The Bottom Line

June 9, 2015

Over the past few years, we have seen many attempts by lawmakers to wriggle out of budgetary discipline by resorting to budget gimmicks. A new CRFB chartbook and one-pager highlight many of these gimmicks, including when they have been used and just how they work.

The one-pager, in particular, focuses on four of the most-frequently used gimmicks in recent years.

June 9, 2015

Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.

The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.

The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.

June 4, 2015

Former Arkansas Governor and Republican presidential candidate Mike Huckabee has criticized other candidates who are calling for entitlement reform, but the promises he makes simply don’t add up. Yesterday at a campaign event in Florida, Governor Huckabee suggested that Social Security and Medicare should not change for anyone currently paying into the program, after he has already pledged to oppose any increase in taxes.

When it comes to Social Security, the Huckabee plan is mathematically impossible if he intends to keep the program as self-financing. The program is scheduled to run out of funds on a combined basis by 2033, which is more than 20 years before those newly entering the workforce begin to retire. Even eliminating all benefits for new workers would have no impact on the date of insolvency. That means the Huckabee plan for Social Security would effectively call for cutting benefits across-the-board by 23 percent in the early 2030s.

June 4, 2015
Another Look at That IMF Paper on Debt–and What It Means for the U.S.

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

I draw a slightly different conclusion from the International Monetary Fund’s new discussion note, “When Should Public Debt Be Reduced?“ than does my fellow Think Tank contributor David Wessel. The paper argues that while debt is bad for economic growth, under many circumstances paying down a country’s national debt is not desirable. As long as a country isn’t bumping against the upper limit, or exceedingly high debt levels (and, by global standards, the U.S. is not) the policies to pay down the debt–raising taxes or cutting productive government spending–do more damage to economic growth than the good that comes from debt reduction.

But the paper also argues that countries should reduce their debt-to-GDP ratio to ensure that debt isn’t growing faster than their economy.

June 2, 2015

Update: This blog was updated on June 30 to reflect a CBO estimate published on June 23. Our original estimate was $13 billion, based on staff calculations and information published in The Hill.

The House Energy and Commerce Committee recently advanced a bill (H.R. 6) unanimously intended to facilitate research into and the development of medical cures. The bill finds savings from elsewhere in the budget to pay for its $12 billion cost, abiding by pay-as-you-go (PAYGO) rules.

The 21st Century Cures Act intends to promote biomedical research, streamline drug and device development, and make the development of cures more efficient. Among other things, it reauthorizes the National Institutes of Health (NIH) through FY 2018, creates a $2 billion per year NIH Innovation Fund through 2020, makes several changes to facilitate drug development and Food and Drug Administration (FDA) approval, utilizes health IT and telehealth to increase access to new developments, and creates a flexible $110 million per year Cures Innovation Fund through 2020.

June 2, 2015

Update (6/12/15): A new CBO score estimates that repealing IPAB will cost $7.1 billion over ten years, with all of the cost recorded after 2021. The text has been updated to reflect this score.

The House Ways and Means Committee today will markup several bills, including repeal of the Independent Payment Advisory Board (IPAB) and the medical device tax. You can find out more about the markup on the Ways and Means Committee website.

Unlike full ACA repeal, these policies stand a chance of overcoming a Presidential veto due to the bipartisan support already exhibited for each: as of this writing, the medical device tax repeal bill in the House (HR 160) has 281 cosponsors while the IPAB repeal bill (HR 1190) has 233 cosponsors. However, repealing these policies without offsetting savings from health care or revenue would be a mistake. IPAB, in particular, should not be abolished without a replacement that can similarly restrain long-term Medicare cost growth.

The Joint Committee on Taxation (JCT) has estimated that repealing the 2.3 percent medical device tax would cost $26.5 billion over ten years. However, JCT estimates that the amendment in the nature of a substitute that is expected to replace the bill in markup will reduce revenues by $24.4 billion over the same period.

Although the original co-sponsors of the bill, Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI), said they expect the bill to be offset, no cost-savers have been produced yet. We suggested bundling payments for inpatient care as one option, which not only would produce enough savings to fully offset repeal but also achieve much of its savings from providers cutting their medical device costs. Thus, the medical device industry would still be asked to contribute to deficit reduction, but in a more efficient manner. There are many other options available as well, as we showed at the time and in our latest health care options.

