The Bottom Line

April 26, 2016

The Committee for a Responsible Federal Budget has been mentioned by name in three presidential debates over the past few months. This is a good sign that fiscal responsibility is an important issue to the viewers of these debates, and we hope the candidates will take note by presenting clearer plans for bringing the debt on a downward sustainable path. 

During the April 14, 2016 Democratic presidential debate in Brooklyn, CNN moderator Wolf Blitzer cited our full analysis of Senator Sanders's proposals while questioning him about fiscal responsibility. Blitzer noted that based on our analysis, Senator Sanders would increase spending by up to $28 trillion over the next decade and add as much as $15 trillion to the national debt. Read the transcript of the debate.

April 18, 2016

Today is Tax Day! Our partners at Fix the Debt have republished their annual chartbook to explain federal taxes – including who pays them, what they pay for, and how they are collected. In addition, they look at the $1 trillion plus amount of tax expenditures in the tax code and how the revenue raised fits into the federal budget. We've highlighted a few of the charts below.

Where Tax Dollars Went In 2015
The taxpayer receipt for 2015 shows that a majority of tax dollars go towards Medicare, Social Security, and defense/military benefits. Relatively few tax dollars fund programs like foreign aid and natural resource protection. Notably, for every $100 paid in taxes, more than $6 goes towards the interest payments on the debt, making it the fourth-largest area of the budget. Because the government is running a deficit, federal taxes don’t cover all spending; taxpayers would have needed to pay an extra $13 for every $100 they spent in taxes to cover it all.

April 14, 2016

On Wednesday, April 6, the McCrery-Pomeroy SSDI Solutions Initiative released its final recommendations and book of policy proposals dedicated to improving the Social Security Disability Insurance (SSDI) program. The book, SSDI Solutions: Ideas to Strengthen the Social Security Disability Insurance Program, represents the culmination of a nearly two-year effort to foster discussion on ways to improve the SSDI program for its beneficiaries as well as those who pay into the program and the economy as a whole.

A video of the event can be found below as well as a detailed recap:

April 14, 2016
Our Debt Problem Needs Action—Not Empty Promises: 5 questions for candidates on balancing the budget

Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt, wrote an article that appeared in the online edition of Time. It is reposted here.

Fiscal policy has not been center stage in this presidential campaign. The limited attention it has received, along with budget-busting promises coming from the candidates, has made this one of the more fiscally irresponsible campaigns in recent memory.

The national debt stands at near-record levels. At 75% of GDP, it’s at the highest point since just after World War II. But unlike then, it is slated to grow faster than the economy—indefinitely.

April 14, 2016

The Congressional Budget Office (CBO) released its Monthly Budget Review for March recently, so we now have data for the first half of Fiscal Year (FY) 2016. CBO shows that the deficit so far in FY 2016 is $457 billion, $18 billion higher than the FY 2015 deficit over the same time period. Both outlays and revenue have grown by 4.1 percent so far, but with spending at a higher starting point, that means higher deficits. Looking closer at the numbers reveals some trends about how the budget is changing this year.

The higher deficit that CBO has found so far in FY 2016 is not a surprise since in their most recent budget projections, they expected a $95 billion higher deficit for the year. Granted, about $37 billion of this increase is due to the fact that the start of FY 2017 falls on a weekend so some payments will be shifted into FY 2016, but the rest of the increase is due to the deficit-increasing legislation lawmakers have passed recently. That will reverse the trend of falling deficits since 2009 and send them back up almost continuously over the next decade. Note that the deficit in the first half of the year is almost all of the way to the projected full year deficit of $534 billion because April, June, and September tend to be big surplus months.

CBO also presents data on the major spending and revenue categories and how they have grown in the first six months of the fiscal year. Some of the more interesting trends are:

April 8, 2016

The topic of tax reform made the news on Monday as the Obama Administration simultaneously took regulatory steps to further limit corporate inversions and released an update to its 2012 Framework for Business Tax Reform. The inversion regulations make it more difficult for companies to move their headquarters abroad, while the tax proposal offers the Administration's views on an area that has potential for bipartisan compromise. 

For companies with a tax residence in the United States, the federal government currently taxes the active income they earn abroad when it is repatriated to the U.S., and taxes passive (financial income) in the year it is earned. An inversion involves a large U.S. company acquiring a smaller foreign company and then moving its tax residence abroad to avoid taxation. Current anti-inversion rules consider a business a U.S. company for tax purposes if at least 80 percent of it is owned by U.S. shareholders, thus when inverting, companies will work to ensure that there is at least 20 percent foreign ownership in the resulting company. Rules issued by the Obama Administration in 2014 and last year limit the ability of companies to game the 80 percent threshold and limit the ability of inverted companies to repatriate income tax-free.

