The Bottom Line

March 9, 2015

In advance of its scheduled release of an analysis of the President's budget, CBO has updated its budget projections for the next ten years. Their new estimates show a somewhat improved but similar picture to their last baseline in January: slightly falling debt as a share of GDP in the near term but rising debt after that. Debt will dip from 74 percent in 2015 to 73 percent by 2018 but then rise to reach 77 percent by 2025. This blog goes into further detail about CBO's March budget projections and what changed since January.

Over the next ten years, deficits are projected to total $7.2 trillion, or 3.1 percent of GDP. Looking at individual years, though, deficits will be rising throughout most of the period. The deficit will stay around 2.5 percent of GDP through 2018 but rise steadily to 3.8 percent by 2025. These widening deficits drive the rise in debt after 2018, when it increases from a low of 72.9 percent in 2018 to 77.1 percent by 2025. The previous projection had debt reaching nearly 79 percent in 2025.

March 5, 2015

Congress approached and addressed the first impending "Fiscal Speed Bump" this week, cleanly funding the Department of Homeland Security (DHS) with appropriations through the rest of the fiscal year. The updated set of speed bumps now have two more approaching in March - the expiration of the "doc fix" for the Medicare Sustainable Growth Rate (SGR) and the reinstatement of the debt ceiling (though the Treasury Department's "extraordinary measures" will move the actual date for action to this fall). We wrote this week on both the prospects for the doc fix can getting kicked down the road until later this year or next and the hard deadline for the debt ceiling in the fall.

In the coming weeks, lawmakers will release their budget resolutions outlining their blueprints for Fiscal Year 2016. Their passage starts the appropriations process, which requires bills to be passed before the October 1 deadline, which coincides with the expiration of the Ryan-Murray budget deal.


March 5, 2015

The Senate Finance Committee held a hearing Tuesday on how best to achieve "tax fairness" as a part of their larger focus on tax reform. Testifying before the committee included Steven Rattner, the chairman of Willett Advisors LLC and a current member of the steering committee for the Campaign to Fix the Debt. Rattner's testimony focused on using the tax code to address income inequality as well as the need to increase tax revenue to a level that makes the budget fiscally sustainable, principles shared by Fix the Debt's Case for Fundamental Tax Reform.

Also testifying before the committee were Dr. Lawrence Lindsey, President and CEO of the Lindsey Group; Deroy Murdock, Senior Fellow at the Atlas Network; and Dr. Heather Boushey, Executive Director of the Washington Center for Equitable Growth. Each witness came to the hearing with a different stance on how the tax code currently treats earners and how it ought to treat earners.

Rattner emphasized the tax code’s historical use as a way of alleviating income inequality. The decreasing marginal tax rate for top earners, the rampant exploitation of tax expenditures, and out-of-date corporate tax scheme all contribute to a code that fails to address adequately the changing circumstances among many Americans, according to Rattner. Despite his long career in the financial services sector, Rattner advocated increasing the capital gains tax rate, saying that he did not believe there would be any change in work ethic among his investment banking colleagues if there were a higher tax rate:

But in my 32 years on Wall Street, I have experienced top marginal Federal tax rates as high as 50% and as low as 28%, and I never detected any change in the motivation to work on the part of myself or any of my colleagues.

March 4, 2015

The Supreme Court ruling on the King v. Burwell case being argued before the Court today will have major policy and political ramifications that have been widely discussed. But a ruling for the plaintiff (King) could also have significant budgetary implications that could complicate action on a legislative response to the Court ruling as well as any legislation to repeal and replace the Affordable Care Act.

The plaintiffs in King v. Burwell argue that language in the Affordable Care Act referring to subsidies to individuals purchasing health insurance in “an Exchange established by the State” means that individuals in the 34 states without a state-run exchange who purchased insurance through the federally-operated exchange are not eligible for the subsidies under the Affordable Care Act. If the Supreme Court rules in favor of the plaintiffs and strikes down subsidies for individuals in those 34 states, the number of people eligible for subsidies and total spending on subsidies would be significantly lower than it is under current law. According to estimates prepared by the Urban Institute, eliminating subsidies for individuals in all 34 states would affect 9.3 million people in 2016, reducing spending on subsidies for insurance premiums and cost sharing reductions by $28.8 billion in 2016 and $340 billion over ten years.

