The Bottom Line

August 22, 2014

Many policymakers have expressed concern about "tax inversions," transactions where American companies move their headquarters overseas in order to pay a lower tax rate. The inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years. Yet even as Congress and the Administration debate whether to stop inversions, there is bipartisan agreement on a series of tax breaks that could cost 35 times more. Reviving the tax extenders continually over the next 10 years will cost about $700 billion (about $400 billion in corporate tax breaks, and about $300 billion for other businesses and individuals).

Since the beginning of the year, at least 14 companies have announced mergers or purchases of overseas companies that would result in an American headquarters moving overseas. Commonly called "tax inversions," these transactions often take place only on paper – no offices or employees move, but the company is considered foreign for tax reasons. By inverting, companies avoid the U.S. corporate tax rate of 35 percent on their overseas earnings, instead paying a much lower (or sometimes zero percent) rate that other countries charge on income outside their borders. This erosion of the corporate tax base is problematic, and there's several ways to address it. One suggestion, by CRFB President Maya MacGuineas, calls for a strategic pause where companies agree not to invert for nine months, paired with a fast-track procedure to encourage comprehensive tax reform.

Inversions are estimated to cost about $20 billion in lost tax revenue over the next 10 years, or about 0.5% of the $4.5 trillion that will be paid in corporate taxes during the same period. Legislation stopping them would raise enough to pay for about one-quarter of the $85 billion cost of continuing the extenders for two years, as the Senate Finance Committee would do. But the extenders have often been extended year-after-year. For example, the current Finance Committee bill continues 52 out of 54 provisions, and expands some tax breaks that were not in the original bill. If the package were continually extended, the provisions would cost $700 billion. (The House, on the other hand, has taken a much more expensive approach, expanding the package to cost over $1 trillion.)

August 21, 2014

The Postal Service has been losing money in recent years and has needed to cut back on services and raise stamp prices. However, these latest reductions are setting off a squabble among lawmakers. After USPS announced plans to consolidate 82 mail processing centers in 2015 and shed 15,000 jobs, 50 mostly Democratic senators sent a letter to the Senate Appropriations Committee and Financial Services and General Government Subcommittee chairs and ranking members asking them to postpone the reductions for one year and return mail delivery standards back to where they were in July 2012 to buy time for postal reform. Senate Homeland Security and Government Committee Chairman Tom Carper (D-DE) responded with a statement arguing that the best way to address these concerns would be for Congress to enact reforms to fix the financial challenges facing the Postal Service. But are lawmakers close to an agreement?

The answer is unclear. Both the House and Senate have produced bills with similar elements, but they have different emphases when it comes to stemming USPS's flow of red ink.

August 21, 2014

The Bipartisan Policy Center's Health Project has kicked off a series of white papers on overcoming the obstacles to delivery system reform with an overview of the opportunities and challenges for reform, over a year after producing a comprehensive health care reform proposal. The white papers will be done in consultation with a diverse set of health care policy experts and stakeholders.

With the "doc fix" set to expire in April 2015, threatening to cut Medicare physician payments by about one-fifth, an opportunity exists for lawmakers to put in place a fiscally responsible replacement system. So far, the "fiscally responsible" part has been elusive, but there appears to be bipartisan consensus on at least what the framework of the replacement would be. These plans generally would establish a value-based payment system where physicians would be penalized or rewarded from year to year based on quality metrics. The plans would provide bonuses to encourage physicians to transition to alternate payment models. This first paper notes this agreement creates opportunities not only at the legislative level to create a better payment system, but also for the Centers for Medicare and Medicaid Services, who would likely be tasked with fully fleshing out the payment reforms.

The paper identifies three general alternative payment models that could be considered for physicians and the health care system more broadly: bundled payments, patient-centered medical homes, and accountable care organizations (ACOs).

August 20, 2014
Congress irresponsibly takes ‘pension smoothing’ from exception to habit

The Washington Post editorial board came out today criticizing the use of gimmicks, saying the recent use of pension smoothing was a new low in terms of fiscal irresponsibility. Pension smoothing was recently passed as part of an 8-month patch to the Highway Trust Fund, which will now have enough funds to pay for federal transportation projects through next May.

Pension smoothing raises money in the short term by reducing the amount of money that companies are required to put into their defined-benefit pension plans. Since companies can claim a tax deduction for pension contributions, making fewer contributions means paying higher taxes.  But over the long term, companies will need to replace those lost pension contributions, reducing revenue in the future. In the meantime, more companies will have underfunded or bankrupt pensions. This provision has been criticized from all sides as not actually reducing the deficit.

