Hardliners Press Johnson to Back Out of Spending Deal

Plus: IRS improvements still not enough, taxpayer advocate says ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [The Fisc](   By Yuval Rosenberg and Michael Rainey Happy Thursday! There’s lots going on, but let’s take an appropriately brief moment to mourn the loss of Fruit Stripe gum, because as The New York Times [reports]( “the striped chewing gum known for its short burst of flavor, has been discontinued after more than a half-century.” Johnson has gotten an earful from his right flank. (Reuters) Hardliners Press Johnson to Ditch His Spending Deal House Republican hardliners are pressing Speaker Mike Johnson to back out of the $1.66 trillion spending deal he cut with Senate Majority Leader Chuck Schumer, fueling a sense of chaos in Congress just days away from deadlines to fund the government and keep agencies from shutting down. Schumer said Thursday that he would start the Senate process for passing a short-term spending bill, setting up a vote next week to keep departments and agencies open while lawmakers work on longer-term appropriations. Schumer did not say how long the stopgap would last, but the two upcoming funding deadlines are January 19 and February 2 and Republican leaders have floated the idea of extending funding into or past March. “For the most part, both parties – Democrats and Republicans – agree we don’t want a shutdown,” Schumer said. “Instead, we want to work together to pass the twelve appropriations bills based off topline funding levels that congressional leadership agreed to last Sunday.” A band of House conservatives vehemently disagrees with that approach. Those lawmakers have voiced their disgust at the spending deal and, after a dozen members staged a revolt on the House floor Wednesday, some members on Thursday urged the speaker to renege on his agreement and push for steeper spending cuts and tougher restrictions on immigration. After meeting with GOP hardliners in his office, Johnson told reporters that he was “having thoughtful conversations about funding options and priorities.” But he squelched rumors that he was going to back out of his deal, saying he had “made no commitments” to do so. “Mr. Johnson has told critics of his deal that he would consider dropping it, but only if they could come up with an alternative that could draw a majority in the House, where the party has just a two-seat edge,” The New York Times [reported](. “Such a plan would need to draw the backing of both the far right and more mainstream Republicans in competitive districts who have balked at the scope of the spending cuts and conservative policy dictates that their colleagues have demanded.” Democrats warned Johnson against trying to change the terms of the deal. “We have publicly and clearly and unequivocally reached an agreement on the top-line spending number,” said House Democratic Leader Hakeem Jeffries. “To the extent that House Republicans back away from an agreement that was just announced a few days ago, it will make clear that House Republicans are determined to shut down the government, crash the economy and hurt the American people.” Some Republicans opposed the idea, too. “The speaker either gave his word and made an agreement or he didn’t,” Rep. Patrick McHenry of North Carolina said, according to [CNN](. “So he’s got to decide whether or not he gave his word. And if he gave his word he’s got to fulfill his word.” Rep. Tom Cole of Oklahoma, a veteran appropriator, echoed the point: “I don’t know how you cut a deal and then go back to change the deal. The speaker already cut it,” he said, according to [Politico](. And Sen. Thom Tillis of North Carolina slammed the notion of backing out, telling [Punchbowl News]( “If Republicans want to snatch defeat from the jaws of victory in the election this year, fail to fund the government.” The bottom line: As previous Republican speakers have found out, it’s not possible to appease all factions of a sharply divided GOP conference. It has long been clear that Johnson would need to rely on Democratic votes to pass a spending package in the House or accept a shutdown to satisfy his right flank. If Johnson backs out of his deal, it would significantly boost the odds of a shutdown and all but ensure trouble in any future dealmaking with Democrats. As Johnson weighs his choices — and frustrates both hardliners and moderates — the odds of a shutdown appear to be growing. A partial shutdown would start on January 20. Budget Deficit Tops $500 Billion in the First