The Bottom Line
CBO recently released an update to its 2014-2024 baseline including the first detailed agriculture projections since May 2013. Since then, Congress passed and the President signed the Agricultural Act of 2014, commonly known as the farm bill. This new law reforms farm support by doing away with the direct payment system, ending payments to farmers based on which crop they grow. Some of those resources are shifted towards increased crop insurance. This baseline is the first to include those legislative changes. The new CBO baseline shows reduced farm spending across most agriculture categories. The chart below compares spending levels from the May 2013 CBO baseline and the April 2014 CBO baseline for farm support programs. This chart does not include nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP), which CBO projects will cost $734 billion from 2014 to 2023, down from $764 billion in last May's projections. The $30 billion reduction reflects both $22 billion due to technical and economic changes in CBO's estimate and $8 billion in changes from the new farm law.
*Commodity Credit Corporation Price Support and Related Programs
**Conservation Program Total
Focusing on just non-nutrition mandatory spending, agriculture outlays are down to $144 billion for the 2014-2023 period under the new CBO baseline. CBO had projected spending levels of $151 billion back in February and $157 billion last May for the same period. Since the effects of the new farm law passed in January were not included in the February 2014 baseline, the $6 billion drop off from May 2013 to February 2014 is a result of technical and economic changes totaling $4 billion and an additional $2 billion from the extension of the sequester under the Ryan-Murray deal. The further decline in projected spending in the April 2014 baseline largely reflects the legislative effects of the new farm law. However, these savings are mostly consistent with the CBO score from January because CBO did not have sufficient new data to update the estimate. Below is a graph comparing year-by-year non-nutrition mandatory agriculture spending under each of the three CBO baselines.
While we support efforts to rein in agricultural and other mandatory spending, it is important to note that the effects of the farm law are highly uncertain. Because modifications and enhancements to programs such as crop insurance, Price Loss Coverage, and Agricultural Risk Coverage have not been implemented yet, CBO’s updated baseline simply incorporates their score of the farm bill rather than updated projections because CBO does not have any new data or other information to re-score the farm bill. As Politico’s David Rogers wrote last week:
But it’s as if the budget analysts are going through withdrawal after living 18 years with the predictability of direct cash payments under prior farm bills. And until producers have made more choices later this year about the new programs, CBO is not putting its name next to more predictions....Thus Monday’s report repeats, without any new detail, CBO’s January estimate of $16.6 billion in savings for the years 2014-2023 — about half from food stamps and half from farm-related expenditures.
Given the risk of uncertain estimates, policymakers should continue to monitor actual farm spending levels and be prepared to make adjustments as necessary. Both President Obama and Chairman Ryan have proposed further reductions in farm subsidies even under the current baseline. These proposals and others should remain on the table for discussion.
In our paper on CBO's analysis of the President's budget, we compared how CBO and OMB estimated the budget's policies relative to CBO's baseline. Of course, as those in the budget world know all too well, there are many different baselines against which to measure. In this blog, we will show you how we estimate that CBO and OMB scored the budget against three other baselines: a "PAYGO" baseline, a "No Offset" baseline, and OMB's baseline.
The first two baselines will be familiar to readers of the blog. The PAYGO baseline is the same as CBO's baseline except that it includes a drawdown of war spending (in contrast to CBO's assumption that it will grow with inflation). For the purpose of this comparison, we assumed the budget's drawdown in the baseline, even though it is slightly larger than the one in CBO's policy alternatives. The No Offset baseline also has the war drawdown but includes a permanent "doc fix," an extension of the 2009 refundable tax credit expansions, an extension of the tax extenders, and a repeal of the sequester (starting in 2016 for discretionary spending).
The OMB baseline also assumes a permanent doc fix and the refundable credit expansions, but it does not include the extenders. For the sequester, OMB assumes that it is in effect only for the years it is technically required. This means that the sequester only cuts discretionary spending through 2021; after that, it reverts to pre-sequester levels, whereas CBO assumes that the discretionary category grows with inflation after 2021. Another minor difference is that OMB's baseline did not incorporate the debt limit suspension or the one-year doc fix, which extended the sequester through 2024 and shifted Medicare savings from 2025 to 2024.
The 2014-2024 estimates of the policies in the President's budget vary widely based on which baseline and which agency's estimate one uses. Excluding the war drawdown, the savings relative to the CBO and PAYGO baselines are about $260 billion and $735 billlion by CBO and OMB estimates, respectively. The savings relative to the OMB baseline are $870 billion and $1.34 trillion. Compared to the No Offset baseline, the net savings jump to $2.23 trillion and $2.8 trillion.
You can click here or on the image below to see the full table with the different estimates.
The table makes clear that while the President does a good job of paying for deficit-increasing policies, it doesn't include all that much savings beyond that. Just adhering to PAYGO will not be enough to make the debt sustainable.
CBO’s latest budget outlook contained good news and bad news for some of the federal government’s largest trust funds. First, the bad news: CBO continues to predict that without legislative action, the Highway trust fund and Social Security’s Disability Insurance (DI) trust fund will be exhausted in the next few years. The good news, however, is that CBO's Hospital Insurance (HI) outlook is far more optimistic than the projections in their February baseline.
Federal Trust Funds
Trust funds are just one of the many accounting mechanisms the federal government uses to link tax revenues designated for a specific purpose with their corresponding expenditures. The federal government has numerous trust funds, the largest being Social Security’s Old-Age and Survivor’s Insurance (OASI) Trust Fund. Under current law, trust funds cannot incur negative balances or borrow money to pay their obligations. However, CBO assumes that all trust fund obligations will be paid in full when calculating their budget baseline, implicitly assuming any shortfall would be covered with general revenues.
Highway Trust Fund
The Highway trust fund faces the most immediate financing shortfall of any of federal trust fund. CBO projects that the highway and transit accounts of the Highway trust fund will be exhausted in FY 2015, with the highway account possibly forced to delay some of its payments during the latter half of 2014. Years of covering shortfalls with general revenues while doing nothing to bring trust fund revenues in line with costs have set the stage for a "transportation funding cliff" in FY 2015, at which point trust fund outlays would need to be cut by about one-quarter to bring spending in line with revenues. By 2024, the highway account's cumulative shortfall will be $120 billion while the transit account's cumulative shortfall will be $44 billion, giving the trust fund a combined cumulative shortfall of about $164 billion (if the additional interest charges to the general fund were included, the total would increase to nearly $200 billion).
Because the trust fund’s outlays have tended to outpace its receipts since 2000, lawmakers have repeatedly transferred money from the general fund to the Highway trust fund. Since 2008, Congress has transferred roughly $53 billion in general revenues to the Highway trust fund, with only the latest transfer of $18.8 billion being offset with savings elsewhere in the budget. Speaker Boehner has recently spoken out against another bailout of the Highway trust fund, and the budget resolution passed by the House included a provision which would score a general revenue transfer to the Highway trust fund with a cost that would need to be offset if the House-passed budget is deemed for purposes of budget enforcement in the House.
There are a number of ways lawmakers could address the Highway trust fund's solvency issues. CBO estimates that increasing the taxes on motor fuels used to finance the trust fund by about 10 cents per gallon by FY 2015 would close the shortfall through 2024. President Obama’s budget dedicates $150 in transition revenue from corporate tax reform to the Highway trust fund, while House Ways & Means Chairman Dave Camp's Tax Reform Act of 2014 would deposit temporary revenues from repatriation into the fund (though those revenues are also used to pay for rate reductions).