March 4, 2015

Repeating a story heard many times before, in a speech at a Federation of American Hospitals conference, House Ways And Means Chairman Paul Ryan (R-WI) indicated (subscription required) that a permanent replacement for the Sustainable Growth Rate (SGR) formula was not likely to pass by the March 31 deadline, and instead that lawmakers would do a short-term "doc fix" to buy more time.

The expiration of the current doc fix, one of this year's Fiscal Speed Bumps, would cause a 21 percent cut in Medicare physician payments starting in April as dictated by the SGR. That lawmakers are doing a short-term doc fix is unsurprising -- it's been standard operating procedure since 2003 -- but it is disappointing because they are as close to enacting a permanent replacement as ever before. Congress just isn't willing or able to agree on offsets to pay for it at this time.

What makes this situation different than previous times where lawmakers had to deal with the doc fix is that there is a bipartisan and bicameral agreement on a replacement system that would promote alternative physician payment models, and help transition away from fee-for-service payment. But while coming up with the replacement may no longer be an obstacle, the $175 billion cost through 2025 (up from $140 billion previously) apparently is, despite the fact that there are countless health care savings options available.

Our PREP Plan came up with $170 billion of savings through 2024 (adding in 2025 would bring this easily above $175 billion) through a combination of improving provider and beneficiary incentives. The appendix of that report also provides several other options that can produce tens of billions more in savings. The fact that lawmakers may have to resort to another short-term patch shows the downside of waiting until the last minute to fix a problem: they will need to spend time to negotiate a package, thus waiting takes that option off the table.

Policies in the PREP Plan

March 3, 2015

October or November -- that's the deadline by which the nonpartisan Congressional Budget Office (CBO) predicts lawmakers must increase the debt ceiling to avoid default.

March 2, 2015

Every year, the Treasury Department releases the Financial Report of the United States Government, which provides a detailed picture of the government's finances over the next 75 years. This year's report, released last week, shows a similar outlook as previous years; we are on an unsustainable fiscal path.

The report presents budget numbers in slightly different ways than CBO does. For one, instead of reporting an annual deficit, which was $483 billion in FY 2014, it reports the net operating cost. This measure differs in a few key respects:

  • It includes changes in government asset values.
  • It measures the increase in debt held by the public, a cash-flow measure, in contrast to the deficit, which uses accrual accounting for credit programs.
  • It includes the net liabilities of federal retirement and veterans' benefits (and similar programs).

The net operating cost is usually higher than the deficit, but it was much higher this year at $791 billion. Most of this is reflected in the fact that debt increased by a lot more than the official deficit did.

The Financial Report also measures net liabilities of the federal government over 75 years. In addition to the "net position," which is the stock to the net operating cost's flow (like debt is to deficits), it also separately evaluates the net social insurance liabilities of Social Security and Medicare and total net liabilities for noninterest spending. The current net position is $17.7 trillion, and the total noninterest liability going forward is $4.7 trillion, or 0.4 percent of total GDP over the next 75 years. Within the total noninterest liability is the net social insurance liability of Social Security and Medicare, which is $41.9 trillion (4 percent of 75-year GDP), or $14.1 trillion (1.3 percent of 75-year GDP) if current trust fund balances and Medicare general revenue transfers are counted. These totals are larger in nominal dollars than last year's report but similar as percentages of GDP.

February 27, 2015

Dr. Elliott Fisher, former Senator Judd Gregg (R-NH), and Dr. James Weinstein penned an op-ed published in Modern Healthcare discussing the need to move away from fee-for-service and towards accountable and effective care in Medicare. They discussed findings of a collaboration between the Dartmouth Institute, Dartmouth-Hitchock Health, and the Campaign to Fix the Debt to create a number of suggestions for establishing better Accountable Care Organizations (ACOs) through improving the financial model and patient engagement. The full findings are available as a white paper, released yesterday.

They noted the quick timeline that the Department of Health and Human Services (HHS) has established for moving to new payment models and the difficulties ACO implementation has faced thus far:

HHS is seeking to tie 85% of traditional Medicare payments to quality or value by the end of 2016 and 90% by the end of 2018; and having 30% of Medicare payments in alternative payment models—such as ACOs—by the end of 2016 and more than 50% by 2018.