The rules released this week take additional steps to discourage inversions. The first rule restricts a foreign company from gaming the 80 percent shareholder rule by acquiring multiple U.S. companies in quick succession; specifically, the rule disregards a foreign company's acquisition of any U.S. stock in the past three years from the threshold calculation. Presumably, this rule targets recently inverted companies that use their increasingly larger size to quickly invert larger U.S. companies.

The second rule addresses "earnings stripping," a technique inverted companies use to lower federal tax obligations by having the U.S. company borrow from a related foreign company and pay tax-deductible interest payments to the related company. The rules related to earnings stripping would consider any debt-related distribution to the foreign company non-deductible stock, as long as the debt is not associated with actual business investment in the U.S.  The rule would also allow the IRS to treat a debt instrument as part-debt and part-equity if appropriate.

The accompanying Framework for Business Tax Reform notes that current tax regulations are inadequate to wholly address the issue of inversions, and the President's budget proposes further policies to lower the U.S. shareholder threshold to 50 percent as well as limit interest deductions. The Framework also acknowledges other issues with business taxation beyond inversions like the high statutory tax rate; distortions among industries, debt and equity, and types of business organizations; a narrow tax base; and complexity.

April 7, 2016

Update: The Congressional Budget Office has released its score of the Senate FAA bill, estimating that it would reduce ten-year deficits by a small amount.

A bill to reauthorize the Federal Aviation Administration is in danger of becoming a vehicle for more tax breaks. Senators are currently discussing adding renewable energy tax credits to the bill that are set to expire at the end of this year, and while the budgetary impact may be modest, it could set off a spending spree.

The bill would reauthorize the FAA through FY 2017 and make several changes to FAA operations. There is no CBO estimate for the bill, but it could become irresponsible based on current negotiations about extensions of tax breaks. Senators are discussing adding some renewable energy production tax credits that were extended only through 2016 in last year's tax deal. While the cost would be very modest, reportedly $1.4 billion over ten years depending on what's included, that might not be the end of the story.

The House FAA bill is different in that it would turn over air traffic control duties from the Federal Aviation Administration to a non-profit corporation, who in turn would assess fees to fund its operations. That policy will result in air traffic control spending shifting from discretionary to mandatory spending, which would increase allow for increased spending unless lawmakers lower the discretionary spending caps by the amount of the spending shift. If they do lower the caps, the bill would still increase deficits by $4 billion over ten years due to increased capital spending, but the total would be much larger if they don't. The House Budget Committee's budget resolution creates a deficit-neutral reserve fund for air traffic control reform but only on the condition that the discretionary caps are reduced, and lawmakers should follow that example if they take that approach.

April 7, 2016

Senator Bernie Sanders deserves credit for trying to pay for his spending proposals' costs but, the offsets fall short according to our new analysis as part of our Fiscal FactCheck project. Senator Sanders's proposals would add $2 trillion to $15 trillion to the debt, depending on whether his health plan's costs run higher than he estimates. As a share of the economy, debt under these policies would grow from roughly 75 percent of Gross Domestic Product (GDP) today to between 93 percent and 139 percent of GDP in 2026 (compared to 86 percent of GDP under current law).

Read the full analysis on our Fiscal FactCheck website. 

April 5, 2016

In a recent blog post on The Wall Street Journal's Washington Wire, director of Brookings Institution's Hutchins Center David Wessel outlines a major reason why the high and growing level of federal debt is a concern: growing interest spending. Wessel makes a few points that we have also made previously: high debt leaves the federal government susceptible to rising interest rates, and higher interest spending will crowd out other spending. It's worth expanding on his discussion of the reasons for and consequences of higher interest spending.

Wessel notes that interest spending in CBO's latest budget projections will rise rapidly as a share of spending over the next decade, from just over 6 percent in 2016 to 13 percent by 2026. This is primarily due to interest rates rising from their current low levels and returning closer to pre-recession rates but also because debt is expected to climb. By the end of the ten-year period, interest as a share of federal spending will be the highest since the 1985-1999 period when interest rates were much higher but debt was lower. Interest will also rise from 1.4 percent to 3 percent of GDP by 2026, the highest total since 1995 and the sixth-highest total in modern history. Wessel points out that within a decade, interest will exceed the size of all non-defense appropriated spending.

