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Capitol Hill Update

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The federal government shutdown that began on October 1 continues as the House of Representatives, the Senate and the White House have been unable thus far to reach an agreement to fund the federal government for the 2014 fiscal year. Intensifying the fiscal crisis is that U.S. Treasury Secretary Jacob Lew has again warned Congress that absent congressional action to increase federal borrowing authority under the debt limit, the United States runs the risk of defaulting on its financial obligations.

Technically speaking, the government reached the federal debt limit on May 17 of this year, and Secretary Lew has been using “extraordinary measures” to continue to meet our financial obligations. He has predicted that his ability to continue to use these measures to meet our financial obligations will cease sometime between October 17 and October 31.

While there has been some movement in the last 24 hours by Speaker of the House John Boehner, R-OH, to provide a short-term, six-week increase in the debt limit in exchange for negotiations involving entitlement and tax reform, it’s uncertain if this proposal will gain enough support to pass Congress and be signed into law by the president. It is also unclear if a reopening of the federal government would be included in the short-term extension.

Although a variety of scenarios could arise from congressional action or inaction, there are essentially three likely outcomes. In the first scenario, Congress could pass a short-term continuing resolution (CR) in the next few days that would temporarily fund the government and include a limited increase in the debt ceiling while congress and the White House negotiate a longer-term deal that might include entitlement and tax reform as well as a longer-term deal on the debt and funding the federal government. The second scenario is that Congress and the White House would agree to a long-term deal immediately that would raise the debt ceiling, fund the government and possibly provide instructions or parameters on tax and entitlement reform going forward. The third, and perhaps most frightening possibility, is that the impasse continues and the federal government remains closed and the U.S. defaults on its debt. This option would adversely affect mortgage, student loan and credit rates and shake financial markets around the world.

These serious discussions regarding government funding and the debt limit increase are constant reminders that the federal government needs to make lasting fiscal and taxation reforms. Although each chamber has made efforts to address the need for tax reform, the issue has been stalled since mid-2013. HR professionals will need to pay especially close attention as the issue progresses, as the Congress will undoubtedly scrutinize two of the biggest tax expenditures to the U.S. Treasury: the exemption of employer-provided health care and retirement benefits.

SHRM continues to advocate on the importance of these benefits and leads the Coalition to Protect Retirement, a diverse group of associations dedicated to preserving the current tax treatment of retirement plans.

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