Five tough challenges for Obama's second term

Barack Obama has pulled off the easy part. He got re-elected. Now, he faces a second term full of painful choices.

You could see it in his campaign, which focused more on Mitt Romney’s flaws than on what the president would do in the next four years. Much of this, I suspect, was the result of the terrible budget constraints under which he operates. In short: Not even a Democrat can do very much new when faced with a trillion dollar deficit.

That and the reality that Republicans still control the House and can block most anything in the Senate, is why Obama is likely to spend most of the next year or two struggling with budget issues even as he consolidates health reform. Bold new initiatives will be off the table until the deficit is addressed. 

His biggest challenge: Find a way to break the logjam between Democrats who are reluctant to slow the growth of programs such as Medicare and Medicaid, and Republicans who insist that all deficit reduction must come from spending cuts and none from new taxes.  Obama will find some moderates of both parties eager to deal, but he will also face hardliners who are not.

It is not an understatement to say that the success of his second term will depend on whether he finds a way to build a coalition of those moderates.

Here is what is likely to happen with five major domestic issues:

The Fiscal Cliff:  On Jan. 2, the 2001-2010 tax cuts are due to expire and automatic across-the-board spending reductions will hit all federal programs except for Social Security and Medicaid. Obama has the leverage to force Congress to extend  the tax cuts on his terms (see below), and could well link such a step to a framework for deficit reduction that delays the spending cuts until later in 2013. Such a deal could include spending and revenue targets, a specific timeline for action, and a temporary extension of the debt limit which will be reached in early 2013.

The 2001-2010 Tax Cuts: Obama has vowed to extend most of them, except for those that benefit taxpayers making more than $200,000 ($250,000 for couples). While Republicans want to continue the tax cuts for all, they have little chance of success. One unsettled issue:  Will Obama try to replace the 2010 payroll tax cut, also due to expire in January, with some other tax reduction for working people?  Congress and Obama are almost certain to agree to extend the Alternative Minimum Tax patch, which would protect about 25 million middle- and upper-middle income households from the levy.

Tax Reform: The president has shown no interest in individual tax reform but has supported the idea of a rate-cutting, base-broadening corporate tax rewrite. His aides insist corporate reform is easier, though I have my doubts. House Ways & Means Committee Chair Dave Camp (R-MI) has been working on a corporate reform of his own. There is an opportunity here, but will it get buried by divisions in the business community and other fiscal conflicts?

Medicare and Medicaid: Obama has vowed to preserve the basic designs of both. However, Senate moderates of both parties are exploring substantial changes in the health programs, including shifting Medicare to a form of premium support and capping federal Medicaid funding to a formula based on inflation and enrollment. Will Obama agree to some of those reforms as part of some grand bargain?

Health Reform: The 2010 Affordable Care Act will take effect as planned. Republicans have lost their chance to repeal it or even make significant changes. That means the law’s tax increases on high-income households will kick in as scheduled in 2013. And in 2014 major insurance reforms, including a broad expansion of Medicaid for the working poor, the requirement that insurance companies sell coverage to all regardless of pre-existing conditions, and the health exchanges will take effect—at least in most states.

The biggest question for the next couple of years is not about Obama, however. It is about congressional Republicans. Will they respond to yesterday’s defeat by doubling down on their no new taxes pledge? Or will they accept a fiscal grand bargain that includes both tax hikes and serious efforts to slow the growth of Medicare and Medicaid. If they do, it is a good bet that Obama will meet them somewhere in the middle.