Bipartisan Policy Center plan proposes sales tax to tackle deficit

In the latest, but surely not last, entry into the Washington contest to solve the nation's debt crisis, the Bipartisan Policy Center's Debt Reduction Task Force released a plan Wednesday that would stabilize the debt at below 60 percent of gross domestic product by 2020 by relying more on spending cuts than on increased revenues -- but not by much.

The group of 19, led by former Senate Budget Committee Chairman Pete Domenici, R-N.M., and former Clinton-era White House Budget Director Alice Rivlin, suggests comprehensive tax reform in its bid to balance the budget (minus debt payments) by 2014.

Although the proposal, "Restoring America's Future," indicates that less than 10 percent of savings in 2020 would come from "new revenues," the reliance on tax-expenditure cuts pushes the revenue side of the equation up. While budget experts usually refer to tax expenditures as a form of spending, cutting them -- which the Domenici-Rivlin plan relies on for 38 percent of savings in 2020 -- doesn't usually feel that way; in most cases, it results in a tax increase.

The main source of additional revenue the group proposes is a 6.5 percent debt-reduction sales tax. This would effectively establish a temporary Value-Added Tax, which will likely set off more than a few indignant reactions from Republican legislators.

To address the current state of the economy, the plan calls for an ambitious economic stimulus in the form of an immediate Social Security payroll tax holiday for 2011 that would exempt employers and employees from paying a 12.4 percent tax into the Social Security Trust Funds. That suspension would direct nearly $650 billion back into the economy and encourage employers to hire more workers -- creating 2.5 million to 7 million jobs over the next two years, according to Congressional Budget Office projections. The tax holiday would later be paid for with general revenues.

While the proposal does not raise the retirement age outright, its approach to Social Security is not all that different from that of the Simpson-Bowles plan released last week. It suggests "index[ing] the benefit formula for increases in life expectancy" starting in 2023, ensuring that early retirees get lower monthly benefits. It also changes the calculation of cost-of-living adjustments and reduces benefits for the top quarter of beneficiaries.

In addressing health care costs -- widely seen as the heart of the country's fiscal troubles -- the plan calls for several specific measures, including phasing out the exclusion of employer-provided health benefits and raising Medicare Part B premiums from 25 percent to 35 percent of total program costs. Medicare would also be used to bargain with pharmaceutical companies for higher rebates, and, starting in 2018, the program would be transitioned to a "premium support" program that limits growth in per-beneficiary support. A health insurance exchange would encourage efficiency through competition.

The task force suggests reining in Medicaid costs through a new federal-state financing arrangement that would "restore incentives for cost containment." To achieve additional health care savings, the group would reform medical malpractice laws and impose excise taxes on sugary drinks and high-fructose corn syrup to combat the specter of out-of-control spending sparked by an obesity epidemic.

The Domenici-Rivlin proposal streamlines the tax code by eliminating "most deductions and credits," allowing it to broaden the tax base and lower corporate and individual tax rates. Individual rates would be set at 15 and 27 percent, instead of the current scale of rates that goes up to 35 percent. Similarly, the top corporate tax rate would be cut from 35 percent to 27 percent. The most sacred tax expenditures, the mortgage-interest and charity deductions, would be replaced with 15 percent refundable credits.

The plan freezes domestic discretionary spending for four years and defense spending for five years before capping both at GDP levels, and calls for the Office of Management and Budget to impose, by law, across-the-board cuts in all programs if spending exceeds the caps. Emergency spending, though, would be exempt.

The proposal also addresses the possibility of additional tax cuts or entitlement spending in the future with a strict pay-as-you-go requirement held in place by automatic triggers and the creation of a Fiscal Accountability Commission to assess long-term budgets.