Disability Insurance Trust Fund
CBO currently estimates that the DI trust fund will be exhausted in fiscal year 2017, while the Social Security Trustees project the fund will run out in calendar year 2016 (both estimates may be correct). At that point, current law will require a 20 percent across-the-board reduction in disability benefits. While the trust fund exhaustion date has not changed from CBO's last estimate, the size of the shortfall has slightly increased. By 2024, CBO expects the DI trust fund to face an annual shortfall of $53 billion ($67 billion including interest), and a cumulative shortfall of $322 billion ($375 including interest).
In the past, Congress has addressed the DI trust fund's insolvency by reallocating a portion of the payroll tax from the OASI trust fund to the DI trust fund. However, relying on this approach indefinitely would bring the OASI trust fund two years closer to exhaustion (from 2033 to 2031). Given that the OASI fund's own insolvency date is fast approaching, it is not clear if such an option is desirable today.
Hospital Insurance Trust Fund
While CBO’s latest baseline had nothing but bad news for the DI and Highway trust funds, the latest outlook for the HI trust fund (which pays Medicare Part A benefits) is significantly better than CBO’s last estimate. Whereas the agency's February baseline projected that the trust fund would run deficits in eight out of the next ten years, the new baseline shows the trust fund running surpluses for most years, with much smaller deficits in those years where outlays do exceed total income. While CBO's February baseline estimated that the HI trust fund would run a cash-flow deficit of $51 billion ($47 billion with interest) in 2024, the CBO now expects a much smaller cash-flow deficit of $12 billion (income including interest would meet expenses).
By 2024, the HI trust fund will have a balance of $261 billion, more than eight times the balance CBO projected just a few months ago. Since CBO's February and April baselines do not project beyond 2024, it is unclear how much longer the trust fund would remain solvent, but the new projections clearly show a further away insolvency date. The improved outlook for the HI trust fund is mostly due to lower projected outlays (a decrease of about 7 percent in 2024), but CBO also projects trust fund income will be slightly higher than previously projected (about 3 percent in 2024).
Policymakers should use the looming exhaustion of the Highway and DI trust funds as an opportunity to review the financing and operations of these programs and enact reforms that put them on a sustainable path. CBO has already provided Congress with a number of different options for improving the finances of the Highway, Disability Insurance, and Hospital Insurance trust funds without resorting to transfers or temporary fixes that leave the underlying problems in place. While the Highway and DI funds will soon require Congressional action, the HI trust fund’s healthier fiscal position should not dissuade lawmakers from addressing growing Medicare costs. Waiting for federal programs to reach the brink of insolvency before addressing them only makes the problem harder to solve.
Shortly after the President's budget was released, we suggested CBO might be somewhat more pessimistic in its debt projections than OMB. Specifically, we predicted CBO would estimate debt on a slight upward path by the end of the decade, reaching 73 percent of GDP by 2024; by comparison, OMB estimated that debt would be on a downward path, falling to 69 percent of GDP by 2024 under the President's budget.
With last week's release of CBO's Analysis of the President's Budget, we can now test our predictions. While we did not come quite as close as in previous years, our prediction turned out to be fairly accurate. Whereas we thought debt would reach 73.2 percent of GDP by 2024, CBO finds it would be on a parallel course but reach 74.3 percent. (As a reminder, OMB projected debt levels falling to 69 percent). Most of this difference is caused by the fact that CBO did not count $150 billion of temporary corporate tax revenue "because the budget does not provide enough details about the proposal." Had CBO counted that revenue, our debt estimate in 2024 would have been within 0.4 percent of GDP of CBO's.
Importantly, part of the reason OMB is so much more optimistic than CBO deals with their conventions for making economic projections. Whereas CBO's GDP, inflation, and other macroeconomic projections are based on what would happen under current law, OMB's are based on what would happen if the President's budget were enacted. The two scenarios diverge particularly because the President's budget includes immigration reform, which CBO has estimated would increase GDP by over 3 percent by the end of the decade.
If we started with CBO's estimates, but added the economic impact of immigration reform and credited the President with $150 billion of claimed corporate revenue, debt would stabilize at about 71 percent of GDP over the latter half of the ten-year window, an outcome which falls between the CBO and OMB estimates and is almost identical to what we had predicted when immigration reform is included.
Ultimately, there is no way to know which estimates and projections are closest, and none are perfect. The uncertainty associated with budget estimates (and additional uncertainty when incorporating economic effects) highlights the need to put the debt on a clear and unequivocal downward path as a share of the economy. If a plan to do so were enacted and ended up falling short, debt would likely still remain stable as a share of GDP. If instead the debt grew even more slowly, the additional debt relief would help to reduce interest costs, improve budgetary flexibility, and spur more private investment and faster growth.
In other words: when it comes to long-term sustainability, there is ample reason to err on the side of caution.
CBO has released their analysis of the President's FY 2015 Budget and CFRB released a report summarizing the findings. CBO finds a less optimistic outlook than the President's Office of Management and Budget (OMB) with debt up to 74.3 percent of GDP in 2024 as opposed to OMB’s projection of debt on a downward path toward 69.0 percent of GDP. You can read the full paper here.
This table summarizes the differences in CBO and OMB's estimates of fiscal impacts of proposals in the President's Budget.
The Congressional Budget Office (CBO) has released its analysis of the President's FY 2015 budget, applying its own budget baseline and methodology to the President's policies. The agency finds that the budget would reduce debt relative to CBO's baseline by significantly less than the Administration anticipates, with debt on a modest upward path in the latter part of the ten-year budget window, increasing to 74.3 percent of GDP in 2024, rather than falling to 69 percent of GDP as OMB previously estimated. This development is not surprising, and we anticipated it when the budget was first released.
Thus, the budget only marginally improves the fiscal outlook relative to CBO's baseline, reducing 2015-2024 deficits on net by only $275 billion and debt in 2024 by only one percentage point of GDP, and it clearly does not do enough to put debt on a sustainable downward path.
The budget gets deficits close to stable at about 3 percent of GDP over the next ten years, a slight improvement over CBO's baseline, where deficits rise substantially in the second half of the ten-year window. Still, the $275 billion of net deficit reduction in the budget (excluding the war drawdown) does not put debt as a share of GDP on a downward path; debt as a percent of GDP would be 74.3 percent in 2024, about the same level it will be at the end of 2014, and it would be on an upward path after 2018. Compared to CBO's baseline, excluding the President's war drawdown, this represents an improvement of only one percentage point of GDP.
The budget gets most of its deficit reduction through tax increases and revenue resulting from immigration reform. As a result, revenue rises steadily from 17.6 percent of GDP in 2014 to 19.2 percent by 2024; by comparison, CBO's baseline has revenue staying steady around 18 percent of GDP. Outlays in the budget remain steady at around 21 percent of GDP through 2019 before rising gradually to 22 percent. This path is similar to what CBO projects in its baseline.
Budget Metrics as a Percent of GDP
A key difference between CBO's and the Administration's estimates of the budget is in their economic assumptions. CBO's projections are much more pessimistic, assuming GDP in 2024 will be $700 billion lower than the Administration projects. These differences in assumptions not only result in CBO projecting $1.3 trillion higher deficits over ten years, they also raise the debt-to-GDP ratio by lowering the denominator. Also, CBO does not give the President credit for $150 billion of claimed transition revenue from corporate tax reform (which the budget would dedicate to the Highway Trust Fund), instead assuming that the specified $225 billion in corporate tax revenue raised would all go to rate reduction.
