April 2011

Rep. Quigley Promotes Budget Process Reform

In a reprise of last year, Congressman Mike Quigley (D-IL) recently reintroduced his bill to create a more transparent budget regime and reform the federal budget process. Quigley’s “Transparent and Sustainable Budget Act of 2011” contains several sound ideas. Key provisions include:

  • A debt reduction target of 60 percent of Gross Domestic Product and a deficit target of three percent of GDP within 10 years.
  • Office of Management and Budget production of a “Quadrennial Fiscal Sustainability Review” as well as a report on unbudgeted fiscal exposures.
  • Use of an accrual accounting system to apply to certain budget areas including retirement benefits and environmental liabilities, as recommended by the Government Accountability Office.
  • Including Fannie Mae, Freddie Mac, and other similar agencies in the budget.
  • Requiring the Congressional Budget Office and Joint Committee on Taxation to include the second decade budgetary impact of any bill they score for Congress.
  • Convening an annual joint session of Congress each October to hear an address from the president on the nation’s long-term fiscal sustainability.
  • Requiring more transparency and evaluation of tax expenditures.

Rep. Quigley also provided in-depth recommendations for fixing the federal budget process in a report late last year. The new bill acknowledges the need for an effective budget process in dealing with rising debt. CRFB commends Congressman Quigley and the bill’s co-sponsors for putting forth a sensible proposal that should initiate debate and action. As Quigley notes,

To truly get our fiscal house in order, we must have a clear understanding of what we’re spending and how we spend it. Fixing a broken budget process allows us to set realistic goals for deficit reduction, and take substantive steps toward a future that isn’t weighed down by debt.

Many correctly point out that budget process reform alone is not enough to get us out of our current fiscal mess. But the process has become so broken that it impedes progress in addressing the country’s immediate and longer-term fiscal challenges. An important and necessary step in this difficult journey is fixing the framework that guides federal budget formulation and implementation.

Quigley’s legislation complements recommendations made by the Peterson-Pew Commission on Budget Reform, which included the goal of stabilizing the debt at 60 percent of GDP by the year 2018 in its December 2009 report, Red Ink Rising. The commission built upon the foundations of the paper in its recent follow-up report on budget process reform, Getting Back in the Black, which shares many similar recommendations to the Quigley bill, such as including tax expenditures in the budget process.

As federal government funding for this fiscal year continues in a haphazard fashion and policymakers get serious about addressing our fiscal dilemma, there certainly is growing, bipartisan momentum for budget process reform. The recommendations in the new legislation and those from the Peterson-Pew Commission represent sound, thoughtful proposals to create a budget process that is not only more functional and transparent, but will facilitate the establishment and enforcement of fiscal goals that will put the country on a better fiscal path.

CNN Money Exclusive - New Taxes: Never Say Never

In her latest commentary for CNN Money, CRFB president Maya MacGuineas talks about the "no new taxes pledge" many members of Congress have signed and how it could stand in the way of the bipartisan compromise that's necessary to get our country back on a sustainable fiscal path.

Click here to read the full commentary.

Spotlight on the States: Connecticut

The next state we turn to in our Spotlight on the States series is Connecticut – a small state that’s had some pretty big budget problems.

Many newly-elected state governors campaigned on platforms of smaller government and made pledges to control spending and not increase taxes. So it should come as no big surprise that many governors have proposed state budgets for FY 2012 that aim to reduce deficits mainly through spending cuts with little to no new revenue (for example: Ohio, Florida, Wisconsin, New York, New Jersey) or, in some cases, even cutting taxes.

Connecticut Governor Dan Malloy (D) made no such promise and he’s taking a different approach as he addresses his state’s fiscal problems. Gov. Malloy embraced fiscal responsibility immediately upon taking office - on his first day he signed an executive order mandating that Connecticut follow Generally Accepted Accounting Principles (GAAP). Facing a $3.2 billion deficit (a little less than 17 percent of the FY 2011 budget), Gov. Malloy introduced his biennial budget on February 16th. The budget totals $19.7 billion for FY 2012 and includes $1.8 billion in spending cuts as well as $1.5 billion in increased revenue. Specific proposals in the budget include:

Revenue Increases
Proposal

FY 2012 Savings ($millions)

Changes to individual income taxes (eliminating property tax credit, creating five new marginal tax brackets, introducing 30% EITC, etc.) $880
Changes to state sales tax - including expanding base through elimination of exemptions and raising the rate from 6% to 6.25% $466
Imposition of provider fees on hospitals and intermediate care facilities $315
Corporate and insurance tax changes – including extending the 10% corporate tax surcharge for 2 more years $75
Permanent and revamped municipal real estate conveyance tax $53
Increase in taxes on cigarettes and alcohol $64
Additional 1% tax on hotels and car rentals $7
 Spending Reductions 
Proposal

FY 2012 Savings ($millions)

Reduction in state workers' salaries and benefits $1,000
Various Medicaid reforms $143
Various changes in Municipal Aid $133
Department of Social Services reforms $138
Reduction in Higher Education block grants $71

 

Income tax reforms in the budget proposal include enacting an EITC to offset the changes in sales taxes for the most vulnerable families (at a cost of $110 million a year) and restructuring the personal income tax by adding five new brackets.  

