The Bottom Line

October 25, 2013
A Fair Trade for Entitlement Reform Includes Increased Revenue

Yesterday, CRFB board member and former Senate Budget Committee argued in the Washington Post that ultimately, additional revenue through comprehensive tax reform will be needed along with entitlement reforms to put the budget on a sustainable path. Responding to a Washington Post editorial, Conrad stated that no part of the budget can be excluded in these upcoming fiscal negotiations:

The Post’s Oct. 20 editorial on the budget challenge [“A fiscal quid pro quo”] made important points but was way off-base on the issue of revenue. It suggested that a fair trade would be reductions to the “sequester” budget cuts in exchange for reforms to Medicare and Social Security and said that Democrats should not insist on additional revenue because that’s a non-starter with many Republicans. Democrats would make a serious mistake by following that advice.

As Conrad explains, the country needs more revenue given our fiscal path, along with entitlement and tax reform. But it's worth noting that new revenues have often been included in comprehensive tax reform. Not only could tax reform help get our fiscal house in order, but it could also help economic growth. Writes Conrad:

Tax reform should be part of any budget deal. Tax reform is necessary to unlock the full potential of our economy. The current tax system is not fair and damages U.S. competitiveness. A five-story building in the Cayman Islands claims to be home to more than 18,000 companies. Is it the most efficient building in the world? No! That and other tax scams cost our country more than $100 billion each year, the Senate Permanent Subcommittee on Investigations has found.

If we don’t fix the revenue side of the equation at the same time as we repair Social Security and Medicare, it will never happen. To suggest, as The Post does, that Democrats should trade adjustments to the sequester for reforms to these programs assumes that the sequester affects only Democratic priorities. More than half of the $1.2 trillion in sequester cuts are to defense, long a Republican priority.

We've known for a while now that solving our debt problem would require tough choices and sacrifices from both parties. Lawmakers have taken advantage of most of the easy policies, so even more modest plans will need to look at all parts of the budget. Concludes Conrad:

A mini-“grand bargain” would require all of these elements: changes to Social Security and Medicare to ensure their solvency for future generations; a modest increase in revenue so all parts of society participate in getting our country back on track; and changes to the sequester cuts that force nearly all of the deficit savings on less than 30 percent of the budget.

We can do this, but everyone must be prepared to give a little so that our nation can gain a lot.

Click here to read the full op-ed.

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

October 25, 2013
Policy Saves Nearly 85 Percent Less

Yesterday, the Congressional Budget Office (CBO) dramatically lowered its estimate of savings if policymakers chose to increase the Medicare eligibility age from 65 today to match Social Security's full retirement age of 67. Last year, CBO estimated that increasing the age would generate $113 billion in savings over 10 years. They've reduced that estimate by nearly 85 percent (their estimate of the savings to Medicare dropped by roughly 60 percent and their estimate of new spending remained similar), and now say that raising the age will result in only $19 billion in savings.

The reason for the dramatic change stems from CBO taking a closer look at the group of people who would be affected by the change — 65- and 66-year olds who would have to wait until they turned 67 to claim Medicare, instead of starting the program at 65. To estimate the cost savings to Medicare for the 65- and 66-year olds whose enrollment would be delayed under this proposal, CBO previously looked at all 65- and 66-year olds in Medicare, including those who are in the program because they are disabled or suffer from end-stage renal disease (ESRD) and would not be affected by this proposal. Beneficiaries with disabilities or ESRD, however, require extensive care, are less likely to have access to employer-provided health insurance, and are far more expensive to cover than the average 65- or 66-year old. 

In updating their analysis, CBO honed in on only the beneficiares who would be affected by the change -- the 65-year olds enrolling for the first time. This group is much healthier, and usually still has health coverage from their employer. In these cases, a person's employer-provided insurance still pays most of the costs, and Medicare is usually only a secondary payer. Providing Medicare to these folks is not nearly as expensive as for enrollees with disabilities or ESRD, and therefore raising the Medicare age so they are not covered does not save nearly as much as previously thought.

Raising the eligibility age for Medicare would also increase spending on Medicaid and exchange subsidies, but "CBO's estimate of the extent to which this option would increase federal spending for Medicaid and exchange subsides has not changed significantly."

Breakdown of Estimate for Raising Medicare Age (billions)
  2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2023
Medicare $0 $0 -$1 -$3 -$4 -$6 -$8 -$11 -$14 -$17 -$64
Other Health $0 $0 $1 $2 $3 $4 $6 $7 $8 $10 $41
Revenue $0 $0 $0 $0 $0 $0 $1 $1 $1 $1 $4
Total $0 $0 $0 -$1 -$1 -$1
-$2 -$3 -$5 -$7 -$19

Source: CBO
Note: Negative numbers denote deficit reduction

CBO's revision shows the value of closely examining and re-examining policy changes, and highlights the uncertainty of all budget estimates. This also reinforces the need to be conservative in budget assumptions and to work to put the debt on a clear and robust downward path.

October 24, 2013

With a deal on the appropriations bill last week, the government has been reopened and a default has been avoided. But the reality is that lawmakers do not have too long before the next budget deadlines draw near.

The budget conference committee has set an informal deadline on December 13 to report its recommendations to Congress. While there is no penalty for missing this deadline, symbolically it serves as our next "fiscal speed bump." On January 1, Medicare provider payments will be cut by 24 percent unless a "doc fix" is enacted, the farm bill will expire and prices will revert back to 1949 law, the unemployment benefit expansion will expire, and some "tax extenders" will sunset. While not quite the fiscal cliff we saw last year, Congress clearly has work to do.

We could also find ourselves back in a government funding and debt ceiling debate in early 2014. The continuing resolution will expire on January 15, at the same time a so-called "second sequester" will go into effect on non-exempt other mandatory spending and Medicare spending. While the debt ceiling is reinstated on February 8th, extraordinary measures should be able to prevent a default until late Febraury or early March, although the exact date is uncertain.

Of course, all of these are manageable if lawmakers can start budgeting and stop the crisis-to-crisis cycle we've seen over these past few years. This is why the budget conference beginning next week is so important. Hopefully, lawmakers can use this opportunity to come together and deal with these deadlines in a fiscally-responsible way.

October 24, 2013

This is the twelfth post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Last week, we wrote about intangible drilling costs, a tax break for companies in extractive industries.

The United States is the only major industrialized nation that taxes citizens on their worldwide income. If an American lives abroad, they owe taxes to both the country they are living in and the United States, but they can claim a credit to avoid double taxation and pay whichever is higher.  All other developed countries do not tax their citizens abroad—those citizens only owe tax to the country they are living in.