CBO's projections make clear that while the President's budget is a small step in the right direction, it does not do nearly enough to put debt as a share of GDP on a clear downward path. In particular, the budget falls short on entitlement reforms, an area that would have been helped had the chained CPI reform not been removed from his budget.
In the Wall Street Journal today, Chris Chocola of the right-leaning Club for Growth called for Congress not to renew the expired "tax extenders." Earlier this month, the Senate Finance Committee advanced legislation to reinstate more than 50 of these provisions, at a cost of $85 billion. As we explained recently, continuing this practice permanently would cost over $1 trillion and wipe out all the revenue gains from the fiscal cliff tax increases.
And not only are these tax breaks expensive, but many would not pass a cost-benefit analysis if appropriately scrutinized. Chocola writes (emphasis added):
A $250-a-year subsidy for those who commute to work using New York's "bike share" program. Breaks for Broadway plays like "Of Mice and Men" starring James Franco and Chris O'Dowd, up to $15 million per production. A $71 million benefit for NASCAR facilities. Billions in credits for the wind-energy industry.
All that and more, coming soon to a taxpayer near you. It's once again time for the annual special-interest orgy known as the "tax extender" legislation, a giveaway bill that Congress plans to take up in the coming weeks.Since the 1980s, when Washington last enacted comprehensive tax reform, Congress has passed extensions of ostensibly "temporary" tax breaks for interest groups. The package is referred to as "tax extenders" because the breaks are almost always extended by Congress without much opposition. The 2014 installment could cost $85 billion in the next two years, and legislators are piling on their pet projects since it's considered "must pass" legislation.
This is all a mistake. Congress needs to clean up the tax code and lower marginal rates across the board, but tax-extender legislation delays any serious reform. Congress should let the extenders expire permanently
Whereas we tend to make the fiscal case for not extending these provisions without offsets, Chocola makes an economic case for allowing them to expire:
Allowing these credits to expire would do little if any harm to the overall economy. Specific industries that have too long considered the government a good customer would have to adjust. But the positive effects of ending capital misallocation would outweigh the temporary downsides. First Trust Advisors LP Chief Economist Brian Wesbury told me that 'moving away from a lobbyist-oriented mentality of annual gifts to special interests will actually improve medium- to long-term economic prospects.'
Eliminating the extenders would increase government revenues, but that's not the reason for ending them. Pro-growth tax reform would likely also bolster government revenues—but would do so in a way that would benefit the economy. Getting rid of tax extenders might even motivate affected industries to lobby for real tax reform that would lower individual and corporate rates.
In the op-ed, Chocola suggested that the Club for Growth would likely put a vote to continue the extenders on their scorecard – meaning Members would get a negative mark for such a vote. But they are not the only group to expires concern over the extenders package currently under consideration. Wayne Brough of the right-leaning FreedomWorks has argued that extenders are a distraction from the real issue of tax reform. Meanwhile on the left, Citizens for Tax Justice and the Center on Budget and Policy Priorities have both urged Congress not to renew the expired tax provisions without offsetting their cost (and let expire provisions that are not worthy of extension). We share this view, as does the Concord Coalition and the Bipartisan Policy Center.
PAYGO rules not only help to keep the debt in check but force policymakers to face real trade-offs to determine what is valuable and what is not.
One of the notable changes in Congressional Budget Office’s (CBO) latest budget baseline was a downward revision in projected Medicare spending from their last forecast in February. CBO now estimates that Medicare spending net of offsetting receipts for the 2015-2024 period will be approximately $106 billion lower than what the agency projected back in February.
Nearly $20 billion of that revision, though, comes from an 18 percent increase in the ten-year cost of replacing the Sustainable Growth Rate (SGR) formula with frozen physician payments, up to $124 billion from CBO's previous estimate of $105 billion.1
Most of the decrease ($98 billion) in Medicare spending is due to technical changes to CBO’s baseline, particularly a $56 billion decrease in projected spending for prescription drugs covered by Medicare Part D, as well as a $38 billion reduction in net spending for Part A and Part B benefits. According to CBO, net outlays for Parts A and B will be slightly higher from 2015 to 2017, but lower in subsequent years than they were in the previous baseline. However, CBO attributes part of this decline to the Sustainable Growth Rate (SGR) formula's scheduled reductions in physician payments (24 percent in April 2015), since the higher spending in the near term will require bigger cuts in later years. It is unlikely that lawmakers would ever allow such a reduction to occur, though Congress has historically offset past "doc fixes" with other health savings.
Recent legislation patching the SGR for 12 months also changed CBO's estimates. As a result, outlays will increase by $6 billion in 2014 and mandatory outlays will decrease by $7 billion for the 2015-2024 period, primarily through reducing over-payments for certain Medicare services and extending the reductions in Medicaid payments to hospitals that treat a disproportionate share of low-income patients.
CBO’s projection of lower Medicare spending is welcome news, but with the baby boom generation beginning to retire en masse, Medicare remains one of the primary drivers of increased debt this decade and beyond. Now is not the time to get complacent about reforms that could improve the program for beneficiaries and taxpayers alike.
In honor of tax day, CRFB released its Tax Day 2014 chartbook yesterday, with ten charts (and one table) that explain federal taxes – who pays them, what they pay for, and how they are collected.
While CBO projects that our fiscal situation will continue to deteriorate in the coming years, Congress may decide to make the situation worse by renewing a host of temporary and expired tax provisions without offsetting their cost. Fundamental tax reform that simplifies the tax code, encourages growth and raises revenue could go a long way in closing the gap between spending and revenues and putting debt on a sustainable path.
A PDF version of our chartbook is available here. The individual charts are posted below with their descriptions. This in addition to our long list of other tax resources, such as the "Tax Break-Down" series that examines each tax break in detail, blog posts on the tax extenders, a resource page on commonly discussed tax reform plans, and an analysis of Chairman Camp's recent draft to overhaul the tax code.
Chart 1: Where Does Government Financing Come From?
CBO’s latest baseline estimates that the federal government will collect just over $3 trillion in 2014, while federal outlays will be about $3.5 trillion. Income and payroll taxes cover about two-thirds of federal spending, with corporate income and other taxes covering another 17 percent. About 15 percent of federal spending in 2014 will be financed by deficits.
Chart 2 & 3: Who Pays Taxes, And How Much?
As our next chart shows, all income groups pay federal taxes, with the highest earners paying the highest tax rates. While the bottom 40 percent of taxpayers on average receive money back from the income tax, they pay a larger share of their income in payroll and excise taxes than upper-income taxpayers. On average, all households outside the top 20 percent pay more in payroll taxes than they do in income taxes.
The top 20 percent of households pay almost 70 percent of federal taxes, with the top one percent of earners paying nearly one-quarter. This reflects both the distribution of income and the progressive nature of the current tax code: in 2010, households in the top income quintile received 52 percent of before-tax income and paid about 69 percent of federal taxes, while households in the bottom quintile received 5 percent of before-tax income and paid 0.4 percent of taxes.
Chart 4: Revenues Are Insufficient for Current Levels of Spending
Since 1980, revenues have averaged about 17.4 percent of GDP, while spending has averaged about 20.4 percent of GDP. Yet the aging of the population and growth in mandatory spending programs are set to push federal expenditures well above their historical average. While revenues are projected to increase in the years ahead (assuming lawmakers allow a number of tax provisions to expire, or offset their cost), the government will still have to rely heavily on deficit financing to meet its current spending obligations.
