Debt Ceiling + Constitution = Tax Increase?

-- by Neil H. Buchanan

In my new Verdict column, I reluctantly return to the trenches of the debt ceiling wars.  Although people might reasonably have imagined that the debt ceiling is "so 2011 ... or 2013 ... or, at worst, soooo thirteen months ago," in fact it will come back to life next Monday, setting in motion yet another round of "extraordinary measures" that will run out late in the summer, just in time for another game of fiscal brinksmanship that could simultaneously also involve the threat of another government shutdown and the return of "the sequester," on top of a first-ever government default.  Good times.

One might have thought that, by now, even the most ardent conservatives would finally have realized that using the debt ceiling to take the economy hostage is bad economics, bad law, and even (by all available evidence) bad politics.  However, as long as some Republicans believe that they are morally required to threaten to destroy the government's full faith and credit, there is a chance that they and their (slightly) less crazy colleagues will end up failing to increase the debt ceiling, setting in motion a completely avoidable disaster.

In my column, I first run through the arguments that Professor Dorf and I have developed over the last few years, showing that President Obama's only constitutional choice is to violate the debt ceiling law, in order not to violate the spending and taxing laws.  (That is our "trilemma," in which the president must choose among three unconstitutional usurpations of Congress's powers: spending, taxing, or borrowing.) The new content of the column, however, draws from recent discussions of the president's ability to take unilateral executive actions, across a variety of areas of law.

The most famous and controversial executive actions thus far have involved the White House's policy decisions regarding normalizing relations with Cuba and especially his moves on immigration, but President Obama's broader reaction to the 2014 midterm elections has been to look for as many ways as possible to achieve his policy goals without having to deal with stonewalling Republican majorities in both houses of Congress.

Vermont Senator Bernie Sanders was more than willing to accommodate the president, sending him a letter two weeks ago that laid out six ways that the president could legally and unilaterally change the interpretation of tax laws, all six of which would increase taxes on corporations and wealthy taxpayers.  The list includes changing the rules regarding corporate "inversions" and closing the so-called carried interest loophole, both of which have garnered headlines over the last few years, along with making changes to several more obscure provisions.

Congress routinely writes the tax laws to allow (indeed, to require) the president to fill gaps, to interpret ambiguities, and so on.  That is why the Treasury Department issues regulations and other guidance on an ongoing basis.  The Sanders letter essentially points out that the executive branch over the years has made decisions that deliberately under-collect taxes, relative to what the government could collect under the laws that Congress has passed.  And those executive decisions can be reversed, in order to collect more tax revenues now.

Although Senator Sanders clearly was not thinking about the debt ceiling when he wrote that letter, I noted in my column that he has possibly put his finger on a policy option that would make the Buchanan-Dorf analysis of the debt ceiling at least temporarily moot.  That is, our arguments have always been based on the assumption that the real "drop-dead date" for the debt ceiling arrives when the president has exhausted all legal means available to pay the nation's bills without increasing debt.  Were that day ever to come, he would face our trilemma.

But the Sanders letter notes that there are, in fact, measures beyond the "extraordinary measures" that the president is permitted to take, under existing law.  And if the debt ceiling is not increased, the president will be not only permitted to take those actions, but he will be required to do so, in order to avoid a constitutional violation.

That means that the Republicans who might wish to use the debt ceiling to force another fiscal showdown could find themselves staring at a tax increase (using any of Senator Sanders's six examples, or others), which would be not only legal but essential to avoid an economic and constitutional catastrophe.

I make a few passing comments about the politics of such a standoff, suggesting that the president might actually choose to violate the Constitution rather than be accused of "choosing to raise taxes on his own."  Here, I want to consider a different question, which relates to the timing of the president's possible actions that would be needed to forestall disaster.

I have argued (see, e.g., this October 2013 Dorf on Law post and links therein) that President Obama's post-2011 strategic decision simply to stare the Republicans down regarding the debt ceiling creates an enormous and unnecessary risk, because it essentially means that the Federal Reserve would be required to save the day.  That is, since we could not possibly know that the Republicans will not blink until the very last second on the very last day before a default would occur, there would not be sufficient time for the Treasury to organize a public bond sale that would bring in the money needed to pay the government's bills the next day.  Only a direct sale of new bonds to the Fed could happen quickly enough.

All of that, however, was based on the assumption that the president would, during the weeks and months that he was staring down the Republicans, have exhausted every other legal option to find enough money to delay the drop-dead date.  But what if the president fails to do so, that is, what if he fails to pursue available legal means by which he could collect more money than his discretionary executive actions (and those of his predecessors) currently would collect?

It is one thing for the president to say, "I didn't instruct the Treasury to be ready to engage in a bond sale on the day before the drop-dead date, because that would have assumed that I would be forced to violate the Constitution (and, oh by the way, it would also have undermined the credibility of my stare-down strategy)."  Is it different for him to say, "I didn't change the rules on tax collections, even though I knew that it was within my discretion to do so, because I didn't want to pay the political price for doing so, and I hoped that the Republicans would eventually blink"?

Again, we are talking about a pure timing problem.  Even if the president were to conclude at 11:59:59pm on the night before the money runs out that he is willing to change the tax rules to collect more money, that extra money would not show up in Treasury's coffers immediately.  But does that really mean that the president is required to change the discretionary part of the tax laws well in advance, simply because failing to do so might one day result in his facing a trilemma?

To put the point differently, is it enough for the president to say, "On the drop-dead date, I faced nothing but unconstitutional choices," or must he also be able to say, "I did everything in advance that I could have done to avoid facing a trilemma, including making changes in tax policies -- changes that, by the way, I think are otherwise unwise and uncalled for, but were necessary to prevent a possible default"?

The timing problem is made even more difficult by the administrative realities of changing the tax policies to which the Sanders letter refers.  As I noted above, even if the president were able to issue new rules at the drop-dead deadline, the new revenues would not begin to flow for days, weeks, or months.  Worse, standard notice-and-comment requirements and other time-consuming procedural barriers would make it necessary for the president to move even earlier in time to make the changes needed to avoid a possible trilemma.  And he would be doing all of this while knowing that the Republicans who want to prove that they can "govern responsibly" could end up winning their party's internal debate, which would allow the debt ceiling to rise without a fight.

Finally, it is worth remembering that, even if executive action to increase tax revenues could succeed in the face of all of these procedural and practical hurdles, it is all simply another delaying tactic.  It would change the drop-dead date, but unless the Republicans eventually increase the debt ceiling, there really will always be a drop-dead date, when every executive action has been exhausted.

Therefore, when I wrote in my column yesterday, "It turns out that Professor Dorf and I might have been wrong, but in a way that the Republicans will hardly find pleasing," I might have been clearer if I had said that, although we might have overlooked some possible executive time-buying moves, everything else in our analysis remains intact.  And if the way to buy time is to collect more taxes from corporations and rich people, I really do not see how Republicans would be pleased.