Today, the Congressional Budget Office (CBO) released its analysis of President Obama's FY 2013 budget proposals. In a somewhat surprising analysis, CBO is slightly more optimistic than the Office of Management and Budget (OMB) was in its analysis this past February. CBO finds that when compared to current law, President Obama's budget would add $3.5 trillion to the deficit, but the current law baseline assumes a number of policies which Congress routinely extends -- such as the AMT patch and the "doc fix" -- and assumes all of the 2001/2003/2010 tax cuts expire and the sequester goes off. Compared to the CRFB Realistic Baseline, or current policy, deficits are about $2.6 trillion lower between 2013-2022.
CBO finds that the President's policies would stabilize the debt at 76.3 percent of GDP by 2022 -- after rising from 73.2 percent this year -- and finds it to be at a slightly lower level than OMB projected (76.5 percent). Still, it would not appear to be enough to stave off rising debt beyond the ten-year window, as OMB's long-term projections show.
CBO projects the 2012 deficit to be $1.25 trillion, about $75 billion less than OMB projected. In addition, 2013-2022 deficits are about $300 billion lower in CBO's estimate than OMB's estimate ($6.4 trillion versus $6.7 trillion).
It is encouraging that, unlike last year, the President's budget does not rely on more optimistic economic and technical assumptions or magic asterisks. Still, CBO's analysis does not change the fact that the President's budget would not put debt on a downward path and likely would not go far enough to ensure long-term fiscal sustainability. Stay tuned for CRFB's full analysis soon.
In what was surprising news to many when, yesterday, freshman Rep. Rick Crawford (R-AR) announced that he would introduce legislation that would apply a tax to those with annual incomes exceeding $1 million. The concept has held pretty much exclusively Democratic support, until now that is. Crawford touted the move as a necessary compromise for a path towards reducing the county’s deficits and sky-rocketing debt.
An aide described it as analogous to other bipartisan efforts to reaching a deal, stating:
He’s watched the Gangs of Six and 100 and deficit commissions, as well as leadership’s budget and tax plan, and he feels there will never be a deal that will pass the Senate without a revenue component
But today we learned what the other half of the compromise contains. Crawford’s proposed legislation, “The Shared Responsibility in Preserving America’s Future Act,” requires passage of a Balanced Budget Amendment (BBA) in exchange for implementation of the millionaires’ surtax.
Although versions have been embraced at times by Democrats in past years, lately a BBA has been seen in a more partisan light as primarily Republican-backed. It will be interesting to see the type of support Crawford’s legislation receives. We commend lawmakers who try to reach across the aisle to find bipartisan solutions to address rising federal debt, and Rep. Crawford's efforts should not go unnoticed.
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.
* * * *
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."
An interesting article by Eduardo Porter in today’s New York Times, A Nation With Too Many Tax Breaks, takes a look at the role of tax expenditures in the federal budget, and how they don't always fit with traditional assumptions about how the government uses its resources.
The article states that while fiscal issues leave the left and the right bitterly divided, both sides rely on an assumption that is "at best overstated" and too narrow: that resources taken from the wealthy are used by the government to pay for programs that, for the most part, benefit the less fortunate. However, as Porter states:
At first glance the budget does seem heavily tilted to take from the rich and redistribute to the rest....But this is too narrow a view of taxing and spending. There is an alternate, more comprehensive way to measure how the government moves resources across the economy. It includes amounts that are not reported either as revenue or spending in the budget, but recorded as tax expenditures; that is, money that the government does not collect because of tax breaks.
While it’s true that entitlement programs benefit mostly lower-income families and individuals, tax expenditures on the other hand disproportionately favor the wealthy. The Tax Policy Center estimates that in total, tax expenditures cost the federal government about $1.1 trillion (7.1 percent of GDP) in revenue. About two-thirds of their benefits go to the top quintile, and only 10 percent of benefits go to the bottom 40 percent. Looking at tax expenditures as benefits can provide a different picture of how the government's resources are distributed, and shows how they are essentially spending by another name but are neither transparent nor receive the same amount of oversight as other parts of the budget.
Porter notes that the last tax reform effort in 1986 made a dent in tax expenditures, but didn't really cut that much (they fell from 8.7 percent of GDP pre-reform to 6 percent post-reform). Considering that many of the prominent plans out there would go much further on limiting tax expenditures, it seems to be an issue receiving more and more attention. Likewise, we’ve been saying for quite some time that tax expenditures are a part of the budget that is sorely in need of reform. At a time when the national debt continues to grow out of control, a portion of the budget that costs $1.1 trillion, and often benefits those who need government assistance the least, cannot be overlooked.
