The Bottom Line

November 19, 2014

Congress and the President need to prep for some important upcoming fiscal moments, and CRFB has a plan to help them do just that. The Paying for Reform and Extension Policies Plan, or the PREP Plan shows a path to restoring the expired tax extenders and avoiding the Medicare Sustainable Growth Rate cuts without adding $1 trillion to the deficit.

The PREP Plan assumes (but does not endorse) the passage of the Tricommittee SGR reform bill and a two-year tax extenders package. The plan includes over $250 billion of offsets, roughly two thirds from reforming incentives to slow health care cost growth and one third from improving tax compliance, along with a fast-track process for tax reform.

You can read the full plan here and view some of the details in the table below.

`Due to interactions, policies can't be scored on an individual basis
*Savings are less than $500 million

In addition to putting forward a plan, CRFB released a number of principles that should apply to any effort to continue extenders or reform the SGR.

November 18, 2014

Following a final rule issued by the Centers for Medicare and Medicaid Services (CMS), CBO has updated its estimate of various "doc fix" policies to replace the Sustainable Growth Rate (SGR) formula. The new estimates show mixed news for policymakers depending on the type of approach they wish to take.

CMS determined that the SGR would cut Medicare physician payments by 21.2 percent in April when the current doc fix expires. Simply freezing physician payments at today's levels would cost $119 billion over ten years, somewhat less than the $131 billion CBO estimated in its August baseline. Providing 0.5 percent annual payment increases, as Congress did for 2014, would cost $140 billion.

Importantly, CBO re-estimated the bipartisan agreement on a permanent SGR replacement at $144 billion, $6 billion more than projected in February – and that estimate included $16 billion of new spending that was passed in the doc fix this past spring, although some of the savings within the SGR replacement bill were used to help offset the temporary fix. 

November 17, 2014

This post is a letter from CRFB President Maya MacGuineas about the passing of former Congressman and CRFB co-Chair Bill Frenzel. You can also view the letter here.

Dear Friends,

It is with great sadness that I inform you that former Congressman and CRFB co-Chair Bill Frenzel died this morning.

November 14, 2014

The CBO has updated its data on the distribution of income and taxes. This analysis contains a wealth of data detailing changes in household income, tax rates, and other statistics since 1979. Below are some of the highlights from the report, drawing out trends since 1979 and how the new 2011 data factored in.

Tax rates have fallen for everyone since 1979 but have risen since 2011. This statistic is no surprise to those who noticed the relatively low revenue intake during and after the Great Recession.  In 1979, the average tax rate was 22 percent, but after the tax cuts in the early 2000s, they fell to around 20 percent. Since the Great Recession, they have fallen further to around 18 percent as individuals' income declined and temporary tax cuts were put in place. The rate decreases were largest for the middle quintiles but were also fairly sizeable for the lowest earners and the top 1 percent. The one major change between 2010 and 2011 – the replacement of the Making Work Pay (MWP) tax credit with the payroll tax cut – made tax rates slightly more regressive, since many of the lowest earners benefited more from MWP, and the highest earners who didn't benefit from MWP could get the payroll tax cut. However, CBO's preliminary numbers for 2013 also show that changes in tax law since 2011, namely the fiscal cliff deal and taxes in the Affordable Care Act, have partially reversed the longer trend, raising tax rates for the bottom 99 percent by 1 percentage point and by 4 percentage points for the top 1 percent.

Income has risen much more for the top 1 percent than for everyone else.  Inflation-adjusted after-tax income (which included government transfers) has risen by 58 percent overall since 2011, but the bottom 90 percent of earners on average have seen income growth below that (a low of 35 percent for the middle quintile). The next 9 percent of earners (90th to 99th percentile) have seen their income grow by more than that, but less than the top 1 percent, who saw their income grow by 200 percent. As a result, the Gini index, a commonly used measure of income inequality, has increased from .358 to .436. Although taxes and transfers do more to reduce inequality than they did in 1979, the underlying distribution of income is much more skewed.