April 5, 2016

Voters say they want a candidate that “tells them like it is,” but as Social Security Trustee Charles Blahous describes, that may mean facing difficult realities about Social Security. In just six years, the Social Security Disability Trust Fund is expected to become exhausted, triggering benefit cuts if no action is taken. Also, the larger Social Security Old Age trust fund is scheduled for insolvency within 15 to 20 years.

April 4, 2016
Debt and deficits rising: Who has courage?

Katherine Gehl, former president & CEO of Gehl Foods, Inc., and a member of the CEO Fiscal Leadership Council of the Campaign to Fix the Debt, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt wrote a guest post for Milwaukee’s Journal Sentinel. It is reposted here.

March 31, 2016

CBO's March baseline is typically a brief update of budget projections for the next decade, but this year CBO has provided a new comprehensive look at insurance coverage for the non-elderly population. The report (and tables) evaluates the sources of health insurance and federal insurance subsidies for people under age 65.

Employer-based coverage remains the largest source of insurance coverage, accounting for 155 million of the 244 million insured in 2016, or nearly two-thirds, while Medicaid and the Children's Health Insurance Program ("CHIP") cover 68 million people, or just over one-quarter of the insured population. Although the Affordable Care Act ("Obamacare") expanded coverage through Medicaid and the health insurance exchanges it only increased net insurance coverage by 23 million, accounting for 9 percent of the insured. Other sources, including Medicare, cover the remaining 15 million insured. Twenty seven million people are currently uninsured. CBO expects this distribution of coverage to remain relatively stable over the next decade albeit with a slight shift from employer coverage to individual coverage.

March 30, 2016

The Congressional Budget Office (CBO) released its own estimate of the FY 2017 President's budget yesterday, a document that includes a 16-page report and several supplemental analyses. Our report on CBO's analysis breaks down the key budgetary takeaways, namely that while the budget does include substantive deficit reduction, it does not do enough to bring debt down as a share of GDP.

March 29, 2016

The Congressional Budget Office (CBO) today released its analysis of the Fiscal Year 2017 President's budget, finding that under the President's policies, the debt would rise slightly from today's post-World War II record-high 75 percent of Gross Domestic Product (GDP) to 77.4 percent by 2026. This is a significant improvement from CBO's current law baseline, which projects debt will rise to nearly 86 percent of GDP, but is worse than the Office of Management and Budget's (OMB) estimate that the President's budget would stabilize the debt at about 75 percent of GDP. Regardless which numbers are correct, it is clear the budget does too little to put the debt on a sustainable downward path.

CBO's projection of rising debt under the President's budget is driven by annual deficits, which would decline over the next two years but then rise nearly continuously thereafter. Under the President's budget, CBO estimates deficits would fall from 2.9 percent of GDP ($529 billion) in 2016 to 1.9 percent ($383 billion) by 2018 before rising to 2.7 percent of GDP ($585 billion) by 2020 and 3.5 percent of GDP ($972 billion) by 2026. Trillion-dollar deficits would likely return by 2027.

March 29, 2016

Recently, the Center on Budget and Policy Priorities (CBPP) criticized the House Energy & Commerce (E&C) Committee for proposing to limit abuse of provider taxes, a mechanism states can use to artificially inflate their Medicaid payments from the federal government. They argued that provider taxes are not actually abused, and that limiting them would result in “damaging Medicaid cuts and undermine health reform’s Medicaid expansion.”

Though CBPP's commentary, authored by Edwin Park, makes some valid points, we believe they in some ways are off the mark. We explain below that:

  1. Provider taxes are in fact abused to generate “free money” from the federal government, and the most significant current anti-abuse provision only applies to taxes above the existing 6 percent threshold, which is what the E&C committee would reduce.
  2. Limiting the provider tax will help force states to make trade-offs as intended in the Medicaid program.
  3. The E&C proposal is extremely modest – probably too much so.
  4. As one of the largest and fastest growing government programs, Medicaid should not be exempt from all scrutiny.

1. Provider taxes are in fact abused to generate “free money” from the federal government.

Since 1984, many states have used provider taxes to increase their payments from the federal government by making Medicaid costs seem higher than they actually are. Though more complicated in reality, the practice essentially works like this: rather than paying a hospital $100 for a procedure and receiving a $50 reimbursement from the federal government (assuming a 50% matching rate), a state will pay that hospital $106, tax the hospital $6 so the state's net cost is still $100, and then get a $53 match from the federal government -- essentially tricking the federal government to pay the state an extra three dollars on top of what is intended.

March 28, 2016

The Congressional Budget Office's (CBO) updated March baseline confirms the era of declining deficits is over. This year's deficit is expected to rise for the first time in seven years.