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 $20 billion drop in the projected cost of those credits. Finally, fewer people getting coverage through their employer means higher taxable income and higher revenue, which is reflected in the "other effects" category below.
|Changes in Affordable Care Act Estimate ($billions)|
|March 2011 Estimate||March 2012 Estimate||Difference|
|Medicaid and CHIP||$627||$795||$168|
|Small Employer Tax Credits||$41||$21||-$20|
|Gross Cost of Coverage||$1,445||$1,496||$51|
|Penalty Payments by Individuals||-$34||-$45||-$11|
|Penalty Payments by Employers||-$81||-$96||-$15|
|Other Effects on Tax Revenue and Outlays||-$113||-$193||-$80|
|Net Cost of Coverage||$1,131||$1,083||-$48|
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.
Comparing fiscal plans can often be a difficult task. The plans may use different baselines, use different ten-year windows, have different estimates for the same policy, or use some magic asterisks to try to make everything add up. Seeing how the plans stack up on the same basis often requires digging through a lot of numbers and cutting through a lot of claims. But no more!
CRFB has just released its apples-to-apples comparison of four major fiscal plans: the Fiscal Commission plan, the House budget resolution last year, the Obama-Boehner near-deal, and the President's FY 2013 budget. The table compares all four plans on the same 2012-2021 window against the same current policy baseline.
Overall, we need a fiscal plan that balances the concerns of short-term economic vulnerability and long-term sustainability. As we said:
It would be far preferable to gradually phase in well thought-out spending cuts and revenue increases to give individuals and the economy time to adjust. CBO’s latest projections show the opportunity in front of lawmakers to “Go Big” by enacting a comprehensive and multi-year debt reduction plan that makes calculated decisions on where to spend less and where and howto raise additional revenues.
Click here to see the full release.
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).
|Comparison of January and March Baselines (Percent of GDP)|
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.
|Reasons for Changes in Baseline (billions)|
|January Baseline Deficits||$1,079||$3,072|
|March Baseline Deficits||$1,171||$2,887|
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.
Spring in Their Step? – As part of the annual spring ritual, we moved the clocks forward an hour. While time marches on, Washington seems stuck in place with no movement on a budget or a plan to deal with our long-term debt problem. Spring is a time of renewal, to make a fresh start. Especially in this leap year, when lawmakers have an extra day, let’s hope they will take the big leap and spring into action to address our fiscal challenges.
Slow Movement on Transportation Bill – The House is in recess this week while the Senate plods along on legislation to reauthorize federal highway spending for two years (S. 1813). Several amendments were considered last week, including one (S. Amdt. 1738) from Sen. Tom Coburn (R-OK) that would eliminate, consolidate or streamline numerous federal government programs identified by the Government Accountability Office (GAO) as duplicative or overlapping. The amendment failed to get the 60 votes needed to pass by a 52-46 vote. The Senate will consider more amendments this week, including two from Sen. Bob Corker (R-TN). One (S. Amdt. 1785) would lower the discretionary spending cap to offset the additional spending in the bill not covered by revenue from the Highway Trust Fund. The other (S. Amdt. 1810) would limit spending in the bill to that which can be covered by the Trust Fund. Corker penned a Washington Post op-ed framing his amendments as attempts to instill the type of fiscal responsibility called for by the Simpson-Bowles Commission. Corker also issued a point of order against the bill on the grounds it violates the spending limits in the Budget Control Act. The point of order was waived by a 66-31 vote.
iPad In, IPAB Out? – As Apple rolled out an upgraded iPad, lawmakers sought to roll back the independent 15-member board of experts charged with controlling Medicare costs in the Affordable Care Act. The House Energy & Commerce and Ways & Means committees both approved of legislation to repeal the Independent Payment Advisory Board (IPAB) last week. A House floor vote expected later this month. CRFB is troubled that legislators are so keen to repeal the board, but have shown little interest in tackling Medicare’s unsustainable growth.
Pay for Performance for Congress – With Congress on track yet again to fail to produce a budget for the fiscal year, some are calling for lawmakers to suffer real consequences. The Senate Homeland Security and Governmental Affairs Committee will hold a hearing on Wednesday on congressional reform proposals. One of the ideas that will be considered is the “No Budget, No Pay” bill, which would withhold pay for lawmakers until they adopt a budget resolution and appropriations bills. See more budget process reform ideas here.
Key Upcoming Dates (all times ET)
- Presidential contests in Alabama, Mississippi, and Hawaii
- Senate Appropriations subcommittee hearing on FY 2013 military construction budget estimates for the Dept. of Defense and Dept. of the Navy at 3 pm.
- Senate Homeland Security and Governmental Affairs Committee hearing on congressional reform proposals, including "No Budget, No Pay" at 10 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the U.S. Agency for International Development at 10 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Dept. of the Air Force at 10:30 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Dept. of Labor at 10:30 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Dept. of Energy at 2:30 pm.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Dept. of Transportation at 9 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the FBI at 10 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Dept. of Veterans Affairs at 10 am.