November 13, 2014

Henry Aaron – Chair of the Social Security Advisory Board and a Senior Fellow at the Brookings Institution – recently weighed in on the Social Security Disability Insurance (SSDI) debate. Given the imminent depletion of the program’s trust fund – leading to an across the board cut in benefits in 2016 absent congressional action – experts and policymakers are starting to wonder how to best address the program’s needs.

As we have argued before, many experts agree that SSDI is facing more challenges than insolvency. Many aspects of the program could be improved, from the incentives created by the eligibility criteria to the determination process to the efforts to encourage beneficiaries to return to work.  While policymakers could simply inject funds into the program – through a payroll tax reallocation from the old-age fund, an inter-fund loan, or a general fund transfer – this would waste an opportunity to enact reforms that would make the program better for beneficiaries, workers insured by the program, and society as a whole. As Aaron explains:

Whether out of compassion or an instinct for political survival, Congress is quite unlikely to cut benefits for disabled Americans, a group that contains some of the neediest of our fellow citizens… Simply reallocating payroll taxes is not acceptable to many members of Congress in both parties. A consensus has arisen that both the design and administration of disability benefits are flawed. Critics of the program have promised to insist on reforms as a condition for agreeing to shift taxes around. Alas, agreement on just what the flaws are and what to do about them is elusive. Even worse, we lack information to undergird well-considered reforms.

The program faces challenges in a number of areas, including its core tenet, the definition of disability. To qualify for benefits, insured workers must be unable to earn above a certain threshold ($1,010 a month in 2012 for non‐blind individuals) due to a “medically determinable physical or mental impairment” (or combination of impairments) that is expected to last at least 12 months or result in death. By defining disability as the inability to work, the program discourages beneficiaries who could potentially go back to the workforce from trying, out of fear that they may lose benefits.

November 11, 2014
Pushing on Air in a Balloon: Health Cost Growth and $1,000 Pills

Dr. Eugene (Gene) Steuerle is the Richard B. Fisher chair and Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget.  He wrote a column today on his blog - The Government We Deserve. It is reposted below.

Numerous recent articles have tried to address whether health cost growth is slowing more permanently. Though I have entered that debate at times , I must admit that it’s a complex question for which there is no definite answer. Policymakers and private practitioners have improved some of the ways that health care is priced and delivered, and more improvements are no doubt forthcoming. But the stories of Gilead and its $1,000-a-pill Hepatitis C drug make one point entirely clear: improving health care costs selectively is like making indentations in a full balloon. Pushing down the air in one place merely makes it pop out somewhere else.

Consider how the government has designed health insurance, particularly Medicare. Essentially, it has delegated its constitutional powers of appropriation to private individuals and companies like Gilead. Congress doesn’t vote to spend more on hepatitis cures. It lets Gilead, along with patients and doctors, make that decision and then shift the costs back to other citizens. As long as Congress refuses to exercise its appropriations responsibility, every cost-saving measure could be nullified by a new Gilead.

The original sin of health insurance, public or private, has been to allow patients to demand and providers to supply more health care while pushing charges onto others. In the extreme, at a zero price to the patient per service received and a potentially unlimited supply of services for which more compensation and profits can be made, it is not surprising that health costs in this country have grown from about 5 percent of GDP in 1960 to around 17 percent today.

November 10, 2014

As expected, the Obama Administration today issued amendments to its FY 2015 war spending (Overseas Contingency Operations) request, adding $5.6 billion for ISIS-related operations to the $65.8 billion already requested. The request includes $5 billion for the Defense Department and $520 million for support for opposition in Syria, Lebanon, and Jordan as well as humanitarian assistance in Iraq and Syria.

The Pentagon spending mostly goes to operations and maintenance accounts in support of the Army and Air Force. The request also includes a $1.6 billion Iraq Train and Equip Fund, which would provide military support and training for the Iraqi government through FY 2017. Other items include support for the moderate Syrian opposition and support for the Jordanian and Lebanese governments in securing their borders.