Chart 5, 6, & 7: The Cost of Tax Expenditures Has Grown Substantially
The number of “tax expenditures” – the various deductions, credits, exclusions and other tax breaks in the current code – has grown over time, actually exceeding the amount of income tax revenue collected in some years. Last year, the federal government lost at least $1.1 trillion in revenue due to tax expenditures. (The two offices who estimate tax expenditures use different totals. The Office of Management & Budget calculated over $1.1 trillion of tax expenditures. The Joint Committee on Taxation uses different lists and estimates and found almost $1.3 trillion in tax expenditures.)
Many of these tax expenditures are similar to government spending programs. For example, spending $1,000 in the form of a Pell grant is economically indistinguishable from giving out $1,000 through refundable education tax credits. This leads many commentators to refer to most tax expenditures as “spending through the tax code” that obscures the true size of government. If tax expenditures were counted as ordinary spending, they would comprise about 28 percent of the federal budget.
In fact, some tax expenditures are larger than similar spending programs. In fiscal year 2012, the federal government lost more revenue due to the mortgage interest deduction (intended to encourage home ownership) than the entire budget for the Department of Housing and Urban Development. Refundable credits, like the Earned Income Tax Credit and the Child Tax Credit, serve as some of the biggest anti-poverty programs, costing nearly double the amount spent on cash aid to impoverished families.
Chart 8: These Tax Expenditures Are Regressive
Aside from refundable credits, most tax expenditures disproportionately benefit high-income taxpayers. Ten of the largest tax expenditures identified by CBO increase the after-tax income of the top 1 percent of earners by 13 percent, with the preferential tax rates for capital gains and dividends alone representing more than 5 percent of after-tax income.
You can read more about some of the largest tax expenditures in the current code by checking out our Tax Break-Down series, which analyzes individual tax provisions and reviews how much they cost, who they benefit, and how they can be reformed.
Chart 9 & 10: What Are The Tax Extenders and How Much Do They Cost?
Congress is currently considering extending over 50 tax provisions that expired at the end of last year. These “tax extenders” are frequently renewed by Congress and are sometimes revived retroactively. Extending all of these provisions for two years would cost roughly $85 billion. About 57 percent of the tax extenders go to businesses, with the research and experimentation credit being the most expensive.
The $85 billion two-year cost to extend all of these provisions is somewhat deceptive, particularly because one of them, bonus depreciation, costs far more to extend permanently than to extend temporarily. If lawmakers continue the current practice of extending all the provisions year after year, they would cost approximately $750 billion (or almost $930 billion with interest) over the next ten years, which would increase debt as a share of GDP from 75.5 percent to 79 percent in 2024. Extending the temporary “bonus depreciation” introduced as a stimulus measure in 2008 accounts for one percentage point of that increase.
And One Table: The Taxpayer Receipt
Our last chart shows where an illustrative taxpayer's money goes. The majority of tax dollars go towards popular functions like national defense, Social Security, and Medicare. Functions like foreign aid and federal employee retirement benefits comprise a relatively small share of the federal budget. For every $100 paid in taxes, more than $6 goes to paying interest payments on the debt. Importantly, taxpayers would have to pay an additional $24.50 for every $100 they paid in taxes in order to pay for all federal spending in 2013.
Now that we've all paid our taxes, it is worth remembering the basic facts about our current income tax system. As lawmakers consider whether to overhaul the current tax code, it is important to recognize the tough choices and trade-offs necessary for any meaningful tax reform.
Happy Tax Day! CRFB has produced a number of analyses and blog posts on tax issues since last year's filing deadline, from our report on House Ways & Means Chairman Dave Camp's Tax Reform Act of 2014, to our recent work analyzing the costs of the tax extenders. Here are just a few of our most recent blog posts on tax issues:
- Extending Tax Breaks Would Squander Fiscal Cliff Revenue
- Paying For the Tax Extenders
- Not April Fool's: Senate Democrats Propose Lower Revenues than House Republicans
- Bonus Depreciation Has Cost $220 Billion Since 2008
- Sen. Murray Introduces Tax Cut Bill
You can learn more about some of the numerous tax breaks in the current code by checking out our ongoing blog series, The Tax Break-Down, which analyzes the costs and benefits of some of the largest and most popular tax provisions one at a time. Previous blogs have looked at:
- State and Local Tax Deduction
- LIFO Accounting
- Preferential Rates on Capital Gains
- Child Tax Credit
- Section 199, the Domestic Production Activities Deduction
- Municipal Bonds
- Cafeteria Plans and Flexible Spending Accounts
- Accelerated Depreciation
- Individual Retirement Accounts
- American Opportunity Tax Credit
- Intangible Drilling Costs
- Foreign Earned Income Exclusion
- FICA Tip Credit
- The Low-Income Housing Tax Credit
- Charitable Deduction
- Tax Extenders
CBO's most recent budget projections show debt on an unsustainable path – rising from a post-war record 73 percent of GDP today to 78 percent by 2024. Importantly, however, CBO's projections do not always reflect where debt is likely to go after accounting for the actions that lawmakers might take.
For that reason, CRFB has constructed two alternatives to the CBO baseline, based on numbers that CBO provides. One alternative, which we call the "PAYGO Baseline," assumes that lawmakers stick to current law, but also reflects the troop drawdown currently underway. By convention, CBO assumes that any uncapped discretionary spending (such as the amounts spent in Iraq and Afghanistan) will grow indefinitely with inflation – an assumption inconsistent with the current drawdown. Adjusting for this assumption, deficits over the next decade will be $700 billion lower than the CBO baseline, including additional interest savings. Under this PAYGO Baseline, where lawmakers draw down war spending and fully pay for new spending and/or tax cuts, debt will decline to 75.5 percent of GDP by 2024.
However, the debt could be much worse than it is under this scenario, which assumes Congress is fiscally responsible and fully abides by pay-as-you-go rules. In our "No-Offset Scenario," we continue to assume the troop drawdown, but also assume that lawmakers enact annual doc fixes, extend the refundable tax credit expansions after 2017, reinstate and continue both the currently expired "normal tax extenders" and bonus depreciation, and repeal future sequestration cuts – all without offsetting the costs. Under this No-Offset Scenario, ten-year deficits would be $1.6 trillion higher than CBO's baseline, and debt would rise to 84 percent of GDP by the end of the decade.
The difference between the PAYGO scenario and the No-Offset scenario highlights the need to abide by PAYGO rules as a minimum standard of fiscal responsibility. Doing so would mean a rising level of debt, but one which would be addressed through reasonable reforms. Failing to abide by PAYGO could mean ever growing debt levels which prove difficult to control.
Importantly, we did not include any estimates for unpredictable events that would make the budget picture even worse, such as future military actions, unexpected increases in interest rates, or additional emergency funding in response to natural disasters.
The table below lists the specific costs associated with each of the policies. In particular, this year's "No-Offset Scenario" includes the $244 billion cost of bonus depreciation, a tax break that was enacted as a stimulus measure in 2008 to spur business investment. Even though it was enacted in response to the Great Recession, the measure was continued along with the annual tax extenders package at the beginning of 2013, and appears poised to be continued without offsets once again.
|Alternative Assumptions About Future Deficits
|CBO Current Law Deficits
|| - $3.421 trillion
||- $8.110 trillion|
|Draw down war spending||$219 billion||$572 billion|
|Interest savings||$16 billion||$109 billion|
|PAYGO Baseline Deficit||- $3.186 trillion||- $7.429 trillion|
|Repeal sequester||- $350 billion||- $874 billion|
|Extend normal tax extenders||- $217 billion||- $466 billion|
|Extend refundable credit expansions||- $30 billion||- $165 billion|
|Enact a permanent doc fix||- $51 billion||- $124 billion|
|Extend bonus depreciation||- $195 billion||- $244 billion|
|Net interest costs||- $56 billion||- $286 billion|
|No-Offset Scenario||- $4.085 trillion||- $9.588 trillion|
Source: Congressional Budget Office April 2014 baseline, CRFB calculations. Savings are positive. Costs and deficits are negative.
