2011 was an eventful year with respect to overall awareness of the nation’s debt crisis. Though dialogue around reducing the federal budget deficit emerged in 2010 through the work of a couple of well-known commissions (Bowles-Simpson, Rivlin-Domenici), the overall crisis became front page news in 2011. This culminated in November with the failure of the debt “supercommittee” to agree on a deficit reduction proposal – largely because Republicans held a firm line on additional tax revenues and Democrats were reluctant to accept major modifications to entitlement programs. This sets the stage for ongoing debate during the 2012 election year.

So, what should we watch for in terms of policy debate and discussion in 2012? Here are three thoughts:

  1. Proposed legislation to delay, reduce, or eliminate $1.2T in automatic spending cuts scheduled to begin as part of sequestration process in 2013
    First, it’s likely that legislation will be introduced, or at least considered, to counteract automatic spending cuts scheduled for 2013 as a result of the debt supercommittee’s failure to offer a proposal for consideration. Certain elements of Congress are gravely concerned with the impact on defense spending. In fact, shortly after the debt super-committee’s failure, several Senators including John McCain (R-AZ) and Lindsey Graham (R-SC) released a statement declaring “We cannot responsibly allow across-the-board, draconian defense cuts to go forward at the expense of our national security.” However, it remains unclear that if any congressional action is taken, whether the White House would veto a proposal that would call for a delay or elimination of the automatic spending cuts. As a reminder, these spending cuts affect non-defense discretionary programs and defense programs roughly equally (over 10 years). Most mandatory spending items like Social Security, Medicaid, and Veteran’s programs are exempt from these reductions. Medicare is impacted slightly through a 2% reduction in spending targeted towards benefits providers, not beneficiaries.
  2. U.S. Supreme Court ruling on the health-care reform law
    In the March 2012 timeframe the U.S. Supreme Court is expected to hear arguments on the constitutionality of the healthcare reform law and specifically the “individual mandate.” The law currently requires all individuals and families to obtain health insurance coverage or face a tax penalty (maximum of $695 per individual or $2,085 per household by 2016). If the high court rules that this provision is unconstitutional, it could have a profound affect on the other elements of the law. From an economic perspective for example, health insurers and medical providers agreed to coverage limits and price concessions in return for the prospect of an additional 30 million citizens obtaining health insurance. The absence of the individual mandate forcing these 30 million individuals to secure coverage would negatively impact the economic balance of the overall healthcare law. 
Read our investor education piece, Healthcare reform and its impact on investors, to learn more.
  3. Increased rhetoric, but likely no resolution before the election on the fate of the “Bush tax cuts”
    Lastly, it’s unlikely that there will be a major tax deal completed before the November elections given the level of discord and disagreement on policy options. Undoubtedly the election results will have a major impact on tax policy in 2013 and beyond.