The Bottom Line

September 18, 2014

In a commentary published today in Roll Call, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) argue Congress should take a closer look at Social Security Disability Insurance (SSDI).

As they explain, the looming 2016 deadline, when the program’s trust fund is projected to become insolvent and result in an immediate across-the-board cut in benefits, will force Congressional action. Given the importance of the SSDI program, they worry about the dangers of waiting until the last minute. They are calling for a constructive debate on SSDI well in advance of the insolvency date, saying "if policymakers wait until the last minute to start cobbling together solutions, they could make things far worse."

In an effort to help inform the debate on potential reforms to the SSDI system, they joined forces to launch the bipartisan McCrery-Pomeroy SSDI Solutions Initiative.

September 18, 2014

Retirement saving policy took center stage Tuesday on Capitol Hill and in the policy world. The Senate Finance Committee held a hearing to discuss ways to improve savings incentives and policies, and Third Way proposed one way to do so.

The Senate Finance hearing featured five witnesses from a broad array of perspectives. All agreed that the current system could be improved. Many witnesses agreed on simplifying retirement account rules, expanding the number of small businesses that offer retirement plans, and promoting the benefits of auto-enroll plans where workers are automatically enrolled in their company's retirement plan until they opt out. Beyond that recommendation, witnesses and lawmakers had serious disagreements how retirement savings should be improved.

The witnesses were:

    • John Bogle, Founder and former CEO of Vanguard
    • Brian Reid, Chief Economist of the Investment Company Institute
    • Scott Betts, Senior Vice President of the National Benefit Services
    • Brigitte Madrian, professor at the Harvard Kennedy School
    • Andrew Biggs, Resident Scholar at the American Enterprise Institute

Chairman Ron Wyden (D-OR) started the hearing by noting skewed tax incentives for retirement saving. As he explained, these incentives cost the federal government $140 billion per year, yet millions of Americans do not have adequate retirement savings. He noted that some taxpayers use the tax-free accounts to accumulate multimillion dollar balances, a practice that has attracted attention in recent years. Ranking Member Orrin Hatch (R-UT) described the bipartisan history of support for retirement tax incentives and hoped that lawmakers could continue without resorting to partisan slogans.

The witnesses disagreed on the effectiveness of current tax incentives.

September 17, 2014

The Centers for Medicare and Medicaid Services released some mixed news on Tuesday for health care reformers -- the results of two different Medicare Accountable Care Organization (ACO) programs in 2013. Twenty-three Pioneer ACOs and 220 ACOs in the Medicare Shared Savings Program (MSSP) generated somewhat modest savings of $372 million for Medicare while qualifying for shared savings payments of $445 million. Both programs performed better on quality benchmarks and patient experience compared to fee-for-service (FFS) Medicare. ACOs are one model that many reformers hope will provide a path forward for better coordinated, higher quality, and more affordable care delivery.

The Pioneer ACOs involve organizations and providers that are more experienced in coordinating care, so they are already on the second year of the program and have more ambitious savings targets. The Pioneers may share in savings if they exceed those targets but also face risk if they fail to meet them, unlike most MSSP ACOs. Overall, Pioneer ACOs saved $96 million, $41 million for the Medicare trust funds, and qualified for $68 million of shared savings payments. Eleven of the 23 ACOs qualified for those payments, while 3 had losses.

September 17, 2014
House to Vote on CR Today

Update: The House Rules Committee made in order an amendment by Armed Services Committee Chairman Howard McKeon (R-CA) to authorize funding to arm the Syrian opposition to fight the Islamic State terrorist group. The amendment does not appropriate new funding, it only allows the Department of Defense (DoD) to request transfers or reprogramming from existing Overseas Contingency Operations (OCO) funding for this purpose.

House Appropriations Committee Chairman Hal Rogers (R-KY) this week released the text of a continuing resolution, or CR, (see Appropriations 101 to learn more) to fund the federal government after September 30, 2014. The legislation, which will likely receive a vote in the House next week, continues funding for all programs, projects, and activities at current levels through December 11, 2014, with small changes. If this CR is signed into law,  lawmakers will need to revisit appropriations some time before December 11 to continue funding the government through enactment of full year appropriations or a further CR.

The CR includes changes such as an extension of the Temporary Assistance for Needy Families (TANF) program and an extension of Export-Import bank operations through June 30, 2015. There are also some funding increases, such as $88 million in new funding to address the Ebola outbreak and $59 million to address disability claims at the Department of Veterans Affairs. A small across-the-board cut along with select funding changes brings the overall budget authority under the FY2015 spending cap of $1.014 trillion, the same as topline spending level agreed to by the House and Senate, known as 302(a) allocations.