Despite deficit reduction enacted in recent years, deficits will approach 2009 levels by 2026, making it the largest nominal-dollar deficit ever outside of a recession.

March 24, 2016

In advance of its scheduled release of an analysis of the President's budget, the Congressional Budget Office (CBO) has updated its budget projections through 2026. Their new estimate shows a very similar picture to their last baseline in January: essentially unchanging debt as a share of Gross Domestic Product (GDP) in the near term but rising debt after that, with $1 trillion deficits still returning by 2022. This blog goes into further detail about CBO's March budget projections and what has changed since January.

Over the next ten years, deficits are projected to total $9.3 trillion, or 4.0 percent of GDP. Deficits will rise nearly every year in dollar terms over this time period. The deficit will stay around 2.9 percent of GDP through 2018 but rise steadily to 4.9 percent by 2026. These widening deficits drive the rapid rise in debt after 2018, when it increases from 75.4 percent in 2018 to 85.6 percent by 2026. The previous projection had debt reaching 86.1 percent in 2026.

Driving the rise in debt over the next decade is rising spending coupled with stagnant revenue. Spending is projected to rise from 21.1 percent of GDP in 2016 to 23.1 percent by 2026, driven entirely by increases in Social Security, health care, and interest spending. At the same time, though, revenue will essentially be flat, falling slightly from 18.2 percent in 2016 to 18.0 percent in 2019 and back up to 18.2 percent in 2026, as growing individual income tax revenue is largely offset by falling corporate revenue and Federal Reserve remittances. Spending and revenue average 22.1 and 18.1 percent of GDP, respectively, over the next ten years, similar to their totals in the January baseline.

Budget Metrics in CBO's Updated Baseline (Percent of GDP)
  2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Ten-Year
Outlays
March 21.0% 20.8% 21.4% 21.8% 22.0% 22.5% 22.5% 22.4% 22.8% 23.1% 22.1%
January 21.1% 20.9% 21.5% 21.8% 22.0% 22.5% 22.4% 22.3% 22.8% 23.1% 22.1%
Revenue
March 18.2% 18.1% 18.0% 18.1% 18.1% 18.1% 18.1% 18.1% 18.2% 18.2% 18.1%
January 18.2% 18.1% 17.9% 18.0% 18.0% 18.0% 18.0% 18.1% 18.1% 18.2% 18.1%
Deficits
March -2.8% -2.7% -3.4% -3.7% -3.9% -4.4% -4.4% -4.3% -4.6% -4.9% -4.0%
January -2.9% -2.8% -3.5% -3.7% -4.0% -4.4% -4.4% -4.3% -4.6% -4.9% -4.0%
Debt
March 75.5% 75.4% 76.2% 77.2% 78.3% 79.8% 81.2% 82.4% 83.9% 85.6% N/A
January 75.7% 75.7% 76.7% 77.8% 78.8% 80.3% 81.7% 82.8% 84.3% 86.1% N/A

Source: CBO

March 24, 2016

The Congressional Progressive Caucus (CPC) released their “People’s Budget,” an alternative to the House budget released last week. The budget offers a more liberal alternative than that proposed by the President and puts debt on a downward path. Major changes in the People’s Budget include dramatic increases in the infrastructure and education spending, and a wide range of tax increases focused on high earners.

The CPC's budget proposes both higher taxes and higher spending in most areas. It calls for $9.2 trillion of gross savings and $5 trillion in investments and other costs over ten years, resulting in $5.1 trillion of deficit reduction over the next decade, including interest savings. This deficit reduction would put debt on a downward path from 77 percent of Gross Domestic Product (GDP) in 2016 to 68 percent of GDP in 2026. By contrast, the Congressional Budget Office (CBO) baseline projects that debt will rise to 86 percent by 2026.

March 24, 2016

The Republican Study Committee (RSC) has released an alternative to the House Republican budget that outlines their vision for the country’s fiscal future. Their plan aims to balance the budget in eight years and reduce the ten-year deficit by $8.6 trillion. As a result, debt would decline faster than the House Republican budget, with debt at 53 percent of Gross Domestic Product (GDP) by the end of the next 10 years, down from 75 percent today.

By their own estimates, the plan would cut spending from 19.2 percent of GDP in 2017 to 17.9 percent by 2026. Revenues would remain at current law levels, remaining around 18 percent for most of the decade.

March 22, 2016
Donald Trump and Ted Cruz's Magical Budget Math

Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt, wrote an op-ed that appeared in The Daily Beast. It is reposted here.

The GOP frontrunners wave ‘growth’ and ‘waste, fraud and abuse’ wands. Don’t get distracted.

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