Potential Offsets for Medical Device Tax Repeal
Policy Ten-Year Savings
Memo: Repeal Medical Device Tax -$24 billion
Health Options
Expand bundled payments for inpatient care $25 billion
Reduce state Medicaid provider taxes to 4.5 percent of patient revenues $35 billion
Reduce Medicare coverage of hospital "bad debts" $30 billion
Encourage use of generic drugs by low-income Part D beneficiaries $20 billion
Equalize payments for similar services performed in different settings $20 billion
Increase Medicare Advantage coding intensity adjustment $20 billion
Increase Medicaid drug rebates $10 billion
Revenue Options
Move up "Cadillac tax" by one year to 2017 $35 billion
Eliminate tax breaks for oil and gas companies $40 billion
Increase cigarette tax by 50 cents $35 billion
Close "John Edwards/Newt Gingrich" loophole $35 billion
Limit tax benefit of retirement accounts $30 billion
Eliminate tax exclusion for private activity bonds $30 billion
Require Social Security numbers for refundable portion of child tax credit $25 billion
Eliminate the mortgage interest deduction for second homes and yachts $15 billion

Source: CBO, JCT

June 1, 2015

The President signed a two-month extension of the highway bill on Friday evening, postponing decisions about spending and the financing of the Highway Trust Fund until July 31. This gives lawmakers time to find a long-term solution to highway funding.

Highway revenues, such as the gas tax, have remained relatively stagnant since 2008 while spending has grown, resulting in a shortfall of approximately $13 billion this year, or $175 billion over the next ten years. Because of the shortfall, Congress has often needed to provide extra funding when extending the highway bill. This time, however, the two-month extension was possible without any additional funding because gas tax revenues exceeded previous projections. Last summer's transfer intended to provide enough funding to continue highway spending at current levels until May 31, but since that time oil prices have dropped quickly, causing an increase in gasoline consumption and tax revenue. As a result, highway programs now have enough money to last through July, but the law authorizing money to be spent still expires at the end of May. Last week's bill aligns the deadlines, so the authorization and the money will now both expire at the end of July.

May 29, 2015

Lawmakers have many potential options to address the shortfall in the Highway Trust Fund. With the President expected to sign a two-month extension of the highway authorization bill soon, lawmakers have bought themselves time to work on a solution to the Highway Trust Fund's $175 billion ten-year shortfall. Over the past several years, Congress has only enacted short-term solutions that have papered over the shortfall, but they should use this opportunity to provide a real and lasting solution to bring revenues and spending in line.

Our plan The Road to Sustainable Highway Spending provides one approach. It would fully pay for a $25 billion upfront transfer to the trust fund to pay for previously-authorized spending, and then bring dedicated revenue and highway spending in line by raising the gas tax by 9 cents and limiting spending to prior year's income. That policy is the default option, and lawmakers could instead use a fast-track process for tax reform that the plan provides to either raise the gas tax further or use another financing source if they wanted higher spending or a lower gas tax increase.

The report also provided four appendix tables with numerous options to increase revenue from current sources, use new transportation-related revenue sources for the trust fund, cut highway spending, or finance a general revenue transfer. The tables are shown below, and you can also download an Excel version of all four here.

May 28, 2015
There are a lot of liabilities out there

The Federal Reserve Bank of Richmond has updated their “Bailout Barometer,” which measures the total financial sector liabilities that have a government guarantee. The total amount guaranteed by the federal government in 2013 was nearly $26 trillion, 60 percent of the total liabilities in the financial sector, a notable increase from the barometer's first estimate of 45 percent guaranteed in 1999.

These guarantees are categorized as either explicit, though guarantee programs like the Federal Deposit Insurance Corporation (FDIC) insurance, or implicit, through the assumption that the government will protect the liabilities in any "too-big-to-fail" bank.

About 35 percent, or $15 trillion, of the financial sector's liabilities are explicitly guaranteed by the government. That figure includes FDIC-insured deposits, similar insurance at credit unions, the total liabilities of the two major Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, and the pension liabilities covered by the Pension Benefit Guaranty Corporation (PBGC).  The cost of providing most of these guarantees is already covered by various fees. We've written previously about proposals to remove the GSEs from the government's books here and the financial problems facing the PBGC here.