The foreign earned income exclusion, sometimes referred to as Section 911, allows U.S. citizens and resident aliens to exclude the first $97,600 (indexed for inflation) of foreign earned income, so that money is only taxed by the country of residence, not the United States. There is also a related exclusion for housing allowances paid by an employer (or a deduction for self-employed housing expenses), which are limited to 30 percent of the income exclusion.

These benefits are in addition to the foreign tax credit that prevents the same income from being taxed by two countries, which is not considered a tax expenditure. Federal employees do not benefit from these exclusions, but they do get a separate set of tax benefits. Federal employees are generally not taxed by other countries and pay tax only to the United States, although amounts recieved for cost-of-living, housing, and travel are excluded from income.

The foreign earned income exclusion is designed to prevent a U.S. taxpayer who moves to a high-cost country from paying more taxes than a similarly situated taxpayer in the United States, since the standard deductions are not adjusted for a higher cost country. The taxpayer living overseas is likely to have to have a higher income and higher expenses to obtain the same quality of life. The exclusions do not matter to a U.S. citizen living in a high-tax country, since they earn enough foreign tax credits not to pay any U.S. tax. However, U.S. citizens in low tax countries could pay little to no income tax due to these exclusions.

The income exclusion's parameters and limit have changed numerous times since its introduction in 1926. From then until 1962, the exclusion was unlimited, after which it was set at $20,000 in the Revenue Act of 1962. The limit was changed numerous times in the 1980s, eventually settling at $70,000 as set in the Tax Reform Act of 1986. The Taxpayer Relief Act of 1997 called for the limit to be indexed for inflation, a policy that went into effect in 2006.

How Much Does It Cost?

According to the Joint Committee on Taxation, the income and housing exclusions will cost $6 billion in 2014, or approximately $90 billion over the next ten years. Most of that cost (84 percent) is from the income exclusion. The Office of Management and Budget has a similar estimate: $6 billion in 2014.

A JCT score of the 2010 Wyden-Gregg tax reform bill estimates that repealing the exclusions would raise $69 billion from 2011-2020. The Congressional Progressive Caucus estimates repeal would save $75 billion in the current 2014-2023 window.

Who Does It Affect?

Obviously, the exclusions are for U.S. citizens who live for an extended period outside the U.S. In terms of the distributional effects, those who benefit from the exclusions have much higher income on average than the overall population. Using IRS data, Eric Toder of the Tax Policy Center finds that in 2006, the average income for someone who used the exclusions was $170,000, compared to the overall average of $58,000.

Average Income per Tax Return by Adjusted Gross Income, 2006

Source: TPC
Note: X-axis represents adjusted gross income, while Y-axis represents income with the FEIE added back in.

In terms of geographical location, in 2006, there were $20 billion in exclusions/housing allowances claimed, with the most coming from Asia ($8.6 billion, about one-quarter coming from Iraq and Japan). The second most came from Europe ($6.6 billion), and the third most came from other North American countries ($1.8 billion). Other regions/continents accounted for less than $1 billion each.

Source: IRS

What Are the Arguments for and Against the Exclusions?

Proponents of keeping the foreign earned income exclusion and housing allowance argue that the provisions are necessary to align U.S. taxation with that of other industrialized nations who do not tax their citizens who live abroad. They also argue that they do not benefit from U.S. government services and so should not pay for them. Proponents also point out that exclusions adjust for higher costs of living abroad and level the playing field for U.S.-based multinationals that hire workers from home, since foreign expatriates working for a foreign multinational are not taxed by their home country. Further, they argue that reducing or eliminating the exclusion would make it more burdensome for U.S. citizens to conduct business or hold a job abroad, thus limiting the ability of U.S. owned businesses to compete. Finally, proponents claim that the exclusions help alleviate double taxation.

Opponents of the exclusion argue it is unfair to give Americans tax breaks for choosing to work abroad, subsidizing their lifestyle choice. Because many companies offer "tax equalization" packages promising employers that they will not pay any more tax overseas than they would pay in the United States, the exclusions subside employers sending employees overseas. They point out that U.S. citizens do still receive government benefits, such as through the U.S. military's presence abroad. They also say that the exclusions are an overly blunt way of correcting for the high costs of living abroad, since they also provide benefits to people living in countries with lower costs than the U.S.

What Are the Options for Reform?

The foreign earned income exclusion has been a frequent target for repeal in bills and other plans over the years. As an example, the Wyden-Gregg bill, Congressional Progressive Caucus budget, Simpson-Bowles plan, and Domenici-Rivlin plan all call for the exclusion to be eliminated. The President's submission to the Super Committee included the income exclusion as part of the 28 percent limit on certain tax preferences, thus limiting its benefit for taxpayers in the 33, 35, and 39.6 percent tax brackets. 

On the other side, in 2008, a group of House Republicans introduced legislation to make the foreign earned income exclusion unlimited. This would transform the U.S. tax code for individuals from a citizenship-based system to residence-based system, where only people residing in the U.S. would be taxed by the federal government. A variant on this idea from Bernard Schneider would apply an "exit tax" regime in place of the current system. This system would apply a tax on a person's property who takes residence abroad, after which they would be exempt entirely from U.S. taxation.

Of course, there are many other options for reform, including changing the limit amount, freezing it so it does not rise with inflation, or subjecting it to another broad-based tax expenditure limit other than the 28 percent limit.

Options for Reforming the Foreign Earned Income Exclusion (2014-2023)
Policy Savings
Repeal the income and housing exclusions $90 billion
Reduce exclusions by half $35 billion
Repeal the income exclusion $75 billion
Repeal the housing exclusion $15 billion
Limit the value of the exclusion to 28% $5 billion
Freeze the exclusion amounts so they cannot grow with inflation $5 billion
Make the exclusion unlimited -$10 billion
Replace the exclusion with an exit tax Dialable

Note: Estimates are based on available scores or very rough CRFB estimates.

Where Can I Read More?


While discussion of the international tax system usually focuses on how businesses are taxed, there is also a question of how individuals should be treated. The foreign earned income exclusion serves as a way to account for higher cost-of-living countries. However, it may not be the best way to reflect differences in cost of living, since it doesn't account for lower cost-of-living countries, and completely eliminates income tax liability for some U.S. citizens in low-tax countries. Lawmakers will have to decide whether the exclusion is worth keeping or whether it is worth scaling back or eliminating for deficit or rate reduction.