The budget estimates in the Congressional Budget Office's (CBO's) baseline released today may have looked largely the same as in February's report, but CBO actually made significant revisions to their cost projections of the coverage provisions in the Affordable Care Act.
Today's projections include a downward revision of $172 billion over ten years to estimates of the health exchange's premium subsidies and a $104 billion downward revision to the net cost of coverage provisions (coverage expansions net of closely related revenue sources like the individual and employer mandates).
Incorporating this year's data on premiums and plan structure in the exchanges on its estimates beyond 2014 for the first time, the revision to the exchange subsidies is almost 15 percent of the program's previously estimated spending and represents the only significant revision to ACA estimates since when CBO incorporated the effects of the Supreme Court decision. Similarly, CBO now projects that "the average premium for the benchmark silver plan in 2016 of about $4,400 is 15 percent below the comparable estimate of $5,200 published by CBO in November 2009."
Previously, CBO estimated that the federal government would spend $1.2 trillion over ten years on exchange plan subsidies; now, it expects spending to total $1.03 trillion over that same period. The agency arrived at this conclusion by fully incorporating lower than expected 2014 premiums into estimates going forward – in February, they only incorporated the effect in 2014 – and by further analyzing the characteristics of the plans offered in the health exchanges. CBO explains:
Previously, CBO and JCT had expected that those plans’ characteristics would closely resemble the characteristics of employment-based plans throughout the projection period. However, the plans being offered through the exchanges this year appear to have, in general, lower payment rates for providers, narrower networks of providers, and tighter management of their subscribers’ use of health care than employment-based plans do.
CBO and JCT anticipate that, as enrollment in the exchanges rises, the differences between employment-based plans and exchange plans will narrow. Therefore, projected premiums during the next few years were revised downward more than were premiums for the later years of the coming decade.
Also contributing to the lower cost of the coverage provisions was a $12 billion increase in the projected revenue from the excise tax on high-cost insurance (the "Cadillac tax"). This increase came from an upward revision to CBO's projections of the number of active (non-retiree) employees receiving employment-based health insurance.
Those downward revisions were partially offset by reductions in associated revenue. Individual and employer mandate penalties are now expected to be lower by about $20 billion combined due to a greater amount of people gaining coverage and due to the partial delay in the employer mandate for 2015. In addition, the greater prevalence of employment-based insurance projected means that more employees are getting tax-free health insurance through their employer rather than wages, which reduces income and payroll tax revenue by about $50 billion over ten years. Finally, the ACA's temporary risk corridor program is now expected to be budget-neutral rather than save $8 billion, as a result of an administrative rule change.
|Net Cost of ACA Coverage Provisions|
|2015-2024 Cost/Savings (-)|
|February 2014 Estimate||$1,487|
|Risk Corridors (Net)||$8|
|Individual Mandate Penalty||$6|
|Employer Mandate Penalty||$12|
|April 2014 Estimate||$1,383|
Although there has been a lot of talk about ACA enrollment with the slow start to the exchanges and the surge in late March, CBO's estimates of coverage have remained largely unchanged. The agency now expects about 1 million fewer people to be uninsured annually, although it has revised downward slightly its estimates of employer coverage overall (due to fewer retirees staying on employer plans) and revised upward somewhat its estimate of enrollment in the exchanges. When the ACA has fully taken effect, the legislation is projected to reduce the number of uninsured people by 26 million per year.
Interestingly, given the recent RAND study estimating that employer coverage has increased by 8.2 million from September 2013 through March 2014, CBO still projects basically no change in total employer-based coverage from 2013 to 2014 (steady at 156 million).
As noted in the introduction, CBO's estimate of the coverage provisions had remained remarkably stable over time since the law's passage, the lone exception being the NFIB v. Sebelius Supreme Court decision reducing Medicaid spending by effectively making the expansion optional. Today's report is actually the first time that technical (rather than statutory) changes have made a significant change in the cost of the coverage expansion. The table below shows how those estimates have changed over time in the 2014-2019 period, the period of time that is common to all the projections.
|Net Cost of ACA Coverage Provisions Over Time|
|2014-2019 Cost (Billions)||2019 Cost (Billions)||2019 Reduction in Uninsured (Millions of People)||2019 Cost per Newly Insured|
|March 2011 Baseline||$775||$158||-33||$4,800|
|July 2012 Estimate (post-SCOTUS decision)||$702||$144||-29||$4,975|
|February 2013 Baseline||$697||$149||-27||$5,525|
|May 2013 Baseline||$710||$151||-25||$6,050|
|February 2014 Baseline||$700||$151||-25||$6,050|
|April 2014 Baseline||$659||$144||-26||$5,550|
Source: CBO, CRFB calculations
Note: Relative sources of coverage for the newly insured are not necessarily the same in each estimate.
2019 cost per newly insured rounded to the nearest $25.
This table has been updated from the original posting to include 2019 data.
In advance of the release of their analysis of the President's budget, the Congressional Budget Office (CBO) has updated their budget baseline for fiscal years 2015-2024. While the newest projections are a slight improvement over their previous estimates in February, they still show debt on a clear upward path as a share of GDP starting in 2018 and likely continuing over the long term.
In the latest baseline, debt declines from 74 percent in 2014 to 72.4 percent by 2017 before rising to 78 percent by 2024. This is a similar path to the February outlook, in which debt reached 79 percent by 2024. This upward path would likely continue thereafter as health care cost growth and demographics cause increased spending on entitlement programs.
Over the next ten years, CBO projects deficits to total $7.6 trillion, or 3.4 percent of GDP. This is $285 billion lower than the $7.9 trillion, or 3.5 percent of GDP, deficits in the February projections. Spending totals 21.5 percent of GDP over ten years, while revenue totals 18.1 percent of GDP. Because many of the changes in this baseline are on the spending side, it is slightly lower than it was in February while revenue remains similar. In terms of the path, spending stays around 21 percent of GDP until 2019 when it gradually increases to 22.1 percent by 2024.
|Budget Metrics in CBO's Updated Baseline (Percent of GDP)|
The changes in this baseline since February reflect downward revisions to health care spending. The largest change is a $186 billion ten-year downward revision to the cost of the exchange subsidies and related spending, due to the lowering of projected premiums in the exchanges. Based on recent trends in spending growth and an analysis of spending on prescription drugs for low-income beneficiaries, Medicare outlays have been revised down by $98 billion over ten years, with $56 billion of that coming from Part D. Medicaid outlays are up by nearly $30 billion due to higher projected enrollment among other effects. Supplementary Nutrition Assistance Prorgram (also known as food stamp) spending is down $24 billion due to lower projected average benefits. Discretionary spending is down $23 billion from lower spend-out rates for certain military spending.
