The Bottom Line

July 11, 2014

The Office of Management and Budget (OMB) this afternoon released the Mid-Session Review, updating its budgetary and economic estimates for the President's budget. The MSR shows a worse outlook for debt, reaching 72 percent of GDP in 2024 instead of 69 percent as originally estimated, although debt is still on a downward path (albeit a shallower one) as a share of GDP.

July 11, 2014

Both the House Ways and Means Committee and the Senate Finance Committee approved legislation on Thursday to fund a short-term patch for the Highway Trust Fund. Both had previously announced plans with offsets: the Finance Committee had an $8 billion plan relying on increasing tax compliance while the Ways and Means Committee had a $10.9 billion plan relying largely on a budget gimmick known as pension smoothing.

The plans have a lot in common, indicating a degree of bipartisan and bicameral agreement. Both deposit almost $11 billion into the Highway Trust Fund to fund highways through next May, extend customs fees expiring in 2023, and rely on pension smoothing. Yet there are significant differences: the Finance Committee legislation, which passed with bipartisan support, includes several tax compliance measures and only partial versions of some policies in the House bill. Unfortunately, one of the House policies, pension smoothing, is a budget gimmick that only raises revenue in the short term and should not be used to pay for anything.

Pension smoothing, which temporarily reduces companies' pension obligations, changes the timing of some taxes paid, raising money in the first six years and costing money thereafter. Since not all of the costs are measured in the 10-year budget window, the provision appears to raise money in the short term.

If Congress decides it wishes to relieve companies of some of their pension obligations, it should not count the temporary revenue generated by that policy. Further, CBO estimated that as a result of pension smoothing, pensions will be more underfunded, likely resulting in more companies' plans being taken over by the PBGC.

Short-Term Proposals to Fund Highways
Policy House Ways & Means
Senate Finance
Enact pension smoothing $6.4 billion $2.7 billion
Extend customs fees by 1 year to 2024 $3.5 billion $2.9 billion
Increase mortgage reporting - $2.1 billion
Clarify of statute of limitations on overstatement of basis - $1.3 billion
Withhold payments from Medicare providers with delinquent taxes - $0.8 billion
Transfer funds from the Leaking Underground Storage Tank Fund $1 billion
$1 billion
Rescind old transportation earmarks - <$0.2 billion
Total Revenue Raised
$10.9 billion $11 billion
Percent Raised From Pension Smoothing Gimmick ~60% ~25%
July 11, 2014

The House passed legislation today to expand and make permanent the bonus depreciation rules that expired at the end of last year. A key argument for this proposal is that making bonus depreciation permanent would reduce the tax rate on capital and therefore encourage investment and faster economic growth. Some analysts have even found that economic growth would generate enough dynamic revenue to more than pay for the $287 billion cost of the legislation. At the same time, others have claimed that permanent bonus depreciation would not have any significant effect on the economy and would only add to deficits and debt.

A recent Joint Committee on Taxation (JCT) macroeconomic analysis aims to settle this debate. Using a variety of models, JCT finds that permanent bonus depreciation would in fact increase economic growth -- by an average of 0.2 percent over the next decade -- but would cost about the same as under conventional scoring.

JCT's analysis includes 6 different scenarios using two different economic models. The different scenarios are designed to account for differences in savings elasticities, monetary policy, and future fiscal policy to correct for the higher debt. All models find that permanent bonus depreciation would increase business capital -- by between 0.6 and 1 percent over the decade -- and as a result would modestly increase economic growth.

July 10, 2014

The White House this week requested an additional $4.3 billion in discretionary appropriations for the current fiscal year to cover the cost of the "urgent humanitarian situation" involving Central American children crossing the Southern border and to pay for fighting this summer's wildfires. $3.7 billion is dedicated to the situation at the border, while $615 million more for wildfires will likely provide enough funding for the whole wildfire season.

Of the additional funding for the migrant situation, about half ($1.8 billion) would go to the Department of Health and Human Services to provide medical and other care for refugee children. The Department of Homeland Security would receive $1.4 billion to cover the additional costs associated with increased arrests and deportations. The request includes $300 million of international assistance given to governments or non-profits in Central American countries to address the "root causes" of migration, including for economic support and to provide services and community support to the migrants that are most likely to attempt a return.

