Contents

• Changes in Federal Spending Assuming that the BCA's Automatic Spending Reductions are Implemented
• Proposals to Replace the FY2013 Sequester
• President Obama's Proposal
• Sequester Replacement Reconciliation Act (H.R. 5652)
• Van Hollen Amendment to H.R. 5652
• National Security and Job Protection Act (H.R. 6365)
• Legislation Requiring Disclosure of Sequester Impact

Summary

The Budget Control Act of 2011 (BCA; P.L. 112-25) provided for an increase in the statutory limit on the public debt in conjunction with a variety of measures to reduce the budget deficit. Included in these measures was the creation of a Joint Select Committee on Deficit Reduction, which was tasked to develop and submit a plan to Congress containing deficit reduction to total at least $1.2 trillion over the FY2012-FY2021 period. However, because the committee did not report out recommendations, the BCA's automatic spending reduction process was triggered. This process is set to begin on January 2, 2013.

Both President Obama and some Members of Congress have offered proposals for repealing or modifying the automatic spending reductions. The President's FY2013 Budget Proposal eliminates the automatic spending reductions for all nine years and replaces them with alternative measures to reduce the deficit. The largest of these proposals include allowing the 2001/2003/2010 tax cuts for singles making over $200,000 and households making over $250,000 to expire; savings generated from changes to Medicare, Medicaid, agriculture, and other mandatory programs; and placing caps on spending on Overseas Contingency Operations (OCO). Together, this proposal totals $2,221 billion more in deficit reduction than what would be achieved by the BCA's automatic spending reduction process between FY2012 and FY2022.

The Sequester Replacement Reconciliation Act of 2012 (H.R. 5652), agreed to by the House on May 10, 2012, would cancel the sequester of approximately $98 billion in discretionary defense, discretionary non-defense, and mandatory defense FY2013 funding scheduled to take place on January 2, 2013; would lower the current FY2013 cap on discretionary budget authority set by the BCA of $1,047 billion to $1,028 billion; and would cut other mandatory non-defense programs. If enacted, this measure would reduce the deficit by $262 billion more than what would be achieved by the BCA's FY2013 automatic spending reductions over the FY2012 to FY2022 period. A similar proposal, the Spending Reduction Act of 2012 (H.R. 6684), was also passed by the House on December 20, 2012.

Representative Chris Van Hollen offered a substitute amendment to H.R. 5652. His proposal would replace the entire FY2013 sequester with a series of revenue increases and spending reductions. If enacted, this measure would reduce the deficit by $30 billion more than what would be achieved by the BCA's FY2013 automatic spending reductions over the FY2012 to FY2022 period. This measure was not made in order by the House Rules Committee.

On September 13, the House passed the National Security and Job Protection Act (H.R. 6365), introduced by Representative Allen West, by a vote of 223-196. The act cancels the FY2013 sequester on discretionary defense, discretionary non-defense, and mandatory defense contingent upon enactment of H.R. 5652, or an alternative measure that would achieve outlay reductions equal to those to be achieved by the FY2013 sequester in those categories. This legislation was determined by CBO to not have a budgetary impact.

In addition to the measures proposed above to replace the BCA's automatic spending cuts, President Obama signed into law the Sequestration Transparency Act of 2012 (H.R. 5872) on August 7, 2012. This legislation requires OMB, in consultation with the House and Senate Appropriations Committees, to submit a detailed report within 30 days of enactment containing information on how the BCA's FY2013 automatic spending reductions will affect each non-exempt program, project, and activity. The STA report was released on September 14, 2012.

---

The Budget Control Act of 2011: Budgetary Effects of Proposals to Replace the FY2013 Sequester

The Budget Control Act of 2011 (BCA; P.L. 112-25), signed into law by President Barack Obama on August 2, 2011, provided for an increase in the statutory limit on the public debt in conjunction with a variety of measures to reduce the budget deficit.¹ These measures included the creation of a Joint Select Committee on Deficit Reduction, which was tasked to develop and submit a plan to Congress containing deficit reduction to total at least $1.2 trillion over the FY2012-FY2021 period. However, because the committee did not report out recommendations and therefore no deficit reduction plan became law by January 15, 2012, the BCA's automatic spending reduction process was triggered. This automatic spending reduction process, set to begin on January 2, 2013, would reduce federal outlays over the next decade unless legislation is enacted to prevent it.