The editorial board criticized the fact that pension smoothing has become a normal provision used to pay for highways rather than a one-off policy. The bill extended pension smoothing for five years, which provided most of the savings to pay for the 8-month highway extension.

We call this a new low in fiscal irresponsibility not because pension smoothing has never been used as a “pay-for” previously. In fact, the bill Mr. Obama signed actually extends, by 10 months, a pension-smoothing provision that helped “fund” the two-year highway bill that preceded this one. But that is precisely the point: Pension smoothing has just crossed the line between exception and habit. Once a bit of an embarrassment, even to Congress, it’s becoming normalized.

August 19, 2014

Social Security is often portrayed in one of two ways, either as its own self-contained program (the “trust fund perspective”) or as part of the broader budget (“the unified budget perspective”). Although focusing on these two lenses is sensible, the reality is more complicated; especially when it comes to the role of general revenue. Even though Social Security is mainly funded by a 12.4 percent payroll tax, general revenue comes into play even under the trust fund perspective. Indeed, since 1965, over $2.5 trillion ($3.1 trillion in today's dollars) of the $20 trillion of income received by the Social Security Trust Funds has come from sources other than the payroll tax, representing 12 percent of the total.

There are three main ways that general revenue has directly or indirectly made its way into the Social Security Trust Funds:

  • Direct transfers from the General Fund: The general fund has occasionally reimbursed the Social Security Trust Funds in specific cases to compensate it for policy changes that would otherwise lower its balance. Most recently, Congress passed a payroll tax cut for 2011 and 2012, lowering the payroll tax rate by 2 percentage points to stimulate the economy but authorizing a general fund transfer so the Social Security Trust Funds would be no worse off. The holiday was responsible for $225 billion of transfers. Congress has also used general fund transfers to pay for extra benefit credits to active-duty military between 1957 and 2001, special age-72 benefits for people not covered by the program by 1968, a payroll tax credit in 1984, and other reasons. Overall, nearly $260 billion has been transferred from the General Fund since 1965, or $300 billion in today's dollars.
  • Taxation of Benefits: Since 1983, retirees with significant income from sources other than Social Security have paid income tax on a portion of their Social Security benefits (prior to that, benefits were tax-free for everyone). Although this money is paid via the income tax, it is credited back to the Social Security Trust Funds. Since 1983, $370 billion has been transferred from the General Fund due to the taxation of benefits, or $440 billion in today's dollars.
  • Interest paid on Social Security bonds: The Social Security Trust Funds currently contain $2.8 trillion of assets, mainly as a result of significant surpluses in the 1990s and 2000s. That money is invested in U.S. Treasury bonds, which earn interest paid from general revenue. The trust funds earned about $100 billion of interest last year and have earned about $1.9 trillion since 1965, or $2.3 trillion in today's dollars.
August 18, 2014

On August 15, PublicSquare.net hosted a debate on Social Security featuring CRFB's very own Ed Lorenzen. The event, titled "Can Simpson-Bowles Save Social Security?" involved Benjamin Veghte, Research Director at Social Security Works, and Lorenzen, a Senior Advisor at CRFB who served on the National Commission on Fiscal Responsibility and Reform that was chaired by Erskine Bowles and Al Simpson. The debate was moderated by Taylor Kinzler.

August 15, 2014

The use of supplemental appropriations got some press last month as the Obama Administration requested $4.3 billion to address the Central American migrant crisis and fight wildfires. Although neither funding measure passed, it showed the role that supplementals continue to play in the appropriations process. Lawmakers use supplemental appropriations to respond to needs that they did not foresee when they passed government funding measures. To see how much activity has taken place outside of the "regular" process, CBO has helpfully recapped in a new report total supplemental appropriations since 2000 (see the data in Excel here). They break down spending by year and type, showing both the amounts that have been requested and what ultimately was passed into law.

Overall, Presidential administrations have requested $1 trillion over the past 15 fiscal years, and Congress has enacted $1.1 trillion of appropriations ($1.15 trillion of gross spending net of $50 billion in rescissions of past authorized spending). The enacted amount is equal to 0.5 percent of GDP over that period, and it peaked at 1.3 percent ($191 billion) in 2009 when war spending was near its peak; by contrast, there was no supplemental spending in 2011 and 2012 and only $225 million so far in 2014. Including interest brings total spending to $1.4 trillion, or 0.7 percent of GDP.