Revenue is largely similar to the February projections but has been revised down slightly by $56 billion over ten years. That mostly reflects a higher than expected number of people getting health insurance through their employer, which reduces the tax base. There are also some offsetting revisions to payroll taxes.
|Changes in CBO's April Baseline (billions)|
|2015-2024 Savings/Costs (-)|
|February 2014 Deficits||-$7,904|
|Exchange Subsidies and Related Spending||$186|
|Food Stamps (SNAP)||$24|
|Individual Income Taxes||-$7|
|April 2014 Deficits||-$7,618|
^Largely reflects changes in the projected size of employment-based health insurance
Although CBO's projections show slight improvement from February, February's numbers showed significant deterioration from previous baselines. The fiscal outlook necessitates action to put debt on a downward path as a share of GDP over the long term. On Thursday, when CBO releases their analysis of the President Obama's Budget, we will see the extent to which his budget achieves this goal.
After allowing taxes to rise on the highest 1 percent of earners at the beginning of last year, many Democrats patted themselves on the back for raising $620 billion of revenue for deficit reduction, while many Republicans declared that the tax increase fulfilled any future need to raise revenue. Yet little by little, Congress is working to give all that revenue back by continuing to extend a host of temporary tax breaks, primarily for businesses.
A recent editorial in The New York Times rightly criticized the Senate Finance Committee extenders package as "hypocritical tax cuts" that would add to the deficit even as lawmakers claim to follow pay-as-you-go rules when it comes to other policy changes. The editorial noted that if Congress continues to pass extenders year after year, "in effect, they will 'give back' more than half of the revenue from the fiscal-cliff deal of 2012, when tax rates were raised on very high income taxpayers."
The editorial makes a good point, but dramatically understates the cost of the extenders by relying on the per-year cost of the two-year package. Indeed, if the Senate Finance package were passed and then continued on a permanent basis, the revenue loss of tax extensions would outweigh the gains from the upper-income tax increase for the entire next decade. About 80 percent of that revenue loss would go to businesses.
From 2013 through 2024, the upper-income tax increases from the fiscal cliff deal will raise about $815 billion and reduce deficits by almost $1 trillion, including interest, relative to a current policy baseline where all the tax cuts were extended (in other words, lawmakers left out $1 trillion of additional costs when they chose not to extend all of the 2001/2003 tax cuts). The New York Times likely took the $85 billion two-year cost of the extenders package and multiplied it by five to get a ten year cost. However, included in the package is bonus depreciation, which we've explained before costs many times more to extend permanently than when it is continued for another year or two. By our calculation, if the Senate Finance Committee package is passed and continued permanently, the extenders will cost $830 billion in lost revenue from 2013 through 2024, or almost $1.05 trillion including interest.
In other words, the cost of these extensions would entirely wipe out the gains from the recent tax increases and then some. About $110 billion of these tax cuts go to individuals, while more than $700 billion goes to businesses – including $300 billion for bonus depreciation alone. Interest contributes the remainder of the costs.
Chairman Wyden has said this is the last tax extenders package he intends to enact and that he plans on dealing with extenders as part of tax reform. But even if this turns out to be true (as we hope it does), how Congress deals with tax extenders now could affect the baseline used to evaluate tax reform proposals. Continuing the extenders without offsets risks setting the precedent that no such offsets are needed and thus lead to a much lower revenue baseline as the starting point for tax reform.
With growing health care costs, an aging population, and unsustainable rising debt levels, the country cannot afford to cut taxes without financing the costs. The revenue claimed from the fiscal cliff deal made a small but important contribution to improving our overall fiscal situation. It would be a shame to allow that to be undone, especially through temporary extensions that appear to be cheap because they are enacted only one year at a time. These tax extenders risk becoming debt by a thousand tax cuts.
*: The $1,040 billion cost of continuing to extend the expired tax cuts includes the $75 billion cost of continuing the tax extenders in the fiscal cliff deal, $85 billion cost of extending the provisions for two years as proposed in the Senate Finance Committee's bill, $665 billion cost if these provisions are extended permanently, and interest costs.
Read an explainer about what the tax extenders are here.
In our discussion of House Budget Committee Chairman Paul Ryan's (R-WI) budget, we talked about one area where the budget actually boosts spending: defense. The budget repeals the sequester for defense spending, shifting those cuts to the non-defense side while further reducing non-defense spending. However, the committee report for the budget resolution tightens the caps by clarifying the definition of what can count as war spending.
First, some background is necessary. One concern about the defense caps is the fact that they only apply to "base" defense spending; war spending is uncapped. There are two issues with that. We have written extensively on the first problem: lawmakers can put caps on war spending and claim savings for a policy that is already in place. In addition, as long as there is no war spending cap, they can also shift money from the base budget to circumvent the defense cap. In the latter case, we previously noted how the FY 2014 omnibus bill included a reduction in the base defense budget in operations and maintenance accounts and other accounts compared to the President's request to comply with the statutory cap on defense discretionary spending and a corresponding increase in the war category (Overseas Contingency Operations), including funding for many of the same accounts that were cut in the base spending bill.
Short of putting OCO caps in place (and not counting the savings), tightening the definition of what can go into the OCO pot can help prevent this type of abuse. Ideally, Congress would codify statutory criteria for funding with OCO designation, potentially based on the criteria developed by OMB for administration requests for OCO spending. Absent formal criteria, lawmakers should subject funding with OCO designation to careful scrutiny to ensure it isn't actually base defense spending.
During the House Budget Committee mark up of the budget resolution, Ranking Minority Member Chris Van Hollen (D-MD) offered an amendment intended to prevent the use of the "Overseas Contingency Operations" designation to circumvent discretionary funding caps. Congressman Van Hollen withdrew his amendment in exchange for an agreement to include report language on this issue in the committee report. The Budget Committee report accompanying the budget resolution includes the following language about use of the OCO designation:
The Budget Control Act of 2011 allows the discretionary caps to be automatically increased for funding designated for OCO/GWOT, which has created a loophole that could be used to circumvent discretionary funding caps. For FY 2014, Congress and the President enacted an appropriations bill that provided $7.4 billion more than the Administration requested for OCO. Abuse of the OCO/GWOT cap adjustment is a backdoor loophole that undermines the integrity of the budget process. The Budget Committee will exercise its oversight responsibilities with respect to the use of the OCO/GWOT designation in the FY 2015 budget process, and it will oppose increases above the levels the Administration and our military commanders say are needed to carry out operations unless it can be clearly demonstrated that such amounts are war-related.
The report also states that non-Pentagon programs that are not directly related to the war effort should be kept in the base budget, and that OCO spending should be limited to Afghanistan, Pakistan, and Iraq instead of being expanded to include certain other conflict areas.
These steps are important in maintaining the integrity of the base defense spending caps. Shifting funds from the base budget to OCO allows appropriators to circumvent the spending caps and provide spending in excess of the caps without the threat of a sequester to bring spending back in line. Following the Pentagon's (and related agencies') requests for OCO spending and making sure that unrelated spending does not make its way into OCO would prevent lawmakers from gimmicking their way out of budgetary discipline.
Congressmen Ryan and Van Hollen are to be commended for working together to express a bipartisan commitment to bringing honesty and transparency to the use of the OCO designation. We hope they follow through on this commitment and use the oversight authority of the Budget Committee to ensure the OCO designation is not abused. They should oppose efforts to use the OCO designation for spending that is not war related, or to increase OCO spending above the levels requested by the administration and military leaders.