The BCA specified a reduction of $1.2 trillion in cuts to budgetary resources over a nine-year period, with $216 billion (or 18%) of the total reduction to be achieved via savings on debt service costs. This amount was stipulated in the BCA itself.² The remaining $984 billion is to be divided equally across each of the nine years, resulting in annual cuts of approximately $109 billion. Approximately $55 billion of these annual reductions will affect defense spending and $55 billion will affect non-defense spending.

Some in Congress have objected to the mechanism by which spending would be cut in these years and have proposed alternatives to these reductions. However, in order to modify the deficit reduction process contained in the BCA, Congress and the President would have to enact legislation to cancel or replace the automatic reductions.

This report provides information on the levels of deficit reduction if the BCA's automatic cuts are implemented as under current law and contrasts that with the alternative proposals offered by some Members of Congress and President Obama. This report also discusses specific determinations made by the Office of Management and Budget regarding the exempt/non-exempt status of certain programs, as well as a discussion of information to be disclosed regarding the FY2013 BCA sequester impact.

Changes in Federal Spending Assuming that the BCA's Automatic Spending Reductions are Implemented

On January 2, 2013, a set of "across-the-board" reductions in non-exempt programs are set to take effect via a sequestration process. These cuts will affect the remainder of FY2013 and will occur unless Congress and the President act to cancel the cuts. Between FY2014 and FY2021, the dollar amount of the cuts will remain the same, though the cuts will be implemented in a different way. In those years, the reductions to mandatory spending will be implemented via a sequestration process, while the reductions to discretionary spending will be made via a lowering of the discretionary spending caps, effectively leaving it up to Congress to decide, via the appropriations process, how the cuts would be implemented under the new, lowered caps. Because Congress retains control over how the discretionary spending cuts in later years (FY2014-FY2021) will be implemented, they can choose to target specific programs, rather than have the more non-discriminatory cuts made via the sequester. The automatic reductions will total $1.2 trillion over the FY2013-FY2021 period. Cuts to discretionary programs as a result of the automatic spending reduction process would be in addition to the cuts to discretionary programs resulting from the BCA discretionary caps.

Based on estimates issued by OMB and CBO, Table 1 shows the reductions in spending to different portions of the budget in dollar terms and percentage terms from this process. Because large portions of the budget are exempt from the BCA's automatic reduction process, the effects on non-exempt programs are much larger than if the same reductions were spread over all programs (i.e., there were no exemptions). For example, total spending (gross outlays) would be reduced by about 2.5% in FY2014, but, as shown in Table 1, CBO estimates the automatic process would reduce discretionary caps for defense by 9.8% and non-defense by 7.4% in FY2014. It would also reduce non-exempt mandatory outlays by 2% for Medicare, as stipulated by the BCA, and, CBO estimates, by 7.4% for other non-defense, non-exempt mandatory accounts in FY2014.

Table 2 shows how the deficit reduction from the BCA and various replacement proposals (discussed later in more detail) will be distributed across discretionary and mandatory spending categories. The amount of deficit reduction shown in Table 2 differs from the amount of the reduction in budgetary resources because the deficit is measured as the difference between outlays and revenue. There is a lag in the time a cut to budgetary resources would result in a reduction in outlays.³ Due to the provisions of the BCA, no changes are made to revenue in the automatic process under that law; however, some proposals to replace the automatic cuts recommend raising revenues to achieve the desired deficit reduction.

Proposals to Replace the FY2013 Sequester

Some Members of Congress have offered proposals for repealing or modifying the automatic spending reductions before they go into effect. In some instances, the proposals replace the entire process through FY2021, and in other instances, they only replace the process in FY2013. The President's FY2013 budget proposal eliminates the automatic spending reductions for all nine years and replaces them with alternative measures to reduce the deficit. The Sequester Replacement Reconciliation Act (H.R. 5652) and the Van Hollen Amendment to H.R. 5652 propose eliminating different elements of the automatic spending reductions in FY2013 only and replacing them with alternative measures to reduce the deficit. These measures and their resulting levels of deficit reductions are shown in Table 2.

