the new joint select committee does not achieve such savings. I. Background The federal government spends more money every year than it collects in revenue. To fund programs, it borrows money by issuing treasury bonds. Estimates are that close to 50 percent of our federal government s annual expenditures are made with borrowed money. The federal government has ongoing obligations to pay back the holders of Treasury debt along with its many

2 other financial obligations. Historically, Congress has limited spending through a national debt ceiling - a selfimposed limit on the amount the United States government can pay on its debts. On May 16, 2011, Secretary of the Treasury Timothy Geithner announced that the federal debt had reached its statutory limit, with the Administration confirming in July that the Treasury would exhaust its borrowing authority on August 2, II. The Budget Control Act The BCA authorizes an increase in the nation s debt ceiling by $900 billion while establishing ten year discretionary spending limits, or caps, for Fiscal Years 2012 through 2021 that reduce the federal deficit by $917 billion. The BCA provides for modification of the debt limit by the President and a process for the Congress to disapprove of those modifications. If the President submits a written certification to Congress by December 31, 2011 that the debt is within $100 billion of the existing debt limit, the Secretary of the Treasury (Secretary) is authorized to borrow an additional $900 billion, subject to the enactment of a joint resolution of disapproval. The debt limit is increased by $400 billion upon the initial submission of the certification. If Congress fails to enact a joint resolution of disapproval within the allotted time the debt limit is increased by an additional $500 billion. In the absence of any further action by Congress, the Secretary is authorized to borrow an additional amount equal to $1.2 trillion, subject to Presidential certification and Congressional disapproval. The President submitted the certificate to Congress requesting the $400 billion initial increase in the debt ceiling on August 2 after signing the legislation into law. Furthermore, the BCA requires a vote on passage of a Joint resolution proposing a balanced budget amendment to the Constitution of the United States between October 1, 2011 and December 31, If a balanced budget amendment is sent to the states for ratification, the Secretary may borrow $1.5 trillion. If a balanced budget amendment is not sent to the states for ratification, but the amount of deficit reduction achieved by the Joint Select Committee on Deficit Reduction (described below) is greater than $1.2 trillion, the Secretary is permitted to borrow an amount equal to the amount of deficit reduction, but may not exceed $1.5 trillion. All increases in borrowing authority are subject to Congressional disapproval. A joint resolution of disapproval must be enacted within 50 calendar days for the initial $900 billion or within 15 calendar days for an additional amount to prevent an increase in borrowing authority. As referenced, another $1.5 trillion in deficit reduction must be recommended by the Congressional Joint Select Committee on Deficit Reduction established by the Act. That committee is charged with proposing legislation to reduce budget deficits by at least $1.5 trillion over the period of 2012 through But if Congress fails

3 to enact legislation from the committee by January 15, 2012 that provides an estimated $1.2 trillion in such deficit reduction, automatic procedures for cutting both discretionary and mandatory spending take effect. The BCA directs the Office of Management and Budget (OMB) to identify and implement cuts to defense and non-defense programs sufficient to produce $1.2 trillion in savings over ten years. These reductions would either be the full savings amount if Congress has not acted at all, or the difference between Congressionally-enacted cuts and the $1.2 trillion in mandatory savings under the BCA. A. Joint Select Committee on Deficit Reduction The Joint Select Committee on Deficit Reduction (the Joint Committee) is authorized to hold hearings, require witnesses attendance and receive testimony and the production of documents, gather evidence, administer oaths and hire committee staff. Upon written request by its Co-Chairs, federal agencies must provide technical assistance to the Joint Committee. The standing committees of the House and Senate may make recommendations to it regarding the reductions or revenue enhancements that should be included in the Joint Committee report to Congress until October 14, The Joint Committee must report deficit reduction recommendations calling for at least $1.5 trillion in additional deficit reduction over the period of Fiscal Years 2012 to 202 to Congress by November 23, A majority vote of the members of the Joint Committee (seven of twelve) will be required for approval of the Committee report. Any member of the Joint Committee may file additional views on the report within three calendar days if that member provides notice of his or her intention at the time of the vote. The Joint Committee must deliver its report to the President, Vice President, the Speaker of the House, and the Majority and Minority Leaders of the House and Senate by December 2, The legislative recommendations of the Joint Committee must be introduced in the House on its next legislative day and in the Senate on the next day the Senate is in session. The Joint Committee recommendations will not be subject to amendment in either the House or the Senate. Each branch must vote on the recommendations by December 23, The legislation will be debatable in the House for 2 hours with one motion to limit debate available and with no other motions available to delay the vote on final passage. The legislation will be debatable in the Senate for up to 30 hours with one non-debatable motion to limit debate and no opportunity to filibuster the motion to proceed to consideration of the recommendations. Final passage of the legislation in the Senate will require only a majority (51) vote. The Joint Select Committee terminates on January 31, 2012.