Transitioning away from fee-for-service payment at such a pace, however, will require major improvements to alternative payment models and additional reforms, some of which may require Congress to act.

ACOs in Medicare—the largest alternative payment model—continue to grow in number, with 424 organizations now serving roughly 7.8 million beneficiaries, mostly within the Medicare Shared Savings Program. However, while the early results of the Medicare ACO programs are in many ways promising, they also highlight the need for further changes. Initial data on financial performance show that only about one-quarter saved enough money to generate shared savings. Many ACO beneficiaries are unaware that they are receiving care from the ACO and seek it from non-ACO specialists or healthcare agencies, making it difficult for the physicians in their ACO to coordinate and improve their care.

The solution to fixing ACOs, they write, lies in two separate strategies.

First, the financial model for ACOs should offer them a greater share of their initial savings (to help fund start-up costs), provide stronger incentives to induce and maintain participation from low-cost provider organizations, and foster alignment of payment schemes across all payer types—not just in Medicare. This strategy will encourage the growth of shared-savings models and motivate high-performing healthcare systems to join the ACO programs.

The second strategy would improve patient engagement in ACOs by modifying how Medicare beneficiaries are assigned to an ACO: Beneficiaries should be given the opportunity to choose to join their ACO; for those not actively choosing, those eligible should be assigned at the beginning of the year (so that their ACO can contact them). Medicare should also test a benefit design that uses modest financial incentives to encourage patients to seek care within their ACO or from providers outside the ACO whom the ACO recommends. Simultaneously, to make such incentives possible, supplemental Medicare plans should be restricted from covering first-dollar beneficiary costs for non-ACO services.

February 27, 2015

Speculation over the next director of the Congressional Budget Office ended today as the House and Senate Budget Committees announced that Keith Hall would become the ninth director in the agency's history. He will succeed Doug Elmendorf, who has been the director since 2009, on April 1.

As a labor economist, Hall has a long history of service within the federal government and in academia. He served as Commissioner of the Bureau of Labor Statistics between 2008 and 2012 and Chief Economist for the Council of Economic Advisers between 2005 and 2008. He also worked in the Commerce Department and is currently the chief economst for the International Trade Commission. Hall has been a senior fellow at the Mercatus Center at George Mason University and has taught there as well as the George Washington University, Georgetown University, the University of Arkansas, and the University of Missouri.

February 27, 2015

Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, testified Wednesday in front of the Ways and Means Social Security Subcommittee on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

Without congressional action, the trust fund reserves will be depleted next year. The exhaustion of the DI fund, one of the upcoming fiscal speedbumps, would result in a roughly 20 percent across-the-board benefit cut. The President has proposed reallocating money from the Old Age fund to bolster the DI fund. This measure, known as a reallocation, has sparked much debate after a new House rule was adopted requiring legislation implementing such a transfer to also include reforms.

Proponents argue that reallocation is a routine measure, enacted numerous times in the past, and is therefore adequate in the current situation. In his testimony, Lorenzen explained that previous reallocations have often been accompanied by reforms, a precedent that's particularly important to follow this time.

After a thorough review of past reallocations, Lorenzen reaches four major conclusions:

February 26, 2015

No matter how difficult the conversation, the national debt needs to be a top priority in the 2016 presidential election, and the next president needs to have a clear plan to bring down the debt in the coming years. Former Senators Judd Gregg and Evan Bayh explained this in an op-ed in Roll Call on Monday while promoting First Budget, an initiative committed to bringing the debt into the spotlight for the 2016 presidential primaries and demanding a debt plan from presidential candidates.

The Senators know how difficult it can be for politicians to discuss tough issues, writing:

As former — and maybe reformed — elected officials, we know how much politicians like to talk about good news: tax breaks, infrastructure improvements, job growth announcements.

But they are far less interested in talking about the bad news and hard choices on the horizon as the federal debt continues on an unsustainable upward path.

Politicians don’t see big constituencies for that kind of news, and no special interests score them on whether they discuss it with voters. Even the close cousin of bad news — blunt talk — is usually avoided in politics.

Yet, politicians and voters alike should understand sacrifices will be necessary in the years ahead as an aging population, rising health care costs and a deeply flawed tax system put more and more pressure on the federal budget.

