Defense Industry Leans On Congress — Avoid Cuts, Even If It Means More Taxes

August 7, 2012 1:58 a.m.

The very real possibility that defense programs will suffer deep, across the board spending cuts early next year has major defense contractors and their allies making an unusual plea to members of Congress: Put everything on the table to avoid the so-called sequester — including higher taxes.

That might not sound like an extraordinary ask. But it’s typical for incumbent interests to leave all questions of ways and means to Congress. And given the defense industry’s enormous power and historic alignment with the GOP, it could have enough force to finally break the GOP of its anti-tax absolutism.A House Armed Services Committee hearing two weeks ago first exposed the rift. Under questioning from Rep. Rob Andrews (D-NJ), two major defense contractors acknowledged that the GOP’s refusal to consider higher revenues was not conducive to solving the looming budget crisis.

“I think everything’s gotta be on the table at this point, now,” said a reluctant David Hess, President of Pratt & Whitney — a subsidiary of United Technologies. “This is a personal opinion. I’m not speaking for the employees of United Technologies, or for UTC.”

Robert Stevens, CEO of Lockheed Martin, volunteered agreement.

“I know when we face challenges in our business — and i don’t intend to imply that the challenge we face come close to the magnitude of the challenges you face on this committee or the Congress faces at large, it really makes ours look pale — we try to put into the recipe every possible ingredient that might lend itself to the formation not just of a solution but in a perfect world a flexible array of solutions — comprehensive, integrated, thorough — that allows us the flexibility to run the business,” he said.

It took a year to reach this point, just five months out from the fiscal cliff. But this was the theory of the defense sequester — to force the GOP to recognize that a persistent refusal to ever raise revenue won’t just threaten social programs beloved by liberals, but the defense industrial complex they’ve nurtured for decades.

Trade associations representing defense contractors see things the same way.

“We’re not endorsing any particular bill out there or saying what tax or entitlement should be changed,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, in a Thursday phone interview. “We do think that everything should be on the table at this point. We do need a solution. It’s really quite urgent at this point and we think Congress needs to do what it was elected to do.”

The National Association of Government Contractors shares this view.

“Compromise will be necessary to avoid sequestration,” NAGC’s VP for communications Simon Brody said in a statement to TPM. “Considering whether to increase revenues or make funding cuts will require careful consideration by legislators, but examining all alternatives is certainly preferable to letting sweeping automatic cuts take effect.”

That’s a real break with the prevailing GOP insistence that higher taxes must not be part of any plan to avoid the sequester. And it’s the rift Rep. Andrews was hoping to expose in his line of questioning.

“I was very pleased with that answer,” Andrews told TPM in a hallway interview Thursday. “I think the defense leaders have been really public spirited and open-minded about this, and I think they’re acting very responsibly and I trust and hope that they will speak favorably about a balanced approach that includes revenue and spending cuts that neither side wants but that will avoid the sequester and reduce the deficit.”

Andrew’s said he’s had private discussions with other senior defense executives who shared the same view, but declined to provide further details.

“I do think you’re going to see a coalition of responsible people emerge — unfortunately it’s going to be in the lame duck, not prior — that’s going to support entitlement support that Democrats don’t want, revenue increases that Republicans don’t want, but deficit reduction that everybody wants, without mindless, across the board cuts in programs.”

Early indications support that view. A group of Republicans led by Sen. Lindsey Graham (R-SC) have proposed staving off or eliminating the sequester with a package that could include revenue from higher service fees and tax loophole closures, but not from rate increases.

Graham’s leadership isn’t on board at the moment, but they sense the danger.

“We’ve got to come to a resolution on the issue before the lame duck,” said Sen. Jon Kyl (R-AZ) — the minority whip and an ardent anti-tax Republican — at a press conference in late July. “If we do not, the pressure to make a deal in context of raising all the tax rates to prevent the fiscal cliff Jan. 1 will be so great that I’m afraid defense will wind up suffering or we’ll have to end up raising taxes to an extent that harms the economy.”

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