October 24, 2013

As part of the bipartisan deal to end the government shutdown and avoid default, a budget conference was established. The purpose of this conference is to reconcile the House and Senate budget resolutions passed earlier this year, and optimally reach an agreement on government funding levels and how to set the country on a fiscally sustainable long-term path.

Today, CRFB published a short primer on the budget conference, and how exactly it works. Below are just a few of the questions that the primer answers.

What is a budget conference?

A budget conference is a process by which the House and Senate reconcile the budget resolutions they have each separately passed to arrive at one budget that each chamber agrees to adopt.

Over what time period will the conference negotiate?

The conferees for the budget conference were named on October 16. When the conferees were named, the House and Senate both set a non-binding deadline for the conference to report its recommendations by December 13, about one month before the government funding bill expires on January 15, 2014. The Chairman and Ranking Members of the House and Senate Budget Committees had a preliminary meeting on October 17. The first official meeting of the full conference is expected to occur during the week of October 28.

How many people have to agree to the recommendations?

In order for the conference committee to offer recommendations, the proposal must be agreed upon by a majority of each chamber's representatives to the conference. In this case, 4 members from the House and 12 members from the Senate must agree upon the final proposal from the conference. If it obtains this support, it will then be sent to the Senate and House for a vote, where a simple majority will be required to pass the conference agreement as a budget resolution.

What is a budget resolution?

A budget resolution is a topline blueprint outlining intended revenue levels and spending by category for the coming fiscal year as well as future years. The blueprint does not mandate any specific policy changes and does not directly change government policy in any way. A concurrent budget resolution is not signed by the President and is not legally binding.

We hope that this Q&A will be a useful primer on the budget conference. Conferees should take advantage of this opportunity to reach an agreement about our long-term fiscal future, and put the nation on a sustainable path to reduce the deficit.

Click here to read the full Q&A.

October 23, 2013

The first official meeting of the conference committee is expected to occur sometime next week, at which point the conferees will begin attempting to reconcile the Senate and House budget proposals. Both budgets were passed with largely partisan support, so both Democrats and Republicans will need to look toward compromises over the next two months.

The good news is that the first point of agreement appears to be putting debt on a downward path as a share of the economy. Both the House and Senate budget proposals achieved this mark, though they go about this in markedly different ways. However, the House and Senate budgets used different baselines, so earlier in the year, we developed the comparison table below in order to measure savings from a consistent standard.

Against our CRFB Realistic Baseline, the House budget retains sequestration and calls for $2.7 trillion in health savings, $960 billion in other mandatory savings, and $250 billion in further discretionary savings, with $165 billion in revenue from letting the 2009 refundable tax credit expansions expire. On the other hand, the Senate budget would cancel sequestration and calls for $275 billion in health savings, $75 billion in other mandatory, and $380 billion in additional discretionary savings, with $810 billion in revenue. Not surprisingly, revenues and health care appear to be the main points of contention.

Finding compromise between the two budgets will be difficult, but we've seen in past negotiations that the parties may be closer to an agreement than might first appear. Hopefully, the conferees can capitalize on this opportunity.

October 23, 2013

Citizens for Tax Justice has released a new tax reform plan which eliminates some tax breaks and uses some of the revenue to cut the top rate and simplify some tax provisions. In total, they estimate the package would raise $2.4 trillion in revenue over the next ten years, or $2 trillion in permanent revenue when temporary effects of a few policies (like accelerated depreciation) are excluded. Much of this revenue comes from eliminating business tax expenditures.

On the individual side, the plan would combine the 33, 35, and 39.6 percent brackets into one 36 percent bracket, and heavily increase taxes on investment by taxing capital gains and dividends as ordinary income and repealing step-up basis for capital gains at death. It would also adopt President Obama's proposal to limit the value of certain deductions and exclusions to 28 percent, reducing their value for people in the 36 percent bracket. Some of the revenue raised is given back by increasing the standard deduction by one-third and repealing some individual provisions that add complexity to the tax code: the personal exemption phaseout, the Pease limitation on itemized deductions, and the Alternative Minimum Tax. In total, their individual reforms raise about $475 billion over ten years.

The business reforms raise the bulk of the revenue, and most of the policies come from the Wyden-Gregg reform bill. The largest policies are to repeal the deferral of taxation on foreign subsidiaries' income so corporations are taxed on their worldwide income. The plan would also repeal accelerated depreciation, reduce the corporate interest deduction by the amount of inflation, and repeal the domestic production activities deduction. In addition, the plan would include smaller policies from Wyden-Gregg like repealing certain oil and gas tax preferences and repealing the lower-of-cost-or-market accounting method. The business reforms would raise $1.5 trillion when temporary revenue effects are excluded. The report also includes two illustrative estimates for reducing the corporate rate to 32 and 30 percent but does not include them in their revenue estimates for the whole plan. Check out our corporate tax calculator to see more examples of combinations of rate reductions and tax expenditure eliminations.

Source: ITEP, JCT

CTJ's plan is a helpful contribution to the tax reform debate. It is very helpful that they chose to separate out the temporary effects from the permanent effects of the policies. Hopefully, lawmakers will be similarly informed when they consider a tax reform package, which will help them avoid gimmicks that raise short-term revenue but hurt our long-term deficit situation.

October 23, 2013

Years of failed budget negotiations have illustrated the political difficulties of a big budget deal. Neither political party is willing to touch their preferred part of the budget without significant concessions from the other side. However, there may be a way forward. In a blog post featured in the Hill, Jim Kessler and Gabe Horwitz suggest that tackling Social Security reform may be a way to break the logjam.

We've written about the cost of delay of waiting to reform Social Security. The program will be insolvent by 2033, and the longer that lawmakers wait to address our entitlement programs, the harder they will be to fix. As an example, achieving solvency solely through benefit cuts would require a 40 percent larger cut in 2033 than if it were enacted today. We've released the interactive tool the Social Security Reformer to illustrate how Social Security could be brought back into balance.

Kessler and Horwitz argue there are two reasons why Social Security reform could help lawmakers break through the political impasse:

First, there is more agreement on Social Security solutions among Democrats and Republicans than meets the eye. And second, a deal to fix Social Security may be the only way to make progress on every fiscal issue that concerns Democrats and Republicans—from sequester to the debt ceiling—providing an incentive for both parties to act.

The solutions in Social Security may be easier because there are a limited number of reform options. The bipartisan plans suggested by Bowles-Simpson and Dominici-Rivlin have laid out the broad outlines of reform, combining modest tax and benefit changes with protections for low-income beneficiaries. As Kessler and Horwitz argue, arriving at a solution on Social Security could lead to progress in other areas of the budget, like "ending sequestration, increasing public investments, and reforming the tax code."