February 26, 2015
Fix the Debt, Dartmouth College, and Dartmouth Hitchcock Release White Paper

Today, Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College released a paper titled Medicare Slowdown at Risk: The Imperative of Fixing ACOs. At an event on Capitol Hill this morning, stakeholders from the Administration, private sector, and the academic community commented on the ideas in front of an audience of Congressional staff, press, and policy experts.

You can read the paper here, and a 2 page summary here. We also previously commented on accountable care organization (ACO) results that were released last September.

The paper represents the culmination of work that began this past September at the Dartmouth Summit on Medicare Reform, a conference that Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College hosted in Hanover, NH.

February 25, 2015

In a little over one month, lawmakers will face their second significant Fiscal Speed Bump of the year when the one-year "doc fix" expires. At that point, Medicare physician payments will be cut by 21 percent because of the long-standing Sustainable Growth Rate (SGR) formula. Policymakers have avoided the cuts since 2003 through temporary doc fix patches, but the relatively low cost of a permanent fix and a bipartisan, bicameral framework for replacement in the last Congress have increased the prospects that a permanent doc fix could finally happen.

In the run-up to the lame duck session last Congress, we released the PREP Plan, which outlined tax and health savings options to pay for a two-year tax extenders and permanent doc fix package. Ultimately, lawmakers added the cost of one year of tax extenders to the debt, but they have the chance to keep with precedent and pay for a Medicare physician solution. The PREP plan divides savings equally between beneficiary and provider changes, focusing on reforms that can improve incentives.

The beneficiary changes in our plan would modernize Medicare's cost-sharing system by simplifying Part A and B deductibles and coinsurance, while creating a new out-of-pocket limit on cost-sharing. At the same time, the plan would restrict first-dollar coverage by supplemental insurance like Medigap to discourage over-utilization of care, and provide additional assistance to lower-income beneficiaries who need it most. Similar reforms have been proposed by Simpson-Bowles, the Bipartisan Policy Center, the Brookings Institution, and the Center for American Progress, among others.

February 25, 2015

Federal Reserve Chair Janet Yellen delivered testimony on the Semiannual Monetary Policy report to the Senate Banking Committee on Tuesday. Not surprisingly, the hearing focused on the economic outlook, the timing of an increase in the federal funds rate, and financial regulatory policy. But the topic of federal debt did come up, and Yellen corroborated our view on why debt should be put on a downward path.

In response to a question from Sen. Heidi Heitkamp (D-ND) about longer-term challenges facing the economy, Yellen responded that one was "longer-run issues with the federal budget."

I think Congress has made painful decisions that have now really stabilized, brought down the deficit very substantially and stabilized for a number of years the debt-to-GDP ratio. But eventually debt-to-GDP will begin to rise, and deficits will increase again as the population ages and Medicare, Medicaid, and Social Security get to be a larger share of GDP under current programs. And there are lots of ways in which these are problems we've known about for a long time.

February 25, 2015

This afternoon, Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, will testify in front of the Ways and Means Subcommittee on Social Security on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

February 24, 2015

The Council of Economic Advisers released its 2015 Economic Report of the President last week, discussing several recent economic developments and how the President's policies fit into them. One chapter of particular interest given its possibility of being on the policy agenda in this Congress is on business tax reform. The chapter discusses the problems with the current system—notably, its high marginal tax rate, relatively narrow tax base, and economically distorting incentives—and how the President's approach would help the economy, productivity, and living standards.

For background, the Administration's policy on business tax reform can be summarized between the specific policies laid out in the budget, with additional detail in its business tax framework. The budget calls for the corporate tax rate to be reduced from 35 to 28 percent and extensions/expansions of some existing tax breaks, like a permanent extension of the R&E credit and new or extended tax breaks for clean energy. The budget also contains a number of revenue-raisers that would pay for them, including a 19 percent minimum tax for income earned abroad, the elimination of tax incentives for fossil fuel producers, and the changing of inventory accounting rules.

The revenue-raisers would pay for the tax breaks but would leave only $140 billion of revenue to pay for the rate cut, only about one-fifth that is needed. However, the framework states that additional revenue could come from addressing depreciation schedules and limiting the deductibility of interest. Finally, the budget dedicates revenue to the Highway Trust Fund from a 14 percent temporary tax on earnings held abroad by U.S. companies.