Administration Amendments to War Spending Request by Category
Category FY 2015 Spending
Previous OCO Request $65.8 billion
Military Personnel $0.1 billion
Operations and Maintenance $2.3 billion
Iraq Train and Equip Fund $1.6 billion
Procurement $0.8 billion
Research, Development, Testing, and Evaluation $0.1 billion
Syrian Opposition Funding $0.2 billion
Jordan and Lebanon Funding $0.3 billion
Humanitarian Assistance $0.1 billion
Amended OCO Request
$71.4 billion

 Source: OMB
Numbers may not sum due to rounding.

November 7, 2014

Two of the biggest items among the tax extenders that Congress may consider before the end of the year are two provisions that allow accelerated write-offs of investments: section 179 expensing and bonus depreciation. Section 179 expensing provides an immediate write-off for small businesses for a certain amount of investment; both the amount and the level at which the favorable tax treatment phase out decreased significantly when the extenders expired at the end of last year. Bonus depreciation allows all businesses to write off half of certain investments immediately. Both provisions are among the costliest in the tax extenders package, costing a combined $315 billion over ten years if extended permanently.

These two policies, and in particular bonus depreciation, are generally justified as stimulative measures, and since they effect only the timing of write-offs, their temporary nature is central to their effectiveness in that regard. However, the Congressional Research Service's Gary Guenther in a recently updated report finds limited short-term economic benefit.

Though there appear to be no studies that address the economic effects of the enhanced Section 179 allowances enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The findings indicated that accelerated depreciation is a relatively ineffective tool for stimulating the economy during periods of weak or negative growth. [emphasis added]

Guenther sees many reasons why the effect of accelerated write-offs may be limited, including both their design and the economic context.

November 6, 2014

The White House this week requested an additional $6.18 billion in discretionary appropriations for the current fiscal year to cover the costs associated with mitigating the Ebola outbreak.

Of the additional funding, three-quarters is for the immediate response to tackle Ebola, while the remaining amount is part of a contingency fund to “ensure that there are resources available to meet unforeseen changes in the epidemic.” The emergency spending would go to various health agencies as well as international efforts to combat the spread of Ebola. The full breakdown of the request is as follows.

Administration Supplemental Spending Request by Category
Category FY 2015 Spending
Department of State and International Assistance Programs $2.1 billion
     US Agency for International Development (USAID) $1.98 billion
     Diplomatic Operations (Department of State) $36 million
     Contributions to International Organizations $85 million
     Bio-safety Training $5.6 million
Department of Defense (DARPA) $112 million
Department of Health and Human Services $2.43 billion
     Centers for Disease Control and Prevention $1.83 billion
     Public Health and Social Services Emergency Fund $333 million
     National Institutes of Health $238 million
     Food and Drug Administration $25 million
Contingency Fund $1.54 billion
Total, President's Request $6.18 billion

Source: OMB

November 5, 2014

With the 2014 midterm elections mostly in the books, the current Congress will return from weeks of campaigning to finish some remaining items before the end of the year and the swearing in of the new Congress. This year's lame duck session will likely to be less busy than some years, but there are still a few key things to get done before the 114th Congress begins.


Enact Appropriations

The current continuing resolution funding the government will expire on December 11, so policymakers will have to either extend it, enact appropriations bills, or cause a shutdown. This is the most important to-do list item for the lame duck Congress. Prior to the recess, appropriators indicated they wanted to get an omnibus appropriations bill done instead of a CR extending funding into the next Congress, and the chances of that look good -- thanks to the Murray-Ryan agreement setting defense and non-defense spending levels, House and Senate funding allocations are relatively close. Key questions that remain include whether lawmakers will provide supplemental funding for Ebola or ISIS and also what level of war spending they will provide (hopefully below the current level -- see "to-don't" list below).

For background on the appropriations process, see our Appropriations 101 document.

