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The "Sequester"

Last Updated:2013-May-07
Principal Writer:Barry Shatzman

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Understanding The Issue
More Information

Reported News

Economic Policy

Related Bills

American Taxpayer Relief Act

2012 (HR-8)

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What is the "Sequester"

In simplest terms, the sequester is a set of budget cuts that took effect on March 1. Until now, it's probably been just a new word in your news vocabulary. But you're likely to feel it very soon.

The neediest will feel it the most. After-school programs will be cut. About 300,000 woman will be removed from the Women, Infants, and Children (WIC) program.

You're doing ok? You're still not immune...

o If you fly, you might experience delays due to cuts to air traffic controllers and TSA agents.

o If you eat meat, you might pay more due to fewer meat inspectors - both at the Food and Drug Administration and at ports.

o If you pay taxes, you might find it harder to get help from the IRS and it might take longer to get a refund. On the on other hand, if you cheat on your taxes you might have a better chance of getting away with it - since enforcement would be reduced.

In all, a total of $85 billion of cuts will be spread evenly across just about every federal agency that provides services to Americans this year. If nothing changes, $120 billion will be cut in each of the following nine years.

How did we get here? The debt ceiling

The process for arriving at the "sequester" began in 2011, when Republicans in Congress said they would not vote to raise the nation's debt limit (also called the "debt ceiling" unless President Obama agreed to cuts to federal programs (including Medicare and Medicaid) while not increasing tax revenue.

As we discussed in our explanation of tax rates, increasing the marginal tax rate for high levels of income affects the wealthiest Americans, while cuts to programs affects those with less.

The debt limit simply is the amount of money the United States is allowed to borrow to meet existing obligations. It can't create new spending - only Congress can do that. In other words, the limit already had been exceeded by previous spending that Congress had authorized.

As a result, the government did not have enough money to pay for services it already had received or committed for, essentially leaving it with three choices.

o Default on the payments owed

o Pay the bills by taking money from federal programs (cutting programs affects the poorest Americans the most)

o Borrow more money by increasing the debt limit.

In August of that year, Republicans and Democrats in Congress came to an agreement - the Budget Control Act. The bill raised the debt limit while reducing the operating budgets of federal agencies over 10 years.

The bill also created a committee to come up with a proposal to cut at least $1.2 trillion from the federal debt over 10 years. The reductions would come from a combination of reductions in spending and increases in tax revenue.

How did we get here? The super committee

The bill also created a committee to come up with a plan to cut at least $1.2 trillion from the federal debt over 10 years. This committee, the Joint Select Committee on Deficit Reduction, was dubbed the "Super Committee."

If the committee did not come up with a plan that could be approved by Congress by the end of 2011, the cuts would happen automatically - to be spread across almost every federal program.

The only programs that would not be affected were pay for military personnel, Social Security, Medicare, and Medicaid - including the State Children's Health Insurance Program (SCHIP).

These automatic across-the-board spending cuts became known as the "sequester."

It's worth noting that the committee's proposed legislation could consist of a combination reduced spending (which mostly affects the poorest - and largest percentage of Americans) and increases in tax revenue (which could be structured to affect only the wealthiest of Americans). If the committee could not reach an agreement that Congress approved, the entire amount would come from reduced spending starting in January 2013.

The committee failed to reach any agreement - the driving reason being the refusal of committee Republicans to agree to any increase in revenues, as this timeline shows.

How did we get here? The "Fiscal Cliff"

With the failure of the Joint Select Committee on Deficit Reduction to reach an agreement, the automatic across-the-board budget cuts of the sequester were set to take effect at the start of this year. But the sequester wasn't the only thing about to hit Americans at the same time...

o The Bush Tax Cuts were set to expire (after the original 10 years plus the 2-year extension) - meaning that tax rates for all Americans would return to pre-2001 levels.

o The temporary 2-percent Social Security payroll tax "holiday" was set to expire. For more on this, see the Lobby99 story.

The collection of service reductions (from the sequester) and and increased taxes (from the expiring cuts) scheduled to take effect in January 2013 became referred to as the "fiscal cliff."

Keep in mind none of this simply "happened" by itself. Congress can make and change laws any time. Any public policies that affect you, from taxes you pay to services you receive, come from the actions of the people you elect to represent your interests.

Congress could have acted on any of these individual fiscal cliff items at any time. Instead - in the final days of its term - before the new Congress was sworn in - representatives passed the American Taxpayer Relief Act.

The bill...

o Made the Bush Tax Cuts permanent for all income under $400,000 a year. Any income in a year over $400,000 now is taxed at 39.6 percent.

o Extended unemployment benefits for a year.

o Ended the payroll tax holiday which had reduced the Social Security payroll tax by 2 percent. As the tax is paid on income up to $113,000 a year, this means that most people now are paying 2 percent more than they did last year. For those earning much more than $113,000, the difference is trivial since they pay that tax only on the first $113,000 of their income.

The bill also delayed implementation of the sequester for 2 months.

More is coming...

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