Quarter The federal budget deficit was $129 billion in December, the Treasury Department [reported]( Thursday. That brings the deficit for the first quarter of the 2024 fiscal year, which began in October, to $510 billion. The deficit for calender year 2023 totaled $1.8 trillion. Revenues of $429 billion in December were $26 billion lower compared to a year ago, while outlays of $559 billion were $19 billion higher. The deficit is increasing more rapidly this year than in 2023, when the first quarter deficit totaled $421 billion. At the current rate, the annual deficit will top $2 trillion in 2024. Tax Cuts or Spending Increases? What’s Driven the Rise in Debt Does the U.S. government have a spending problem or a revenue problem? Republicans insist that rising deficits and debt and are caused by the former, while Democrats have argued that repeated tax cuts have undermined the fiscal outlook. It’s a debate you’re likely to hear often in the coming months, but a new analysis by the non-partisan Committee for Responsible Federal Budget, which advocates for deficit reduction, says that — shocker! — both lower taxes and higher spending are to blame for the rise in debt since 2001. If not for policy changes enacted over the last 22 years, the debt would be fully paid off, CRFB says. “Debt is 37 percent of GDP higher due to major tax cuts, 33 percent higher due to major spending increases, and 28 percent higher due to recession responses,” the report says, noting that most debt can be attributed to bipartisan legislation. Five major tax bills have cost more than $8 trillion through last year, and lawmakers enacted nearly $6 trillion in net spending increases. Responses to the Great Recession and the Covid-19 pandemic added another $6.8 trillion in costs. The study also looks at how spending and revenue have changed as a share of the economy since 2001. It finds that rising spending, primarily in mandatory programs, accounts for about two-thirds of the growth in annual deficits, while declining revenue explains one-third. “Had revenue remained stable as a share of the economy, the debt would be half its size; had primary spending been stable, it would be nearly paid off,” the report says. The bottom line: CRFB says that whether spending is too high or revenue is too low “is a question of values and priorities that cannot be answered objectively.” But it says that improving the nation’s fiscal outlook can’t rely on just higher taxes or slower spending. “Any realistic plan to fix the debt will require addressing both revenue and spending,” CRFB says. $1 Billion in Ukraine Military Aid Not Properly Tracked: Watchdog A Pentagon watchdog says that more than $1 billion worth of weapons the U.S. has sent to Ukraine has not been properly tracked, raising questions about how military aid is being used and possibly abused in the war-torn country. The Defense Department’s inspector general said in a [report]( released Thursday that officials had failed to track nearly 40,000 weapons that by law require careful monitoring. The weapons include Javelin and Stinger missiles, night vision goggles and Lethal Miniature Aerial Missile Systems (LMAMS). The Pentagon maintains a database tracking such systems, but the inspector general found that the databases were either not up to date or did not reflect the full scope of weapons transfers that had occurred. The inspector general said it had no evidence that the weapons are being misused in any way, but as The New York Times’ Lara Jakes [reports]( there are concerns that those weapons are especially vulnerable to theft and resale by arms traffickers. Defense officials say the reporting and tracking requirements are unrealistic and all but impossible to fulfill in wartime conditions. They also say that they lack the manpower to track all of the sensitive weapons systems being sent to Ukraine, the number of which now exceeds 50,000, according to one official who spoke to the Times. Taxpayer Advocate Says IRS Improvements Still Not Good Enough The IRS has made enormous strides in recovering from pandemic-era challenges, says Erin M. Collins, the national taxpayer advocate. But her new annual report makes it clear that the IRS still has a long way to go to achieve its goal of becoming an efficient, modern tax agency. “After several difficult years for taxpayers, the IRS, and society in general, tax administration in 2023 mostly managed to leave its COVID-19 problems behind,” Collins writes. “The IRS eliminated most of its processing backlog, generally paid refunds