With hundreds of billions of dollars of new revenue locked in to preserve Social Security, suddenly solutions to other vexing fiscal problems fall into place. The pressure to find significant new revenue through tax reform is dramatically lessened. Chain-weighting the Consumer Price Index creates billions in program savings and increased tax revenue. That money can be used to increase discretionary spending held captive under sequestration, meaning Democrats get new spending on investments without adding a dime to the deficit. Finally, the debt ceiling could be hiked substantially, because fixing Social Security has the added benefit of improving our long-range fiscal outlook by trillions of dollars.

Lawmakers should address Social Security soon, as the program becomes more difficult to reform the longer they wait. But now, there is an extra reason to reform Social Security. It could be the key to unlocking a budget deal that could finally put our national debt on a sustainable downward path.

Click here to try our Social Security Reformer.

October 23, 2013
Weekly Update on Budget and Fiscal Policy Developments and a Look Ahead

Shutdown Smackdown – The shutdown ended and a default was averted last week, but the fallout continues as voters express their displeasure with lawmakers through record-low approval ratings. A new poll says that 64 percent of Americans are pessimistic about Congress’ ability to deal with issues down the road because of the shutdown and debt ceiling fiasco. That could change if a budget deal can be reached that addresses our fiscal challenges and breaks the cycle of governing from crisis to crisis. However, voters aren’t hopeful that will happen; another poll says 72 percent aren’t optimistic that Washington will be able to avoid another budget crisis when the current agreement expires. There isn’t much time before we find ourselves on the brink of a shutdown and breaching the debt ceiling once again. The cost of the recent drama goes beyond denting the reputation of Congress. The economy took a hit as well, with Standard & Poor’s estimating a loss of $24 billion. With the rest of the government back to work, the Senate is taking this week off, but legislators have a lot of work ahead. Will Washington do the people’s business or will it be business as usual?  

Budget Conference Ramping Up – The conference committee formed by the deal ending the shutdown is preparing to get to work. Senate Budget Committee chair Patty Murray (D-WA) and House Budget Committee chair Paul Ryan (R-WI) met over breakfast the day after the deal and their staffs have been laying the groundwork to begin negotiations. They are set to meet, along with the ranking members of their committees, on Wednesday and the full conference committee is planning to conduct its first meeting on October 30. The committee has until December 13 to reach agreement. The Washington Post has some helpful info on the conference committee. 

Lots of Work Ahead – The continuing resolution funding the government expires January 15, 2014 and the extension of the debt limit expires February 7, though “extraordinary measures” by the Treasury Department will be able to prolong the date in which action will be required. While short-term deals are not the optimal way to run the country, historically they have often led to bigger budget deals. One of the main goals of the conference committee will be to replace the automatic, across the board cuts of the sequester that are unpopular with just about everyone. We offer some principles to follow in approaching sequestration replacement: at a minimum, don't worsen the deficit; replace mindless cuts with smart reforms; replace temporary savings with permanent deficit reduction; and aim for a permanent sequester solution. Achieving a real solution will require policymakers to work together and make some tough decisions, but as former Defense secretary and Office of Management and Budget director Leon Panetta said at a recent event hosted by our partners at the Campaign to Fix the Debt, “Hopefully, having been through this experience of a shutdown and the implications of not increasing the debt ceiling, that will be a sufficient enough incentive for them to now turn to governing.”   

Lots of Ideas and Support to Work With – The budget conference committee won’t be starting from scratch. Plenty of ideas have been put forward, including several budget proposals. As we point out, every budget put forth this year put the debt on a downward path, so any deal from the conference committee should do the same. In addition, Fix the Debt offers some principles through its Citizens’ Plan. And a new poll from Fix the Debt shows that there is broad public support for a comprehensive debt plan. Fiscal Commission co-chairs Erskine Bowles and Alan Simpson also offered ideas earlier this year in “A Bipartisan Path Forward to Securing America’s Future”. Now you can devise your own budget using a new tool based on their approach.    

Time for Tax Reform – Tuesday marked the 27th Anniversary of the signing of the Tax Reform Act of 1986, the last major reform of the tax code. It’s definitely time for change and the effort in Congress to modernize the tax code continues. Senate Finance Committee chair Max Baucus (D-MT) says his work with House Ways and Means Committee chair Dave Camp (R-MI) will proceed on a “parallel track” along with the work of the budget conference committee. The conference committee could boost their efforts by crafting budget reconciliation language allowing tax reform to be considered without the threat of a filibuster. There is plenty of room for reform. Follow our ‘Tax Break-Down’ series examining various tax expenditures that are ripe for change.  



Key Upcoming Dates (all times are ET)


October 23, 2013

  • House Armed Services subcommittee hearing on impact of continuing resolution and sequester on military acquisition and modernization at 3:30 pm.


October 30, 2013

  • Bureau of Labor Statistics releases September 2013 Consumer Price Index data.


November 7, 2013

  • Senate Armed Services Committee hearing on the impact of sequestration on national defense at 9: 30 am.
  • Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.


November 8, 2013

  • Bureau of Labor Statistics releases October 2013 employment data.


November 20, 2013

  • Bureau of Labor Statistics releases October 2013 Consumer Price Index data.


December 13, 2013

  • Date by which the budget conference committee must report to Congress


January 15, 2014

  • The continuing resolution funding the federal government expires
  • 2014 sequester cuts take effect
  • First set of IPAB recommendations expected


February 7, 2014

  • The extension of the statutory debt ceiling expires


October 22, 2013

On this day 27 years ago, President Ronald Reagan signed into the law the Tax Reform Act of 1986, which stands as the last major overhaul of the US tax system. The law serves as the ultimate example in this country of tax base-broadening and tax rate-lowering reform and is often cited as the inspiration for many tax reform plans today. The Act consolidated individual income tax brackets from 15 to 2, reducing the top individual rate from 50 to 28 percent and the top corporate rate from 46 to 34 percent. To help low earners, the standard deduction and earned income tax credit were increased and indexed for inflation.

In addition, a number of tax expenditures and other tax provisions were reduced or eliminated, including the deductibility of consumer interest (other than mortgage interest), the investment tax credit, the meals and entertainment deduction, and the state and local sales tax deduction. There were also many revisions to depreciation schedules, accounting methods, and other rules. Overall, the Act was revenue-neutral, with the individual tax system receiving a $120 billion tax cut over five years and the corporate side getting a $120 billion tax increase over the same period. According to the Joint Committee on Taxation, the Act in total was slightly progressive in terms of the distributional effect.