Other alternatives have been proposed, but in order to facilitate comparisons between the different proposals, only those with CBO or OMB cost estimates having a budgetary impact are included in Table 2. Because this report is not intended to be a legislative tracking report, other legislation will only be included in this report if it has been issued a CBO score or been passed by the House or the Senate.

President Obama's Proposal

In his FY2013 budget, President Obama proposes replacing the BCA automatic cuts with prescribed spending cuts and tax increases. The largest of these proposals include allowing the 2001/2003/2010 tax cuts for single filers making over $200,000 and married joint filers making over $250,000 to expire; savings generated from changes to Medicare, Medicaid, agriculture, and other mandatory programs; and placing caps on spending for Overseas Contingency Operations (OCO). Together, this proposal totals $2,221 billion more in deficit reduction (see Table 1) than what would be achieved by the BCA's automatic spending reduction process between FY2012 and FY2022.⁴

Sequester Replacement Reconciliation Act (H.R. 5652)

The House-passed FY2013 budget resolution proposes to replace the Budget Control Act's automatic cuts with spending cuts to be achieved elsewhere. Pursuant to instructions included in the FY2013 budget resolution, the Sequester Replacement Reconciliation Act of 2012 (H.R. 5652), as considered by the House, proposes to replace portions of the FY2013 sequestration with spending cuts achieved elsewhere while leaving the FY2014-FY2021 automatic cuts in place.

The legislation would cancel the sequester of approximately $98 billion in discretionary defense, discretionary non-defense, and mandatory defense FY2013 funding scheduled to take place on January 2, 2013. The sequestration of FY2013 non-defense mandatory funding of approximately $12 billion would remain in place. In exchange for eliminating the majority of the FY2013 automatic spending reductions, H.R. 5652 would lower the current FY2013 cap on discretionary budget authority set by the BCA of $1,047 billion to $1,028 billion and would cut other mandatory non-defense programs. The change to mandatory programs include alterations of the SNAP benefits and eligibility criteria, modifications to certain housing and financial authorities, alterations to the provisions related to health insurance exchanges established by the Affordable Care Act, adjustments to the required retirement contribution rates paid by federal employees and Members of Congress, and changes to Medicaid and CHIP.

If enacted, this measure would reduce the deficit by $262 billion more than what would be achieved by the BCA's FY2013 automatic spending reductions over the FY2012-FY2022 period (see Table 2).⁵ The deficit in FY2013 itself would be higher as a result of H.R. 5652 than it otherwise would have been had the BCA's automatic spending reductions remained in place. This measure was passed by the House on May 10, 2012, by a vote of 218-199.

On December 20, 2012, the House passed the Spending Reduction Act of 2012 (H.R. 6684) by a vote of 215-209. This bill is a modified version of H.R. 5652, as previously passed by the House. H.R. 6684 was reportedly considered as a companion measure to legislation proposing to extend the current tax rates for those with annual incomes under $1 million as part of the debate over how to resolve various tax and spending issues related to the fiscal cliff.⁶ If enacted, this measure would reduce the deficit by $237 billion over the FY2013-FY2022 period.⁷ The deficit reduction contained in H.R. 6684 differs from H.R. 5652 primarily due to the assumed enactment date, changes to various effective dates, and the removal of provisions related to flood insurance reauthorization that had already been signed into law.⁸

Van Hollen Amendment to H.R. 5652

Representative Chris Van Hollen proposed a substitute amendment to H.R. 5652. His proposal would have replaced the entire FY2013 sequester with a series of revenue increases and spending reductions. Changes in spending would have been achieved mainly by ending the direct payment program for agricultural producers. Among the revenue measures contained in this amendment were a new minimum tax for taxpayers with adjusted gross income of greater than $1 million, increased retirement contributions paid by Members of Congress, and limits on certain tax deductions used by oil and gas companies.

