The Fiscal Cliff and Beyond

1. The Fiscal Cliff and Beyond Joel Packer, Principal, The Raben Group; Jpacker@rabengroup.com and Executive Director, Committee for Education Funding

2. HOW DID WE GET TO THE FISCAL CLIFF?

3. Record Deficits Registered in Last Four Years U.S. Deficit and Surplus (Billions of Dollars) Surplus 1996 2012 1972 2009 Budget Deficit $1.13 T in FY 2012 Deficit The U.S. has long history of budget deficits, but deficits in last four years significantly larger than trend Source: Congressional Budget Office, Historical Tables.

5. Debt as Share of GDP, 1940-2050, Under Current Policies Source: CBPP based on Congressional Budget Office data, January 2010.

6. Fiscal Year 2012 Outlays EPA = 0.2%

7. Final FY 11 and 12 Appropriations • FY 11 cut ED (other than Pell) by $1.2 billion. • FY 12 total ED funding cut by $233 million. • All programs cut by 0.189% across-the-board cut. • EPA has been cut by $1.9 billion since FY 10.

8. The Budget Control Act of 2011 How small will the box be?

9. Caps and Cuts • BCA set in law discretionary caps for ten years (FY 12-FY 21). • Reduced spending by more than $900 billion over ten years. • Supercommittee failure triggered sequestration. • $1.2 trillion in automatic cuts between FY 13-21; 50% from defense, 50% from nondefense • FY 13 cuts now reduced and delayed until March 1, 2013. • However, other than Impact Aid, education cuts would not start until July 2013.

10. Sequestration = Largest Education Cuts Ever! • FY 13 = fixed percentage across-the-board cuts. • CEF projects a cut of 5.9% = $2.9 billion for ED. • Head Start cut $473 million. • Pell grants exempt in first year. • FY 14-21 – will not be ACB cut; further lowers discretionary caps • Squeezes education $; Pell no longer exempt.

11. Impact of Sequestration in FY 13

12. Education Department Funding In billions

13. Sequester would cut EPA $500 million FY 13 sequester level = $7.9

14. FY 2013 Sequester Cuts Fall on The Smallest Pieces of the Budget Mandatory $2,160B Tax Expenditures $1,343B Defense Discretionary* $729B Domestic Discretionary* $504B Cuts Cuts Cuts $16B $27B – 32% of Sequester $43B – 50% of Sequester Non-Defense – 50% Defense – 50% * These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the non-exempt monies that are subject to sequester. Additionally, the figures assume that a continuing resolution at FY 2012 levels is enacted for FY 2013, that war funding (Overseas Contingency Operations funds) is provided at the level requested by the president. Defense discretionary funds include unobligated balances from prior years, which are subject to sequester. Sources: Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and Budget and Treasury

15. WHAT’S IN THE FISCAL CLIFF DEAL? • Raises tax rates on individuals/households earning $400k/$450k or more • Makes Bush-era tax cuts permanent for all other taxpayers • Raises tax rates for capital gains/dividends from 15% to 20% for same incomes • Raises estate tax from 35% to 40%, with first $5M exempted • Phases out personal exemptions and limits itemized deductions for individuals/households earning $250k/$300k 15

16. WHAT’S IN THE FISCAL CLIFF DEAL? • Permanently indexes AMT to inflation • Extends American Opportunity Tax Credit, Child Tax Credit, and Earned Income Tax Credit for five years • Preserves “extenders,” includes several education tax breaks • Allows temporary 2% payroll tax cut to expire • Extends unemployment insurance for one year • Extends Medicare “Doc fix” for one year 16

17. WHAT’S IN THE FISCAL CLIFF DEAL? • 2 month delay in sequester • $24 billion reduction paid for with $12 billion in revenues and $12 billion in spending cuts • $6 billion in defense cuts and $6 billion in NDD cuts • Reduces across-the-board cut form 8.2% to 5.9%. 17

18. OUTLOOK – Multiple Cliffs • Debt Ceiling reached by end of February • Republicans demanding more cuts • Sequester set to hit on March 1 • Repealing entire sequester costs $960 billion. • White House wants 50% new revenues/50% spending cuts • Six-month CR expires on March 27, 2013 • Provides small 0.612% across-the-board increase • Sequester cuts – if they happen – will be from CR levels. CR has no effect on the sequester.

19. 2012 Debt Limit Crisis Could Lead to Default Updated 1/3/13 February 2013 March 2013 Debt Limit Reached U.S. hits $16.4T debt limit; U.S. Treasury Secretary takes “extraordinary measures” to avoid default Congress Negotiates Congress debates how to reduce the national debt and whether to raise the debt ceiling Congress Passes American Taxpayer Relief Act Sequester delayed by two months; Congress postpones debt reduction deal and negotiations to raise the debt ceiling Possible Default on U.S. Debt Obligations Failure to reach a debt reduction deal or raise the debt ceiling could cause the U.S. to default on debt obligations, throwing financial markets into a tailspin Source: National Journal Research, 2012, “Analyst: Changes of U.S. Default Now 20%,” Damian Paletta, January 1, 2013, Wall Street Journal.

20. Questions?