September 17, 2014

Earlier in the week, we highlighted a portion of CBO Director Doug Elmendorf's presentation at Cornell University highlighting the increased resources going to health care, Social Security, and interest spending to the detriment of the rest of the budget. In addition, the slideshow contained other helpful charts showing how the federal budget could change over the next decade, the choices policymakers face to alter the trajectory of debt, and a further look at the impacts of the Affordable Care Act. Here are some of the more interesting charts from that presentation.

Putting Debt on a Sustainable Path Requires Significant Changes

With debt set to continue to rise as a percent of GDP, simply maintaining the status quo will require significant changes. Keeping debt stable at its current elevated level of 74 percent of GDP for the next 25 years would require $2 trillion of savings over ten years, twice as much as the savings in the President's budget. Getting debt close to its historical average of 40 percent of GDP in 25 years will require $4 trillion in ten-year savings.

Individual Income Tax Revenue is the Only Growing Revenue Stream

CBO's ten-year projections show only a modest rise in revenue as a share of GDP over the next decade, from 17.5 percent to 18.2 percent, and in fact from 2015 to 2024 revenue will remain roughly flat.

September 16, 2014

Former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) today launched the McCrery-Pomeroy SSDI Solutions Initiative, a bipartisan effort to identify potential improvements to the Social Security Disability Insurance (SSDI) program.

The goal of the SSDI Solutions Intiative will be to solicit practical, implementable, and thoughtful ideas to improve the SSDI program through a "call for papers," a peer-review process, and an academic-style conference.

As we've explained before, the SSDI trust fund is projected to run out of funds in just two years – after which current law calls for a 20 percent across-the-board benefit cut. This could be avoided by borrowing or reallocating funds from the old-age system, but doing so would further strain the OASI trust fund, which also faces projected insolvency in the early 2030s. More importantly, the SSDI Solutions Initiative argues, it represents a missed chance to begin making improvements to various aspects of the SSDI program. They explain:

Instead of viewing the avoidance of trust fund exhaustion as a political liability, we believe policymakers should regard it as a policy opportunity. If provided with thoughtful and practical ideas to improve the SSDI program, policymakers could not only avoid insolvency but begin to reform the SSDI program for the better. This means identifying proposals well in advance of the deadline, rather than waiting for Congress to cobble together a last-minute, poorly conceived solution.

September 15, 2014

In a recent presentation at Cornell University, CBO Director Doug Elmendorf explained how the budget is projected to change over time. More resources will go toward health care programs, Social Security, and interest spending, while the portion flowing to everything else will decline.

Elmendorf noted two features that distinguish the current and future federal budget from previous ones: Federal debt will be much higher than at almost any other point in history, and spending on health care and retirement programs will take up a greater share of spending. In addition, as a result of mounting debt and rising interest rates, interest spending will climb significantly over the next ten years to a level rarely seen in modern history.

The growth of those three categories – health care, Social Security, and interest – is quite stark over the next decade, representing 85 percent of total spending growth over that time, in nominal dollars. The three factors will increase from 54 percent of total spending currently to 66 percent by 2024. Elmendorf attributed their growth to four factors:

    • The aging of the population
    • The health insurance expansions in the Affordable Care Act
    • The growth in per-capita health care costs
    • The rise of interest rates


Source: CBO

September 15, 2014

House Republicans plan to vote this week on a jobs package combining bills that would "build a robust economy and foster job creation." While promoting economic growth should be a top priority after a lackluster jobs report and a slow recovery, policymakers should also be fiscally responsible. Unfortunately, the House Republican approach would make the debt much worse. We've compiled the cost estimates for the various bills, and the package would cost more than $570 billion over ten years, before interest.

The package includes a combination of tax, spending, and regulatory changes, many of which could help to spur short or long-term economic growth. The majority of the costs in the legislation come from permanently extending and expanding a few expired tax provisions which focus on promoting research and investment. Unfortunately, the legislation would include over $570 billion of costs, but only $400 million worth of savings. Without offsets, the package will add substantially to the debt.

This increase in debt isn’t only bad for the fiscal situation; it also works against the exact purpose of the bill. As CBO has noted, a high national debt creates drag on economic growth by crowding out private investment, reducing output, and increasing interest rates. The package's care-free attitude towards increasing the debt will dampen any economic growth that would occur from the legislation.