Last year, we pointed to a Third Way report showing how the tax code had changed since 1986. Some of the tax breaks that were eliminated have been re-instated in some form or another, while many other new tax expenditures have been enacted. In addition, while the American Taxpayer Relief Act resolved some of the temporary nature of the tax code, there are still a number of often narrowly-targeted "tax extenders" which are renewed every year or two en masse.

This time of year usually renews calls for a comprehensive overhaul of the tax code. This year was no different, as Dave Cote and Keith Stephens in the Arizona Republic called for reform to simplify the tax code, reduce economic distortions and lower rates. About the problems of our current code, the two wrote:

Our current tax code is needlessly complicated and globally uncompetitive. Our complex tax system has real consequences that cost real jobs and slow productivity. With so many arcane provisions in the code, companies often face perverse incentives to focus on reducing their tax liability to save money rather than engaging in some economy-expanding endeavor.

The 1986 Act can provide an example for lawmakers today, although given our debt situation we should be looking to make reform revenue-positive. They should also take a lesson in how long it took for the Act to come together. President Reagan originally called for his Administration to develop a tax reform plan in his 1984 State of the Union Address. The first iteration of the plan was released shortly after the 1984 election, and another version came out in May 1985. It took another year and a half before Congress was able to get a bill through as they worked out many policy aspects and political disagreements. Still, the effort showed that with enough commitment on the part of major stakeholders, a major reform plan can become reality.

While the tax-writing committees have been working diligently on compiling options and drafts on different parts of the tax code, it will take a while to  formulate a viable bill. However, as our Tax Break-Down series and our corporate tax calculator show, there are a lot of options already out there to reform the tax code and boost economic growth. Even if tax reform will be difficult, its potential for economic growth and deficit reduction is well worth it.

October 22, 2013

The Campaign to Fix the Debt has recently released the results of a new national telephone poll that found broad support for a comprehensive deficit reduction plan that includes tax reform, sequester replacement, and structural changes to Social Security and Medicare. The bipartisan poll was conducted by Anzalone-Liszt-Grove Research and Voter Consumer Research with 800 likely voters.

Voters clearly see the need for reform – the poll found that the budget deficit is tied with the economy as the number one issue for Congress to address.  This is a significant shift from a July CBS poll, which had the economy beating out the debt as a priority by 24 points.

Not surprisingly, respondents were initially resistant to Social Security and Medicare changes, with only 34 percent in favor of general entitlement reform in the abstract. But when the poll noted that any reforms would be phased in gradually, that support jumped to 55-35 percent. Entitlement reform as part of a comprehensive plan was even more popular -- 61 percent of voters responded favorably to entitlement reform alongside cuts to wasteful spending and increased revenue from closing tax loopholes.

The specific policies that could be included in a comprehensive deficit reduction plan all tested favorably.  Chained CPI, increasing the ages, means testing, and cost sharing reforms  polled with majority support in the context of including protections for low-income populations, cutting waste, and phasing reforms in gradually. Tax reform also polled very well, especially the idea of closing tax inefficient and unfair tax loopholes.

The chart below demonstrates the broad support for provisions that could be included in a "grand bargain" on fiscal issues.

This new poll is encouraging news as Congress prepares to begin the budget conference process. Lawmakers should heed this call from voters to enact a comprehensive deficit reduction plan that makes structural changes to ensure the solvency of Social Security and Medicare, overhauls or eliminates wasteful tax expenditures to promote fairness and simplicity, and replaces the across-the-board sequester cuts with more targeted reforms.

October 22, 2013

Yesterday, the Campaign to Fix the Debt unveiled its Citizens' Plan for lawmakers to consider over these next two months of budgetary debates. Lawmakers should take three steps: Stop the madness and end the crisis-to-crisis approach, start working together, and solve our debt problem by developing a comprehensive plan that would include entitlement and tax reform.

The release of the plan is fitting given most American's views on the budget outlook and the decisions that must be made:

The public is concerned about the debt, and is willing to accept the tough choices and the compromises needed to come up with a viable plan. We have a unique opportunity to take action with the current budget conference. What is required now is leadership.

The "Stop, Start, Solve" plan the Campaign puts forward would be a welcomed approach for most Americans. And there are models that lawmakers can follow when developing a comprehensive plan, like the recommendations from the Fiscal Commission, Domenici-Rivlin Deficit Reduction Task Force, and the Bipartisan Path Forward. Specifically, the Citizen's Plan calls for a plan that would:

  • Take steps to bring the debt down off of its current unsustainable path.
  • Replace some or all of the blunt mindless sequestration cuts with better targeted, longer-term reforms.
  • Significantly slow the growth of federal health care spending and improve the health care delivery system so that it is less of a drain on our economy and the rest of the budget.
  • Reduce and reform other areas of spending such as farm subsidies, federal employee retirement programs, and duplicative, wasteful, or low priority areas. We should also fix the way we measure inflation, by switching to the more accurate chained consumer price index.
  • Enact comprehensive tax reform by eliminating, reducing, and reforming tax preferences, lowering tax rates to grow the economy, and generating revenues.
  • Fix Social Security through a balanced plan or by establishing a bipartisan process on a separate track to restore the program’s financial health and strengthen it for future retirees and generations.
  • Address the debt ceiling either by increasing it or by fixing it on a more permanent basis, possibly by indexing it to a debt plan or to economic growth.
  • Grow the economy by implementing a thoughtful and well-targeted plan in a reasonable timeframe that allows the recovery to strengthen while dealing with the nation’s dangerous debt trajectory.

Of course, agreeing upon such a plan will be hard and require tough choices. But the problem requires that kind of leadership and the American people should demand action from our leaders:

Lawmakers should not be allowed to continue to use the same tired excuses that there is no time, it is too hard, or that the public does not want compromise. The public wants solutions. It wants to remove short-term crises in favor of long-term certainty and stability. It wants–and needs–true leadership.

Click here to read the release.

October 21, 2013

As the dust begins to clear from this month's political battle over the debt ceiling and government shutdown, there have many reports of businesses waiting to make key investments until political stability returns. Today, in a new op-ed in the Financial Times, BlackRock CEO and Chairman Larry Fink notes the partisan wrangling in Washington may been doing real, lasting damage by weakening investor confidence in the stability of our political system. Even with some economic fundamentals suggesting that the recovery is taking hold, Fink argues that economic uncertainty is doing damage:

The market environment is still challenging. Uncertainty is high and political wrangling is pushing the fundamentals to the backburner. You cannot overestimate the impact of this on confidence at a time when business leaders should be making decisions that drive growth. It has put the US economy in a holding pattern that, if it persists, could lead to a global slowdown.