August 14, 2014

It was on this day 79 years ago that President Franklin Roosevelt signed into law the Social Security Act of 1935. While lawmakers have expanded the program since 1935 and changed it in many ways, the Social Security system still protects Americans against the “vicissitudes of modern life.” Social Security is the flagship program of social insurance in the United States.

It’s no secret that Social Security faces serious long-term funding challenges, as the latest report from the program's very own trustees highlights. If no action is taken, all benefits are set to drop by 23 percent in 2033, when all the programs assets would dry up, and disability benefits are on course to drop by almost one-fifth by 2016 when the Disability Insurance trust fund goes dry. It is critical that lawmakers address the gap between Social Security spending and revenues so the program can enjoy another 79 years (and more) of providing full benefits to retired workers, disabled workers, spouses, and any surviving family members. And the longer we wait, the more difficult solutions will become.

Luckily, CRFB has an incredible interactive tool to get lawmakers and the public started on picking and choosing from many reform options to set the program on a sustainable path: CRFB’s Social Security Reformer.

August 14, 2014
The Long-Term Answer to Inversions? Tax Reform.

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire two weeks ago. It is reposted here.

 

August 13, 2014

In an op-ed that appeared in several papers, including the Providence Journal, CRFB President Maya MacGuineas dispelled five myths about Social Security that are often brought up in the debate about the program (and have been revisited with the release of the Trustees' Report).

August 12, 2014

In a New York Times article describing Republican plans if they re-take Congress next year, reporter Carl Hulse cited CRFB, saying that "balancing the budget without new revenue would require more than $5 trillion in reductions over a decade." Below, we explain our numbers and show the various ways to balance the budget within a decade.

Using CBO's baseline with a war drawdown, we estimate that there would be a deficit of 3.7 percent of GDP, or $1 trillion, in 2025. Balancing the budget in that year would require 2025 savings equal to that amount, but the path of savings has a great influence on how much in cuts must be made over ten years due to accumulated interest savings.

August 12, 2014

Both the Government Accountability Office (GAO) and Senator Tom Coburn's (R-OK) office have released new reports on a tax credit that rewards banks for investing in low-income communities. Both reports raise questions about whether the money is being used as effectively as it could be. The GAO report raises some concern with the credit's complexity and effectiveness, finding certain cases where investors are receiving many sources of federal money for the same project. Senator Coburn's report goes farther, identifying several places where the credit has been used for questionable purposes and calling for the credit's elimination. As his report explains:

The federal New Markets Tax Credit program was created to steer taxpayers dollars into banks that would in turn funnel financial assistance to businesses and developers in low-income communities to help create jobs. Yet, virtually every neighborhood, from Beverly Hills to the Hamptons, could qualify for the program. The New Markets Tax Credit (NMTC) has subsidized wealthy investors in nearly 4,000 projects, including car washes, bowling [alleys], parking lots and breweries. Many of these are wasteful and not a federal priority – such as an ice skating rink and a car museum - while others are corporations in little need of taxpayers’ handouts – such as chain restaurants like Subway and IHOP.

Since 2000, the New Markets Tax Credit (NMTC) has given investors, mostly large banks and financial institutions, a 39 percent credit for loaning money to businesses in low-income communities. Investors claim the credit over seven years.

GAO notes the financial arrangements used to claim the credit have become much more complex.

August 12, 2014
We've got to fix Social Security

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote an op-ed distributed via McCatchy wire service that appeared in several papers around the county, including today's Providence Journal. It is reposted here.

August 11, 2014

The Social Security Trustees recently showed what it would take to make Social Security solvent over 75 years: immediately raise everyone’s taxes by over 2.8 percentage points, immediately cut everyone’s benefits by 17 percent, or cut benefits for new beneficiaries immediately by 21 percent. They also warn that those costs will go up substantially if our leaders in Washington procrastinate. Indeed, waiting until 2033 will increase the needed adjustments by 50 percent. As they explain:

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033.

The Trustees make clear that there are two costs to waiting.

August 11, 2014

CBO's July Monthly Budget Review brings us ten months into the fiscal year, and it's time to update our tracking of the slow growth of Medicare so far in 2014. Through June, Medicare growth totaled 1.2 percent over the first nine months of FY 2014, or 3.6 percent when removing the effect of a number of temporary* or phased-in policies, mostly from the Affordable Care Act (what we refer to as the "underlying" growth rate).

