Government Shutdown Now Over – But What About Sequestration?

The government may be back up and running and funded under a short-term continuing resolution (CR), but the battle is far from over as Congress heads toward new deadlines to address budgetary matters.  There has been some confusion about what the current budget agreement means in terms of sequestration’s annual cuts to discretionary and mandatory programs instituted in 2012.  The law signed by the President to address the short-term continuing resolution and temporarily raise the debt ceiling does not provide federal agencies flexibility to administer new sequestration cuts at this time.  With the government spending levels remaining at FY 2013 levels for the duration of the CR, a new round of sequester cuts are not set to kick in until January 2014.

The law established a short-term budget conference committee, with a set deadline of Dec. 13, 2013 to outline recommended spending levels and program cuts.  Of note is that the committee deadline is set in advance of when the second year of the sequester will begin.  The deadline provides a window of opportunity for the new budget conferees to address how the sequester cuts are applied in FY 2014.   The conferees may contemplate making other adjustments to entitlement programs (Medicare and Medicaid) to address health care spending issues that will be negotiated during their deliberations.  In addition, Medicare payments to physicians are set to be cut by approximately 25 percent if Congress does not address the cut by December 31, 2013 and offset the cut with a payfor that would likely include cuts to other health care entities. Any of these negotiations and decisions, if ultimately accepted by Congress, could impact the size of the Medicare sequester cuts in January FY 2014.

Drinker Biddle Webinar on 2013 Regulatory and Economic Outlook

It’s not too late to RSVP for tomorrow’s “2013 Regulatory and Economic Outlook” webinar featuring Drinker Biddle’s Lobbying and Advocacy Team Senior Government Relations Director Jodie Curtis, Drinker Biddle Counsel Heather B. Abrigo, and Drinker Biddle Director of Growth Strategies Nick Araco.

The webinar, to be held at 10:00 a.m. on Wednesday, October 9, 2013, will touch upon implementation of the Affordable Care Act (ACA, or health reform) and in particular what employers need to be thinking about, the debt ceiling debate, sequestration, and the current legislative and regulatory environments. For more information or to register, see http://www.drinkerbiddle.com/Register/2013-Regulatory-and-Economic-Outlook?Section=Events.

Drinker Biddle Webinar on 2013 Regulatory and Economic Outlook

Drinker Biddle’s Lobbying and Advocacy Team Senior Government Relations Director Jodie Curtis will be joining Heather B. Abrigo, Counsel, Drinker Biddle, and Nick Araco, Director of Growth Strategies, Drinker Biddle, to present a webinar on “2013 Regulatory and Economic Outlook.” The webinar, to be held at 10:00 a.m. on Wednesday, October 9, 2013, will touch upon implementation of the Affordable Care Act (ACA, or health reform), the debt ceiling debate, sequestration, and the current legislative and regulatory environments. For more information or to register, see http://www.drinkerbiddle.com/Register/2013-Regulatory-and-Economic-Outlook?Section=Events.

Washington Post Highlights Impact of Sequester on Scientific Research

In the September 24th edition of the Washington Post, Ariana Eunjung Cha highlighted the impact of budget cuts on research funding in her article “Budget Sequester Squeezes Scientific Research.” Cha notes that sequestration, across-the-board cuts that went into effect on March 1, 2013, has delayed research and forced layoffs in research labs across the country.

Sequestration Becomes a Reality

For months policymakers in Washington have devoted countless hours debating and attempting to prevent the automatic the board spending cuts know as sequestration.  (For more information on the sequestration process, see DBR’s Dewonkify on sequestration).  Washington has known that sequestration has been a possibility (however at times remote) since the Budget Control Act was enacted in August 2011.  At midnight tonight, Friday, March 1st, sequestration becomes a reality.

What actually happens in sequestration?

Earlier this week, the White House Office of Management and Budget released a memo to all agencies providing some guidance on how to prepare for sequestration.  Agencies are still sorting out how to specifically implement many of the sequestration requirements.  These cuts will not necessarily happen overnight.

The Senate Appropriations Committee has a list of the impact of sequestration by agency.

There’s been a lot of talk of furloughing federal workers. Does this mean federal workers would expect a long weekend?

No.  Some agencies have already issued furlough notices to employees, most notably the Department of Defense.  But not all agencies will necessarily furlough employees, and some may delay any immediate furloughs.  For example, the Internal Revenue Service announced that it would not furlough individuals until after the April 15, 2013 tax deadline.

What does it mean if for federal workers who are furloughed?

Basically, a furlough is forced unpaid leave.  Employees who are furloughed do not get paid for the time they are furloughed.  They also are not allowed to work during their furlough time.

Employees will keep their full health insurance benefits.  However, for other benefits (such as retirement account contributions) that are income-based, furloughed employees will likely see reductions.

What’s being done to stop this?

Policymakers in Washington have proposed several options to address these cuts.