As others have written, one way that political uncertainty threatens growth is when businesses choose to put off on investing in new facilities, employees, or equipment for a more stable fiscal climate. When that politically-cautious attitude moves to the bond market, Fink argues, the impact is far worse:

Many foreign investors are rethinking their approach to investing in US debt. Even a marginal change in the willingness of governments, pension funds, insurance companies and other institutions around the world to buy America’s bonds will incrementally raise interest rates and drive up the costs of financing our deficits. That will not only worsen the fiscal situation at federal, state and local levels; it will also mean higher borrowing costs for anyone buying a house or other big-ticket items. The end result: slower growth."

But Fink also notes that lawmakers can avoid further endangering US political credibility by coming together and compromising during the upcoming budget conference.

"The short-term damage has been done; the next round of budget discussions needs to show that the American political system still works. If our leaders can return to the standards of good faith, civil deliberation and mutual respect that have always provided the foundation of our global economic leadership, we can restore the confidence of all Americans – as well as business leaders, investors and markets worldwide – and with that the potential for a long-term US economic resurgence.

A positive economic impact would be a major benefit of successful bipartisan negotiations over the budget -- the capital that companies have been keeping "on the sidelines" would help speed the recovery, and a healthy bond market will help drive foreign investment in our economy over the long term. Fink's arguments suggest that dealing with the debt will have an expansionary impact on the economy, creating jobs and building a prosperous future.

Click here to read the full op-ed.

October 21, 2013

Now that the government shutdown and debt default threat are in the rearview mirror (for now), analysts have been taking time to survey the economic damage, in particular the more quantifiable effects of the shutdown on the economy and the budget deficit. The results, of course, are not good and highlight the need to avoid confrontations like this in the future and not wait until the eleventh hour to find a solution. Since we will back in a similar position again at the beginning of next year, we will see soon if policymakers have learned their lesson.

Perhaps the most widely cited number on the economic cost of the shutdown is from Standard & Poor's (S&P), who estimate that the shutdown  reduced GDP growth by $24 billion, or 0.6 percent in the fourth quarter of 2013. Macroeconomic Advisers estimates an effect of about half that size. The economic hit comes from the lost demand as employees did not receive pay checks and certain government purchases and services were not completed. IHS Global Insight also estimated that lost wages alone knocked $3.1 billion off GDP, and they lowered their 4th quarter growth forecast by 0.6 percentage points. Granted, some of this may simply be consumption deferred until the first quarter of next year, but some of it is permanent output loss, particularly the effect on federal contractors who did not receive back pay.

And the hit did not stop when President Obama signed the law funding the government. In an interview in the Washington Post, Office of Management and Budget director Sylvia Mathews Burwell, who by now is as familiar as anyone with the technical messes of recent budget policy, noted that in addition to the backlog of work that awaited affected workers when they got back, there could definitely be an effect on employee morale and future recruitment. If there is significant uncertainty about how the federal government will operate -- and consequently whether employees will have uneven paycheck schedules -- fewer people will be willing to work for it.

Lawmakers shouldn't be patting themselves just for narrowly avoiding default and getting out of the shutdown. The economic pain was unnecessary, and the shutdown will hurt the confidence of people in the government going forward, whether they are employed by it or not. Lawmakers should work well ahead of the deadlines next time to avoid these stand-offs.

October 18, 2013
Hey Congress: Use This Moment

The shutdown may be over and fears of a default adverted for now, but the reality remains that we still haven't made any progress on our debt problem. CRFB President Maya MacGuineas writes in zpolitics that with a few months before we approach the next fiscal hurdles, lawmakers should get busy and begin to work toward a permanent solution.

As we finally emerge from what was simply the most recent in a long series of short-term fiscal crises, it is abundantly clear what our leaders in Washington should do to prevent themselves from governing on the edge of a cliff in the future: they must stop the madness of shutdowns and showdowns, start earnest bipartisan negotiations and solve the problem of our unsustainable national debt once and for all.

The just-concluded fiscal near-disaster proves that short-sighted political gamesmanship produces very few winners, and a whole bunch of losers. Worse still, such crises divert attention from the real issues that are driving our debt over the long term – namely our outdated tax code and our ever-more-costly entitlement programs.

If lawmakers needed any more reason to work for the problem, the voters clearly view solving the debt problem as our most important priority:

Moreover, Americans understand that the national debt is problematic. In a recent poll we commissioned with prominent Democratic and Republican pollsters, a plurality of respondents said that the debt was the single most pressing issue Washington must tackle – more than jobs, immigration reform or health care.

We need to take advantage of this opportunity, especially with the conference committee beginning to negotiate. If we do not, we can we expect more of the crisis to crisis approach that has plagued us so much in the past. Write MacGuineas:

The time for our elected leaders to be worrying about short-term political gains has long since passed – if it ever existed at all. Now, they must use this latest opportunity to stop all of the fruitless chicanery, start honest negotiations and solve our fiscal problems – before they get even worse than they were last week.

Click here to read the full article.

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

October 18, 2013

Recent reports have suggested the new budget conference committee may focus its attention of a deal to replace sequestration. A recent paper from the Center for American Progress suggests a set of principles that any sequester replacement should meet; yet that set, unfortunately, ignores the importance of maintaining fiscal responsibility and fixing our long-term debt.

The four principles CAP outlines are:

  • Keep it manageable: Replace the sequester for three years.
  • We have already paid for 60 percent of the sequester in the fiscal cliff deal, so we should only offset 40 percent of any repeal costs.
  • Balance is a necessary component: Savings should consist of revenue increases as well as spending cuts.
  • Focus on the economy: Include further short-term jobs measures in addition to sequester repeal.

We do agree that fixing the debt will require deficit reduction from both tax and entitlement reform and that economic growth should be a central concern in any fiscal deal. However, we worry CAP's proposal to replace only three years of sequester will fall short of what is needed, and their proposal to offset only 40 percent of the costs threatens fiscal responsibility and credibility.

While a three-year replacement of sequester could help the short-term economy and modestly improve the long-term fiscal picture, it would unnecessarily leave the threat of sequester in place, would be too small to put our debt on a downward path, and would make sequester replacement that much harder next time.

