Mainbrace - July 2012 (No. 2)

CONGRESSIONAL FAILURE TO ENACT MARITIME LEGISLATION AND THE FISCAL CLIFF

By Joan M. Bondareff and Jonathan K. Waldron

As the November election draws closer, the main questions on everyone's lips in Washington, DC—other than who will win the election itself—are whether Congress can enact any maritime legislation and are we about to fall off a "fiscal cliff"? Congress has for the most part demonstrated an inability to enact substantive maritime legislation, including spill legislation following Deepwater Horizon. With regard to the phrase "fiscal cliff," this was coined by Federal Reserve Chairman Ben Bernanke to describe the perfect storm of economic events facing the nation. The questions for the maritime industry are when will Congress be able to accomplish anything in the maritime space, and what impact will the fiscal cliff, also called "Taxmaggeddon," have on their businesses?

Taxmaggeddon

The "fiscal cliff" consists of two major components: "sequestration" and the expiring Bush tax cuts. Other components include the need to raise the debt ceiling—estimated to occur this fall or later; the expiration of the payroll tax holiday; the extension of unemployment benefits; the Medicare "Doc Fix"; the Alternative Minimum Tax ("AMT") patch; and tax extenders (including the Production Tax Credit for the wind industry).

For those who haven't followed the budget debates closely, "sequestration" is the term Congress used in the Budget Control Act of 2011 (P.L. 112-25) to describe the imposition of automatic across-the-board cuts in the amount of $1.2 trillion over ten years to help balance the budget. Sequestration was triggered because the Joint Select Committee on Deficit Reduction could not reach a deal on how to balance the budget. The cuts will go into effect on January 2, 2013, unless Congress can now come up with an alternative. The cuts are equally divided between the Department of Defense ("DOD") and the civilian agencies. (Social Security, Medicaid, assistance to low-income families, and the Department of Veterans Affairs are exempt.)

To date, most of the focus has been on the impact on the defense industry, and major defense contractors have been very vocal in their opposition to sequestration. Lockheed Martin, for example, has announced they will send lay-off notices to their employees in the September-October time frame to provide the required 60-day notice. Their allies on the Hill are also very vocal in trying to forestall more cuts to DOD.

Recently, Congress has begun to focus on the impact of these cuts on the non-defense world. Senators Patty Murray (D-WA) and John McCain (R-AZ) joined forces to add an amendment to the farm bill, which passed the Senate 64-35, calling on the Obama Administration's Office of Management and Budget ("OMB") to report "as soon as practicable" on how the cuts would impact both the military and civilian agencies. OMB has been reluctant to provide these details so far in the hope that Congress will do its job and avert the crisis. But once the farm bill is enacted, the Administration will have to provide this information to Congress and perhaps then, seeing the dramatic impacts the cuts will have, Congress will act!

In the meantime, Congress is working on the FY2013 budget for the year beginning on October 1, 2013. So far, no appropriations bills have been enacted for any department and some observers are predicting that we will have yet another Continuing Resolution to keep the government open though all or part of 2013. The lack of certainty over funding, along with the fear of sequestration, has led to agencies' holding back on awarding new contracts.

We have already seen a decline in budgets for the maritime agencies. For example, the Maritime Administration budget for FY2013 was cut significantly in the House-passed bill. No new funding was provided for the title XI loan guarantee program, the short sea shipping program, or the popular small shipyard grants program. The House has also zeroed out funding in 2013 for the also popular TIGER grant program, which allows ports to qualify for infrastructure funding. The Coast Guard has fared somewhat better with a 46 percent increase in funding for ship construction; but funding for aircraft purchases was reduced by 30 percent, and shore facilities and aids to navigation were reduced by 39 percent. However, even the Coast Guard would not be exempt from sequestration.

The Bush tax cuts are slated to expire at the end of 2012, but former President Bill Clinton has already suggested that they may need to be extended for a while longer to avoid a further hit to the economy. President Obama has proposed allowing the cuts to expire on the wealthiest taxpayers while still protecting the middle class. Among the other provisions expiring on December 31, 2012, the two percent employee payroll tax deduction, the current estate tax regime, and various energy provisions will all come to an end if Congress does not act. Many of these provisions will be considered during the lame duck session following the November election, although the legislative calendar is already looking quite full for that short time frame, leading many to suspect that Congress will favor short-term extensions rather than fundamental reform.

Tax reform continues to be on everyone's lips, too, but serious reform is likely to be pushed back until 2013. The House is considering a mechanism to fast-track tax reform in 2013, but whether the Democrats agree to it depends on whether it is tied to increased revenues. At a minimum, significant tax reform discussions will continue in 2012, and a multitude of hearings are expected on the subject. In addition, both the House Ways and Means Committee and the Senate Finance Committee are developing discussion drafts to address corporate tax reform and other fundamental reforms to the tax code.

Failure to Enact Substantive Maritime Legislation

It is an understatement to say that the 112th Congress has not produced a lot of substantive legislation. As of this date, the only transportation-related legislation it has been able to agree on has been reauthorization of the highway bill on June 29. This bill included language that established a trust fund to be known as the ''Gulf Coast Restoration Trust Fund'' in which 80 percent of all administrative and civil penalties paid by responsible parties in connection with Deepwater Horizon will be placed for use to help restore the Gulf of Mexico following the incident.

Further, progress on the Coast Guard and Maritime Transportation Act of 2011 (H.R. 2838) continues to be slow in 2012. The House passed its Coast Guard Authorization last year. The Senate Commerce Committee filed its report and version of this bill (Coast Guard Authorization Act for Fiscal Years 2012 and 2013) in January of this year (S. 1665) after having reported it months earlier at the end of last year. Reportedly, the Senate continues to sort through the bill to fend off any problems (earmarks and other committee jurisdictional claims) and get it scheduled for Senate floor consideration or even consideration of a Conference with the House.

In order to keep things moving on the House side, Congressman LoBiondo introduced the Coast Guard Authorization bill of 2012 (H.R. 5887) on June 1, 2012, which was marked up on June 7 in the House Committee on Transportation and Infrastructure. With regard to specific spill-related legislation, there appears to be little—if any—movement until after the elections in 2013.

Conclusions

With so many issues being punted to this lame duck session, there are only a limited number of days for Congress to act to avoid the "fiscal cliff" or enact substantive maritime legislation. The Senate will continue to try and find floor time to move its Coast Guard bill, S.1665. It remains unclear if it will really happen before the summer recess or even this year. If they are successful, then the House and Senate Conference would likely move forward to work on mutually agreeable language. With regard to "Taxmaggeddon," with the fate of the economy in its hands, and a possible report from OMB on the effects of sequestration on popular programs, Congress may focus their minds and allow a deal to be struck on at least avoiding sequestration in 2013 and extending all or some of the Bush tax cuts. More likely, Congress will move the January effective date for sequestration to sometime in March 2013. n

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