timely, and answered taxpayer telephone calls at pre-pandemic levels.” Collins adds that the “good news is that, with limited exceptions, we are back to business as usual. The bad news is that the baseline level of ‘business as usual’ was not good enough.” The report cites 10 areas that need improvement at the IRS, including more rapid return processing, better hiring and training processes, and stronger efforts to prevent and address identity theft. Simply answering the phones remains a sore spot. Collins says that although the agency claims that it answered 85% of calls during the most recent tax season, that number is a technicality, and the true rate is more like 35%, with only 29% of calls being answered during the 2023 fiscal year overall. IRS Commissioner Danny Werfel acknowledged that a lot of work still needs to be done. “I feel like there have been some critical advances and some important building blocks are in place,” he told [The New York Times](. “I have never tried to explicitly or implicitly indicate that any victory lap is appropriate.” Werfel said that billions of dollars in funding cuts for the IRS being through by Republicans in Congress would not hurt the agency’s current modernization projects, at least not in the short run. But at some point, the reduction in funds would hurt those efforts. “We’re going to at some point in the future hit the cliff,” he said. [Read the full taxpayer advocate report here](. Inflation Rises Slightly in December Inflation edged higher in December, according to government data released Thursday, serving as a reminder that the battle against rising prices is not yet over, even as it continues to show progress overall. Prices rose 0.3% month-over-month, the Labor Department said, and were 3.4% higher on a 12-month basis. Both numbers were higher than in November, when the monthly inflation rate stood at 0.1% and the 12-month rate was 3.1%. Much of the increase was driven by housing, with food and energy prices contributing as well. The core inflation rate, which ignores volatile food and fuel prices, was up 0.3% on a monthly basis, the same as in November, and 3.9% on a 12-month basis — the lowest reading for core inflation since May 2021. What the experts are saying: Some analysts said the latest data is basically a bump in the road. “It just tells you the last mile is a struggle,’’ Vincent Reinhart, chief economist at Dreyfus Mellon, told the [Associated Press](. Others, however, saw signs of potential trouble in services inflation, which could continue for some time. Joseph Brusuelas, chief economist at RSM, warned that sticky services inflation could push the Federal Reserve to delay interest rate cuts this year, making a March cut less likely. The bottom line: Economists have warned that disinflation would be bumpy, as the December data amply demonstrates. We will need to see a few months more data to know if it’s anything more than that. Fiscal News Roundup - [Johnson Flails as Republicans Demand Consequences for Conservative Hijacking]( – Politico - [Schumer Moving Forward With Temporary Funding Bill to Avoid Shutdown as Spending Talks Continue]( – CBS News - [Jeffries Warns That Johnson Reneging on Spending Deal Would Tank the Economy]( – The Hill - [Senate GOP Caught Off Guard by Talks of Alternative Spending Deal: ‘Good Luck’]( – The Hill - [Budget Fight Threatens Poor Families With Cuts to Housing Aid, Evictions]( – Washington Post - [Senate Border Talks Broaden to Include Afghan Evacuees, Migrant Work Permits and High-Skilled Visas]( – CBS News - [More Money Is Helping the IRS. Republicans Still Want to Cut Its Budget]( – Washington Post - [Congress Nears Deal to Partially Restore Biden’s Expanded Child Tax Credit]( – Washington Post - [Fresh Inflation Data Shows Intact, but Bumpy, Cool-Down]( – New York Times Views and Analysis - [Pristine Inflation Data Is Too Much to Expect]( – Jonathan Levin, Bloomberg - [Stephanie Kelton: ‘Inflation Has Come Down in Spite of the Fed, Not Because of It’]( – Brooke Masters, Financial Times - [How About Those Factories?!]( – Harold Meyerson, American Prospect - [The Pentagon Is Giving the Arsenal of Democracy a Reboot]( – James Stavridis, Bloomberg - [Targeting Drug Middlemen Could Create More Loopholes]( – Bloomberg Editorial Board - [Why Trump Is Winning, as Shown in Wednesday Night’s Dueling Programming]( – Philip Bump, Washington Post Copyright © 2023 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website or through Facebook. 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