More troubling is CAP's proposal to offset only 40 percent of sequetration. As we've explained before there is no basis to count the revenue from the fiscal cliff deal (which was a revenue loss compared to current law) against the sequetration:

[T]here were no serious offers during the Super Committee which would have turn off most of sequestration and extend most of the tax cuts without a much larger deal. Indeed, had the Super Committee agreed to pass $4 trillion in tax cuts and $800 billion of sequester reductions for only $800 billion of revenue, such a deal would have been incredibly irresponsible.

While the CAP paper argues we've already accomplished some of the Super Committee's goal, in many ways the opposite is true. As it turns out, the sequester only contains two-thirds of the savings in the original Super Committee target. A return to the Super Committee's goal would therefore mean offsetting 150 percent of the costs of sequester, not 40 percent.

CAPs sequester principles, unfortunately, do not pass the basic test of fiscal responsibility. Policymakers should adopt an alternative set of principles which more closely match the following:

  • At Minimum, Don't Worsen the Deficit: Lawmakers should put in place a plan large enough to put the debt on a clear downward path; but at absolute minimum they must abide by Pay-As-You-Go (PAYGO) principles to replace every dollar of sequester relief with a dollar or more of gimmick-free deficit reduction.
  • Replace Mindless Cuts with Smart Reforms: We've extensively explained the problems with the mindless, abrupt, across-the-board spending cuts. Replacing them with gradual, targeted, and pro-growth deficit reduction measures could be a win-win both in the short and long term.
  • Replace Temporary Savings with Permanent Deficit Reduction: Sequestration expires after 2021 and would technically produce no long-term savings, even though our greatest fiscal problems are long-term. Policymakers should replace these temporary cuts with permanent savings -- particularly with provisions that grow over time or address growing health costs and the aging of the population.
  • Aim for a Permanent Sequester Solution: Rather than dealing with sequestration one year at a time, policymakers should agree to a sustainable set of caps on a longer-term basis, accompanied by long-term deficit reduction to replace sequester.

Few would argue that sequestration is good policy or that it truly restrains long term debt growth. Yet repealing it without replacing it would both worsen our fiscal situation and send a message that our policymakers cannot credibly keep to their fiscal committments.

Sequestration should be replaced, but only if done so in a fiscally responsible manner.

October 18, 2013

With President Obama's signature on Thursday morning, the nation went from the brink of default to having a least a little elbow room on the debt ceiling for a few months. The actual date on which the nation would default (the "X date") is uncertain given the question of whether extraordinary measures will be available, but the bill will at least prevent a breach of the debt ceiling through February 7. With extraordinary measures, the Bipartisan Policy Center estimates that Treasury would be able to delay the X date until sometime between late-February and mid-March.

Although lawmakers need to address our unsustainable long-term debt, bringing the nation to the precipice and threatening default are not the way to do so. With enough lead time to avoid scaring markets, however, short-term debt ceiling increases in the past have helped to foster negotiations and achieve significant deals. Extending the nation's borrowing authority through at least February 7 should give lawmakers more time to work out the details for a comprehensive deal to reform entitlements, restore investments, and reform our tax code. The graph below shows that in at least five different budget deals, temporary debt limit increases bought time for and preceded the final deal.

This is not to say that reaching an agreement after a temporary increase is particularly easy, and this can no better be seen than the 1990 Omnibus Budget Reconciliation Act. Negotiations on a budget agreement began in mid-May of 1990. By August 9, a deal still had not been worked out, so the debt limit was temporarily extended to October 2. The initial agreement between President George H. W. Bush and Congressional leaders was rejected by the House, requiring further negotiations and five other debt ceiling extensions in October before a compromise could be reached. On November 5, President Bush signed the Omnibus Budget Reconciliation Act, which raised the debt ceiling by $915 billion, the largest increase in history at the time in nominal dollars. In total, negotiations went on for 139 days, but the result was a deal containing nearly $500 billion in deficit reduction over the next five years, including discretionary spending caps and the Pay-As-You-Go (PAYGO) rule. The agreement played a large role in the budget surpluses of late 1990s, so while the road may have been rocky, it provided significant fiscal gains.

A permanent deal by now would have been preferable, rather than a stopgap measure, but the worst possible outcome would be going over the brink and defaulting. The temporary increase buys some time for lawmakers to work on a fiscal deal, but it's up to them to use it wisely.

October 17, 2013

In additional to reopening the government and suspending the debt ceiling, last night, both the House and Senate agreed to go to Budget Conference. Both Houses named their conferees, and the conference leaders -- House Budget Committee chair Paul Ryan (R-WI), House Budget Committee ranking member Chris Van Hollen (D-MD), Senate Budget Committee chair Patty Murray (D-WA), and Senate Budget Committee ranking member Jeff Sessions (R-AL) -- had a breakfast this morning to discuss the best way forward. Under the agreement last night, the conference is supposed to submit a final report on December 13th. That final report should include a plan to put the debt on a clear downward path relative to the economy.

Essentially, the conference committee will be looking to reconcile the House and Senate budget resolutions which passed their respective chambers earlier this year. While it may seem like those budgets have little in common, there was one overarching theme which was embodied not only in those two budgets (see a comparison here), but in every single budget resolution proposed this year. All of the budget proposals -- including from as far left as the Congressional Progressive Caucus and as far right as the Republican Study Committee -- put the debt on a downward path as a percent of GDP. Where these budgets succeeded, the conference must succeed as well.

Source: HBC, SBC, CBC, CPC, RSC, CRFB calculations
Note: Debt numbers are adjusted for changes in CBO's baseline and GDP numbers since the plans were released

The upcoming budget conference offers a real opportunity to agree to a package of deficit reduction. Although their recommendations are by no means bindings, they can put forward a process ("reconciliation") and create the political space (through a bicameral bipartisan agreement) to allow Committees of jurisdiction to enact comprehensive debt reduction.

Both parties have released a number of plans which put debt on a downward path and as a result of the many plans that have been put in recent years, there are many options that could be accepted on a bipartisan basis. The foundation for a deal is there. Now both sides have to come together in the spirit of principled compromise to truly address the country's long-term finances. For this budget conference, failure should not be an option.

October 17, 2013

This is the eleventh post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Our last post was on the American Opportunity Tax Credit, which provides a credit for undergraduate tuition. 

Intangible drilling costs are one of the largest tax breaks available specifically to oil companies, allowing companies to deduct most of the costs of drilling new wells in the United States.

In order to determine taxable income, U.S. businesses can normally deduct expenses from revenues so they are only taxed on profits. Under normal income tax rules, a company that pays expenses in order to make future profits would need to deduct the expenses over the same time period as profits.  The costs for drilling exploratory and developmental wells would need to be deducted as resources are extracted from the well.