Administration Supplemental Spending Request by Category (billions of dollars)
Category FY 2015 Spending
Services and medical care for child refugees $1.8 billion
Apprehending, prosecuting, and removing undocumented families $1.4 billion
Repatriation of migrants and aid to Central American countries $300 million
Other increased enforcement and surveillance $177 million
Additional 40 immigration judges and other legal costs $64 million
Subtotal, Immigration Request
$3.7 billion
Wildfire Funding $615 million
Total, President's Request $4.3 billion
July 9, 2014

The House Ways and Means Committee just published its plan for a short-term fix to the Highway Trust Fund, which needs an additional $8 billion to fund highway construction through the end of the year.  Unfortunately, it relies on a known gimmick called "pension smoothing," which technically raises revenue on net over 10 years but may cost money in future years. Lawmakers should not be using any gimmick, let alone a "pay-for" that may increase future deficits.

Since lawmakers have less than a month before disruptions occur, they may need to rely on a short-term patch while a long-term highway bill is being negotiated. To help, we published a list of options to offset a transfer of general revenue into the highway fund, which intentionally left off pension smoothing, even though it was used to "fund" the last highway bill, because it is a gimmick.

The Ways & Means plan raises $10.9 billion for the Highway Trust Fund: $6.4 billion from the pension smoothing gimmick, $3.5 billion from extending customs fees through 2024, and $1 billion transferred from an over-funded trust fund for leaking underground oil tanks. However, the pension smoothing money is entirely a timing shift that raises money upfront and transfers the costs beyond the 10-year budget window.

July 9, 2014

CBO's release of the June Monthly Budget Review (MBR) gives us another data point in what has been an interesting story for Fiscal Year (FY) 2014: the slow growth of Medicare. Last month, the MBR showed Medicare spending growing by only 0.3 percent in FY 2014 compared to spending in the same time period (eight months) in FY 2013. We further noted that excluding the effects of temporary or phased-in policies (in order to illustrate Medicare's underlying growth rate) would bring the growth rate up to 2.5 percent, still well below anticipated economic growth and Medicare beneficiary growth. Incorporating the June data shows a mild acceleration in Medicare's growth rate, yet still remaining very low.

July 8, 2014

Congress returns from its July 4th recess this week, and it will have plenty of work to do. Most pressing is the looming insolvency of the Highway Trust Fund (HTF). In less than a month, federal disbursements for highway projects will be disrupted if nothing is done. In addition, the House will take up a bill to permanently extend bonus depreciation, a business tax break enacted as stimulus in 2008. Also, the conference committee on a bill to reform veterans' health benefits in response to the unfolding scandal at the VA is expected to resume, and the President has called for a $3.7 billion supplemental request for funds to secure the southern border in response to an influx of child migrants.

The first three issues, in particular, all have the potential to significantly impact the federal budget. First, the Highway Trust Fund faces a nearly $170 billion shortfall over the next ten years, an issue that has been addressed in recent years by mostly unpaid for general revenue transfers. Because of budget conventions, these transfers don't count as increasing the deficit, even though the transfers allow greater levels of spending than would otherwise be the case. The Senate Finance Committee is looking to transfer $8 billion to the HTF to extend it through the end of the year, offsetting the cost with other revenue provisions. Closing the ten-year shortfall within the HTF through various options available to lawmakers or fully offsetting a general revenue transfer would reduce debt by about 1 percentage point of GDP by 2024; put another way, it would avoid the 1 percentage point of GDP being added to the debt that would occur if lawmakers transferred general revenue without offsets.

Second, the House is expected to vote this week on bonus depreciation, a business tax break enacted as stimulus in 2008. The House bill not only permanently extends the current provision to allow 50 percent of many new business investments to be written off in year one but also expands the tax break by making eligible new categories of investments. In total, the bill would cost $360 billion through 2024 including interest, increasing debt as a percent of GDP in 2024 by 1.5 percentage points of GDP. We've written before on how bonus depreciation has already cost $220 billion since 2008, and should not be treated as a normal tax extender because it interacts with other parts of the tax code.

July 8, 2014

Citizens for Tax Justice released a new report detailing options to raise revenue, which could help lawmakers in their pursuit of tax reform to lower the debt. The revenue-raisers in the report are divided into three categories – those that raise money from high-income individuals, businesses, and multinational corporations. Within those categories, the report distinguishes between options that would only be considered in the context of tax reform and less significant changes that could be enacted on their own. Finally, the report helpfully separates the permanent and temporary impacts for provisions that raise greater revenue upfront.

July 3, 2014

The Pension Benefit Guaranty Corporation (PBGC) put out an annual report this week of its financial status insuring private pensions around the country. Although most pension plans look to be in better shape than last year, some plans covering multiple companies are likely to fail. At that point, between 1 and 1.5 million people would receive a guaranteed amount from the PBGC that is lower than their promised benefit. However, the PBGC itself is underfunded, and does not have sufficient reserves to sustain these payments for the long term. According to the report, the pension fund will "more likely than not" run out of funds by 2022 and is 90 percent likely to run out by 2025.