Pass Defense Authorization

Somewhat related to appropriations, lawmakers will also have to pass a defense authorization bill. For the budget world, this may be important to see if Congress will consider codifying a strict definition of war spending -- as the House budget resolution and an amendment to the House defense appropriations bill did -- or consider personnel savings policies that the Pentagon has long called for. Doing either of those things may help policymakers stay within the defense spending caps in the future and better ensure the integrity of those caps.

November 3, 2014
Despite gains, much work remains on entitlement programs

Over the long term, the country's debt is projected to grow to unsustainable levels. This outlook has not changed for the last two decades, according to a recent Washington Post op-ed authored by former Senators Bob Kerrey (D-NE) and John Danforth (R-MO), co-chairs of the 1994 Bipartisan Commission on Entitlement and Tax Reform. Entitlement trends contributing to dramatic growth in debt over the long term were considered unsustainable then, and they still are.

Kerrey and Danforth note that there has been some good news, notably the slowdown in health care spending and (temporarily) low interest rates reducing the amount the government pays in interest. However, the core drivers of our long-term problems – population aging and rising health-care costs – remain. The problems have become harder to address:

Meanwhile, the passage of time, the failure to take more ambitious actions and the enactment of new obligations have combined to limit our choices and placed the government in a more difficult position to address the challenges than it was in 20 years ago.

The debt burden has grown sharply. Debt held by the public has gone from 48 percent of gross domestic product in 1994 to 74 percent in 2014. This limits our fiscal flexibility and constrains the policy choices of future generations.

Demographics are working against us. The baby boom generation, which was coming into its peak earning years when we were on the commission, has begun to retire, slowing potential economic growth, lowering potential revenue and increasing spending on retirement and health-care benefits.

Because of the delay in addressing entitlements, it will be more difficult to turn the titanic trends in these budget programs. Social Security has run cash deficits since 2010, and every year of delay increases the shortfall which must eventually be addressed. The senators note that health care programs have expanded, income tax rates have been cut, and the amount lost annually to "tax expenditures" has increased. At the same time, discretionary spending will be at its lowest level in 50 years (as a percentage of the economy), making it increasingly difficult to find savings in that area.

October 31, 2014

Happy Halloween! For the spookiest day of the year (though some might argue that's April 15th), CRFB is thinking about scary costumes and wondering what budget polices they represent.

Frankenstein—What could be more fitting than comparing our nation’s tax code to a monster cobbled together by a mad scientist?  Comprehensive tax reform should be an essential part of the next Congress' agenda.  Its spark of life is just what this country and the economy needs.

Zombies—The undead rising from the grave is just like one of the more pressing issues in the upcoming lame duck Congress. More than 50 tax cuts known as "tax extenders" lapsed at the end of 2013, yet Congress is considering retroactively bringing them back from the dead for 2014. If a two-year extension (2014 and 2015) passes Congress after the election, the impact is a trick, not a treat, of about $85 billion added to the national debt over ten years.  But of course there could be an even scarier deal

Vampires—Interest on our national debt will suck the life out of our budget, leaving little room for important spending. Right now, interest rates are low and we pay relatively little. But Dracula is hovering above us: Interest payments are projected to nearly quadruple in nominal dollars by the end of the decade (increasing as a share of the economy from 1.3 percent in 2014 to 3.0 percent in 2024). At the same time, discretionary outlays will shrink from 6.8 percent to 5.2 percent of GDP in 2024.  The essential roles of government are being bled dry by interest on our national debt.

October 30, 2014

A recent Health Affairs piece from CRFB's Loren Adler and Adam Rosenberg showed that the prescription drug benefit, Part D, has been responsible for a majority of the Congressional Budget Office's downward revisions to actual and projected Medicare spending since 2011 (although Part A, the hospital insurance component, also played a significant role).

But judging the slowdown by how much CBO projections have changed is only one way to look at the issue. Another way would be to compare the actual slowdown in annual growth rates of each Part of Medicare over the past few years. Not surprisingly, a similar story arises from this approach -- the slowdown has been most prominent in Part D, followed closely by Part A. 

