Deal to stop sequestration will have more defense budget cuts and new tax increases

Washington insiders believe that the threat of $500 billion in sequestration defense cuts and an extension of the Bush tax cuts will be worked out in the lame-duck session of Congress after the elections. The opposite is true: we’re headed for higher taxes and still more defense cuts.

Looking toward the looming “fiscal cliff” during the lame duck this winter, Democrats hold two powerful bargaining chips: the various tax cuts that expire at the end of this year and the threat of sequestration. Republicans only have a vote to raise the debt ceiling as leverage. And the timing of when the debt will need to be increased is in flux and could be pushed to 2013. It appears increasingly likely the final outcome will be a Congress that both raises taxes and cuts more military spending — all without seriously addressing the lion’s share of the federal budget on entitlement spending. 

{mosads}When negotiating last summer’s debt-ceiling deal, Speaker of the House John Boehner (R-Ohio) worked with Senate Majority Leader Harry Reid (D-Nev.) and President Obama in search of a grand bargain. Before the final deal collapsed and the Budget Control Act became law, apparently House Republicans were willing to accept $800 billion in tax increases. As Boehner later stated, “There was an agreement with the White House for $800 billion in revenue … it was the president who walked away from this agreement.” 

This would continue a trend for Republicans. During the so-called Gang of Six negotiations last year, Senate Republican members were willing to go further than House Republicans, proposing $2.3 trillion in tax increases and $886 billion in defense cuts over 10 years as part of a larger package. Earlier this month, Sen. Lamar Alexander (R-Tenn.) expressed the general sentiment of the GOP: “Tax reform is at the top of the list of most Republican senators and most of us feel like that means broadening the base, closing the loopholes and could include more revenues.” Sen. Lindsey Graham (R-S.C.) commented recently that he had “crossed the Rubicon” on the American for Prosperity pledge not to raise taxes. And Senate Armed Services Committee ranking member John McCain (R-Ariz.) said just last week that he still supports a potential blueprint put forward by Sen. Pat Toomey (R-Pa.) during the failed supercommittee negotiations to close certain tax loopholes, such as subsidies for ethanol production, and raise revenues.

The bottom line was already clear last year: defenders of defense have little leverage to undo sequestration without tax increases as part of the deal. What’s worse, however, is the fact that the groundwork is also being laid that any deal to “fix” sequestration will require more defense budget cuts beyond the $487 billion already stripped from the sector. Sen. Carl Levin (D-Mich.) has indicated that while he opposes sequestration, he could still support around $100 billion in additional defense budget cuts. This would peg the total closer to $600 billion over the next 10 years. 

As with taxes, Democrats will be pushing on an open door when it comes to pressuring Republicans to give in to additional defense cuts. Already in the Senate, nearly a dozen Republicans have implicitly signed up for as much as $886 billion in defense cuts through their support of the Simpson-Bowles and Gang of Six plans. When it comes time for Congress and the president to strike a final deal this winter, the common expectation will be for defense to “pay its fair share.” Despite contributing more to deficit reduction than any other federal agency, the military will be called on again for further cuts — and Republicans, for the most part, will not take issue. 

Sequestration, in its current composition, will be avoided. But the result will leave little for pro-defense Americans to celebrate: taxes will get raised, defense will fall further and entitlement spending will remain on a wholly unsustainable, unaffordable path. The depressing reality is that the Republican Party will once again get out-negotiated by the White House and the Senate.  

The center of gravity has shifted in the debate so that now any further defense cuts short of full sequestration can be portrayed as Republicans “saving” defense. Yet, it will be a hollow victory if the final defense cut from 2012 levels is roughly $600 to $850 billion over the next decade. At least under the Simpson-Bowles plan — which proposed defense cuts of roughly this magnitude — defense cuts are matched by substantial entitlement cuts to get the primary cause of the looming fiscal crisis under control. As it stands as part of a lame-duck deal, Republicans will cave on both taxes and defense without the benefit of putting entitlement spending on a sustainable course.

Expect that the final deal will be portrayed as a victory because it stops sequestration — however, the reality is that our national security and our economic future will both be the big losers.  

Eaglen is a resident fellow at the American Enterprise Institute’s Marilyn Ware Center for Security Studies.