National Council Special Analysis: Deficit Negotiations and the “Fiscal Cliff”

by Rebecca Farley on November 29, 2012

U.S. Capitol DomeAll the talk in Washington this month is centered around one question: will Congress be able to reach a grand deal to avert the tax increases and across-the-board spending cuts that are slated to automatically take effect at the end of the year?

Negotiators remain far apart on critical details, and rumors are swirling about what cuts and tax increases might be included in the final plan.

But what’s really at stake – and how will it affect behavioral health? In a special analysis on, the National Council breaks down the major issues in the “fiscal cliff” debate, their effect on the behavioral health system, and what to watch for in the ongoing news coverage of the negotiations.

Income Tax Rates, Deductions, and Loopholes. The Bush-era income tax cuts are set to expire at the end of this year, resulting in an automatic tax increase for all earners on January 1. President Obama and congressional Democrats have proposed extending the lower Bush-era tax rates for all Americans except the wealthiest 2%, those earning more than $250,000 per year. This proposal would raise over $1 trillion in revenue. Congressional Republicans, on the other hand, have said they want to keep the Bush rates intact. Instead, they propose limiting certain individual tax deductions and loopholes. House Speaker John Boehner has argued this would be less harmful to businesses and the economy, although it would raise less money for deficit reduction – likely resulting in a need for higher spending cuts. In addition, some lawmakers have proposed limiting the charitable deduction; click here for an opportunity to speak up in defense of this deduction.

  • What it means: Republicans’ willingness to consider tax-raising approaches to deficit reduction marks a departure from their bargaining position in the 2011 debt ceiling fight and Supercommittee negotiations. Despite agreement in both parties that income tax rates should not rise for most Americans, it is the potential tax increase for top earners that has become a major sticking point. It is not yet clear how and whether negotiators will be able to bridge the gap between the Republicans’ and Democrats’ proposals.
  • What to watch for: The tax issue is widely considered to be the key to a breakthrough in negotiations to avert the fiscal cliff – and how Congress deals with it will affect the level of spending cuts required in other areas.

Sequestration. Originally enacted as a “stick” to encourage a deficit reduction compromise by last year’s bipartisan Supercommittee, most Members of Congress never expected to see sequestration actually take effect. Republicans and Democrats have agreed upon a two-step framework to avoid sequestration. Under this plan,  there would be an immediate “down payment” which is likely to include both tax hikes and spending cuts, followed by a broader debt-reduction effort next year. Congressional staff have been hard at work trying to hammer out the details of the framework. However, compromise remains elusive, largely due to disagreement over the balance of tax increases and spending cuts to be included in the plan.

  • What it means for SAMHSA: Sequestration would result in major automatic spending cuts to most federal agencies on January 1, including an estimated 8.2% cut to the Substance Abuse and Mental Health Services Administration.
  • What it means for Medicaid: Medicaid, Social Security, and certain programs for very low income Americans are exempt from sequestration. However, Congress has expressed a willingness to consider Medicaid reforms as part of the negotiations on averting sequestration. President Obama has proposed a plan to revise federal Medicaid matching rates, a proposal that would save about $70 billion over 10 years by sharply reducing federal Medicaid payments to the states. Congressional Republicans have suggested converting Medicaid to a block grant or permitting states new flexibility in setting income and benefit levels for beneficiaries. Any proposal that reduces the federal government’s contribution to Medicaid will put additional pressure on states, which are already struggling to meet the demand for Medicaid services as a result of the recession. It is still unclear whether Medicaid cuts will be part of a final deal.
  • What it means for Medicare: Medicare providers could be subject to a 2% payment cut should sequestration go into effect. The latest news from Capitol Hill this morning indicated that negotiators could be considering up to $400 billion or more in unspecified Medicare cuts as part of the fiscal cliff deal. Details were not available on what form these cuts would take, although possibilities include gradually raising the Medicare age or limiting payments for certain post-acute services.
  • What it means for health reform: In the wake of the November election results, health reform will not be repealed. However, several key provisions within the Affordable Care Act have been suggested as a source of spending cuts. These include the Prevention and Public Health Fund (which supports important primary care-behavioral health integration activities), the Center for Medicare and Medicaid Innovation, and the federal subsidies that will be available on a sliding scale to lower-income individuals purchasing insurance on the exchange. As with the potential Medicaid and Medicare cuts, no details are yet available on whether or to what extent these programs will be targeted for spending reductions.
  • What to watch for: As Congress dismantles sequestration and replaces it with a new spending reduction plan, how will cuts be apportioned between entitlement programs, defense discretionary spending, and non-defense discretionary spending?

Debt Ceiling. Since 1962, the national debt ceiling – that is, the statutory limit on the government’s money-borrowing authority – has been raised over 70 times. Most of the time, debt ceiling votes are mundane matters, usually passed with unanimous or near-unanimous consent. But in recent years, fiscal conservatives in Congress have used the debt ceiling as a leverage point to demand spending reductions. Because the government budget usually operates at a deficit (meaning that spending levels exceed revenue each year), the government must borrow money to continue operating – and when it hits the debt ceiling, it can no longer do so. It was the August 2011 vote to increase the debt ceiling that also led to the creation of the congressional Supercommittee and sequestration. Treasury Secretary Timothy Geithner has said he expects the government to reach the debt ceiling again early in the new year.

  • What it means: The memory of the August 2011 debt ceiling fight is still painful for both parties, which suffered major public image problems in the aftermath of the debate. If possible, most Members of Congress would like to avoid a repeat scenario – yet, the debt ceiling is also a powerful source of leverage in negotiations, and can be used by fiscal conservatives to win promises of additional spending reductions.
  • What to watch for: Will a debt ceiling increase be included in the fiscal cliff deal – or will Congress address it separately after the new year? A separate debt ceiling fight could spell another opportunity for spending cuts.

Stay tuned to and the Public Policy Update for the latest news on sequestration and the fiscal cliff negotiations.


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{ 3 comments… read them below or add one }

George DelGrosso November 29, 2012 at 10:11 pm

Thanks for the current and concise information.


Bob Hewitt December 6, 2012 at 2:13 pm

I, too, appreciate the information. It should be noted that the ‘fiscal cliff’ is a human creation by people who believe that the deficit is more critical than unemployment & do not necessarily believe that growth and increased consumer demand are legitimate ways of reducing the deficit. They are generally opponents of government funded programs and entitlements. And beware of a ‘Grand Bargain’ that hurts the people we serve.


Mary L. Boeger December 11, 2012 at 12:54 pm

Thanks for keeping me up-to-date. This information cannot come to me soon enough!


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