4 B. Automatic Reductions If no additional deficit reduction is enacted, the automatic cuts of $1.2 trillion over ten years would represent a cut of approximately 8 percent from projected spending levels. Social Security payments, Medicare premiums, copayments, and certain low income programs are exempt from these across-the-board cuts. The cuts to Medicare can only come from provider payments and are capped at 2 percent of the annual cost of the Medicare program. Military pay is also likely to be exempted from any automatic cuts to defense programs. Given these exemptions there will have to be larger reductions in spending for the remaining programs than 8 percent to achieve the required $1.2 trillion in savings. C. Congressional Budget Office Estimates The Congressional Budget Office (CBO) recently offered its estimates that if Congress fails to enact legislation from the Joint Committee calling for $1.2 trillion in deficit reduction, the sequestration process created in the BCA would result in the following between 2013 and 2021: Reductions ranging from 10 percent (in 2013) to 8.5 percent (in 2021) in the caps on new discretionary appropriations for defense programs, yielding total outlay savings of $454 billion; Reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in the caps on new discretionary appropriations for nondefense programs, resulting in outlay savings of $294 billion; Reductions ranging from 10 percent (in 2013) to 8.5 percent (in 2021) in mandatory budgetary resources for nonexempt defense programs, generating savings of about $100 million; Reductions of 2 percent each year in most Medicare spending based on the application of a special rule for Medicare, producing savings of $123 billion, and reductions ranging from 7.8 percent (in 2013) to 5.5 percent (in 2021) in mandatory budgetary resources for other nonexempt nondefense programs and activities, yielding savings of $47 billion. Thus, savings in nondefense mandatory spending would total $170 billion; About $31 billion in outlays stemming from the reductions in premiums for Part B of Medicare and other changes in spending that would result from the sequestration actions, and An estimated reduction of $169 billion in debt-service costs.

5 CBO estimates that the automatic reductions would produce net budgetary savings of approximately $1.1 trillion from 2013 through The reductions would take the form of equal cuts in defense and nondefense spending beginning in fiscal year Some 71 percent of the savings would be generated from further cuts in discretionary spending, with only 13 percent resulting from a net reduction in mandatory spending. As described, the BCA exempts a significant portion of mandatory spending for Social Security, Medicaid and other such income-eligible programs from sequestration, and has a special rule that limits reductions in spending for Medicare. The remaining savings, some 16 percent, result from lower debt-service costs. III. Expiring Energy Tax Provisions Thirteen of the fifty-nine temporary tax expenditures that are set to expire on December 31 of 2011 provide incentives for assorted types of energy production, use and efficiency. These provisions include: Credit for certain non-business energy property; Credit for electric drive motorcycles, three-wheeled vehicles, and lowspeed vehicles; Conversion credit for plug-in electric vehicles; Alternative fuel vehicle refueling property (non-hydrogen refueling property); Incentives for alcohol fuels (income tax credits, excise tax credits and outlay payments); Incentives for biodiesel and renewable diesel (income tax credits, excise tax credits and outlay payments); Placed-in-service date for facilities eligible to claim the refined coal production credit (other than refined coal facilities that produce steel industry fuel); Credit for construction of new energy efficient homes; Credit for energy efficient appliances; Grants for specified energy property in lieu of tax credits (1603 payments);

6 Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or State electric restructuring policy; Suspension of 100 percent-of-net-income limitation on percentage depletion for oil and gas from marginal wells; and Incentives for alternative fuel and alternative fuel mixtures other than liquefied hydrogen (excise tax credits and outlay payments). Given the focus on deficit reduction, any efforts to extend some or all of these provisions before the year s end will be carefully analyzed by the members of the Joint Committee, along with other federal tax credits, deductions and exemptions to determine which should be continued or extended as part of tax reform or revenue enhancement. To that end, the Joint Committee will hold a hearing entitled Overview: Revenue Options and Reforming the Tax Code on Thursday, September 22, More information is available on the Joint Committee s website at * * * This Update provides general information and not legal advice or opinions on specific facts.