The day before he released his full proposal, Gov. Malloy said he knew full well that some would criticize the spending cuts and others would criticize the tax increases, and that "everybody's gonna be upset - that's a certain reality." While his proposal has been criticized--especially for the tax increases--Gov. Malloy has also been praised for his budget’s balance between spending cuts and tax increases. In an editorial titled "Connecticut’s Better Budget", the New York Times says that Gov. Malloy’s budget "spreads the pain more evenly" than other state budgets and that "he recognizes that budgets cannot be balanced fairly in the short term, or at all in the long term, without having new money coming in." The one question that remains is whether the governor will be able to get the $1 billion in concessions from state workers that he seeks.

Whether or not one agrees with the specific policies Gov. Malloy wants to put in place, the relatively balanced approach to his state's budget should be admired. 

PS: Click here to try and balance the Connecticut budget yourself and then try your hand at the federal budget here.

‘Line’ Items: Spring Cleaning/Opening Day Edition

Cleaning out the House – Spring is often associated with housecleaning. Congress is long due to clear out the FY 2011 budget seeing as we are now half way through the fiscal year. This week may be the week, with a deadline looming on Friday and both sides reportedly close on a deal. The continuing resolution funding the federal government expires on April 8 and many lawmakers have indicated they are unwilling to approve of more stopgap measures. Negotiators are trying to finalize a deal to fund government for the rest of the fiscal year that would cut a total of $33 billion from the FY 2010 spending level. Agreement must still be reached on where exactly the cuts will come from and what to do about the policy riders included in the House-passed long-term continuing resolution, H.R. 1, including denying funds for certain EPA activities and cutting off federal funding to Planned Parenthood. Congress just may clean the 2011 budget house in time for the 2012 budget.

Opening Day for FY 2012 Budget – Baseball season may have gotten underway last week, but some real hardball is expected to begin Tuesday when House Budget Committee Chair Paul Ryan (R-WI) unveils his proposed budget for next year. Ryan reportedly will swing for the bleachers with a budget plan that seeks to cut over $4 trillion over the next decade. The budget will open up debate over entitlements by slowing the growth of Medicaid and Medicare, which are major drivers of our debt. Ryan told Fox News that his blueprint will propose to block grant Medicaid. In regards to Medicare it will move along the lines of the “premium support” system he recommended along with former OMB and CBO Director Alice Rivlin, which would gradually transform the system into one where seniors pay for their health care through vouchers. The entitlement debate will heat up more when the trustees who oversee Medicare and Social Security issue their annual report later this month on the state of finances for the two programs. Ryan also said his budget will include spending caps, perhaps along the lines of what Senators Claire McCaskill (D-MO) and Bob Corker (R-TN) proposed earlier this year. Democrats have already begun batting practice on the plan with House Budget Committee Ranking Member Chris Van Hollen (D-MD) saying the proposed Medicaid changes would do “serious damage to the health safety net”--and the bats are just warming up.

Juggling the Lineups – While the two parties look to keep mostly to their own dugouts in the budget debate, some bipartisan teamwork is developing. Senators Ron Wyden (D-OR) and Dan Coats (R-IN) will platoon on a bill similar to the comprehensive tax reform legislation that Wyden and then-Sen. Judd Gregg (R-NH) co-sponsored last Congress. House Republicans are talking to Blue Dog Democrats about fiscal cooperation. Rep. Ryan teamed up with Rep. Jim Cooper (D-TN) on a bill to improve Medicare transparency. And Senators Tom Coburn (R-OK) and Herb Kohl (D-WI) hooked up on a double play to reduce the printing of the Congressional Record in order to save around $8 million annually.

Coburn Seeks to Strike out Ethanol Credit – Sen. Coburn has taken to the mound against the tax subsidy for ethanol producers. He faces some opponents who are going to bat for the tax credit, including powerful farming interests and Grover Norquist of Americans for Tax Reform. Corburn is getting some help from colleague Sen. Jon Kyl (R-AZ) who supports eliminating the tax credit along with other tax subsidies. He said:

In fact, I support striking any of the so-called tax expenditures, which are just another way for taxpayers to be writing a check. They are spending by the government, and we shouldn’t have those in the tax code.

