U.S. Debt Ceiling: A Plan to Kick the Can?

House Republicans want to tie an increase in the debt ceiling due in September/October to a concrete process for corporate tax reform, as reported here and here.  One idea is to couple  a short-term debt limit increase to a mandate for the House to pass a tax-reform plan. The debt limit would increase further when the House passes its plan, and again when the Senate passes a plan.

Corporate tax reform (and its possible link to the debt limit) will be in the spotlight this week as the Joint Committee on Taxation today is expected to release recommendations compiled by 11 House Ways & Means working groups. Jaret Seiberg at Guggenheim highlights the possiblity of market-relevant headlines on the mortgage interest deduction, the corporate debt deduction, the tax treatment for REITs and master limited partnerships (MLPs), and overall corporate tax rates.  Meanwhile, the House likely will pass a bill this week calling on the U.S. Treasury to prioritize payments, an authority many believe that they already have (and which the Senate will not move on).  As we move forward, these two issues will be increasingly linked.

Better-than-expected fiscal numbers, and the prospect of a one-time transfer from the government sponsored enterprises (GSEs), have pushed back the date when the debt limit (to be reset to the level of indebtedness on May 19) is expected to bite starting in July/August until the fall.  The deficit now is running at a 4.5 percent of GDP pace, well down from 10.1 percent in fiscal year 2010.  With the effects of the sequester beginning to build, this dramatic fiscal tightening looks to subtract around 2 percent of GDP from growth this year.  Too much, too fast from a macroeconomic perspective, but good news on the debt-limit front.

Does this possible link of corporate-tax reform to the debt ceiling materially increase the prospect of new legislation in the near term?  Certainly the committee chairs are motivated and have laid out their core reform principles.

I remain skeptical that we can have a grand bargain that overcomes the vast differences between the positions of the two sides (e.g., different stances on top rates, revenue, and treatment of foreign source income).  This proposal, if implemented, would likely lead to gridlock in committee once each house has passed a bill.  But the advantage of linking debt-ceiling increases to corporate tax reform would be that even if the process ultimately fails to deliver, it could still push the debt limit past the midterm elections.  That’s a very small prize, but perhaps the best alternative to another cliff showdown, as there is little evidence of a plan B both sides could sign on to.

This piece is cross-posted from Macro and Markets with permission.