May 26, 2015
To Balance, Budget Would Need Implausible Levels of Growth

The Congressional budget resolution proposes to bring the budget into balance by reducing spending $5.3 trillion over the next decade while keeping revenue at current law levels (i.e., no tax cuts). But at the same time, it calls for roughly $2 trillion worth of tax cuts from repealing taxes in the Affordable Care Act (ACA) and extending various expired tax breaks. Some have suggested (subscription required) this $2 trillion difference could be bridged with dynamic growth effects that must now be scored by the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). However, we find that even under very generous assumptions, the use of dynamic scoring could only recover about one-third of the lost revenue.

Source
Direct Revenue Impact Dynamic Impact (Generous) Max Percent of Revenue Recovered
Repeal ACA Tax & Coverage Provisions ~$1.3 trillion ~$0.3 trillion
~25%
Revive Extenders and Enact Tax Reform ~$0.7 trillion ~$0.4 trillion ~55%
Total Revenue Lost ~$2 trillion ~$0.7 trillion ~35%

Source: CRFB calculations based on Senate Budget Committee and Joint Committee on Taxation documents.

The $2 trillion revenue gap in the budget resolutions comes from two sources. First, the budget calls for the repeal of the tax increases enacted in the Affordable Care Act ("Obamacare") to help pay for the expansion of health insurance coverage. We estimate this would cost roughly $1.3 trillion over the next ten years, based on 2012 estimates. The budget resolution also calls for budget process reforms that would allow temporary or expired tax breaks to be continued without offsets, a move that could reduce revenue somewhere in the range of $700 billion, depending on the exact details.

At the same time, the budget calls for repealing the coverage provisions of the Affordable Care Act and enacting tax reform, two changes which could produce additional economic growth and therefore higher revenue collection. Yet this additional revenue – at least as scored by JCT and CBO – will almost certainly fall short of the $2 trillion in revenue losses.

May 22, 2015

This week, Representatives John Carney (D-DE) and Jim Renacci (R-OH) introduced a bipartisan bill to improve the budget process. The Budget Integrity Act of 2015 contains many changes similar to the recommendations we have made in our Better Budget Process Initiative papers Improving Focus on the Long Term and Improving the Debt Limit

The bill would make five main reforms:

1.  Require Long-Term Cost Estimates for Legislation with a Significant Fiscal Impact – As we proposed in our paper, Improving Focus on the Long Term, the Budget Integrity Act would require more long-term scoring of select legislation. Specifically, it would require the Congressional Budget Office (CBO) estimates to include an analysis of the 30-year impact of legislation with a projected gross budgetary impact of at least 0.25 percent of Gross Domestic Product ($45 to $69 billion) in any year this decade. This is similar to the provision included in the conferenced budget resolution that we've written about.

2.  Codify Rules Objecting to Legislation That Would Increase Long Term Deficits – As we mentioned in our paper, Improving Focus on the Long Term, Senate rules currently include a point of order against legislation that increases the deficit by more than $5 billion in any of the four decades beyond the 10-year budget window; 60 votes are required to wave this point of order. The Budget Integrity Act codifies this rule into law so it cannot be repealed or changed by a new Senate rule, and also applies this point of order to legislation in the House.

3.  Require CBO and Office of Management and Budget (OMB) Reports on Revenue, Deficits, and Debt over 40 Years – The Budget Integrity Act proposes specifying that CBO and OMB should report 40-year budget outlooks with their normal 10-year projections. It also requires these reports to include long-term projections for both current law and current policy.

May 21, 2015

Earlier this week, Senate Budget Committee Ranking Member Bernie Sanders (I-VT) introduced the Medicaid Generic Drug Price Fairness Act, a bill designed to hold down spending on generic drugs in Medicaid. The bill, which has also been introduced in the House by Rep. Elijah Cummings (D-MD), is a reprise of similar legislation introduced in the last Congress.

Skyrocketing Generic Drug Prices

The legislation comes in the wake of a huge jump in generic drug prices in 2014 -- even among certain drugs that have been on the market for a considerable amount of time -- without a clear cause. In some cases, the generic drug is now barely cheaper than the brand-name equivalent that benefited from patent protection. Forbes cites a report showing that several drug groups at least doubled in price and some jumped by much more than that. A few drugs whose prices jumped by an order or two of magnitude drew the particular ire of Sen. Sanders and Rep. Cummings last year.