The enormous cost of providing long-term care represents a major challenge for America's health system, and a major funding challenge for Medicaid, the public program that covers much of the cost of long-term care. To identify a solution to this challenging problem, the Bipartisan Policy Center (BPC) recently launched a Long-Term Care Initiative (LTCI) to find a politically and fiscally viable path forward to improve the financing and delivery of long-term services and supports (LTSS). The report released Monday accompanied by a panel discussion of the initiative's leaders detailed the LTSS problem and BPC's approach toward finding policy options, which they will release later this year.
Currently, paying for long-term care (such as in-home assistance and nursing homes) presents a major challenge for many families, draining the savings of many seniors until they qualify for low-income assistance through Medicaid. The costs place a burden on families who struggle to afford necessary care, states, and the federal government. Medicaid spends over $100 billion annually on LTSS. Family and friends acting as unpaid caregivers also provide services each year worth more than $450 billion, but the cost of these unpaid services is not accounted for in total LTSS spending.
Even as expensive as the current system is, the costs of long-term care are set to grow dramatically if current demographic and health care cost trends continue. By 2050, the report highlights that the number of Americans who will need LTSS is expected to be 27 million, more than double the 12 million in 2010. Costs are also expected to rise from 1.3 to 3 percent of GDP. Acting now to reform the long-term care system, both delivery and payment methods, can help to get costs under control before they become overwhelming.
Reform is complicated for a number of reasons. LTSS has many stakeholders, including those who require services, their family, paid caregivers, providers, private insurers, states, and the federal government. Additionally, there is significant diversity among the population of individuals who require LTSS. They are not all elderly, in fact 44% of the population is under age 65. The type of care required varies significantly across this population, which results in wide variation in the level of assistance required.
Source: Bipartisan Policy Center
There is substantial debate over the best path forward. Expansion of the limited private insurance market is one possibility; however, the market would require significant reforms and government intervention to work efficiently. Another option is public assistance expansion through Medicaid. Both face strong headwinds of resistance.
In their paper released yesterday, BPC stated they seek to:
"(1) identify the most pressing problems associated with the current system of providing LTSS in the United States; (2) identify the barriers to finding a sustainable means of financing and delivering LTSS; and (3) outline some of the more critical policy questions that will guide BPC’s work in the coming months. Given the disparate populations in need of LTSS, and the challenges both in terms of politics and budgets, a solution to financing LTSS will likely require a series of policy options—including public and private options as well as long-term and short-term options—and will require legislative and regulatory changes. In the coming months, BPC leaders, staff, and senior advisors will reach out to experts, stakeholders, and policymakers and, later this year, present bipartisan policy approaches that we hope will move the dialogued forward. Importantly, as in A Bipartisan Rx, BPC will also work with economists and actuaries to estimate costs and savings associated with these policy solutions. We believe that developing a realistic, politically viable set of policy options is not only achievable, but is also imperative to relieve the pressure on persons who need LTSS, their families and caregivers, and local, state, and federal governments."
Given that the financial and social costs of long-term care will only continue to grow, BPC's initiative will begin much needed debates and conversations. We look forward to their policy options later this year.
Budgets for the upcoming fiscal year have been released from the White House, House Republicans, House Democrats, the Republican Study Committee, the Congressional Progressive Caucus, and the Congressional Black Caucus. All of them offer competing visions for the size and scope of government over the next decade.
Encouragingly, all of the budgets include some deficit reduction and would result in lower debt as a percentage of Gross Domestic Product (GDP) in 2024 than today, ranging from the Congressional Black Caucus that only has debt declining by 1 percent of GDP over the decade to the Republican Study Committee, which dramatically slashes the debt over ten years.
However, the numbers above are not strictly comparable, because the percentages are based on different-sized economies. Many of these plans include significantly different projections based on assumptions about how their policy proposals would affect economic growth. For instance, the House Democrat's budget and the President's assume immigration reform has been signed into law, which CBO estimated could increase GDP in 2023 by 3.3 percent and 5.4 percent by 2033. The House Republican budget included savings stemming from assumed economic feedback due to the impacts of lower deficits on interest rates and revenues, known as a "fiscal dividend." The same fiscal dividend could apply to the notable savings in the other budgets, although the others did not choose to incorporate those savings. In order to compare these budgets, CRFB also calculated what these budgets would look like if they all used the same baseline projections for the amount of economic growth.
If the budgets are re-estimated using the same baseline for economic growth, three of the budgets look less optimistic: 1) debt under President Obama's budget would stay relatively constant at 73 percent of GDP, rather than fall to 69 percent of GDP; 2) the House Republican budget would produce debt more than 1 percent of GDP higher than they projected; and 3) debt under the House Democrat's plan would be nearly 2.5 percent of GDP higher. The three other budgets (the Congressional Black Caucus, Republican Study Committee, and Congressional Progressive Caucus) would remain the same because they did not rely on dynamic scoring to achieve deficit reduction.*
as if they were measured under CBO's baseline, excluding gains from economic growth and fiscal
dividends. Current law baseline represents CBO's current law baseline plus a drawdown of war spending.
The Republican Study Committee budget includes the most deficit reduction ($7.4 trillion of net savings), sufficient to balance the budget in four years. The other budgets find smaller amounts of deficit reduction, but all would decrease the debt in 2024 relative to where it is today.
|Deficit Reduction in FY 2015 Budgets (2014-2024)
||New Savings||New Costs||Net Deficit Reduction|
|Republican Study Committee||$7.9 trillion||$0.5 trillion||$7.4 trillion|
|House Republicans||$5.6 trillion||$0.5 trillion||$5.1 trillion|
|Congressional Progressive Caucus||$5.9 trillion||$3.6 trillion||$2.7 trillion|
|Congressional Black Caucus||$2.1 trillion||$0.9 trillion||$1.2 trillion|
|Obama Budget||$2.0 trillion||$1.3 trillion||$0.7 trillion|
|House Democrats||$1.5 trillion||$1.0 trillion||$0.5 trillion|
*The Republican Study Committee did include a nod to dynamic scoring, suggesting that tax reform should be revenue-neutral on a dynamic basis (a provision we find troubling because it relies on uncertain estimates and could unintentionally worsen our fiscal situation). However, the RSC budget did not incorporate any growth estimates into their budget.
Just after House Democrats released their budget this week, the Republican Study Committee has come out with its own proposal to balance the budget in just four years. The budget reduces spending by $7.4 trillion over ten years relative to their baseline, which includes a war drawdown. By 2024, the budget produces a surplus of nearly $300 billion, or 1.1 percent of GDP. As a result, debt declines from 74 percent of GDP in 2014 to under 50 percent by 2024, and debt remains close to flat in nominal dollars over that period of time. Revenue adheres to the current law levels (around 18 percent of GDP) while spending declines from 20.5 percent of GDP in 2014 to 17.3 percent by 2024. The RSC budget gets its savings in a similar way to the Ryan budget, but it goes further in a number of areas.
The RSC budget repeals the Affordable Care Act's coverage expansions and replaces them with a standard deduction for purchasing health insurance, an expansion of Health Savings Accounts, tort reform, and other reforms. Like the Ryan budget, it block grants Medicaid, but freezes the grants at FY 2015 levels for ten years, saving almost $460 billion more than Ryan's proposal. On Medicare, it enacts cost-sharing reforms like those in one of CBO's health budget options. It also would convert Medicare to a premium support system starting in 2019 for new beneficiaries -- with premium subsidies based on the average plan bid -- and would raise the Medicare retirement age to 67 starting in 2024.