From 2010-2014, Medicare per beneficiary spending actually shrank at an average annual rate of 0.3 percent (although total spending still increased as more and more baby boomers reached retirement). As illustrated below, both Parts A and D experienced negative per beneficiary growth over this window, while Part B grew only slightly slower than GDP per capita.

October 30, 2014

As soon as the election is over, the lame duck Congress will be pressed to deal with several pieces of must-pass legislation before the end of the year, including their last chance to retroactively extend a set of tax breaks that have been expired since last year. These tax extenders are routinely extended for a year or two at a time without offsets so they add to the national debt, causing it to grow even more than already projected under current law.

An article from Bloomberg suggests that some lawmakers may be considering breaking tradition -- but not in a good way. Instead of extending the provisions for just one or two years (adding a smaller amount to the debt), they will select a few of the bigger provisions to extend permanently.

For example, one potential deal between the two parties could permanently extend and expand the research & experimentation tax credit (as provided for in H.R. 4438); permanently increase the amounts that small businesses can write off immediately; and continue the expansions to refundable tax credits like the Child Tax Credit and American Opportunity Tax Credit that were originally passed in the 2009 stimulus (ARRA) and that currently expire in 2017.  Along with these new provisions this potential deal would also provide for a two-year (2014 and 2015) extension of all the other provisions. This is bipartisanship in the worst sense: both parties adding provisions they want to the national credit card.

October 30, 2014

The National Academy of Social Insurance (NASI) released a survey last week (see video of CRFB President Maya MacGuineas at the release event) showing that a majority of Americans are willing to raise taxes – including their own – to preserve Social Security. Given the program's funding gap, it is an encouraging sign that Americans are willing to pay higher taxes to improve Social Security's solvency. Trade-off analysis, which NASI used, is an excellent way to get Americans to consider complex issues with pros and cons to all sides. Unfortunately, the design of the survey prevents the answers from being as useful as they could have been.

NASI's survey set out to determine how Americans would prefer to improve Social Security. Most respondents favored raising taxes (both the payroll tax rate and the taxable maximum) and increasing benefits. Respondents opposed raising the retirement age or means-testing benefits. This result differs from other similar surveys that found support for balanced packages of tax increases and decreased benefits for high earners.

Although it is impossible to know for sure, this survey's divergent results may have been driven by its framing of certain choices.

October 29, 2014

The last few months have seen a number of new ideas to save money in Part D of Medicare by encouraging more efficient use of drugs by prescription drug plans and beneficiaries. But Part D has also grown significantly slower than expected since its inception.

On this blog and in Health Affairs, we've highlighted the disproportionate role that Part D has played in the federal health care spending slowdown. One quarter of the $900 billion downward revision in the Congressional Budget Office's (CBO's) health care spending projections through 2021 came from Part D. And Part D's downward revision was by far the largest as a percent of program spending (nearly one quarter) among the major health care programs. Looking back further, actual 2013 Part D spending ended up almost 50 percent lower than CBO's original projection when the law passed ($50 billion vs. $99 billion), and total spending over the 2004-2013 period ended up being 36 percent lower ($353 billion vs. $550 billion).

In their Health Affairs post analyzing the Medicare slowdown, CRFB analysts Loren Adler and Adam Rosenberg cited a CBO report breaking down the sources of the slowdown in Part D. In this post, we examine more closely that report, which not only goes into the reason for slower growth in Part D but also how Part D's design compares to Medicaid in controlling costs.

In analyzing the source of the slowdown, CBO's conclusion is clear:

Taken together, the faster-than-expected slowdown in national drug spending per person and the smaller-than-expected enrollment in Part D account for nearly all of the difference between CBO’s initial projection and actual Part D spending. CBO’s original projection reflected the agency’s judgment that elements of the program’s design that were intended to foster price competition between private plans would help to limit the costs of Part D, yielding lower costs per enrollee than would be expected for a similar population under a typical employment-based drug plan offered at that time.

