Baucus Urges Deficit Plan With Tax Increase, Spending Cut

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Photographer: Win McNamee/Getty Images

People with disabilities, their family members and allies at a rally against possible cuts to Medicaid on the Capitol.

The “only way forward” for the U.S. to reduce the long-term budget deficit is through a combination of spending cuts and tax increases, said Senator Max Baucus, chairman of the Senate Finance Committee.

Baucus, a Montana Democrat, said at a hearing in Washington today that Congress should start working to avoid the fiscal cliff of automatic tax increases and spending cuts scheduled for the end of the year and implement more gradual deficit-reduction efforts.

“We don’t just face a spending problem or a revenue problem,” said Baucus, whose panel has jurisdiction over the tax code, Social Security and Medicare. “It’s both.”

If Congress doesn’t act by the end of the year, taxes will increase for income, estates, capital gains and dividends. Automatic cuts to defense and non-defense programs will take effect in January. The Congressional Budget Office has warned that inaction could lead to a recession in the first half of 2013.

Former Senator Pete Domenici, a New Mexico Republican, and former CBO director Alice Rivlin, who also was head of the Office of Management and Budget in President Bill Clinton’s administration, testified today on their bipartisan deficit- reduction plan. The plan, created through the Bipartisan Policy Center in Washington, includes tax and spending changes to lower the budget deficit.

Raising Revenue

“You can’t get there any other way except by reforming entitlements and raising more revenue from a reformed tax system,” Rivlin said.

With the fiscal cliff coming Dec. 31, Rivlin said, Congress should postpone the tax increases with a requirement to fold the issue into a broader tax system overhaul. Republicans have called for extending all of the expiring tax cuts temporarily and restructuring the tax code. President Barack Obama wants to let the tax cuts for the top 2 percent of taxpayers expire at the end of the year.

Baucus questioned how a short-term extension wouldn’t lead to further extensions and how an extension could be paired with a credible longer-term effort.

“I’m just trying to determine what that process is,” he said.

Baucus also said he disagrees with some elements of the Domenici-Rivlin plan, including changes to Social Security, Medicare and Medicaid, along with the elimination of tax breaks for higher education.

Medicare Benefits

Rivlin emphasized that their plan doesn’t end the guarantee for Medicare benefits. It would allow future recipients to choose a private plan with government-subsidized premiums. The plan has been changed to remove a value-added tax that was in the initial proposal.

Senator Orrin Hatch of Utah, the top Republican on the committee, said Obama’s lack of leadership on the issue has been “remarkable.”

“All we hear are vague principles, with the only definitive characteristic being more redistribution,” Hatch said.

Republicans, including Hatch, maintain that tax increases shouldn’t be considered as part of deficit reduction.

Domenici said Democrats would have to accept cuts to entitlement programs and Republicans would have to accept more revenue.

“This is not a normal time,” Domenici said. “We cannot allow ideological purity, in my opinion, to stand in the way of what’s right for our country.”

A co-chairman of Obama’s deficit-reduction commission, Erskine Bowles, was meeting with senators of both parties in the Capitol today. Bowles, a Democrat, was chief of staff to Clinton.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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