- Senate Appropriations subcommittee hearing on FY 2013 budget estimates for the Government Accountability Office, Congressional Budget Office and Government Printing Office at 2:30 pm.
- Dept. of Labor's Bureau of Labor Statistics releases February 2012 Consumer Price Index (CPI) data.
- Missouri Caucus
- Puerto Rico Primary
- Oregon GOP Debate sponsored by PBS at 9 pm.
- Illinois Primary
- House Appropriations hearing on the budget, Military Construction, Veterans Affairs and Related Agencies, with Eric Shinseki, Secretary of Veterans Affairs.
- Louisiana Primary
- US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.
- Presidential contests in DC, Maryland, Wisconsin, and Texas
- Dept. of Labor's Bureau of Labor Statistics releases March 2012 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases March 2012 Consumer Price Index (CPI) data.
- Tax Day! Federal income tax returns are due.
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.
The Citizens for Tax Justice (CTJ) just released a new report detailing their own estimates of a number of options for raising revenue through eliminating or reducing tax preferences or enacting new taxes. The CTJ argued that many of these tax expenditures were inefficient and revenues could be spent elsewhere in recovery measures or to reduce the federal deficit. They proposed a wide scope of policies, ranging from changes with large revenue impacts to small-change loophole-closers.
As they explain:
Even when lawmakers agree that the tax system has too many loopholes, they cannot agree on how to get rid of them. Some lawmakers oppose legislative proposals that would close one or two small tax loopholes and say that such changes should be done as part of a sweeping tax reform that overhauls the entire tax code. Other oppose sweeping tax reform as too radical a change and prefer to focus on the more limited proposals to close one or two small tax loopholes.
...[This paper] includes options that are compatible with either approach. Some of the revenue raisers suggested here are so large that they are most likely to be enacted as part of a sweeping tax reform or some other major initiative. Others are relatively small and might be used to, for example, offset the costs of a temporary increase in infrastructure spending, food stamps, unemployment insurance or some other economic recovery measure.
CTJ offers the following options:
|Revenue Options (billions)|
|Tax Capital Gains as Ordinary Income||$533|
|Repeal Deferral for Offshore Profits||$583|
|Eliminate Accelerated Depreciation||$569|
|Eliminate Domestic Production Deduction||$163|
|Enact Buffett Rule||$171|
|Eliminate LIFO and LCM Inventory Accounting||$98|
|Enact President Obama's Fee on Banks||$61|
|Eliminate Fossil Fuel Preferences||$38|
|Disallow Business Deduction for Stock Options Paid||$25|
|Eliminate Carried Interest Loophole||$21|
|Close Payroll Tax Loophole for S Corporations ("John Edwards Loophole")||$11|
As a side note, CTJ assumes a different behavioral response to raising capital gains taxes than does Joint Committee on Taxation. A greater capital gains tax could cause individuals to hold onto investments longer and therefore reduce the actual revenues of this tax increase, at least within the ten-year window. The CTJ paper argues that JCT overestimates the impact of this response, and therefore their estimates of repealing the capital gains break are larger than estimates from the JCT.
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.
As the Treasury Department continues its winding down of TARP programs, it will sell off $6 billion of AIG shares, likely bringing its ownership stake in the company down seven percentage points to 70 percent.
So far, Treasury has received about $18 billion of proceeds as it has reduced its ownership of AIG common stock from 92 percent to 77 percent, not including the $6 billion that is coming. The most recent CBO report on TARP does not project that Treasury will be able to fully recover the cost of AIG support; in fact, it will be the most costly area of TARP, with a projected subsidy cost of $25 billion. Overall, Treasury has provided $68 billion in efforts to support AIG, leaving $50 billion outstanding prior to the sale.
It is unclear whether this upcoming sale will affect CBO's projection one way or another. Since CBO calculates the cost of TARP using fair-value accounting (see our blog on understanding fair-value accounting here), the sale would affect its projection only to the extent that shares were sold at an unexpectedly high or low level. AIG share prices have risen since the time of CBO's last report, so the subsidy cost may decline if CBO did not anticipate that happening.
The table below shows federal government support for AIG through TARP, as well as Federal Reserve support via their page on AIG.
|Federal Government Support of AIG (billions)|
|Max Amount Given||Amount Outstanding|
|Support Through TARP||$68||$50|
|Fed Revolving Credit Facility||$72||$0|
|Fed Securities Borrowing Facility||$20||$0|
|Maiden Lane II||$23||$7|
|Maiden Lane III||$30||$18|
In addition to the sale of stock, AIG will also be repaying a lending facility from the Federal Reserve Bank of New York (AIA ALICO). This facility is only one of many forms of support that the Federal Reserve System has extended to the company, some of which have not yet been repaid.
Continue to check out Stimulus.org for the latest on Treasury's winding down of TARP.