Components of President Obama's Business Tax Reform Plan
Policy Savings/Cost (-) Through 2025
Reform the international tax system $238 billion
Change inventory accounting rules $84 billion
Eliminate fossil fuel tax preferences $50 billion
Reform financial and insurance industry tax treatment $34 billion
Enact other revenue raisers $40 billion
Extend and expand R&E credit -$128 billion
Enact/extend small business tax cuts -$94 billion
Enact/extend manufacturing and clean energy incentives -$58 billion
Enact infrastructure and regional growth tax cuts -$26 billion
Total, Business Tax Reform Reserve $141 billion
Make unspecified changes to depreciation and interest deductions ~ $560 billion*
Cut corporate rate from 35% to 28% ~ -$700 billion
Implement 14% transition tax on earnings held abroad $268 billion
Dedicate revenue to Highway Trust Fund -$238 billion

Source: OMB, CBO, CRFB calculations
*Numbers represents roughly the additional revenue needed to finance the rate cut. Actual revenue may be larger since depreciation changes raise less in the long term than the short term

The chapter includes four interesting discussions of elements of business tax reform:

February 24, 2015
Dynamic Scoring Won't Be Perfect But it is Worth Doing

Rudolph Penner was the director of the Congressional Budget Office from 1983 to 1987, and he is an Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget. He wrote a guest post that appeared in the Tax Policy Center blog. It is reposted below.

February 23, 2015

CBO unofficially closed the books on the American Recovery and Reinvestment Act (ARRA, or the 2009 stimulus), putting out its final report on the economic and fiscal effects of the legislation. ARRA passed in February 2009 during what ended up being the deepest output and employment decline of the Great Recession; the economy had shrunk by 8 percent in the last quarter of 2008 and was in the process of shrinking another 5 percent in early 2009, while hundreds of thousands of people were losing their jobs each month. The legislation, originally scored as costing $787 billion, included a number of different provisions intended to stimulate the economy, including increased safety net spending, fiscal aid to states, infrastructure projects, and tax cuts for both individuals and businesses. CBO's latest report includes an updated score of ARRA ($836 billion) and adds economic effects for 2014 to the effects they already reported for previous years.

Not surprisingly, CBO finds that ARRA had limited effect on the economy in 2014 given that only 2 percent of the total deficit impact took place in that year. It boosted real GDP by between 0 and 0.2 percent in 2014 and lowered the unemployment by between 0 and 0.2 percentage points. The economic effect peaked in 2010, when nearly half of the deficit impact of the legislation took place, raising real GDP by between 0.7 and 4.1 percent and lowering the unemployment rate by between 0.4 and 1.8 percentage points. Compared to its projections at the time, CBO found much less of a boost to real GDP in 2009 but a greater boost in 2010 and 2011. It also found less of a reduction in unemployment in 2009 and 2010 but a greater effect in 2011 and 2012 than they thought at the time.

February 23, 2015
Congress Can't Dodge Social Security Disability Insurance Trust Fund's Approaching Insolvency

Jim Kolbe and Charlie Stenholm are former members of Congress and members of the Committee for a Responsible Federal Budget. Jim Kolbe (R-AZ) served from 1985 to 2007, while Charlie Stenholm (D-TX) served from 1979 to 2005. They wrote a commentary that appeared in Roll Call, which appears below.

February 20, 2015

Next Tuesday will be the 40th anniversary of the beginning of the Congressional Budget Office, and University of Maryland Professor Phillip Joyce has begun the celebration early, publishing a Brookings working paper reflecting on CBO's growth as an agency and its role in the budget process. The CBO, which was created in the 1974 Budget Act, started on February 24, 1975, when Director Alice Rivlin officially took office.

Joyce notes that CBO's visibility and reputation have grown significantly since its establishment to the point that it is central not only to the budget process but any major legislation:

CBO was created, in large part, to give Congress more leverage over the White House in key policy debates. Time and again Congress has made use of that capacity to place its own stamp on overall fiscal policy and to respond to particular Presidential policy proposals. In fact, the key events that have established and enhanced CBO’s credibility have virtually all involved its response to Presidential initiatives, such as the Carter energy policy, the Reagan budget proposals, or the Clinton and Obama health reform efforts.

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