As we've argued many times, if something is worth having, it is worth paying for. The fact that a package has the potential to promote growth does not mean we should allow it to add to the debt over the long run. In the past, we’ve suggested numerous offsets to pay for unemployment insurance, highway spending, extending tax provisions, veterans health care, or the Medicare "doc fix." Any of those, or any number of others, could be attached to this package to make it more fiscally responsible.

Provisions in the September 2014 House Jobs Package
Policy Ten-Year Costs, 2015-2024
Expand and make permanent bonus depreciation $269 billion
Expand and make permanent the research & experimentation tax credit $156 billion
Expand and make permanent 2013 levels of small business expensing (Section 179) $73 billion
Change the definition of full-time employment from 30 to 40 hours/week $46 billion
Repeal medical device tax $26 billion
Make permanent two expired tax breaks relating to S Corporations $2 billion
Exempt from the employer mandate servicemembers and veterans who already have health insurance $1 billion
Codify standards for regulations that create private mandates < $0.1 billion
Require agencies to submit a monthly report of proposed and final regulations < $0.1 billion
Require major regulations to get Congressional approval "significant"
Exempt most private equity financial advisors from SEC registration negligible
Exempt certain merger & acquisition brokers from SEC registration negligible
Streamline the process to obtain permits to extract critical and strategic minerals from public land negligible
Permanently ban states and localities from imposing taxes on internet access $0
Increase timber production on federal lands  - $0.4 billion [savings]
Total, House Republicans Jobs Package  $572 billion*
September 15, 2014

Former Pennsylvania governor and Fix the Debt Campaign co-chair Ed Rendell (D) has penned an op-ed arguing that progressive candidates should care about debt reduction. He explains that reducing the debt allows for funding other progressive priorities and helps hardworking families by improving the economy. If progressives ran on this issue, they can also reclaim the issue from "budget scolds" by proposing solutions other than "gutting welfare programs, slashing entitlements and imposing needless austerity."

He states:

This year, progressives will run on strengthening the economic recovery, reducing inequality, improving college affordability, promoting broad-based wage growth and making sure the most vulnerable among us are well cared for. And if we want all these to happen, we also need to campaign on fixing the national debt — not as budget scolds — but as the wing of the party that connects how growing debt is incompatible with the American dream.

As Rendell argues, rising levels of government debt will eventually hurt everyday families.

September 12, 2014

Senators Chuck Schumer (D-NY) and Dick Durbin (D-IL) have introduced legislation that would reduce the benefits to companies that choose to "invert," or move their headquarters overseas for tax reasons. The bill is very similar to a proposal included in last year's President's Budget, which would save about $3 billion over ten years by limiting tax deductions. It targets "earnings stripping," when companies with large amounts of cash borrow purely for tax reasons.

Recent months have seen a wave of corporate "tax inversions," where U.S. companies merge with a foreign corporation to move their headquarters overseas and avoid the high statutory U.S. tax rate on corporate income. Inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years.

Schumer and Durbin's proposal targets what they call “one of the most egregious practices of corporate inversions,” known as earnings stripping. This practice involves a foreign parent company lending to its U.S. subsidiary. Then, the U.S. subsidiary can send its profits to the parent company as interest. While this paper transaction doesn't change the company's overall financial position – it has the same income and debt levels as before – the loan provides two tax benefits. First, the U.S. subsidiary will have greater interest payments, which can be deducted as a business expense. Second, more of the company's income is "booked" outside the United States, where companies do not have to pay U.S. tax unless they repatriate the funds back to the U.S.

September 9, 2014

Note: Last updated 9/9/14. The status table below will be updated regularly throughout the FY2015 appropriations process.

The appropriations process was in full swing on Capitol Hill this summer with both the House and Senate working on individual bills. Unfortunately, none were signed into law before Congress left for the August recess. It now appears that Congress will pass a continuing resolution to extend current funding levels and avoid a government shutdown. The House is planning to vote on such package this Thursday.

The table below shows the status of each appropriations bill. To learn more about the appropriations process, read our report: Appropriations 101.

September 9, 2014

Tax breaks for homeowners are one of the largest categories of tax breaks offered by the federal government. A new report by the Corporation for Enterprise Development entitled "Upside Down: Homeownership Tax Programs" quantifies these tax breaks, showing that the majority of federal housing resources are given through the tax code. Because of their structure, these tax breaks result in an outsized benefit for the wealthiest homeowners.

The report profiles seven tax breaks given to homeowners, totaling $221 billion in lost annual revenue for the government. This cost is not only larger than the budget for the Department of Housing and Urban Development, but also nine other Cabinet level agencies combined. Incentives to support homeownership are also much larger than those for affordable housing, such as the Low-Income Housing Tax Credit.

