Trading Defense Cuts for Tax Cuts

Sen. John McCain, R-Ariz., has a novel idea. Instead of allowing $500 billion of cuts in the defense budget to go forward as part of last year’s deficit reduction deal, he wants to use money saved from closing tax loopholes.

However, that is setting up a clash with other members of Congress, including from his own party, who want to use money from any closed tax loopholes to lower overall tax rates. That is the approach favored by House Ways and Means Committee Chairman Dave Camp, R-Mich., who argued in an editorial for The Hill on Monday that Congress needs to act soon to prevent the expiration of the Bush tax cuts from increasing taxes by $4.3 trillion over the next decade.

Congressional Republicans plan to introduce legislation before the August recess to prevent the tax increases from occurring. Increasingly more Democrats in Congress appear to be willing to go along with another short-term extension of the current tax rates to avoid the so-called “fiscal cliff,” although so far the Obama administration has not agreed to extend the tax cuts for those earning over $250,000 a year.

But McCain is concerned about another aspect of that fiscal cliff, the so-called “sequestration” that was included in last year’s Budget Control Act. Democrats and Republicans agreed at the time to work on deficit reduction measures as part of the deal to increase the debt ceiling, or else face steep spending cuts of $1.2 trillion in both defense programs and discretionary spending, starting next year. However, the super-committee of Democrats and Republicans that was supposed to produce a set of recommendations by the end of last year for spending cuts and revenue increases failed to agree on what to do about taxes, leaving the sequestration option on the table.

House Republicans passed a bill last month to replace the defense cuts with cuts in Medicaid spending, food stamps and implementation of the Affordable Care Act. But no Democrats joined them in voting for that measure, and it is not expected to get far in the Senate. Congressional Democrats and the Obama administration insist that Republicans cannot reduce the deficit through spending cuts alone, but must agree to some tax revenue.

Now McCain wants to build upon some of the ideas that were put forward in the super-committee by Sen. Pat Toomey, R-Pa., last fall, according to The Hill. Toomey was willing to agree to close some tax loopholes during the final negotiations in the super-committee before it failed to reach an agreement. McCain is negotiating with Sen. Carl Levin, D-Mich., who chairs the Senate Armed Services Committee, on averting the defense cuts. Levin has his own ideas on closing tax loopholes and has introduced legislation repeatedly over the years aimed at reducing the use of foreign tax havens and tax incentives for moving jobs offshore.

Opposing the idea of any tax increases is Grover Norquist, who visited Capitol Hill last week to hammer home the point that the no-tax pledges signed by most GOP lawmakers with his lobbying group Americans for Tax Reform forbid them to raise overall net taxes in any way.

McCain and Levin are not the only pair of lawmakers who are attempting to forge a bipartisan deal to avert steep spending cuts. Camp and Senate Finance Committee chairman Max Baucus, D-Mont., have reportedly been meeting with a small group of lawmakers to try to find ways to prevent the massive tax increases scheduled to go into effect in January. But Norquist’s no-tax pledge may ultimately be the deciding factor in whether any deal on taxes can be reached in Washington.