The Issue
Bipartisan Fiscal Deficit Commission (The Bowles/Simpson Commission)
In December 2010 the National Commission on Fiscal Responsibility and Reform failed  to reach the 14 votes necessary to move its deficit-reduction proposal to Congress, with a final tally of 11 member votes in support and 7 votes against. While the proposal's defeat was anticipated given deep concerns over recommended tax increases and spending cuts, the commission's efforts have highlighted the importance of finding solutions to address the the nation's growing deficits.

Commission Proposal:

• 'The Moment of Truth' - Commission Proposal (PDF)
• IS Summary of the commission proposal
  

Background
National Commission on Fiscal Responsibility and Reform
President Obama signed an executive order February 18, 2010 to establish the National Commission on Fiscal Responsibility and Reform. The bipartisan commission is charged with making recommendations to Congress to adopt policies that will help bring the budget closer to balance and restore fiscal stability. 

• National Commission on Fiscal Responsibility and Reform website 
  
• Contact the National Commission on Fiscal Responsibility and Reform  

The commission is:

• Co-chaired by former White House Chief of Staff Erskine Bowles and former Senator Alan Simpson (R-WY)
• Comprised of 18 appointed members
• 12 appointed by Congress (3 each per party per chamber) – appointees must be sitting members of Congress
• 6 appointed by the President (No more than 4 may be from the same party)
• Expected to release initial recommendations to Congress no later than December 1, 2010
• 14 of 18 commission members must agree on budget recommendations before they can be submitted       
  

Deficit Commission Proposal
The final proposal released December 1, 2010 by the National Commission for Fiscal Responsibility and Reform provides for nearly $4 trillion in deficit reductions by 2020, recommending reduced tax rates, broad spending cuts and tax expenditure changes, as well as health care and entitlement reforms. The proposal would cut the deficit to 2.3% of GDP by 2015 and stabilize the debt by 2014, reducing it to 60% of GDP by 2023 and 40% of GDP by 2035. Although the proposal was not formally adopted by the commission, some of the recommendations will likely be a part of the annual budget debate in 2011. Highlights include:

Spending Recommendations
The commission proposal would impose $50 billion in immediate spending cuts with $200 billion in savings by 2015 taken from both non-defense and defense programs.  Among the recommendations:

• Proposes a cap on all discretionary spending through 2020 (spending for FY 2013 would return to FY 2008 levels; spending growth would be restricted to half the projected inflation rate through 2020)
• Reduces White House and Congressional budgets by 15%, reduces the federal workforce by 10% through attrition, and imposes a three-year pay freeze for all civilian federal employees and Congressional members
  
• Eliminates all earmarks
• Gradually increase gas tax to fund transportation spending (by 15 cents beginning in 2013)
• Congress will be required to find additional cuts in total discretionary spending to meet the proposed caps
  

Tax Recommendations  
The commission proposal calls for enactment of comprehensive tax reform by 2012 with the stated goals of lowering rates, broadening the tax base, reducing tax expenditures, and lowering deficits. Tax reform proposals would raise $80 billion in revenue to be applied to the deficit by 2018 and $180 billion by 2028.  Among the recommendations:

• Proposes that tax reform rely on “zero-based budgeting” (essentially a complete revamp of the income tax system) by first eliminating all income tax expenditures.
• According to the commission, the following tax expenditures must be amended and included in the new code:
• Charitable giving
• Current law replaced with a 12% non-refundable credit for all taxpayers; to qualify, contributions must meet or exceed 2% of the taxpayer’s adjusted gross income (AGI)
• Support for low income workers and families
• Maintain current law for the EITC and the Child Tax Credit
• Mortgage interest only for principal residences
• Current law replaced with a 12% non-refundable credit for all taxpayers (for primary residence only; mortgage capped at $500,000)
• Employer-provided health insurance
• Capped at 75^th percentile of premium levels in 2014 (cap frozen through 2018 and phased-out by 2038)
• Retirement savings and pensions
• Consolidate retirement accounts; cap tax-preferred contributions to lower of $20,000 or 20% of income, expand saver’s credit
• Along with the revision of tax expenditures, the commission further proposes:
• Three income tax brackets – 12%, 22%, 28%, as well as a flat corporate tax rate of 28%
• Repeal of the alternative minimum tax (AMT), the personal exemption phase-out (PEP) and Pease provisions
• Elimination of all itemized deductions, with all taxpayers taking the standard deduction (except the specific tax expenditures cited above)
• Taxing capital gains and dividends taxed at ordinary rates
• Proposes two fail-safe options if Congress and the President fail to enact reform by 2013:
• Across the board reduction of itemized deductions, non-refundable credits for individuals, income tax exclusion for employer provided health care, and general business credits, beginning in 2013 and increasing over time
• Trigger to reduce tax expenditures further and moved rates and expenditures down to zero-based levels (8%,14%, 23% tax rates; elimination of all tax expenditures)

Additional Revenue and Savings
The commission also proposes changes to health care and entitlement programs that would yield significant savings.  Among the recommendations:

• Ensure long-term solvency of Social Security
• Index the retirement age to increased longevity (Increasing the retirement age by one month every two years after it has reached age 67 under current law; this would result in the retirement age reaching 69 by 2075)
• Establish more progressive benefit formula and accurate measure of inflation
• Broaden payroll tax base
• Increase taxable maximum to capture 90% of wages by 2050
• Fully offset the “Doc fix” for Medicare payments through increased cost sharing, malpractice liability reform, and payment reforms.
• Establish a process for reviewing total health care spending
• Reform agriculture subsidies and federal workforce retirement programs
• Consider a one-year payroll tax holiday in 2011 to spur economic growth