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3 Fiscal Cliff, Sequestration Scenarios as Deadline Nears

Dec. 31, 2012 - 01:11PM   |  
By JOHN T. BENNETT   |   Comments
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As U.S. Senate Republican leaders and White House officials scramble to cobble together contents of a deal to avert the so-called fiscal cliff, it remains unclear whether they will find a way to delay or void pending defense cuts.

Most lawmakers say some kind of “small” cliff deal likely will pass Monday or later this week.

That bill is expected, however, to focus primarily on extending tax cuts for middle-class Americans. The two sides are still haggling over the income level at which tax breaks should be allowed to expire, which would bring more revenue into federal coffers.

Time simply is running out on resolving other issues as an 11:59 p.m. EST deadline approaches for passing legislation that cuts the deficit by at least $1.2 trillion. And that means lawmakers and officials likely won’t have enough time to find the needed monies to avoid twin $500 billion cuts to projected defense and domestic spending.

Here are three scenarios that could play out as the final hours of 2012 tick away:

1. Small Deal, Sequestration Delay: This remains the most likely scenario, according to lawmakers and sources. Such a deal would extend the middle-class tax cuts, while raising tax rates on Americans who make the most. That likely will fall between $250,000 and $800,000.

Asked about the prospects for a deal by Defense News late Sunday afternoon, Sen. Olympia Snowe, R-Maine, took a long breath — there were a lot of those on Capitol Hill this weekend. She then said: “I know these are contentious issues. On the other hand, I find it difficult to believe that under these circumstances, they wouldn’t get some kind of agreement, even limited and small.”

In a Monday morning television interview, Sen. Bob Corker, R-Tenn., said a small deal is all but certain.

Sen. Barbara Boxer, D-Calif., told Defense News on Sunday that if a “small deal” resembles President Obama’s latest proposal, defense spending would not be cut as deeply as the pending $500 billion, 10-year cut. To that end, sources have said Obama’s proposal called for about $100 billion in new defense cuts, which could include the Pentagon, State Department and other agencies.

2. Small Deal, Full Sequester: Some lawmakers and sources say this scenario is also possible. That’s largely because both sides want to extend the tax breaks to avoid economic ripples, meaning it’s likely they can strike a deal to do so either by the 11:59 p.m. deadline or later this week.

But a striking change Sunday and Monday on Capitol Hill has been evident in comments made by an increasing number of Democrats and Republicans.

Snowe told reporters that GOP members are having a tough time measuring the impact the fiscal cliff and sequestration would have. Moments later, the No. 2 Senate Democrat, Dick Durbin of Illinois, told a massive throng of reporters, “we’re having a hard time quantifying” the “true consequences” of a cliff dive and the implementation of both arms of the sequester cuts.

How many votes might a deal that allows sequestration get? More than one might expect. Boxer said Monday morning on the Senate floor that she voted in August 2011 “for a sequester if we couldn’t find savings.” Without a deal in the next few hours that voids the sequester, “we have to step up and do the sequester,” Boxer said. “We can’t run away from the things we’ve said.”

3. No Deal, Full Sequester: This appears to be a long shot. Numerous lawmakers told reporters Sunday and Monday morning some version of the same line of thinking: “No one wants this to happen.”

As with scenario No. 2, this would mean the Pentagon and defense firms likely would soon begin issuing furlough and layoff notices.

Senior defense officials have said they could absorb some new spending cuts without a major impact on the Obama administration’s almost year-old DoD military strategy. If sequestration is allowed to kick in Jan. 2, all non-exempt Pentagon spending accounts would shrink about 10 percent.

Pentagon Comptroller Robert Hale and other officials have said furloughs could be ordered, meaning DoD civilian workers might be sent home as a way to pay for other activities, such as operations in Afghanistan.

In a late-December memo to DoD employees, Defense Secretary Leon Panetta said Pentagon officials “will carefully examine other options to reduce costs” before ordering furloughs.

But, for the Pentagon, lawmakers could still act in January and avert the worst-case scenarios.

“I do not expect our day-to-day operations to change dramatically on or immediately after January 2, 2013, should sequestration occur,” Panetta wrote in the memo.

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