The PBGC provides insurance to defined-benefit private pension plans covering approximately 44 million people. Companies covered by PBGC pay premiums for this insurance. In exchange, PBGC will pay benefits to plan employees if the pension plan goes bankrupt. There are two separate insurance programs with different premiums, rates, and payout rules: one covering approximately 34 million workers in plans maintained by a single employer, and another covering 10 million workers in multiemployer plans.

First, the report's good news: single-employer plans are in a stronger financial position than last year, though they are not out of the hole yet. The PBGC's ten-year deficit improved from $32 billion last year to a deficit of $7.6 billion this year, mostly because of the improved economy and the increased premiums in the Murray-Ryan budget agreement. That agreement increased single-employer premiums for 2015 and 2016 and indexed them to wage growth. Although the program is still projecting a deficit, it is expected to be solvent throughout the next decade thanks to balances in its revolving fund.

Now, the report's bad news: many multiemployer plans are severely underfunded, particularly those involving unions with declining membership. Because of lower than expected market returns, declining numbers of employees, and other factors, the number of underfunded plans has increased dramatically this decade.

Multiemployer plans covering almost 1.5 Million people are severely underfunded (i.e., <40% funded)

July 2, 2014

Department of Transportation Secretary Anthony Foxx started the Highway Trust Fund clock yesterday, informing state transportation directors that disruptions in federal reimbursement of highway projects would begin on August 1. The cash management measures are intended to prevent outflows from depleting the Highway Trust Fund.

Starting August 1, the federal government would no longer reimburse states for projects immediately. Instead, they will distribute to states a proportionate share of available funds every two weeks when the fund receives incoming revenue. This is a major change from the current scenario of daily distributions. Of course, uncertainty will make it difficult for the state transportation departments to anticipate precisely how much they will be reimbursed and will lead states to delay some projects until there is a longer-term solution.

DOT considers $4 billion of funding the cut-off point for implementing cash management measures for the highway account. Their latest Highway Trust Fund ticker shows the account's fund running out by late August or early September, at which point spending could only be reimbursed with incoming revenue, enough to cover about three-fourths of spending.

http://www.dot.gov/sites/dot.gov/files/pictures/HTF-Cash-Flow-Summary-through-05-30-14-End-of-Month-Cash-Balances-Graph.jpg

July 2, 2014

In the context of a middling U.S. economic recovery, several commentators have argued that we should ignore deficit reduction in order to pursue growth-promoting policies. This debate, however, overlooks a critical point since both objectives can be achieved simultaneously. A recent report commissioned by the Peter G. Peterson Foundation, authored by economists Janice Eberly and Phillip Swagel, highlights just this point, that economic and fiscal health are not in conflict.

July 1, 2014

The Tax Policy Center and Urban Institute have issued a new report entitled "Flattening Tax Incentives for Retirement Saving." Authors Barbara Butrica, Benjamin Harris, Pamela Perun, and Eugene Steuerle examine three different options to change the tax treatment of 401(k)s and describe their effects on the annual income distribution of taxes along with the lifetime distribution of taxes and income.

The three options are:

  • Reduce the 401(k) combined employer/employee contribution limit from $51,000 to the lesser of $20,000 or 20 percent of income
  • Expand the saver's credit so middle-income earners can take greater advantage of it
  • Replace the income and payroll tax exclusions for 401(k) contributions with a 25 percent refundable credit
July 1, 2014

Our recent paper Trust or Bust: Fixing the Highway Trust Fund called on lawmakers to identify a long-term fix to the funding gap in the Highway Trust Fund (HTF). Unfortunately, it appears unlikely that there is sufficient time to enact a fix before funds fall too low and disrupt construction this summer. A short-term patch can be enacted by transferring funds from general government revenue. To be fiscally responsible, however, this transfer should be fully offset elsewhere in the budget.

Previously, we discussed long-term options to restore highway solvency by cutting spending, raising more from current highway taxes, and raising new taxes. Below are tax, spending, and other options that could pay for upfront general revenue transfers to shore up the HTF in the short-term, although they leave the HTF's chronic imbalance in place. These options can buy time, but they do not replace the need to identify a long-term solution to bring dedicated revenue and spending in line.

