Sen. John McCain (R-Ariz.), the ranking member on the Armed Services Committee, said Thursday that revenue increases should be on the table for Congress if it means avoiding the automatic cuts to Defense and domestic spending that are set to be triggered at the end of this year, a possible signal toward a compromise between members of the two parties, most of whom agree that sequestration would have severe consequences for the military and the broader economy.

McCain said proposals to close tax loopholes and eliminate subsidies could serve as the starting point for a bargain between Republicans and Democrats to come up with $1.2 trillion in 10-year savings called for by the Budget Control Act. A bargain along those contours is what’s needed to avert sequestration unless Congress decides to dispose of the deficit-cutting law altogether.

“Look, the effects of sequestration are devastating,” McCain told a defense conference in Washington organized by Bloomberg Government. “It’s so devastating that the secretary of Defense will not even contemplate the plans that are necessary to implement sequestration.”

Talks behind closed doors

McCain said groups of senators are already talking behind closed doors looking for a deal. He said he believes the door on the Republican side is now open to revenue increases, a key demand of Democrats. However, “revenue increases” are in the eye of the beholder, he said.

“[Anti-tax activist Grover] Norquist and my dear friend Sen. Tom Coburn (R-Okla.) had a big fight about whether it was a tax increase if you eliminated ethanol subsidies,” he said. “We don’t need ethanol subsidies, and we’re finally doing away with them. Is that a tax increase? I don’t think so.”

McCain said he and Sen. Patty Murray (D-Wash.) also have reached an agreement to include language in this week’s farm bill that would require the Obama administration to detail exactly which programs the sequestration cuts hit, both in defense and non-defense programs. He believes those details could stir outrage among constituents and press lawmakers toward a deal, and he said it’s irresponsible for the administration not to have already issued that guidance.

Sen. Carl Levin (D-Mich.), chairman of the Armed Services Committee, said he thinks Congress will ultimately come to an agreement, but not before the negative effects of sequestration start to manifest themselves.

“I’m confident there will not be a sequester,” he said. “I’m not confident that it’ll be obvious that it won’t happen in time to avoid the damage which is done by the prospect of sequestration.”

That damage, according to Levin, would include layoffs by defense contractors who, under federal law, have to give employees 60 days’ notice before letting them go. To avoid mass layoffs, he said Congress needs to at least send a signal to companies and local governments that a deal is within reach by this fall.

“I think 90 percent of us want to avoid sequestration,” he said. “There may be 10 percent who are so anti-government they don’t care, but there are several conversations going on as to how we might be able to avoid it. One of those is between me, Sen. McCain and a few others. We’re trying to figure out some way to signal to the economy that there’s a determination to look at all components of our budget, a determination to avoid sequestration, and that revenues are on the table. If we can get 10 Republicans and 10 Democrats just to agree in principle, I think it would send a positive signal.”

Potentially 1 million defense jobs lost

McCain and Levin’s concerns about the economic impacts of sequestration are based, in part, by studies and estimates the defense industry has been circulating.

Marion Blakey, president and CEO of the Aerospace Industries Association, said the cuts would lead to the loss of a million jobs in and around the defense industrial base.

“There’s 335,000 that are direct within the contractor defense community, but then you have the ripple effect of the ancillary jobs that are tied into those and are supported by those. You very quickly get to a million,” she said. “That’s without taking into account the uniformed military that will drop in the course of this, and it’s without taking into account all of the domestic spending cuts to federal agencies. You put that all together, and we really do think we have several million jobs that are at stake.”

Rep. Jim Moran, a Northern Virginia Democrat who sits on the House Appropriations subcommittee on Defense and whose district includes many defense contractors large and small, said he’s in agreement that sequestration would be a disaster. But he’s far less optimistic about avoiding it than are McCain or Levin. “They’re proceeding under the assumption that the House is as rational as the Senate. I don’t share that view anymore,” he said.”

Moran said there are many reasons for his lack of optimism. For one, Republican leaders on the House side remain opposed to revenue increases as part of a potential deal. There are also the budget bills the House has already passed.

“We have 12 appropriations bills, and none of them are acceptable to the Senate,” he said.

The White House has also issued statements opposing several of the appropriations measures.

Moran said unlike the quiet preliminary deal making that McCain and Levin described in the Senate, Republicans and Democrats in the House aren’t close to coming to the table.

“We’re not even talking to each other anymore,” he said. “We’ve got two different camps. Republicans wake up, read the Drudge Report and put on Fox News. Democrats get up, read the New York Times and listen to NPR, and then we don’t talk to each other. It’s worse than it’s been in the 20 years I’ve been in the Congress, and for that reason, we haven’t been able to reach any kind of agreement.”

Sequestration “overhyped”

But Gordon Adams, a professor of international relations at American University who oversaw defense spending for the Office of Management and Budget in the 1990s, said the worry about sequestration is overhyped.

While he agrees that budget cuts on autopilot are a horrible way to manage a defense drawdown and said he believes Congress will indeed find a way to cancel sequestration, he said much of the debate over the issue is “political theater.”

“Sequester is a miserable way to manage anything. That said, it is manageable,” he said. “It’s not going to happen without pain, but it is manageable. It will depend on how you move outlays, because the issue is outlays, not budget authority, so it has forward effects that you can move around. It’s a terrible way to do defense planning, there’s no question about it. But it’s not the end of the world. We’ve doubled the defense budget in the last 10 years, and even if sequestration happens, we’ll be back at roughly 2007 levels of defense spending. It’s a very ugly way to get there, but it’s not the end of the world.”

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