Lots of Letters – Letters and statements on fiscal matters went flying around Washington last week. Over 64 thought leaders issued a letter to the White House and congressional leaders calling for action on deficits and debt. This followed a previous letter from 64 Senators demanding bipartisan action. The Blue Dog Coalition issued benchmarks for fiscal reform that include putting everything on the table and reducing the deficit by $4 trillion over the next decade. And Sen. Scott Brown (R-MA) wrote his own letter seeking bipartisanship and long-term solutions.

Key Upcoming Dates

April 7

• Weekly unemployment claims data released by the Department of Labor BLS.

April 8

• The current continuing resolution (CR) funding government operations expires. Congress must adopt spending bills funding the federal government for the rest of FY 2011 by then or pass another stopgap measure.

April 15

• Statutory deadline for Congress to enact a Fiscal Year 2012 Budget Resolution.

April 18

• Deadline to file federal tax return.

April 15 - May 31

• Period in which Treasury Secretary Geithner says the U.S. will likely reach the debt ceiling.

MarketWatch: March 28-April 1, 2011

As events continue to develop both at home and abroad -- fiscal, humanitarian and otherwise -- the markets are sending and receiving mixed messages. The world and many economies have been rocked by political unrest, natural disasters, and (in the case of Europe) uncertainties over some countries’ fiscal outlooks. The U.S. government is locked in a fierce budget battle with a shutdown looming, while at the same time new economic data shows that the recovery continues to build momentum -- albeit not as fast as anyone would like.

On the positive side, today’s jobs report estimates that we’ve created 216,000 net jobs in March, including an additional 230,000 net private sector jobs (but 14,000 net job losses in the public sector). Unemployment ticked down a notch to 8.8 percent from 8.9 percent in February. Earlier this week, the Bureau of Labor Statistics reported 3.4 percent average weekly wage growth in the third quarter of 2010 -- compared to 2.9 percent in the previous quarter. Stock indices reacted positively on Friday, but these statistics are still subject to revision. The economy still faces significant headwinds though, given continued high unemployment and that some of the largest sectors -- notably construction and housing -- are still struggling and are far below pre-crisis levels.

At the same time, however, world events are pushing oil prices higher. Prices have now reached $106 per barrel, compared to $91 on January 1st. Along with rising food prices, these increases have been spilling over into other goods and services and could continue doing so throughout the economy -- especially as oil will slowly move into the more expensive “summer blends”. In Europe, Portugal and Ireland continue to face downgrades by rating agencies, based on new budget data and capital positions of some financial institutions, respectively.

Meanwhile, negotiations continue over FY 2011 spending levels here at home. It appears that policymakers may be close to a deal that would cut more than $30 billion this year compared to proposals in the House which would cut over $60 billion from funding levels from the first 5 months of this year. But it is not at all clear that there will be sufficient support to avoid a government shutdown after April 8th (when the current CR expires). A government shutdown could have negative consequences on markets, in particular by calling into question Washington’s ability to agree on important fiscal issues -- including the upcoming debt ceiling debate or our medium-term fiscal situation -- which are critical for both short-term and long-term confidence in U.S. bonds. There has been growing momentum in Washington for dealing with our long-term fiscal problems as evidenced by the recent string of letters and groups (see here, here, and here) calling on key policymakers to lead on bipartisan, multi-year, and comprehensive deficit and debt reduction.

All in all, yields on Treasury Bonds have been stable over the week. Interest rates on long-term bonds remain low, but are still higher on average than what we witnessed during the fall. This seems to reflect more of a strengthening of the economy (and, as a result, the attractiveness of more and more other investment options) than wariness over holding U.S. debt as of now. As time passes and U.S. debt continues to increase, this may change.

Reps. Cooper and Ryan Call For Medicare Transparency

Yesterday, Reps. Jim Cooper (D-TN) and Paul Ryan (R-WI) introduced H.R. 1252, the “Medicare Information Act” (MedInfo Act). The legislation aims to better inform taxpayers about their individual Medicare contributions and benefits by including information in a yearly statement they already receive about Social Security. The overview of the bill states:

 

Every year, American taxpayers receive a Social Security letter that provides a concise, user-friendly record of their total contributions and a summary of their estimated annual benefits. The “MedInfo Act” would include Medicare information on this same statement. It would provide every eligible taxpayer and beneficiary, 25 and older, with information on their lifetime Medicare contributions and benefits. Taxpayers deserve to see what contributions they have made to Medicare and what benefits they have already received or are likely to receive. The intent is to facilitate greater understanding of the Medicare program.

