GOP Senators May Raise Taxes to Avert Defense Cuts

Senate Republicans eager to avert deep automatic cuts in defense beginning early next year have begun serious talks with Democrats about raising revenues – the dreaded “R” word – to help blunt the impact of the looming budget cuts mandated by a new deficit reduction law.

Senators John McCain of Arizona and Lindsey Graham of South Carolina and four other Republicans on the Armed Services Committee are exploring ways to block long-term defense cuts with a combination of alternative reductions in domestic programs and $40 billion to $50 billion of new fees and taxes.

RELATED: Contractors Say Defense Cuts Mean Layoffs and Chaos

Graham told reporters Tuesday that he has proposed a 3-to-1 ratio of government spending cuts to revenue raising provisions, along the lines of the deficit reduction recommendations unveiled in December 2010 by the Simpson-Bowles presidential fiscal reform commission.

Graham said that if Republicans agree to raise $40 billion or $50 billion in new revenues, “It’s going to be easier to get Democrats’ help with the $60 billion or $70 billion that we’ll have to find throughout the other parts of the government,” according to The Hill.

McCain and Senate Republican Whip Jon Kyl of Arizona told The Fiscal Times Tuesday that Senate and House Republican and Democratic leaders and Armed Services committee members were conferring at multiple levels to determine whether a compromise could be worked out by August that would either postpone or cancel out the first round of the automatic savings in defense and domestic programs – which will total $110 billion next year.

“There are many, many ways to do it,” Kyl said in an interview. “There’s mandatory savings, there are discretionary savings. A lot of Democrats say there have to be revenues in there, too. Well, there are revenues that can be found. Obviously Republicans don’t think it would be very good for the economy to be raising taxes at this point. But there are other revenues in the way of fees and so on that the government collects.”

The automatic across-the-board spending cuts, known as sequestration, were approved by Congress and the Obama administration last July as part of major legislation to raise the debt ceiling while reducing the long term deficit. The Budget Control Act requires $1.2 trillion in automatic cuts over the next decade – equally divided between defense and domestic programs – with the first $109 billion taking effect January 2, 2013.

But since then, many Republican and Democratic lawmakers, Defense Department officials and budget experts have come to regret the action, fearing that it will lead to a hollow military force and pose hardships for members of the military and their families.

Defense industry giants including Lockheed Martin, Boeing and General Dynamics have warned of major cutbacks and layoffs unless Congress blocks the sequestration. The Bipartisan Policy Center said recently that the deep savings cuts would greatly add to the country’s economic woes by slowing growth and wiping out more than a million jobs – without putting a dent in the federal debt.

The drive to protect the Pentagon budget and defense industry jobs comes amid growing concerns about the sputtering economic recovery and an unemployment rate stubbornly holding at 8.2 percent. The aerospace-defense industry directly employs 624,400 workers across the country who manufacture military and civilian aircraft, weapons systems, spacecraft and internet systems. But there are hundreds of thousands of others employed by subcontractors, suppliers and other downstream businesses that would bear the brunt of the budget cuts as well.

The National Association of Manufacturers concluded in a recent analysis that the across-the-board budget cuts would destroy nearly 1 million jobs by 2014, with Virginia, California and Texas taking the biggest hits – each shedding more than 100,000 jobs. Other states that would be hard hit include Florida, New York, Maryland, Georgia, Illinois, Pennsylvania and North Carolina.

The NAM study projects that the aerospace industry could lose 3.4 percent of its jobs by 2015 because of downsizing at the Pentagon. Shipbuilders could cut 3.3 percent of their workforce by 2014. And the search and navigation equipment industry could see employment drop nearly 10 percent by 2016.

Republicans have adamantly opposed the use of increased tax revenues and fees to address the long-term deficit problem, arguing that any savings should be achieved by cutting back on wasteful spending. Instead, Republican presidential candidate Mitt Romney and congressional Republican leaders have been calling for a permanent extension of the Bush-era taxes, plus a new round of tax cuts potentially offset by elimination of tax preferences.

McCain, Graham and Kyl have been seeking a compromise with Democrats over future defense spending, eyeing tax loopholes and fees that were identified by Sen. Pat Toomey, R-Pa., while Toomey served on last year’s House-Senate “Super Committee.” The committee sought unsuccessfully to negotiate a $1.2 trillion long term deficit reduction package and avoid the sequester.

Toomey’s plan would have eliminated some tax breaks or loopholes – such as capping itemized deductions for mortgage interest or ending tax breaks for corporate jets – in exchange for lowering the top tax rate from 35 percent to 28 percent and cutting entitlements spending.

That proposal was a technical violation of the Taxpayer Protection Pledge against any tax increases. But Toomey, a former president of the anti-tax Club for Growth, has strong standing among conservatives and Tea Party members. That helps to explain why Senate Republicans are revisiting his proposal in search of revenues that could be used to avert the defense cuts and still pass muster with anti-tax forces – including Grover Norquist’s Americans for Tax Reform.

RELATED: Sequester Could Wipe Out More Than a Million Jobs

While the focus has been on sparing the Pentagon even deeper cuts than those already required under President Obama’s budget, the sequester would also force hundreds of billions of dollars in savings in domestic programs and social services.

Senate Majority Leader Harry Reid, D-Nev., until now has opposed any deal making that would derail the automatic cuts next year – possibly holding out until he can use the threat of a sequester as a bargaining chip later this year. However, other Senate Democrats, including Armed Services Committee Chairman Carl Levin of Michigan and Sen. Patty Murray of Washington State, are taking part in the negotiations with McCain and Graham.

“If Republicans are willing to come to the table in order to resolve this . . . we can get to a decision and not go to sequestration,” Murray told Politico. Her state is home to Boeing facilities and other defense firms. Levin added, “I’m optimistic that we can find something we can agree on on at least a general outline.”