Yesterday, the Senate passed a two-year $109 billion transportation bill by a 74-22 vote. Since 2009, when the last five-year transportation bill expired, Congress has used short-term extensions to dole out transportation funds. But there are pressing needs for Congress on surface transportation spending: the need to enact a new transportation bill before March 31, when current authorization for transportation funding expires and the need to put the Highway Trust Fund on a solvent path. 

The bill passed by the Senate yesterday would address the first issue, but unfortunately would not make the changes necessary to put the Highway Trust Fund on more solid footing where dedicated revenue levels are in line with spending.

Surface transportation spending is largely funded through the Highway Trust Fund, where the 18.4 cent federal gas tax is meant to cover spending levels. However, incoming revenues from the gas tax have been below actual spending levels. Ensuring that future spending is fully financed is important for controlling deficits and debt. As CRFB discussed last week, lawmakers have three options:

• Limit transportation spending levels to incoming revenues in the Highway Trust Fund
• Increase Highway Trust Fund revenues
• Transfer general revenues from the Treasury to the Highway Trust Fund to make up the gap

Ideally, lawmakers would go with one of the first two options. However, the Senate transportation bill falls short.

Senate Transportation Bill

As mentioned above, the Senate bill is a two-year $109 billion extension for transportation. The package essentially continues previous funding levels, but contains a few loophole-closers to close the Highway Trust Fund financing gap and also relies on a transfer from the Leaking Underground Storage Tank trust fund. These transfers (including the revenue-raisers, which come from general revenue) total about $10 billion.

CBO projects that the bill would reduce the deficit by about $7 billion over ten years, but it would do little for long-term Highway Trust Fund solvency (note that CBO's baseline assumes Highway Trust Fund insolvency). The bill would continue the trend of plugging the HTF with outside transfers, rather than doing one of the first two options mentioned above to bring spending and revenues in line. Even with the bill, the trust fund would be insolvent in 2014.

What Happens if Lawmakers Go Past March 31?

Both Ezra Klein and POLITICO had informative articles in the past few weeks on the consequences of the looming end of the current surface transportation funding. Interestingly, breaching the deadline could actually cost the government more.

If March 31 rolls around with no bill, not only will transportation projects come to a grinding halt but the shut down may even cost the government more in disruption fees. Most of the 18.4 gas tax will expire and states will be unable to use money from the Highway Trust Fund. Given how tight state budgets are at the moment, most states would be forced to contract and lay off workers. In addition, construction companies have demobilization and mobilization fees for stopping and resuming work, adding to the cost. Finally, there is $50 billion in already-approved projects, which the government would have to pay for through general revenue.

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However lawmakers choose to fund transportation projects, it is important that they make the necessary changes to ensure Highway Trust Fund solvency. The options are clear, and as Sen. Bob Corker (R-TN) said in a recent op-ed:

"These alternatives will require the kind of tough choices many Americans make every day...For Congress to spend more than it is taking in is not rational and would demonstrate that neither party is ready to lead."

In its March baseline, CBO made a number of changes in its projections for health care spending. Given the significance of health spending to the budget in both the near-term and long-term, it's useful to take a look at what has changed.

Overall, CBO has increased its estimate of health care spending by $25 billion through 2022 compared to the January projections, with some programs increasing costs and others projected to spend less.

Medicaid: Medicaid spending projections have increased by about $145 billion over ten years, mostly due to worse economic assumptions that increase the projected enrollment of people in the Medicaid.

Medicare Parts A and B: CBO now projects enrollment in Medicare Advantage, a program in Medicare that allows beneficiaries to receive benefits through private plans, to be higher both in 2013 and after the ten-year period compared to earlier projections, despite reforms in the Affordable Care Act that reduce payments to these plans. Higher enrollment in Medicare Advantage is projected to increase spending in both Medicare Parts A and B.

Medicare Part D: Costs in Medicare Part D, Medicare's prescription drug program, are projected to be lower by $107 billion -- primarily due to more high-volume generic drugs being available and lower drug utilization. Overall, Medicare spending has been revised down by $7 billion.

Affordable Care Act: CBO also updated its estimate of the coverage provisions of the Affordable Care Act, revising down costs somewhat from last year's estimate. Note that CBO did not similarly update its projections of the offsets of the bill, so the last comprehensive score remains the one they did for the repeal bill (HR 2) last February. Overall, the net cost of the coverage provisions is about $50 billion less from 2012-2021 compared to their estimate a year ago ($1.08 trillion compared to $1.13 trillion), $38 billion of which is accounted for by legislation passed within the past year.

Many changes in CBO's assumptions, whether by incorporating new data or altering their model, have resulted in changing estimates for the Affordable Care Act. Overall health care spending is projected to grow more slowly, which lowers spending in many different categories. Worse economic projections compared to last year have resulted in higher projected Medicaid spending and lower projected exchange spending.