Two of the largest preferences highlighted in this report are the mortgage interest deduction, which cost the federal government $69 billion in 2013, and the property tax deduction, which cost $29 billion. Both deductions are only available if a taxpayer owns their home and itemizes their deductions, which means they aren't available to the more than two-thirds of taxpayers that do not itemize. Because wealthier individuals are more likely to itemize and face higher marginal tax rates, they gain a larger benefit from the deductions. The average family in the top 1 percent of the income distribution received over $10,000 in benefits from these two deductions, while the average family in the bottom fifth received $3. In particular, the benefits of the property tax deduction grow rapidly at the top of the income scale since it is not capped like the mortgage interest deduction.

September 9, 2014

One of the bills to replace Fannie Mae and Freddie Mac and overhaul the housing finance system just got a verdict from CBO: it will save $58 billion under the current budget rules for scoring credit programs. The bill, the Housing Finance Reform and Taxpayer Protection Act of 2014 (S. 1217), passed the Senate Banking Committee in May by a 13-9 vote, with both bipartisan support and opposition.

Fannie and Freddie have drawn the ire of some policymakers after the federal government placed them into conservatorship and infused hundreds of billions of dollars to rescue them during the heart of the financial crisis. However, after a change in the terms of the agreement that required the two government-sponsored enterprises (GSEs) to pay their net worth back to the federal government each quarter, the situation has reversed: Fannie and Freddie have brought in an estimated $200 billion for the Treasury in the past two years alone. Still, lawmakers are concerned about the inherent instability of the current arrangement and the potential risk to taxpayers if the housing market turns down again.

S. 1217 would replace Fannie and Freddie by 2020 with a new Federal Mortgage Insurance Corporation (FMIC), which would provide mortgage guarantees funded by fees.

September 9, 2014

One of the biggest stories in CBO's August budget update was the huge downward revision to expected spending on interest to service the debt, down by $615 billion in total through 2024.

Primarily, this revision stems from lower projected interest rates, resulting in $465 billion less spending over ten years. Another $90 billion came from technical changes (mostly from estimates of payments on inflation-protected debt securities), and $60 billion came from a lower debt burden as a result of all the revisions in the new baseline (a change known as debt service). The interest rate story is the most interesting, though, since it has the largest implications for the federal government's interest burden in the future.

Our analysis of the report noted that interest rates had been revised down both in the short term and the longer term. In 2014, the rate on ten-year Treasury notes is now expected to average 2.8 percent rather than 3.1 percent, and to stabilize by 2019 at 4.7 percent instead of 5.0 percent. CBO made a similar revision to projected three-month T-bill rates. As a result of these changes, interest spending was revised down by more than $30 billion through 2016 and by $50-65 billion annually in the 2017-2024 period.

This downward revision by CBO continues a recent trend of declining projections as interest rates have stayed depressed for longer and the economy has been slower to recover than CBO originally anticipated.

September 8, 2014

Prior to the release of CBO's August baseline, we surmised that one of the revisions to the budget would come from Medicare, whose growth in 2014 had come in much lower than CBO expected. As it turns out, CBO did revise Medicare spending in 2014 down by $9 billion, with growth expected to be a very low 2.4 percent for the year.

September 8, 2014

The Council on Foreign Relations has released a new report and scorecard comparing the United States federal debt situation to other G-7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom). The verdict is not good. While the U.S. had a much lower debt-to-GDP ratio in 2000 than the G-7 average, it has since caught up and is expected to have higher debt than every country in the group besides Japan by 2040. The report's author Rebecca Strauss shows the deterioration in the U.S. fiscal position since 2000 plus the daunting trajectory of debt going forward.

Although the G-7 as a whole has seen its debt rise as a percent of GDP since 2000, the U.S. government's rise has been much faster, with debt more than doubling over that time period. Average G-7 debt was 54 percent of GDP in 2000 compared to 34 percent for the United States. Since then, U.S. debt has grown to nearly the levels of the G-7, with average G-7 debt at 86 percent and the U.S. at 82 percent (note the report uses different numbers than CBO in order to make an apples-to-apples comparison with other countries). In addition, the share of debt owned by foreign countries has risen from one-third to about half in that period of time. Much of the growth in U.S. debt has come since 2009, when deficits averaged 7.6 percent of GDP largely due to the financial crisis, slow recovery, and economic stimulus measures.


Source: International Monetary fund

September 8, 2014

CBO’s baseline budget projections are often referred to as “current law” since they generally assume Congress continues the laws as they are written (even when that is not the most realistic scenario). However, CBO’s baseline deviates in several important ways from what would happen under a strict interpretation of current law -- that is, if Congress were to pass no new laws.