August 11, 2014

Before leaving town for August recess, Congress passed additional VA funding and a short-term patch to the Highway Trust Fund. However, more deadlines are approaching quickly, and Congress will have many "fiscal speed bumps" next year – all of which present firm deadlines for action.

The end of the fiscal year is September 30. At that point, Congress needs to have passed appropriations bills or a continuing resolution for next year to fund the government. Since Congress has not yet passed any of the 12 appropriations bills and are only in session a little over two weeks in September, it seems likely that a continuing resolution will be needed to avert a government shutdown. (See Appropriations 101 for an explanation of the process).

Beyond that, there will be pressure to revive tax extenders, a package of over 50 tax breaks. Although they expired at the end of 2013, they can be reinstated retroactively without much difficulty if done this year. The House and Senate have taken different approaches to the extenders (though both would add to the deficit), but they would need to come to agreement before the end of the year.

Next spring, several of this year's extensions will expire: The debt ceiling will need to be raised when it goes back into effect on March 16, and Medicare provider payments will be cut by 24 percent unless a "doc fix" is enacted by March 31. By the end of May, Congress will need to shore up the Highway Trust Fund and re-authorize the fund's spending. As part of a long-term highway fix, Congress will either need to raise highway revenues or cut spending as we explained in our paper, Trust or Bust: Fixing the Highway Trust Fund.

August 8, 2014

In the recent Social Security Trustees report, the issue of same sex marriage made a surprising appearance. Without calling much attention to it, the Trustees assume that all states will eventually legalize same-sex marriage. And while this would increase spending somewhat, they estimate the financial impact would be minimal.

August 7, 2014
Seven Highlights in JCT's New Tax Expenditure Estimates

As lawmakers fight over whether to extend and expand expired tax breaks or create new ones, the Joint Committee on Taxation (JCT) this week updated its estimate of the already existing tax breaks for 2014-2018. Adding up the individual costs of tax expenditures shows a total of $1.2 trillion for 2014, more than two-thirds of total projected income tax revenue this year. These totals do not include the effect of tax extenders that expired at the end of the last year, so that total could grow depending on the actions of lawmakers (although those costs would likely be recorded in 2015 and beyond). JCT's total is slightly less than the $1.3 trillion that the Office of Management and Budget (OMB) estimates.

To some extent, changes in JCT's estimates of each tax expenditure over time can help point out broader economic trends. Here's some of the highlights of the changes between JCT's estimates last year and this year.

August 6, 2014

Rep. John Larson (D-CT) earlier in the summer unveiled his plan to reform Social Security, a plan that has now been evaluated by the Social Security Administration's Office of the Chief Actuary (OACT). The reform would fully close Social Security's 75-year shortfall and about three-quarters of the 75th year deficit, meaning that it would ensure 75-year solvency but not sustainable solvency.

First, thank you. It is tremendous to see a Member of Congress addressing Social Security’s challenges with real fixes. As we have pointed out, the longer we delay, the harder those fixes will be.

The plan is certainly a useful contribution to the debate, recognizing not only the magnitude of the changes that will have to be made to close Social Security’s gap, but also that increasing scheduled benefits, as the plan does, will require significant revenue increases that go beyond just higher taxes on the wealthy.

The plan has a number of parts. It would:
  • Raise the payroll tax rate by 2 percentage points to 14.4 percent, phased in over 20 years
  • Apply the payroll tax to income above $400,000 unindexed (the current taxable maximum would catch up around the mid-2040s due to indexation) and credit benefits for that income through a special lower "AIME+" benefit factor
  • Increase the income threshold for the taxation of Social Security benefits to $50,000/$100,000
  • Increase the lowest PIA factor in the benefit formula from 90 to 93 percent
  • Use the faster-growing CPI-E for cost-of-living adjustments (COLAs)
  • Create minimum benefit of 125 percent of the poverty line for people who have worked 30 years or more
  • Invest one-quarter of the trust fund in equities
  • Re-allocate revenue to the DI trust fund to keep it solvent 
August 5, 2014

In a letter to the editor submitted to The New York Times, CRFB president Maya MacGuineas rebutted NYT columnist Paul Krugman on his criticism of Sen. Rob Portman's (R-OH) op-ed in The Wall Street Journal on CBO's long-term budget outlook. MacGuineas pointed out numerous factual errors in Krugman's post and noted the dangerous implications of the debt in CBO's projections, which Krugman seems to dismiss. The letter is posted below in its entirety.

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