Some of the price increases are almost certainly the result of raw material shortages or price markups for specific compounds needed in production, but many experts suspect that consolidating market power among generic drug producers and decreasing competition may be playing a significant role. Generic drug-makers, including during testimony at Sen. Sanders' Subcommittee hearing late last year, have generally refused to clarify what the causes have been.

May 21, 2015

Marc Goldwein is the Senior Vice President and Senior Policy Director of the Committee for a Responsible Federal Budget. He wrote a guest post that appeared on the RealClearPolicy blog. It is reposted below.

Congress faces yet another deadline, and yet again is set to stall. This time, there literally could be a bumpy road ahead.

The current legislation authorizing highway and mass-transit spending is scheduled to expire at the end of the month. Not long after that, the Highway Trust Fund (HTF) will run out of reserves, which will cause road-improvement projects across the country to grind to a halt. Legislative action is required to avoid delaying critical infrastructure projects and the jobs they produce.

A two-month extension of highway funding has already been passed by the House and is likely to be enacted soon. Lawmakers should use the extra time to end the cycle of temporary fixes and produce a long-term solution that is free of gimmicks and is fiscally responsible.

Another short-term extension is in keeping with Washington's recent track record in dealing with similar circumstances. Time after time, deadlines have been nearly missed or even outright disregarded when it comes to important budget and fiscal matters. Lawmakers have often kicked the can down the road with short-term patches, only to be forced to address the same issue again and again. Steering haphazardly over these "fiscal speed bumps" has imperiled the nation's finances and caused voters to question the ability of Congress to function.

May 21, 2015

The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.

Consensus on the Gas Tax

Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.

No One Likes the Sequester

The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.

May 19, 2015

The Peter G. Peterson Foundation (PGPF) hosted its 2015 Fiscal Summit today, which brought together leading lawmakers and policy experts to discuss the nation's economic and fiscal challenges. Part of the agenda was the "Solution Initiatives III," where five think tanks – the American Action Forum (AAF), the American Enterprise Institute (AEI), the Bipartisan Policy Center (BPC), the Center for American Progress (CAP), and the Economic Policy Institute (EPI) – presented their ideas to improve the nation's finances and prioritize different programs. As the title indicates, this is the third time PGPF has had think tanks present fiscal solutions after previous rounds in 2011 and in the run-up to the fiscal cliff in late 2012.

In contrast to current projections, which have debt rising continuously starting later this decade to over 100 percent of Gross Domestic Product (GDP) by 2040, the plans would all either stabilize debt at about its current level or put it on a clear downward path. AAF is the most aggressive, getting debt down from 74 percent of GDP this year to 16 percent by 2040. CAP, EPI, and AEI also put debt on a downward path to 46, 54, and 63 percent, respectively, while BPC stabilizes debt at about its current level.

 

May 18, 2015

In our recently released plan, The Road to Sustainable Highway Spending, we propose a variety of measures to support the Highway Trust Fund (HTF), including providing fully offset funding for previous commitments, raising the gas tax, making sure we spend within our means in the future, and creating a "fast track" plan for tax reform to provide alternative financing. Additionally, we propose a few new reforms that will fix the inconsistency within the budget process that effectively exempts highway spending from budget discipline.

As we've explained before, the budget has a hybrid system for the HTF that treats contract authority (akin to budget authority in this case) as mandatory spending while treating outlays as discretionary spending. This nuance allows increased HTF spending to bypass both the Budget Control Act (BCA) caps on discretionary budget authority and pay-as-you-go (PAYGO) rules on mandatory outlays, permitting Congress to approve additional infrastructure investment without providing the means to pay for it. In addition, under existing budget rules, the Congressional Budget Office is required to assume that highway spending continues at inflation-adjusted levels in the baseline, even after the trust fund is depleted. As a result, Congress can enact legislation increasing spending for highways without increasing revenues and can make general revenue transfers to cover the inevitable shortfalls in the trust fund without paying for the added costs.