October 28, 2014

House Majority Leader Kevin McCarthy (R-CA) tells Politico that his priorities for the next Congress include the budget process, and in particular, evaluating the budgetary impacts of legislation over the long term and biennial budgeting. We generally share McCarthy's support for biennial budgeting though our enthusiasm depends on what emerges from the legislative process –  and it is by no means a silver bullet.

On long-term budgeting, Politico's Jake Sherman writes:

Also in McCarthy’s crosshairs: the congressional budget process. He thinks writing a budget each year is antiquated, and said Congress should consider budgeting once every two years. Also, he wants to reform the Congressional Budget Office so it studies the impact of legislation over, say, 20 years, instead of 10. He said Congress often times gets “stuck in our subcommittees” and he wants to “start looking at what we’re doing in the next 50 years.” McCarthy says Washington is frozen because the “structure holds us back.”

“The ideas are great,” McCarthy said, “but what stops the ideas from becoming law? Some of the archaic things we do.” McCarthy added, with a hefty dose of incredulity, “The budget act is the Budget Act of 1974. Does the world look like it did in ‘74?”

We are encouraged to hear McCarthy discuss the importance of long-term budgeting. Our recent paper "The Budget Act at 40: Time for a Tune Up?" shared McCarthy's concerns about a lack of focus on the long term as one of the key problems in the current budget process:

October 28, 2014
Urgency of Federal Deficit Remains

Erskine Bowles is a former co-chair of the Simpson-Bowles Fiscal Commission and member of the Committee for a Responsible Federal Budget. He wrote an op-ed that appeared in USA Today.

The good news that the budget deficit declined to $486 billion in fiscal year 2014 has prompted a declaration in some circles that the deficit is no longer a concern, and we should now turn our focus to making investments in economic growth. This either/or analysis is shortsighted and the source of many of our nation's current problems created by both parties. America is and will continue to be constrained from pursuing dynamic economic growth opportunities and from making smart investments in the future until we put our budget on a fiscally sustainable course.

I wish I could believe the recent decline in the deficit is sustainable. The temporary factors related to the recession — which caused the deficit to increase dramatically — are now receding, but the structural problems with our budget remain.

October 24, 2014

Social Security's finances are far from secure, and every year that Congress waits before addressing the problem makes it harder to fix. This week, the Social Security actuaries updated their estimates of options to restore solvency based on the assumptions in the 2014 Social Security Trustees report. Most of the options save a similar amount as last year but close a smaller percentage of the larger shortfall.

The most recent Trustees report showed a slightly bigger shortfall than last year, mostly because of slower short-term economic growth and the addition of one more high-deficit year at the end of the 75-year estimation window. Even though most policies would save about the same amount, the shortfall has grown by 6 percent, so each option closes a slightly smaller percentage of the shortfall.

October 23, 2014

In response to Howard Gleckman's piece on the FY 2014 deficit where he noted that the budget had returned to "normal," Donald Marron wrote that the most common concept of normal is not all that useful. The 2014 budget ended up being close to the 40-year historical averages for spending, revenue, and deficits. That average is often considered a benchmark for fiscal metrics, and it is frequently used by the CBO and others.

Still, Marron notes that this average may not be helpful in assessing the appropriateness of the size of deficits because of what those deficits have lead to and how bad years can skew the numbers.

But what has been the result of that “normal” policy? From 1975 to today, the federal debt swelled from less than 25 percent of GDP to more than 70 percent. I don’t think many people would view that as normal. Or maybe it is normal, but not in a good way.

Just before the Great Recession, the federal debt was only 35 percent of GDP. Over the previous four decades (1968 through 2007), the deficit had averaged 2.3 percent of GDP, almost a percentage point lower than today’s 40-year average.

But what would be a better benchmark? Brad DeLong suggests having deficits to keep debt-to-GDP constant, but that has a few problems. In the current context, it would leave debt at a historically high level and leave no room for error. Below, we will look at a few other benchmarks.

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