Senate:  Yesterday, the Senate voted on two bills to prevent the sequestration.  By a vote of 51-49, the Senate failed to proceed on S. 388, legislation that would have postponed cuts in fiscal year 2013 and part of 2014.  Matching deficit savings would have been achieved through a mix of higher taxes on those making more than $5 million a year, oil companies, and firms that export jobs overseas, as well as more focused cuts to the Departments of Defense and Agriculture.

The Senate also defeated by a vote of 38-62 S. 16, legislation that would have maintained the overall cuts, but would have afforded the President greater discretion in how they were applied.   The Administration released a Statement of Administrative Policy strongly opposing S. 16.

House: The House passed two bills (H.R. 5652 and H.R. 6365) last year that would have replaced the across-the-board sequestration cuts with offsetting cuts to domestic spending and entitlements.  Both bills passed without any Democratic votes, and the Senate refused to consider either.

Earlier today, House Speaker John Boehner indicated that the House will pass a Continuing Resolution next week that will cover the remainder of fiscal year 2013.  As with S. 16, that bill is expected to maintain the sequestration cuts, but allow agencies greater discretion in how to apply them.

Administration:  The Administration continues to advocate for the proposal it released in December 2012 as part of the fiscal cliff negotiations.  That proposal calls for $2.5 trillion in overall deficit reduction through a mix of tax increases and targeted spending cuts.

The White House also has released a state-by-state analysis of the impact of the sequestration.

What’s the status of negotiations?

Earlier today, President Obama met with Congressional leaders at the White House.  The hour-long meeting failed to yield any results.

Please continue to check back for more information. We will be providing updates as the sequestration unfolds.

*Andrew Bowman contributed to this posting.

**For a great piece on how sequestration effects the life sciences industry, read this blog post by our colleagues.

Fiscal Cliff Bill Passes Congress

On New Year’s Day, the House of Representatives passed H.R. 8, the American Taxpayer Relief Act of 2012, to avoid going over the “fiscal cliff.” The final vote was 257-157, passing with 172  Democrats and 85 Republicans. (The bill passed the Senate at 2 am on New Year’s Day by a vote of 89-8.)

The final package included tax policies, a two month delay on the sequestration and a one year fix to the Sustainable Growth Rate.

Below are some documents on the package that passed Congress – including the bill, a Congressional Budget Office score, a summary and more.

 

American Taxpayer Relief Act Copy

One-Pager on America Tax Relief Act

Offsets Summaries – American Tax Relief Act

Extender Summaries – American Tax Relief Act

CBO Detail on SenateHR8-TitleVI

Joint Committee on Taxation – Estimated Revenue Effects of HR 8 the American Taxpayer Relief Act of 2012

White House Summary on Fiscal Cliff

Fiscal Cliff, Taxmageddon, Sequestration – What Does It All Mean?

Now that the election is over, the President, the U.S. Congress, the media, and the financial markets have shifted their attention to the impending economic calamity that Congress created and that Congress must fix—otherwise the country will tumble off the “fiscal cliff.”

“Fiscal cliff” is the new buzzword being used to describe the situation that the U.S. will face at the end of this year when several tax policies are set to expire, new taxes from the Affordable Care Act will kick in, and provisions of the Budget Control Act of 2011 will go into effect.  If no action is taken by Congress and the President during the lame duck session, $500 billion of spending cuts and tax increases will automatically occur.

Both sides of the aisle worry that the fiscal cliffincluding “taxmageddon”could plunge the U.S. back into a deep recession. The bipartisan Tax Policy Center estimates that if no deal is struck by January 1, 2013, 90 percent of Americans would face tax increases, at an average of $3,500 in additional taxes by April 2013.*

In 2011, legislators reached a bipartisan agreement to raise the debt ceiling.  However, in exchange for raising the debt ceiling, the agreement mandated that Congress put forward a plan to balance the budget—by December 31, 2012—or automatic spending cuts of 10% across the board would go into effect.  These automatic cuts are also known as “sequestration.”

Taxmageddon

“Taxmageddon” is a term created by Congressional aides to refer to the date of December 31, 2012—when a large number of tax cuts are set to expire and tax increases from the Affordable Care Act are slated to take effect.

Those tax policies that are set to expire are the Bush-era tax cuts, the payroll tax holiday, the alternative minimum tax (AMT) patch, and the tax extenders.

  • The Bush-era tax cuts, which President Obama extended, comprise of cuts that are applied to income, capital gains, and dividend taxes.
  • As part of the compromise for extending the Bush-era tax cuts, President Obama successfully included the payroll tax holiday that would drop an individual’s withholding rate, allowing workers to keep more of their earnings.
  • The AMT was put in place to make sure that those wealthy taxpayers who are able to lower their tax obligations through deductions, credits and exemptions—still pay at least the minimum amount of taxes.  In 2010, Congress passed a two-year patch for the AMT.  Some say that the taxes on the middle class will go up unless Congress extends the AMT.
  • Tax extenders are designed to give temporary tax breaks to encourage development of specific industries—for example, R&D companies, investment companies, manufacturers, movie and television producers, and the oil, gas, and alternative fuel companies.

Check out this Congressional Research Service report for more information on the expiring tax provisions.

