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The $1.5 Trillion Question: What Happens Nov. 23?

Peter Larkin Shelby Report Independent GrocersCome Nov. 23, most grocers will have little on their minds besides serving holiday shoppers and maximizing the end-of-Thanksgiving sales. Meanwhile, in Washington, thoughts of drumsticks and stuffing will have to take a back seat as the primary focus will be on the 12-member deficit reduction commission which must produce at least $1.5 trillion in deficit-reducing savings by Nov. 23. Congress must either pass the committee’s ­recommendations in an up or down vote by Dec. 23 or face $1.2 trillion in automatic reductions, split evenly between discretionary (i.e., defense) and non-discretionary (i.e., Medicare, Social Security) spending.

The pressure to reduce the deficit and pass savings is ­intense. As hard as it may be to find savings that are politically acceptable for both parties, the alternative is an even harder pill to swallow. By failing to pass $1.5 trillion in deficit-reducing savings by Dec. 23, Congress tees up an almost unthinkable scenario for politicians as sacred programs such as defense and Medicare are subject to automatic cuts. So Congress really doesn’t have much of a choice; they must identify and pass the savings, and it’s fair to say that just about “everything” is on the table.

Although Republicans initially proclaimed tax increases were a non-starter, it is becoming more and more likely that the 12-member commission, formally known as the Joint Select Committee on Deficit Reduction, could lay the groundwork for significant tax reforms. Over recent months consensus has increased in Congress to rewrite the tax code by closing tax loopholes and lowering rates, similar to what was done in the Tax Reform Act of 1986, often referred to as the second of the two Reagan tax cuts. In the ’86 act, Congress greatly simplified the tax code by reducing the number of deductions and tax brackets. Republicans may be supportive of closing tax loopholes if the overall savings are used to lower rates.

This by no means is an indication that Congress is ready to start drafting tax reform legislation, particularly 12 months away from a national election, but it’s clear that more and more careful thought is being given to a major tax overhaul.

In addition, President Obama continues his call for Congress to raise taxes on higher income earners to pay for his proposed American Jobs Act. Pressures to raise revenues through tax increases—including eliminating tax breaks for certain “luxury items” and high income earners—will continue through the 2012 elections. N.G.A.’s tax committee continues to evaluate various proposals that have been discussed, weighing them against the impact on independent retail grocers and wholesalers.

Among the other recommendations the deficit commission may address are overhauling big entitlement programs such as Medicare, Medicaid and Social Security. One idea, which has previously had the backing of President Obama and Republicans, would save $125 billion over the long run by raising the Medicare age from 65 to 67. Reforms to Social Security are likely to be tame at best over the next year, given both parties are dependent on the baby boomer and senior votes in the upcoming elections. It’s hard, however, to envision achieving the required savings without some magnitude of entitlement reform.

As you can see, there is no clear path to enact much-needed deficit reforms. With the 2012 elections just a year away, it’s clear that coming to a consensus in Congress will be even more difficult. The alternative, however, may be enough of a deterrent to force compromise and tough decisions.

In this time of Thanksgiving let us not forget the men and women who will celebrate the holiday season far away from their loved ones fighting to protect the freedoms that many Americans often take for granted. We owe a great deal of gratitude to our troops and must never forget those who have given the last full measure of sacrifice. On behalf of the N.G.A. board of directors and staff, we wish you and your families a Happy Thanksgiving.

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