Washington Eases the Sequester

On January 13, 2014, congressional leaders announced they had reached a compromise over longstanding appropriations disputes, opting for limited progress in place of chronically disabling fiscal stalemates. The resulting Omnibus Appropriations Bill for Fiscal Year 2014 spelled out in detail the funding authorized by the Bipartisan Budget Act of 2013, passed by large bipartisan majorities in Congress and signed by President Obama on December 26, 2013.  

The $1.1 trillion Omnibus measure was hailed by leaders of both parties. Representative Hal Rogers (R-KY), Chairman of the House Appropriations Committee, emphasized that the compromise “reflects Republican priorities.” Senator Barbara Mikulski (D-MD), Chairwoman of the Senate Appropriations Committee, declared it marked the end of “shutdown, slowdown, slam-down politics.” 

Temporary Relief 

The government shutdown fiasco and upcoming midterm elections convinced Congress that the $109 billion in cuts mandated this year by sequestration was politically unacceptable. The Budget Act provided about $62 billion in relief from sequestration over two fiscal years, $44 billion this year and $18 billion in 2015. Congress enacted real revenue raisers, e.g., aviation security fee hikes and increased retirement and health care contributions by federal workers, and engaged in some budgetary gimmickry – extending the sequester for two additional years through 2023, military retirement benefit cuts, and mandatory spending cuts that must later be funded by annual appropriations. 

A minority of congressional Republicans criticized the compromise for relaxing the fiscal discipline of sequestration’s mandatory cuts while also approving deficit spending estimated by critics to exceed $500 billion this year. And a countervailing minority of congressional Democrats criticized the measure for failing to fund federal long-term unemployment insurance, jobs programs, and investments in education, medical and scientific research, and infrastructure.  

Erskine Bowles and Alan Simpson, Co-Chairmen of the National Commission on Fiscal Responsibility and Reform, welcomed the Budget Act but correctly emphasized that its modest accomplishment still failed completely to deal meaningfully with what they view as the fundamental fiscal challenges facing the nation – entitlement spending and tax reforms. This was no “grand bargain,” but it does mark the return to a more orderly process whereby Congress and the President work through compromises on specific spending priorities rather than defaulting to the mindless continuing resolutions and across-the-board approach of the sequester. 

Compromises

Relief from the fiscal year 2014 and 2015 cuts is evenly split between defense and non-defense spending. And each opposing political party preserved its most important priorities. President Obama’s signature legislative accomplishment, The Affordable Care Act, remained intact, as did his most important domestic priorities like the clean air and water programs of the Environmental Protection Agency and the Dodd-Frank financial system reforms. The President also secured a $1 billion increase in funding for Head Start and the restoration of funding for medical research and job training programs, which had suffered sequestration cuts last year. For their part, congressional Republicans avoided an income tax increase, their most important priority, while returning overall federal discretionary funding to the level of the last days of President George W. Bush’s administration in 2008.   

While congressional Republican leaders highlighted the latter achievement, it was only possible, of course, because of the President’s policies to end the Iraq War and expedite the military withdrawal from Afghanistan. And an increase in income taxes was avoided largely by raising revenues from other sources – aviation security fees, increased health care and retirement contributions from federal workers, and budget gimmickry. Congressional Republicans also achieved modest goals in cutting funding to the Transportation Security Administration while opening the agency to the use of private security contractors.   

Other symbolic provisions advanced by congressional Republicans that were nods to their tea-party faction were also adopted. These included language barring a recurrence of alleged misdeeds of both the Internal Revenue Service for targeting tea-party organizations and the Bureau of Alcohol, Tobacco, Firearms, and Explosives for its failed “Fast and Furious” operation.  

No Tax Extenders…Yet

Unlike last year’s fiscal compromise enacted in the American Taxpayer Relief Act of 2012, the most recent fiscal deals failed to include a tax-extender provision. Consequently, approximately 60 tax benefit provisions for individuals and businesses expired at the end of 2013. Among these were tax provisions of benefit to the maritime industry and other businesses like the renewable energy tax credit and the research & development tax credit. Individual tax deduction provisions that expired included the deductibility of sales and use taxes in states without an income tax, tuition expenses, and mortgage insurance premiums. Together, these tax benefits are projected to total about $55 billion this year alone. 

While Senate Majority Leader Harry Reid (D-NV) proposed legislation last December that would have extended the benefits, Senate Republicans blocked consideration of the proposal. Whether tax extension legislation will resurface in the near term, perhaps as part of the Medicare “doc fix,” or whether House Republicans will use it as leverage for a broader tax reform measure remains unclear.  

While there is considerable political support for such legislation in Congress, there is also tea-party Republican opposition to extending the tax breaks without budgetary offsets to pay for them. Additionally, certain provisions like the renewable energy tax credit have become more controversial as legacy energy sources (fossil fuel interests) oppose it. Nine senators wrote to Senate Finance Committee Chairman Baucus (D-MT) opposing renewal while 24 other senators urged him to approve. 

The most likely impact of the expiration of the renewable energy credit will be to slow the development of offshore wind farms. Whether one agrees or disagrees with the wisdom of such development, the history of wind energy in the U.S. shows that it is highly sensitive to the availability of this tax credit. 

Benefits for Maritime 

Considering the current austere budget environment, the maritime industry achieved notable successes in the Omnibus Appropriations Bill. The measure provided $186 million to fund the Maritime Security Program, rescuing it from a planned cut of 20 ships (out of a 60-ship fleet). Congress also rejected President Obama’s proposal to cut and dismantle the P.L. 480 Food for Peace program that provides critically important American food aid abroad and essential cargo for the U.S.-flag fleet. And it increased funding for navigation, port, and maritime infrastructure projects by:  

• adding over $100 million to the funding provided by the Harbor Maintenance Trust Fund; 

• boosting the federal share of funding for the Olmsted Locks and Dam Project, thereby making more funds available from the Inland Waterways Trust Fund for other projects;

• raising port security grants funding, and 

• boosting TIGER grants.   

The Omnibus Bill also funded the U.S. Coast Guard at $10.2 billion this year, a level much higher than that requested by President Obama. The Omnibus measure appropriated to the Coast Guard an additional $250 million for operations and $385 million for acquisitions, construction and improvements. Importantly, the bill expressly included funding for long lead-time materials for the eighth National Security Cutter, which the President’s budget did not request. And while the President’s budget basically zeroed out the service’s aviation acquisition program, the appropriations bill provided over $175 million for the program.   

The new funding is on top of the provision in the Department of Defense Authorization Act of 2014 to transfer 14 new surplus C-27J aircraft from the U.S. Air Force to the Coast Guard. This transfer represents the equivalent of an additional appropriation of approximately $400 million. Moreover, the transfer will occur as quickly as the services can accomplish it rather than awaiting further congressional action – not to mention the time it would take to actually build new aircraft. In a remarkably challenging budget environment, the Omnibus Bill represents a strong vote of confidence by Congress in the importance of the Coast Guard to the nation’s maritime security.   

Likewise, Congress rallied to the defense of the U.S. Navy’s shipbuilding program by appropriating over $1.5 billion more than the President’s budget to fund construction of surface combatants and a new Virginia class submarine. Had the sequester cuts not been blocked and these additional funds provided, the Navy’s shipbuilding program would have been torpedoed.  

Challenges Remain 

Nevertheless, the harsh reality remains that funding for the Navy’s fleet remains about 30 percent below what is required to meet our national security needs. So despite the relief provided this year, the long-term prognosis remains challenging.