May 14, 2015

With the Social Security trust funds facing a significant shortfall over the next 75 years and expected to run out of money within 20 years, Alicia Munnell of the Center for Retirement Research at Boston College highlights two loopholes that could be closed to improve the program's solvency in a small but meaningful way.

Noting that creative ways to maximize Social Security benefits have been gaining popularity in recent years, Munnell focuses on two strategies to exploit loopholes she and her colleagues discussed in 2009 policy briefs, which have yet to be closed (the third loophole she highlighted has since been shut down through a new Social Security Administration regulation).

The first allows married beneficiaries reaching the normal retirement age (NRA, currently 66) to choose either to claim their own worker or spousal benefits (which is equal to one-half of your spouse's benefit), and the option to switch their choice later. This gives them the option of claiming a spousal benefit at age 66 and then switching over to their own unaffected retirement benefit when it maxes out at age 70, effectively giving the individual up to four years of the spousal benefit entirely on top of their own earned benefit. This loophole achieves no policy goal, and appears the result of a historical accident.

May 14, 2015

The budget resolution conference agreement has passed both the House and Senate. While we previously wrote about the conference's deficit reduction and budget process issues, a likely flash point between Congress and the President will be how the Congressional budget handles discretionary spending and the sequester. While the budget resolution does not call for changes in the discretionary spending limits set under sequestration, the discretionary spending levels in the budget directly and indirectly deviate from the Budget Control Act (BCA).

The conference agreement does this by cutting both non-defense discretionary (NDD) spending below sequester levels and using Overseas Contingency Operations (OCO) funding to allow the defense budget to go above the sequester levels. For FY 2016, the conference agreement would keep spending at the levels set by the sequester. In addition the conference agreement leaves open a mechanism for sequester replacement in a fiscally responsible way, though this may still lead to conflicts between the House, Senate, and White House.

Discretionary spending in FY 2016

For the FY 2016 appropriations season, which we will continue to update on The Bottom Line as bills develop, the agreement abides by the sequester levels for non-war spending, although it would also effectively raise defense spending by creating a $38 billion slush fund in war spending. In effect, this takes the congressional budget to the total defense request in the President's budget, which instead provided sequester relief through the normal defense channel offset with other savings. The President’s budget also provided NDD funding above the sequester with offsets.

May 13, 2015

With the deadline for extending the surface transportation authorization just a few weeks away and Highway Trust Fund (HTF) bankruptcy approaching this summer, CRFB has released the The Road to Sustainable Highway Spending, a detailed plan to fix the HTF's finances and bring greater rationality to the process of determining highway spending and revenue. The plan would fully close the $175 billion trust fund shortfall through 2025 and set up processes to make future general revenue transfers to the fund much less likely.

Click here to read the full plan.

The plan first articulates three principles that any responsible highway solution should abide by:

  1. Act quickly to ensure adequate funding. Congress must extend the highway bill this month and provide sufficient funding to avoid disruptions this summer.
  2. Offset any general revenue transfers with real savings. While at least a short-term general revenue transfer is likely needed, it would be irresponsible to enact a transfer without equal-sized spending cuts or revenue increases to offset the cost. Resorting to gimmicks such as pension smoothing undermines the trust fund’s credibility.
  3. Close the structural imbalance. Lawmakers cannot rely on general revenue transfers in perpetuity and must ultimately bring highway spending and dedicated revenue in line. Plans should close this gap, and any that fail to do so should acknowledge that further action will need to be taken in the future.
May 8, 2015
CRFB Releases Mandatory Spending and Revenue Options Compendium

CRFB has released a new compendium of over 150 options to reduce mandatory spending and raise revenue. Despite declining in deficits in recent years, the debt is still projected to rise substantially over the long term. In addition, a series of upcoming Fiscal Speed Bumps will force lawmakers to make decisions about spending and revenue that could require large amounts of offsets, or potentially add almost $2 trillion to the debt.

Click here to see the full list of options.

Our list of options is meant to assist in finding fiscally responsible Speed Bump solutions, achieve some of the unspecified savings in the budget resolution, and help make the country's fiscal situation sustainable.

This paper updates and expands a health care and revenue options report released during the fiscal cliff discussions in late 2012. The new list also focuses on revenue and health care but also includes options for other mandatory (non-health, non-Social Security) spending that may be useful in the months ahead.

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