If enacted, this measure would reduce the deficit by $30 billion more than what would be achieved by the BCA's FY2013 automatic spending reductions over the FY2012-FY2022 period (see Table 2).⁹ The deficit in FY2013 through FY2015 would be higher as a result of this amendment than it otherwise would have been had the BCA's automatic spending reductions remained in place. This measure was not made in order by the House Rules Committee, and therefore was not offered.

National Security and Job Protection Act (H.R. 6365)

On September 13, the House passed the National Security and Job Protection Act (H.R. 6365), introduced by Representative Allen West, by a vote of 223-196. The act cancels the FY2013 sequester on discretionary defense, discretionary non-defense, and mandatory defense contingent upon enactment of H.R. 5652, or an alternative measure that would achieve outlay reductions equal to those to be achieved by the FY2013 sequester in those categories. (The sequester of mandatory non-defense spending would still occur.) The legislation also lowers the current FY2013 cap on discretionary spending from $1,047 billion to $1,028 billion and combines the separate discretionary spending caps for defense and nondefense into one universal cap on discretionary spending. Though this legislation has been scored by CBO, it was determined not to have budgetary impact.¹⁰

Legislation Requiring Disclosure of Sequester Impact

On August 7, 2012, President Obama signed into law the Sequestration Transparency Act of 2012 (STA; P.L. 112-155). The act requires the President, with the assistance of OMB and federal agencies, in consultation with the House and Senate Appropriations Committees, to submit a "detailed" report within 30 days of enactment containing the uniform percentage reduction and dollar amount reductions for each account, and each program, project, and activity (PPA) within those accounts, required under the sequestration scheduled to occur on January 2, 2013. The report also is required to include a list identifying all exempt discretionary and mandatory spending accounts.

The STA report was released on September 14, 2012.¹¹ In addition to providing some details on the level of the reductions themselves, the report made several other important points. First, it mentioned that the estimates contained in the report were preliminary and, as stipulated by the STA, were based generally on the assumption that FY2013 appropriations are funded at the FY2012 level. Therefore, both the percentage reduction and resulting dollar amount of the reductions within specific accounts as listed in the report are likely to change if the sequester were to be implemented on January 2, 2013. Second, the classifications of certain accounts as exempt or non-exempt had not yet been determined; federal administrative expenses being one example. Once final determinations are made, any changes to the size of the sequestrable base would alter the size of the reductions. Third, OMB also stated that it was unable to show the amount of the reductions at the PPA level due to the time constraints imposed by the STA. Therefore, the reductions in the report are shown at the budget account level, which often can contain several PPAs.¹²

In addition to the STA, the BCA requires OMB to submit a report containing information regarding the calculations and reductions required under the automatic process, including the FY2013 sequestration, on January 2, 2013, and with the President's budget submission each year thereafter. No other reporting requirements are included in the BCA itself.

However, OMB has issued responses to questions raised by Members of Congress regarding certain sequestration implementation issues. In a May 25, 2012, letter to House Budget Committee Chairman Paul Ryan, OMB's Acting Director Jeffrey Zients wrote that the Administration had determined, reiterating from an earlier letter, all programs administered by VA, including Veterans' Medical Care, were exempt from sequestration.¹³ In a June 15, 2012, letter to House Committee Chairman Howard P. "Buck" McKeon, Ileana Ros-Lehtinen, and Mike Rogers, Mr. Zients wrote that the Administration has "identified no statutory basis for generally exempting OCO funds from sequestration."¹⁴ Finally, on July 31, 2012, Zients sent a letter to Speaker Boehner notifying him of President Obama's intent to exempt military personnel accounts from the FY2013 sequestration.¹⁵

