April 27 (Bloomberg) -- Senator Mark Warner said his bipartisan group of six senators working to strike a deal to cut the national debt is considering a plan to slash $3 in federal spending for every $1 of tax revenue it raises.
While the emerging proposal by the so-called Gang of Six won’t increase tax rates, the Virginia Democrat said it will include scrapping some tax breaks and limiting others, such as shrinking to $500,000 from $1 million the size of mortgages on which interest payments can be written off or scaling back deductions for charitable giving.
Details of the plan -- still under negotiation and being drafted for release as early as next week, according to a person familiar with the talks -- are scarce, given the group’s secretive discussions. Yet Warner said it will involve spending cuts on health care, defense, agriculture and other domestic programs, along with changes to Medicare, Medicaid and Social Security.
The plan is going “to have enough pain in there that everybody’s going to be mad, a bit,” Warner, 56, told constituents during a stop in Fredericksburg, Virginia, last week, part of a four-day, 150-mile road trip through his state to talk up the efforts of the lawmakers’ group.
The 3-to-1 ratio of spending cuts to revenue increases -- which mirrors the level President Barack Obama proposed in a speech earlier this month -- may cause pain for Democrats who have demanded that tax increases be a greater part of any deficit-cutting effort. It will also prove a hard proposal to sell to some Republicans, who oppose tax increases.
Pressing the Urgency
Warner said in an interview that the lawmakers are discussing whether to fold their debt-cutting plan into the 2012 budget blueprint. On his tour of Virginia last week, he pressed the urgency of the effort to shave $4 trillion off the $14 trillion U.S. debt, saying it is linked to a looming vote over raising the nation’s $14.3 trillion legal debt limit.
“There’s a window now, and at some point, if we go back to business as usual, Democratic plan versus Republican plan, I see a train wreck happening,” he told health-care workers at the Spotsylvania Regional Medical Center in Fredericksburg, about 50 miles south of Washington.
Any debt plan will likely need backing from both parties to get through Congress, giving Warner’s Gang of Six -- the only bipartisan group of lawmakers working to craft a measure -- outsized influence. While Obama and Republican Representative Paul Ryan of Wisconsin, who heads the House Budget Committee, are promoting “serious” proposals, both include poison pills for the opposing party, Warner said later in the interview.
‘Not Going to Happen’
Ryan’s proposal would cut the debt by more than $4 trillion over a decade without raising taxes or cutting defense spending. It would largely privatize Medicare, cap Medicaid and reduce other expenditures to levels that, “at least even privately, everybody acknowledges that’s not going to happen,” Warner said,
Obama’s plan to cut $4 trillion over 12 years includes a tax increase on high earners. While Warner supports that idea, he said it stands little chance of enactment. A Bloomberg National Poll last month found that 59 percent of the public backs repealing the 2001 and 2003 tax cuts for households earning more than $250,000 annually, while 37 percent oppose doing so.
There’s not much time to bridge the gap: The Treasury Department says the government will reach its legal debt limit by May 16 and run out of options for avoiding default no later than about July 8. And Standard & Poor’s revised the nation’s credit outlook from “stable” to “negative” last week on concern that policy makers won’t be able to forge a debt agreement.
‘A Grinding Halt’
“If Congress does not raise the debt limit some time over the next 60, 90 days and America defaults, you will see interest rates spike 3 or 4 points at least,” Warner told constituents at the hospital. “This economy will not just slow down, it will come to a grinding halt.”
For all the debate about the deficit in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago, even though Treasury data show the amount of marketable debt outstanding has risen to more than $9 trillion from about $4.3 trillion in mid-2007.
The yield on the benchmark 10-year note is below the average of about 7 percent since 1980 and the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.
That doesn’t detract from Warner’s sense of urgency.
In the interview, Warner, a first-term senator who co-founded a company that is now part of Overland Park, Kansas-based Sprint Nextel Corp. and served as Virginia’s governor from 2002 to 2006, said his group must act before the polarizing politics surrounding the debt slam the door shut on a compromise.
“The sooner we can get out our plan the better, but it has to be fully thought through,” he said, because it will face “immediate scrutiny.”
The time pressure may also help build momentum, Warner said, since lawmakers are eager to find a way out of the debt dilemma.
“With the debt limit, you don’t get to wait until the 11th hour -- the markets react beforehand,” he said. “A lot of members, I think, are saying, ‘How do we get ourselves out of this box?’ I think that will help us.”
As voters listened to his debt talk and then passed a microphone, they pressed him about ways to rein in government spending. One prefaced her question by saying, “Thank you for being a centrist in a sea of extremists,” to which Warner quickly replied, “Which means I get arrows from both sides.”
Calling the Gang
As he traveled through Virginia in a Nissan Sentra with three young aides to meet with constituents during a congressional break, he spent hours on his cell phone with other senators in the Gang of Six, co-led by Republican Saxby Chambliss of Georgia.
The group also includes Republicans Tom Coburn of Oklahoma and Mike Crapo of Idaho and Democrats Kent Conrad of North Dakota, the Budget Committee chairman, and Dick Durbin of Illinois, the Senate majority whip.
While the six have generally been stingy with details of their plan, they have made it known that they are basing their work on the 2010 recommendations of the leaders of Obama’s bipartisan debt commission -- former White House chief of staff Erskine Bowles, a Democrat, and former Senator Alan Simpson, a Wyoming Republican.
People familiar with their proposal say it will likely include a set of benchmarks and deadlines for debt reduction, with automatic spending cuts and tax increases if Congress fails to enact the changes necessary to meet the targets.
Still, Warner said the group knows that many lawmakers won’t support a compromise that fails to also make substantial reductions up front.
He said failure to raise the debt limit would “light the fire that burned down the house, but there are other members who’ve made quite clear that the only way they’ll vote for something is if there’s some level of down payment, so we’re working through that.”
The gang’s Republicans are pushing just as hard for a deal.
“The country can’t afford for us not to have an agreement,” Coburn said on NBC’s “Meet the Press” on April 24.
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