Starting January 1, 2013, five taxes from President Obama’s health care reform law will kick in.  Those new taxes are the medical device manufacturing excise tax, a Medicare payroll tax increase, a surtax on investment income, itemized deductions for medical expenses, and the flexible spending account cap.

  • The medical device manufacturing excise tax is a tax on the sale of certain medical devices by the manufacturer, producer or importer of the device at a rate of 2.3 percent.  Class I medical devices are exempted from the tax, i.e., eyeglasses, contact lenses, hearing aids, and any device of a type that is generally purchased by the public at retail for individual use.
  • High-income earners will also see their FICA Medicare payroll tax go up 0.9 percent—from 1.45 percent to 2.35 percent.  The surtax on investment income affects the net investment income of most joint filers with adjusted gross income of more than $250,000 and $200,000 for single filers.
  • The tax rates on long-term capital gains and dividends for these earners will jump from 15 percent to 18.8 percent.
  • Itemized deductions for unreimbursed medical expenses will be raised from 7.5 percent of the adjusted gross income to 10 percent of the adjusted gross income—for most taxpayers.
  • A $2,500 annual cap will be imposed on flexible spending accounts. These pre-tax accounts currently have no federal limit.

To learn more about each of these, please visit the Kaiser Family Foundation Health Reform Implementation Timeline.

Sequestration

“Sequestration” is a rarely used procedure in budget-related legislation that allows for automatic spending cuts to all federal discretionary and most mandatory federal spending programs.

The Budget Control Act authorized an increase in the debt ceiling in exchange for $2.4 trillion in deficit reduction over the next ten years.  This total includes $1.2 trillion in spending cuts identified by the legislation, with an additional $1.2 trillion that was to be determined by a bipartisan group of Senators and Representatives known as the “Super Committee.”  In the event the Super Committee failed to reach agreement, the bill created a trigger mechanism to implement burdensome, across-the-board spending reductions known as “sequestration.”

Under sequestration, federal agency budgets would be reduced annually by roughly $110 billion to meet the deficit reduction goals, with cuts split evenly between Defense and Non-Defense spending.  Non-defense cuts includes a mandatory health spending cut of approximately $16.6 billion (i.e., Medicare and other mandatory programs) and discretionary health spending cuts of approximately $38.1 billion (i.e., National Institutes of Health, Centers for Disease Control and Prevention, Health Resources Services Administration).  This was intended to be so unpalatable to Super Committee members that they would be forced to come together and make a deal.

As we all know, the Super Committee was not able to come to an agreement and the sequestration process was initiated.  Without further Congressional action, these cuts will take effect on January 1, 2013.

Congress has not yet come up with a plan to balance the budget, so the fiscal cliff continues to loom.  Neither party wants to see the U.S. go off the cliff, but serious negotiations will have to occur in order to stop this from occurring.

What do you think is going to happen?  Do you think Congress will take us over the cliff?  Or will they kick the can down the road and pass a temporary six month extension?

* http://www.nytimes.com/2012/10/17/business/financial-survival-in-a-time-of-fiscal-peril.html?pagewanted=all

BREAKING – WHITE HOUSE RELEASES SEQUESTRATION REPORT

The White House this afternoon released its report on the forthcoming sequestration.  The report, which runs nearly 400 pages, provides a dire warning, saying that the Office of Management and Budget’s findings leave “no question that the sequestration would be deeply destructive to national security, domestic investments, and core government functions” and that “The Administration strongly believes that sequestration is bad policy, and that Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package.”

Among the health care items identified, the report indicates:

  • “The National Institutes of Health would have to halt or curtail scientific research, including needed research into cancer and childhood diseases.”  The report identifies a sequester percentage of 8.2%, or $2.518 billion.
  • Nondefense CDC spending would also be cut by 8.2%, or about $464 million
  • Medicare is subject to a 2% reduction limit, for a total of $11.085 billion, which will come from provider payments.

We will continue to monitor and sift through the report and provide information as it becomes available.

For more background on sequestration, please see our earlier posts.

Sequestration Fight Heats Up

Yesterday, the American Hospital Association (AHA), American Medical Association (AMA), and the American Nurses Association (ANA) released a report finding the Medicare cuts called for under the Budget Control Act of 2011 will result in the loss of approximately 766,000 health care jobs by 2012.  Unless Congress acts by the end of the year, beginning in 2013, Medicare providers will receive a two percent across-the-board cut to their reimbursement.  Medicare benefits will not be cut nor will payments to certain low-income programs provided in Medicare (like the low-income subsidy provided in Medicare Part D).  (For additional information on the Budget Control Act, click here.)

The Report estimates that in 2013, the first year of the sequestration cuts, almost 500,000 health care related jobs will be lost.  California, Florida, and Texas are expected to experience the biggest job losses while Alaska, DC, and Wyoming are expected to experience the fewest job losses.

Later this week the Administration is slated to release its report detailing how it intends to implement the sequestration cuts that are slated to begin in January 2013.  This report was due to Congress last week, but the Administration delayed the report due to the complexity of the issues involved.