The break for intangible drilling costs (IDCs) is an exception to the general rule. Independent producers can choose to immediately deduct all of their intangible drilling costs. Since 1986, corporations have only been able to deduct 70% of IDCs immediately, and must spread the rest over 5 years.

Intangible drilling costs are defined as costs related to drilling and necessary for the preparation of wells for production, but that have no salvageable value. These include costs for wages, fuel, supplies, repairs, survey work, and ground clearing. They compose roughly 60 to 80 percent of total drilling costs. 

The deduction for intangible drilling costs has been permitted since the beginning of the income tax code, in order to recognize the risks involved in drilling developmental wells—not every well strikes oil. Only IDCs associated with domestic or offshore wells may be deducted; foreign wells cannot be expensed in this way.

How Much Does It Cost?

According to the Joint Committee on Taxation (JCT), the tax break for intangible drilling will cost roughly $1 billion in 2013, and $16 billion over the next decade.  This is the largest tax preference specifically for oil and gas and totaled about 8 percent of the total value of tax preferences for energy and natural resources in 2013. In contrast, expensing for exploration and development costs for nonfuel minerals (like coal) will cost $0.1 billion in 2013, and $1 billion over the next decade.


What are the Arguments For and Against the Deduction for Intangible Drilling Costs? 

Supporters of the deduction argue that oil and gas and exploration and development is a high-cost industry, and allowing expenses to be recovered immediately encourages companies to invest. They explain that altering the deduction could result in job losses, since wages are included in the deduction.

More broadly, supporters point out that the oil and gas industry receives the same treatment that other manufacturing or extractive industries receive, and are merely a target because of the now-controversial nature of reliance on fossil fuels. Finally, supporters of energy independence often support the IDC deduction, as it promotes further exploration and development of wells within the United States.

Opponents argue that since this tax provision was introduced over a hundred years ago, technology has advanced to the point where dry wells are less of a problem. The success rate of striking oil (or gas) is about 85%, which means producers are spending less on exploring wells that won’t become profitable.

More generally, opponents say that oil prices are expected to remain high, and that demand continues for oil and other fossil fuels. They believe there is no need to subsidize an industry that is already booming.

What are the Options for Reform? 

President Obama has continually proposed repealing the break for intangible drilling costs in his yearly budgets, a proposal also suggested by Senator Sanders and Representative Ellison. Fully repealing this tax break would raise $14 billion through 2023, though importantly would largely represent a timing shift, and raise only about $100 million in 2023 alone. A number of other tax reform plans, including the Domenici-Rivlin plan, the Simpson-Bowles plan, and the Wyden-Gregg/Coats plan would also repeal the preference for IDCs.

Alternatively, the deduction could be repealed for most wells, but still allow a company to deduct costs for unproductive dry wells, raising $10 billion. Or, the deduction could only be eliminated for the five biggest oil companies, raising $2 billion over ten years.

If the deduction were repealed, drilling costs would need to be treated like other depletable property, deducted over the life of the well.

Options for Reforming the Expensing of Intangible Drilling Costs
Options 2014 - 2023 Revenue
Repeal expensing for all extractive industries, including oil, gas, coal, and other hard mineral mining $18 billion
Repeal intangible drilling cost expensing for oil and gas companies completely $14 billion
Repeal intangible drilling cost expensing for oil and gas companies, only for C-Corporations $10 billion
Repeal expensing for the 5 largest oil producers $2 billion
Keep expensing only for dry wells $10 billion


Where Can I Read More?

* * * * *

The deduction for intangible drilling costs allows oil and gas producers to deduct most of the costs associated with finding and preparing wells. When the deduction was created in 1913, it was intended to attract business to the costly and risky business of oil and gas exploration. Some argue that technology has advanced enough that locating wells is no longer as costly, and this deduction is an unneeded subsidy to a profitable oil industry. Others argue the deduction is an important way to support the domestic energy industry and promote energy independence. As part of tax reform, policymakers will need to decide whether to keep this incentive for energy production, or repeal it in favor of lower tax rates or a lower deficit. 

Read more posts in The Tax Break-Down here.

October 17, 2013

Yesterday, former Defense Secretary and CRFB board member Leon Panetta headlined a press conference at the National Press Club on the need for our lawmakers to come together and work toward a comprehensive debt deal. Panetta was joined by CRFB President Maya Macguineas, former Director of the Office of Management and Budget and Congressman Jim Nussle (R-IA), President & CEO of US Hispanic Chamber of Commerce Javier Palomarez, Executive Director of Leaders Engaged on Alzheimer's Disease Ian Kremer, President of the National Small Business Association Todd McCracken, President of the Association of American Universities Hunter Rawlings, and President & CEO of Research!America Mary Woolley.

Panetta said that at a very least lawmakers shouldn't take actions that cause harm. Of particular note given his background as Secretary of Defense, Panetta argued that the combination of this shutdown and the sequester was hurting national defense by "virtually hollowing out our military." From ships and infantry that could not be deployed because of the sequestered to the furlough Department of Defense workers, Panetta explained that the "negotiate-by-crisis" approach taken by lawmakers was having real consequences.

On today's agreement in the Senate, former OMB Director Nussle was pleased but emphasized the need to do more. "We have an opportunity, cooler heads did prevail," he said.  But in order to take advantage of this second fact, lawmakers needed to begin to look at entitlement and tax reform - and that would require tough choices. "No one is going to agree 100 percent of the time" said Nussle. But he added that everyone should be able to find some areas of compromise.

MacGuineas called for lawmakers to move forward on a comprehensive plan to put debt on a downward path. She said that the nation would only get its fiscal house in order after taking a hard look at entitlement programs, other spending, and the tax code. That was a common sentiment among the other speakers, with many expressing frustration of the failure of lawmakers to protect key investments as we work to address the national debt.

It's always important to remember that fiscal responsibility is hard, and requires difficult choices on the behalf of lawmakers. But for Panetta, that is part of the job description and lawmakers needed to trust the other people in the room. Panetta reflected on his own experience:

It was tough. Not easy. It took courage, and there were risks involved. But that’s what governing’s all about. That’s why we elect people. We don’t elect people to simply serve blind in office. We elect people to make the tough choices of governing this country. Hopefully, having been through this experience of a shutdown and the implications of not increasing the debt ceiling, that will be a sufficient enough incentive for them to now turn to governing.

The budget deal has at least averted disaster, but the hardest work lies ahead. Hopefully, lawmakers hear the message that was delivered today.

Click here for video of the event.

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