Footnotes

1.	For more information on the Budget Control Act of 2011, see CRS Report R41965, The Budget Control Act of 2011, by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. For more information on the budgetary effects of the BCA, see CRS Report R42506, The Budget Control Act of 2011: The Effects on Spending and the Budget Deficit When the Automatic Spending Cuts Are Implemented, by [author name scrubbed] and [author name scrubbed].
2.	The actual amount of debt service savings will depend on future interest rates and the timing of the deficit reduction. As described in CBO's analysis of the net budgetary savings resulting from an automatic $1.2 trillion reduction in the event a Joint Committee bill is not enacted, debt service savings amount to 16% of the total between FY2013 and FY2021. See Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, September 12, 2011.
3.	For example, based on CBO estimates the FY2013 sequester would cut budgetary resources by roughly $109 billion, $55 billion on defense discretionary, $39 billion on non-defense discretionary, and $16 billion on non-defense mandatory (including Medicare). (Cuts to defense mandatory spending total less than $500 million over the FY2013-FY2021 period because the vast majority of defense spending is discretionary.) The corresponding effects on FY2013 outlays is estimated at $24 billion on discretionary defense, $21 billion on discretionary non-defense, and $9 billion on mandatory non-defense. The effect of the remainder of the FY2013 reductions occur in later years. Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, Tables 1-3 and 1-5.
4.	The deficit reduction proposed in the President's budget to replace the automatic spending reduction process total $3,187 billion. However, the budget also proposes to cancel $996 billion in automatic cuts. Therefore, the cumulative effect of these reductions is $2,221 billion. CRS calculations based on Office of Management and Budget, Budget for Fiscal Year 2013, Summary Tables, Table S-2.
5.	Congressional Budget Office, Cost Estimate for Sequester Replacement Reconciliation Act, Table 2.
6.	The companion tax legislation, however, was ultimately not considered by the House. Emily Holden and Matt Fuller, "Democrats Boycott Votes on Rules for Tax and Sequester Replacement Plans, Defense Conference Report," CQ Roll Call, December 20, 2012 and Daniel Newhauser, "In Stunning Rebuke, GOP Won't Deliver Votes for Boehner's 'Plan B'," CQ Roll Call, December 20, 2012.
7.	The total deficit reduction amount includes discretionary spending reductions as a result of lowered FY2013 discretionary cap level from current BCA FY2013 cap levels. The total amount of deficit reduction could change based on future appropriations actions for FY2013. Congressional Budget Office, Estimate of the Budgetary Effects of H.R. 6684, the Spending Reduction Act of 2012, as Posted on the Web Site of the House Committee on Rules on December 19, 2012, p. 3.
8.	U.S. Congress, House Committee on Rules, Summary of Changes Between H.R. 6684 and H.R. 5652, 112th Cong., 2nd sess., December 19, 2012.
9.	Congressional Budget Office, Letter to the Honorable Chris Van Hollen Regarding a Proposed Amendment to the Sequester Replacement Reconciliation Act of 2012, Table 2.
10.	Due to scorekeeping conventions, CBO does not score this legislation as having a budgetary impact because it is contingent on the passage of additional legislation. The cost estimate for this legislation can be found at http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr6365.pdf.
11.	The STA report can be found at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf.
12.	OMB, OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), pp. 3-5, 9-10.
13.	The letter does not address whether administrative expenses for the VA programs would be exempt from sequestration. Letter from Jeffrey Zients, Acting Director of the Office of Management and Budget, to The Honorable Paul Ryan, Chairman of the House Committee on the Budget, May 25, 2012, http://www.whitehouse.gov/sites/default/files/omb/legislative/letters/response-letter-to-chairan-ryan-05232012.pdf.
14.	Letter from Jeffrey Zients, Acting Director of the Office of Management and Budget, to The Honorable Howard P. "Buck" McKeon, Chairman of the House Committee on Armed Services, The Honorable Ileana Ros-Lehtinen, Chairwoman of the House Committee on Foreign Affairs, and The Honorable Mike Rogers, Chairman of the House Permanent Select Committee on Intelligence, June 15, 2012, http://www.whitehouse.gov/sites/default/files/omb/legislative/letters/response-letter-to-chairman-mckeon-ros-lehtinen-rogers-06152012.pdf.
15.	Letter from Jeffrey Zients, Acting Director of the Office of Management and Budget, to The Honorable John A. Boehner, Speaker of the House of Representatives, July 31, 2012, http://www.whitehouse.gov/sites/default/files/omb/legislative/letters/military-personnel-letter-boehner.pdf.