Unlike Ryan's and President Obama's budgets, the RSC budget attempts to address the funding shortfall facing Social Security. It would use the more accurate chained CPI for cost-of-living adjustments and increase the normal retirement age to 70, up from the currently scheduled 67. It would also address the looming Disability Insurance trust fund shortfall in 2016 by encouraging beneficiaries to return to work, updating medical eligibility criteria, requiring beneficiaries to work more in recent years, and by prohibiting unemployment insurance beneficiaries from also collecting DI.
Other Mandatory Spending
The RSC budget block grants and reduces food stamp funding, increases federal employee pension contributions, reduces Pell Grants, reduces agriculture subsidies, and reduces transportation spending, among other things.
Total discretionary budget authority is reduced below sequester levels, frozen at $950 billion through 2018 and allowed to grow at about 2 percent per year after that. Defense spending is funded at pre-sequester levels starting in 2016, leaving the remaining reductions to be made up through deeper cuts on the non-defense side. The budget also outlines many reductions in discretionary program funding to help meet the lower NDD caps.
The RSC budget directs the Ways and Means Committee to come up with a tax reform plan that reduces the top individual and corporate rates to 25 percent, reduces capital gains and dividends tax rates to 15 percent, repeals the estate tax, and replaces the Earned Income Tax Credit with a payroll tax exemption, among other changes. Its tax reform effort would target revenue-neutrality on a dynamic basis, which is concerning given the uncertainty of dynamically-estimated revenue.
The RSC budget adds yet another approach to reducing deficits and debt, being the most aggressive of the plans that have come out. We will continue to provide analysis of other alternative budgets as they are released.
Following House Budget Committee Chairman Paul Ryan's (R-WI) budget markup last week and floor debate this week, the Congressional Black Caucus budget released yesterday joined the Progressive Caucus and the House Democrats in their effort to offer alternatives to Chairman Ryan's budget. Their budget achieves $1.2 trillion in deficit reduction (not including war drawdown savings) over the coming decade keeping deficits between 2.5 and 3 percent of GDP.
Across the ten-year window, the budget has annual spending levels between 21 and 22 percent of GDP and revenue at about 18-20 percent. Unlike the House Democratic and Republican budgets, the CBC budget does not rely on dynamic scoring to improve their numbers. The CBC budget would put debt on a similar path to the House Democrats' budget, leaving it roughly stable at 72.7 percent of GDP by 2024.
A significant amount of the budget's deficit reduction is achieved through revenue increases totaling $2 trillion over the next decade. The budget, however, identifies $4.3 trillion in options to choose from in order to meet the budget's $2 trillion goal. These options include taxing capital gains and dividends as ordinary income, increasing the top rate to 45 percent, and limiting the deductibility of interest for businesses.
On entitlements, the budget states that with regards to Social Security and Medicare, "any savings derived from changes to these programs should be used to extend their solvency – not to reduce the deficit or pay for tax cuts for millionaires and billionaires." On Social Security, it supports switching to the faster-growing CPI-E (the Experimental Consumer Price Index for the Elderly) for cost-of-living adjustments and suggests raising the payroll tax cap, currently set at $117,000, to pay for it. It does not suggest specific changes to Medicare. The budget also proposes the creation of a public option for health insurance, which CBO estimated could save about $190 billion through 2024. This publicly run insurance option would compete with private insurers through the health insurance exchanges set up by the Affordable Care Act.
The CBC budget proposes new spending initiatives. It would permanently repeal sequestration and increase non-defense discretionary spending by an additional $885 billion over ten years on top of that. It would provide $100 billion for a direct employment program to be administered by the Department of Labor. Additionally, it proposes $230 billion in new infrastructure spending and $100 billion in funding for school modernization and supporting jobs for teachers, first responders, and law enforcement. It also increases funding for Head Start, raises the federal minimum wage to $10.10 per hour, and fully funds the current maximum Pell Grant level.
While this budget's deficit reduction is lower than in some other budgets, unlike the House Republican and House Democratic budgets, the CBC budget at least does not use dynamic scoring to claim further uncertain deficit reduction through economic feedback. Still, the budget does not achieve enough savings to put debt on a sustainable path, only barely stabilizing it by the end of the 10-year window.
Source: HBC, OMB, RSC, CPC, CBC
Congressman Reid Ribble (R-WI) and Congressman Mark Pocan (D-WI) introduced the Long-Term Studies of Comprehensive Outcomes and Returns for the Economy Act, or Long-Term SCORE Act, today.
The bill would allow any member of Congress to request a long-term score covering at least 50 years for any legislation that already received a traditional ten-year CBO score. To support this work, the measure would create a division of long-term scoring at CBO and authorize $5 million a year to fund it. The measure would provide the CBO Director some flexibility in determining the information provided and length of the long-term scores based on practical considerations.
The Congressional Budget Office (CBO) currently provides formal cost estimates for legislation within a ten-year window, although in rare cases CBO provides some supplementary information about the long-term impacts of legislation. For example, as we explained in our report Looking Beyond the Ten-Year Budget Window, CBO provided second decade analysis of the immigration reform bill that passed the Senate last June.
However, the ten-year window measured by CBO often does not provide a complete picture and is utilized by lawmakers to skirt fiscal responsibility by hiding the true deficit impacts of legislation in the eleventh year and beyond. For example, the unemployment insurance extension that passed the Senate recently contained a pension smoothing gimmick that hides costs in the out years by changing the timing of obligations without changing the magnitude. Alternatively, policymakers pull savings scheduled in the out years into the budget window, as Congress did in the recent SGR patch, by moving cuts scheduled in 2025 to 2024. Changes to Roth IRA accounts are another trick used by lawmakers to create savings inside the budget window, even though the changes are paired with costs outside the budget window. This device was used in different ways in the fiscal cliff deal and Chairman Dave Camp’s (R-MI) recent tax reform proposal.
You can find an overview of some of these gimmicks in our chartbook: Everything You Need to Know About Budget Gimmicks in 8 Charts.
The legislation could encourage lawmakers to focus more on the long-term costs and benefits of legislation and create an incentive to pursue policies that improve our long-term fiscal outlook. As CRFB President Maya MacGuineas stated in an article about this legislation “There’s such a bias right now toward the short term, this is a really important step. A long-term analysis would be good both for fiscal issues in the budget and promoting smart investments and policies that would grow the economy.”
In addition to preventing the gimmicks highlighted above, long-term scoring could shine light on policy changes with upfront costs and long-term savings. For example, Health Affairs recently noted that spending on preventative care for diabetes patientscreates the most savings outside the ten-year budget window.
Further, long-term scoring could provide useful information about policies that produce additional savings outside the ten-year window. The premium support proposal, Medicare age increase, and cost sharing reforms in the Ryan Budget begin late in the ten-year window and are thus given only partial credit in a traditional ten-year score. Similarly, the cost sharing reforms in President’s Budget do not begin until 2017 and would only apply to new beneficiaries, resulting in much greater long-term savings than appears in a traditional ten-year score.
It is important to note that while the bill would provide lawmakers with additional information about costs and savings outside the ten-year window, those impacts would not be allowed to be used to offset impacts inside the window for the purpose of PAYGO or other budget rules.
The Bottom Line
We support efforts to provide policymakers with as much information as possible when considering the budgetary impacts of legislation, and additional information about the long-term fiscal effects of legislation is particularly important given our long-term fiscal challenges. The bill acknowledges the challenges in preparing long-term estimates by providing for additional funding for CBO and giving CBO flexibility to judge what information can practically be provided. But even recognizing the challenges and shortcomings in long-term estimates, additional information about the long-term budgetary effects of legislation will make a valuable contribution to the legislative process.