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On Feb. 5, President Obama called on Congress to approve a “package of spending cuts and tax reforms” that would delay the implementation of the across-the-board spending cuts (sequestration) that were enacted under the Budget Control Act of 2011 and scheduled to take effect on March 1.
The Budget Control Act requires a total of $1.2 trillion in automatic cuts in discretionary and mandatory programs, split evenly between defense and non-defense spending, over 10 years. The first round of these sequester cuts was originally set to take effect on Jan. 2, 2013, but was delayed for two months under the American Taxpayer Relief Act of 2012.
During his remarks, the president noted that Democrats and Republicans have already been able to reduce the deficit by over $2.5 trillion through a combination of spending reductions and tax rate increases for more high-income individuals, and he expressed the hope that Congress would push that total to $4 trillion by approving a balanced mix of spending cuts and tax reforms as part of the fiscal year 2014 budget. The president offered few details on what should be included in this smaller package, but cited the tax and spending proposals he offered during the recent fiscal cliff negotiations as still being on the table.
Congressional Republicans immediately rejected the president’s call for a “balanced” package as an attempt to increase the tax burden on businesses and high-income individuals. House Speaker John Boehner (R-Ohio) stated in a press release, the president’s sequester should be replaced with spending cuts and reforms that will start us on the path to balancing the budget in 10 years.
In the last Congress, House Republicans voted twice to replace the sequester with a combination of discretionary cuts and cuts to mandatory spending. The Senate did not act on either of those proposals during the 112th Congress, and there are no plans to reintroduce those bills again in this Congress.
For his part, Senate Finance Committee Chairman Max Baucus (D-Mont.) stated that he agreed with the president on the need for a balanced approach to address the sequester, but he cautioned against using tax reform as a “quick fix” to raise revenue.
Meanwhile, Senate Democrats are aiming to produce a bill to replace the sequester, which would include tax increases and spending cuts, and it would replace the $85 billion in automatic spending cuts. If the full caucus approves the draft plan, it could be formally introduced on the Senate floor by Thursday.
Exactly how the budget sequester debate will end remains unclear, as specific proposals has not been revealed yet. However, some have expressed a willingness to allow the sequester to take effect as scheduled rather than replace it, in whole or in part, with additional revenues.
Sequestration holds unique and serious implications for small business. First, because the majority of the federal budget (nearly 70 percent) has been exempted from sequestration, those programs under the scope will be unusually hard-hit—including programs that may be very successful and those targeting small business. Second, sequestration could have a devastating effect on federal small-business contractors. It is likely that, in order to address government personnel reductions and tight budgets, contract bundling will almost certainly increase, and subcontractors—where many small businesses start out and remain—are likely to be the first cut from a prime contract.
Please click here for more on how sequestration will impact small business.