At the same time, more individuals are projected to be uninsured and fewer employers are projected to offer insurance, which increases the amount of penalties paid to the government. Also, utilization of the small business tax credits for providing coverage has been less than anticipated, leading to a $20 billion drop in the projected cost of those credits. Finally, fewer people getting coverage through their employer means higher taxable income and higher revenue, which is reflected in the "other effects" category below.

CBO's baseline does not change what we already know about health care spending: we have some work to do to keep it controlled, especially over the long-term as population aging and rising costs will make that task even harder.  

Although CBO's analysis of the President's budget is the newsmaker in March in the budget world, CBO also updates its current law baseline, which shows slightly lower deficits from 2013-2022 than it projected in January. Compared to January, ten-year deficits have shrunk by $186 billion from $3.1 trillion to $2.9 trillion. Also, debt as a percent of GDP is slightly lower in 2022 compared to January's projection, declining from 62 percent to 61.3 percent. The 2012 deficit, however, has increased by more than $90 billion to nearly $1.2 trillion.

Even though it has only been two months since their last baseline, a number of factors have resulted in changes to the budget projections. Legislative changes -- namely the payroll tax cut and unemployment insurance extension--have increased the deficit by $7 billion from 2013-2022, although most of the unoffset costs of that deal occur in 2012 (an additional $100 billion of deficits).

In addition, CBO has made a few technical revisions. As a result of these revisions, they have pushed their estimate of total revenue up by $226 billion over ten years. Also, mandatory spending has been revised up by $116 billion, netting a $143 billion increase in Medicaid spending against a $26 billion decrease in Social Security costs. They also revised interest projections downward by $90 billion due to both a projected Treasury shift towards issuing more short-term debt and the lower deficits resulting from the other revisions. 

As you can see, the baseline has changed, but only slightly. As CBO said in its report on the baseline:

The fundamental story about the federal budget has not changed: Although the deficit is starting to shrink, it remains very large by historical standards. How much and how quickly it declines will depend in part on how well the economy performs over the next few years. Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year under current law.

Yesterday, in POLITICO David Rogers had an article about an effort in the House to temporarily delay the sequester scheduled to hit at year's end. As a reminder, this sequester was originally put in place in order to force the Super Committee to identify $1.2 trillion in deficit reduction. Due to the Super Committee's failure, the sequester is now scheduled to go off on January 1, 2013.

Policymakers will need to find a way to turn off the sequester, preferably replacing it with a comprehensive fiscal plan to put the debt on a downward path over the medium term and significantly improve the long-term fiscal picture. According to Rogers, many in the House are instead looking to enact and pay for a one-year delay of the sequester. As he explains:

At this stage, the goal is not to match the full $1.2 trillion in 10-year savings ordered by the Budget Control Act last summer. Instead, the primary focus is on the first round in 2013, half of which — about $54.7 billion — would come from national defense spending.

Currently, bills have been introduced in both the House and the Senate to repeal the sequester--both its defense and non-defense portions--for a year, paid for by reducing the federal workforce by ten percent.

Rogers also discusses the possibility of using the reconciliation process to the bill through the House. They could use the process to get the bill passed in the House, leaving the Senate with the pressure to take up the bill. However, there are complaints from both sides about this plan, with conservatives disliking paying for a year of costs with ten years of offsets and many Democrats dislike the specific offset and the idea of shifting cuts away from defense and towards domestic spending.

Politics aside, allowing the sequester to go into effect is clearly bad policy. Rather than enacting smart and targeted reforms focused on low-priority spending and the drivers of future debt, the sequester calls for a sharp and indiscriminate cut.

The only thing worse than letting the sequester hit, though, would be repealing it without putting the debt on a stronger path. Paying for a one-year delay would certainly be better than not paying for it, but it misses the point of the sequester -- to force action on a comprehensive deficit-reduction plan. We've written before about the importance of the sequester in helping policymakers to achieve this goal, and the irresponsibility of weakening it without putting a plan in place. Instead of jumping through political hoops to find a temporary fix, policymakers should focus on a permanent one.

In an op-ed in Roll Call, David Walker lamented the lack of a "feasible" debt plan among the Presidential candidates, including President Obama. While fiscal policy has been a focus during the 2012 presidential campaign, the plans put forward concern Walker on questions of specificity, sufficiency, and political practicality. In order for a plan to be feasible, according to Walker, it must make economic sense, be socially equitable, be culturally acceptable, pass a basic math test, be politically feasible, and achieve meaningful bipartisan support.

By these criteria, Walkers judges all of these plans as failing. Furthermore, citing our analysis, Walker says neither President Obama nor the GOP candidates would get our debt burden down to an acceptable level. As a result, he says that "all the candidates need to go back to the drawing board" in order to craft a politically and economically feasible plan to get the debt under control.

Read the full op-ed here.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.