President Barack Obama and U.S. congressional leaders hope to trim budget deficits by as much as $4.5 trillion over 10 years as part of a landmark deal that would tame the national debt and avert a looming default.
The Treasury Department has warned it will run out of money to cover the country's bills if Congress does not raise the $14.3 trillion debt ceiling by August 2.
Though Democrats and Republicans agree on the need for trillions of dollars in budget savings, they remain sharply divided about how to get there.
Following is a summary of the debate:
ANNUAL SPENDING
The two sides have tentatively agreed to limit the growth of the annual discretionary spending that covers everything from law enforcement to airport security and the military.
Earlier talks yielded possible savings of $900 billion to $1.3 trillion, aides from both parties say.
First they must agree on the starting point. Should it be the budget that was in effect in January, the slimmed-down version that passed in April or the even lower level that Republicans hope to have in place later this year? That could make a difference of hundreds of billions of dollars.
Another area of disagreement: Democrats want a guaranteed portion of those cuts to come from military spending, an idea Republicans do not like.
The deal might include a mechanism to ensure Congress observes these cuts in coming years. Republicans want to cut spending automatically if it exceeds a level relative to the economy, while Democrats want to mandate tax hikes or spending cuts if budget deficits exceed agreed-upon levels.
TAX REVENUE
This is shaping up to be the most contentious area of the debate as Democrats insist a deficit deal cannot rely on spending cuts alone and Republicans say they will not back any deal that leads to a net increase in tax revenues.
With Congress unlikely to back higher tax rates, Democrats have focused on tax breaks that reduce government revenues by a total of $1.1 trillion each year. Republicans say they are open to closing many of these breaks but only in the context of a broader tax-code rewrite that would lower rates overall.
Obama and House Speaker John Boehner have discussed wrapping this rewrite into the debt talks but details remain up in the air and lawmakers would have a difficult time writing such complex legislation before August 2.
Items on the table include:
- Scaling back a tax break for employer-provided health benefits, which will cost $117 billion this year.
- Limiting itemized deductions for the wealthy, which could bring in $293 billion in extra revenue over 10 years.
- Ending subsidies for ethanol producers. Senate Republicans have voted twice to end this break, which would save roughly $6 billion per year.
- Repealing tax breaks for big oil companies, which would save $45 billion.
- Imposing normal income-tax rates of up to 35 percent on hedge fund managers, who now pay the 15 percent capital-gains rate on their compensation, which they claim as "carried interest." This would yield $20 billion.
- Repealing the "last in, first out" accounting method, which would raise $70 billion.
- Matching the depreciation schedule of corporate jets to the longer schedule that commercial airlines use. This only saves $3 billion but has taken on symbolic value.
OTHER REVENUE
Other tax provisions would actually worsen the budget picture but could surface as Democrats look for ways to stimulate the economy and Republicans look for measures that will allow them to say they are not backing a net increase in tax revenue.
These include:
- Extending a payroll tax cut that expires at the end of this year, which would cost $112 billion.
- Limiting the Alternative Minimum Tax, which would cost roughly $137 billion.
- Making permanent a tax credit for business research costs. This would cost roughly $100 billion.
- Give subsidies to emerging "clean energy" industries.
Other measures would not affect the tax code but could generate additional revenue for the government.
Among them:
- Auctioning off underused electromagnetic frequencies.
- Selling excess property no longer needed by the government.
HEALTHCARE
The government's healthcare bill is projected to nearly double over the coming 10 years, driven by an aging population and medical costs that are outpacing inflation.
Republicans have proposed dramatic changes to the Medicare program for the elderly and the Medicaid program for the poor. Democrats say they will not agree to changes that reduce benefits but the two sides have agreed to relatively modest savings of $200 billion to $400 billion.
Budget experts say major changes to Medicare will be needed if negotiators are to reach their $4 trillion goal.
Possible savings include:
- Better coordinated coverage of "dual eligibles," people qualifying for both Medicare and Medicaid, who account for a disproportionate amount of the government's health spending.
- Requiring drug companies to offer the government a lower price for prescription drugs used by "dual eligibles," which would save $49 billion through 2020.
- Reducing Medicare benefits for wealthy retirees who can afford their own health coverage. Many Democrats worry this could lead to an erosion of public support for the program.
- Changing the way the federal government provides Medicaid money to states that administer the program, rewarding those that spend the money more efficiently.
- Reducing medical fraud and overpayments.
- Limiting medical malpractice lawsuits.
BENEFIT CUTS
The two sides have tentatively agreed to a number of cuts in other benefit programs that would save roughly $500 billion.
Among the possible cuts:
- Changing the way inflation is measured to slow the growth of retirement benefits and tax deductions that are linked to the inflation rate. This could save up to $300 billion. Liberal interest groups fiercely oppose this idea.
- Scaling back retirement benefits for federal workers.
- Charging higher premiums to unstable companies whose benefits are backed by a federal insurance program.
- Reducing farm subsidies.
- Requiring graduate students to pay interest on their federal student loans.