Each Medicare statement would include:

  • A summary of Medicare's benefits and options
  • The individual’s total Hospital Insurance (HI) contributions
  • Actuarial estimate of expected contributions during the individual’s lifetime
  • Individual’s total received benefits
  • Actuarial estimate of actual and/or expected benefits during individual’s lifetime

CRFB board member Gene Steuerle of the Urban Institute wrote an interesting column about paying into Medicare earlier this year. (See Are You Paying Your Fair Share for Medicare?) He referenced work he did that compared average lifetime Medicare benefits and taxes over time. The chart below summarizes some of his findings:

If You Turn 65 In...
Lifetime Medicare Benefits Lifetime Medicare Taxes
Single Man
1960 $14,000 $0
1980 $57,000 $7,800
2010 $161,000 $55,000
2030 $251,000 $84,000
Single Woman
1960 $21,500 $0
1980 $74,800 $7,800
2010 $181,000 $55,000
2030 $279,000 $84,000
One Earner Couple
1960 $35,000 $0
1980 $132,000 $7,800
2010 $343,000 $55,000
2030 $530,000 $84,000
Two Earner Couple
1960 $35,000 $0
1980 $132,000 $15,600
2010 $343,000 $109,000
2030 $530,000 $167,000

*Earning average wage - $43,100 in 2010 dollars. 

As we and many others have reiterated countless times, entitlement reform will have to be addressed soon and the growing cost of health care will have to be restrained (see some ideas here). The debate over entitlements will accelerate next week when Rep. Ryan unveils his FY 2012 budget proposal on Tuesday, which reportedly will include reforms to Medicare and Medicaid.

Enhanced transparency will be important to reform. The more information taxpayers have concerning their contributions and benefits, the easier it will be for them to adjust to any future changes. CRFB commends Reps. Cooper and Ryan for introducing legislation that would improve transparency. As CRFB president Maya MacGuineas said:

Congressmen Cooper and Ryan are right to emphasize the need for more transparency in the Medicare program. We are going to have to ensure its long-term sustainability, and highlighting the costs and benefits is a useful exercise to help get that discussion underway.

 

Poll Suggests Conflicting Ideas About Public Knowledge of the Budget

One of the biggest challenges in getting public support for deficit-reduction measures has always been knowledge about the composition of the federal budget. After all, if people think that cutting foreign aid and government worker benefits is enough to solve our deficit issues, they will be skeptical of reforms to more popular areas of the budget or tax increases. A new CNN poll is another in a long line of polls that have attempted to gauge public knowledge of how their tax dollars are spent. Like many of these other polls, it attempts to show that the public significantly overestimates the size of several areas of the budget, especially among domestic discretionary programs.

CNN's poll asked 1,023 adults about how large they thought different areas of the budget were. They allowed respondents to pick any number they wanted in response to the questions, but presented their data in ranges (less than 1%, 1-5%, 6-10%, for example). They then computed the median response for how large each area of the budget was. As it turns out, the public has a pretty good idea of the size of Social Security but way overestimates the portion of the budget that is dedicated to certain other domestic spending, foreign aid, and defense.

Poll Responses vs. Actual Figures, Percent of Total Budget
Budget Category Most Common Range Median Response Actual 2010 Proportion (OMB)
Military More than 50% 30% 19%
Medicare 11-20% 20% 13%
Social Security 11-20% 20% 20%
Medicaid 11-20% 15% 8%
Education 1-5% 10% 3%
Foreign aid 1-5% 10% 1%
Government pensions 1-5% 10% 4%
Food assistance 1-5% 10% 3%
Housing assistance 1-5% 7% 2%
Public broadcasting 1-5% 5% 0.01%

Note: "Median response" column doesn't add to 100% because they are the median of different responses. Right column doesn't add to 100% because not all areas of the budget are included.

These type of results are not unusual. But if you break the numbers down further, looking at the ranges CNN gave, the results are not as bad as you might think.

Many of these domestic areas actually had a significant plurality of people guessing in the right range. Areas such as nutritional and housing assistance had about 40-45 percent of people guessing in the 1-5 percent range, with much smaller amounts guessing in other ranges. The same goes for money spent on education and government benefits, where about one-third guessed in the correct range. While these numbers could be better, we can't expect the public to be experts on the budget. But we also might say this is because the federal budget is so indigestible to most; as part of each year’s budget, the government could better serve the public with a more transparent and easier to understand summary of the distribution of spending and revenues, for example.

So while this poll suggests the idea we hear frequently--that the public does not really know the composition of the budget well--it may not be as bad as the poll makes it appear. There does seem to be a good base of knowledge among a significant portion of the public. Nonetheless, we can always continue to do a better job of educating the public about budgetary issues which have (and will continue to have) such a large impact on people's lives.