For context, the CBO baseline is based on specifications laid out in the Congressional Budget Act of 1974 and the Gramm-Rudman-Hollings Act of 1985. Lawmakers wanted the baseline to be a useful benchmark against which to measure legislative changes, so they modified the baseline's assumptions from "pure" current law to better accomplish that goal. These deviations ensure that lawmakers will get relevant information about the magnitude of policy changes rather than having them obscured by technicalities. CBO is instructed to modify the strict interpretation of current law in cases when not doing so would be clearly unreasonable and thus devalue the baseline's function.

CBO's baseline differs from a strict current law baseline in four main ways.

September 5, 2014

In a highly anticipated release, the Centers for Medicare and Medicaid Services (CMS) this week released updated data and projections on National Health Expenditures (NHE) and its components. This release updates the last set of projections put out in January and extends the time period by a year to 2023. Overall, the latest projections show another year of slow health care spending growth in 2013, but a pick-up in growth starting this year.

NHE growth is projected to have been just 3.6 percent in 2013, similar to what it has been since 2009 and only slightly above the 3.4 percent economic growth rate for that year. Growth is then expected to pick up -- as it has in past projections -- to 5.6 percent in 2014 as a result of the coverage expansions in the Affordable Care Act kicking in. It will then decelerate to 4.9 percent in 2015 due to reductions in Medicare Advantage payments, the expiration of a temporary hike in Medicaid primary care physician payments, and stabilization in Medicaid enrollment. For the rest of the projection period, growth will hover around 6 percent. Over the 2013-2023 period, NHE growth is projected to average 5.7 percent, 1.1 percentage points higher than the 4.6 percent projected economic growth rate, but still roughly a percentage point slower than the recent historical average.

The newest projections represent an improvement over CMS's previous ones, as NHE spending has been revised down by a total of $860 billion over the comparable 2012-2022 window.

September 4, 2014

With the economy recovering slower than originally anticipated, the government now expects to collect significantly less revenue this decade than it did just two years ago. The most recent budget projections from the Congressional Budget Office (CBO) show the government taking in $1.8 trillion less over a ten-year period than was projected in February 2013.

Growing entitlement spending is the primary source of growth in the federal budget, but this growth would not lead to higher debt if revenues kept pace. Despite the savings from the widely noted $900 billion slowdown in health care spending since March 2011, federal revenues are set even faster, widening the deficit. Over the same 2013-2021 time period, revenue projections have fallen $1.2 trillion since February 2013 and net health care spending has fallen $780 billion since March 2011.

February 2013 was the first budget baseline after the fiscal cliff law, which allowed certain tax cuts for high earners to expire while permanently extending most of the 2001/2003 tax cuts. In that baseline, revenues were expected to climb to 18.5 percent of GDP, both in the immediate future and by the end of the decade. Over the last two years, though, CBO has continually revised these revenue projections downward, particularly in their February baseline of this year. The last month's projections showed revenue staying under 18.2 percent of GDP throughout the period.

Half of the $1.8 trillion is due to decreases in individual income tax revenue. Payroll taxes experienced a similar but smaller decline. Corporate tax revenue is expected to be much lower than expected in the near term – projections for 2016 dropped over 15 percent – but only slightly lower over the long term. Excise taxes are the only exception to the decline, with projections that have slightly increased over the last two years.

September 3, 2014
Costs Could Exceed $10 billion per Year

Recent events in Iraq and Syria have raised the prospect of expanding military operations in the region beyond airstrikes. Gordon Adams in a Fiscal Times article roughly estimated that $10 billion-$15 billion per year would be required to expand air operations and provide ground support for a campaign against ISIS, though the estimate is uncertain because it is not clear exactly how the U.S. would respond.  Regardless of the exact number, it is clear that if the military is to expand its operations in Iraq and Syria, it would cost billions of dollars.

Given high and growing debt levels, lawmakers should avoid substantially adding to the debt to fund the operation.

Of course, the "path of least resistance" would be for Congress to fund these new costs by designating them as Overseas Contingency Operations (OCO), which are not subject to the same statutory caps that constrain most discretionary spending. And to be fair, the increased costs would indeed be used toward overseas operations in Iraq. Yet, every major budget assumes OCO spending will decline, and using the OCO designation as a slush fund for any new military operation could significantly worsen the debt situation.

A sensible solution to this concern might be to accompany any new funding for ISIS with a set of OCO caps, designed to limit total funds spent on military operations in Iraq and Afghanistan.

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