Options To Offset a Transfer of General Revenue
Policy Ten-Year Savings Trust Fund Extension
Dedicate one-time "deemed repatriation" tax to the HTF $125 billion 8 years
Dedicate temporary transition revenue from repealing LIFO to the HTF $90 billion 6 years
Repeal certain oil and gas tax preferences^ $35 billion 30 months
Eliminate tax exclusion for new private activity bonds $30 billion 24 months
Require filers to have a SSN to file for a refundable child tax credit $20 billion 16 months
Eliminate Amtrak subsidies* $15 billion 12 months
Eliminate "Capital Investment Grants" for the rail system* $15 billion 12 months
Reduce farm subsidies $15 billion 12 months
Close Section 179 "luxury SUV loophole" $10 billion 8 months
Reduce Strategic Petroleum Reserve by 15 percent $10 billion 8 months
Increase sequestration by $1 billion/year $10 billion 8 months
Repeal tax deduction for moving expenses $10 billion 8 months
Clarify worker classification $5 billion 4 months
Prevent "double dipping" between unemployment & Social Security Disability $5 billion 4 months
Allow drilling in ANWR and the Outer Continental Shelf $5 billion 4 months
Reduce federal research funding for fossil fuels and nuclear energy* $5 billion 4 months
Repeal or phase-out tax credit for plug-in electric vehicles $1.5 - $5 billion 1 - 4 months
Require inherited IRAs to be paid out within 5 years $4 - $5 billion 3 - 4 months
Extend current Fannie/Freddie fees through 2021 $4 billion/year 3 months
Extend customs fees through 2024 $4 billion 3 months
Deny biofuels credit for black liquor (retroactively) $3 billion 3 months
Increased mortgage reporting $2 billion ~2 months
Require the IRS to hire private debt collectors $2 billion ~2 months
Enact federal oil and gas management reforms in the President's Budget $2 billion ~2 months
Devote mandatory aviation security fee to deficit reduction through 2024 $1.5 billion ~1 month
Make coal excise tax permanent $1.5 billion ~1 month
Make Travel Promotion Surcharge permanent $1.5 billion ~1 month
Clarification of statute of limitations on overstatement of basis $1.5 billion ~1 month
Close the "gas guzzler" loophole $1 billion ~1 month
Revoke passports for seriously delinquent taxpayers  < $0.5 billion <1 month

Sources: CBO, OMB, JCT, and CRFB calculations
All numbers are rounded and calculated by CRFB based on a variety of sources.
*These discretionary changes would need to be accompanied by reductions in the discretionary spending caps.
^Includes expensing for exploration and development as well as the “percentage depletion allowance” 

June 27, 2014

The Obama Administration yesterday released the details of its request for war spending (Overseas Contingency Operations, or OCO), with a grand total of $66 billion of funding – $60 billion new funding in addition to $6 billion of State Department/international program funding already in the President's budget.

June 26, 2014

Continuing our series of transportation-focused blogs, this blog discusses the budgetary treatment of the Highway Trust Fund (HTF). While most of the attention regarding the HTF has focused on proposals to address the impending exhaustion of the HTF, the need to reauthorize highway programs by the end of September presents an opportunity to reform the budgetary treatment of spending from the HTF to provide greater transparency in highway spending.

June 26, 2014

As we approach the twin deadlines to reauthorize surface transportation spending and shore up the Highway Trust Fund (HTF), policymakers should note the importance of addressing the structural imbalance between highway spending and dedicated revenue.

June 26, 2014
CRFB Releases Updated Budget Simulator

Over the past few years, lawmakers have engaged in a series of budget showdowns trying to avoid fiscal speed bumps and reduce deficits. However, debt projections continue to show an unsustainable outlook, and there appears to be little appetite for the kind of deal that would be necessary to put it on a downward path as a percent of GDP. That's where you come in.

June 26, 2014

The Senate Finance Committee is beginning a markup of a short-term patch to the Highway Trust Fund, providing funding through the end of the year. Without additional funds, the Highway Trust Fund will run low this summer, disrupting funding for highway projects, and eventually run out of money entirely. If that happens, all revenue coming into the trust fund for 2015 will be used to pay for current projects, meaning no new projects would receive funding next year.

June 25, 2014

The Ways & Means Committee today marked up new and extended tax breaks costing more than $210 billion of lost revenue and increased outlays over the next decade, plus another $35 billion in interest payments.

June 25, 2014

CBO published its score of the Postal Reform Act of 2013 (H.R. 2748), a bill introduced by House Oversight Committee Chairman Darrell Issa (R-CA), on Monday. The bill would deliver net unified budget savings of $17 billion over the 2015-24 period, reflecting a $23.6 billion reduction in off-budget spending and a $6.6 billion increase in on-budget spending.

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