The Bottom Line

March 28, 2014

Senate Budget Committee Chair Patty Murray (D-WA) introduced legislation yesterday to cut taxes for low- and middle-income workers in a few different ways. The legislation is intended to be fully paid for, and although there is no official CBO or JCT score, it appears to accomplish that goal.

The tax cuts include one that has been prominent in recent years and one that has not been part of the tax code for nearly 30 years. The former is an increase in the Earned Income Tax Credit for childless workers. The policy in this bill is somewhat more generous than the President's proposed expansion, nearly tripling the maximum credit from about $500 to $1,400 in 2015 and extending the income at which the credit fully phases out to 133 percent of the full-time earnings of a minimum wage worker, or about $19,000 in 2014. Like the President's expansion, it would also reduce the age at which someone can qualify to 21 (as long as they are not a student or a dependent). To cut down on fraudulent payments, the bill would double the penalty (from $500 to $1,000) for tax preparers who fail to comply with due diligence requirements when preparing returns which claim the credit.

The second tax cut would bring back a form of the two-earner deduction, which existed in the tax code prior to the Tax Reform Act of 1986. The pre-1986 version provided a deduction to married couples equal to 10 percent of the second earner's first $30,000 of income (for a maximum deduction of $3,000). The Murray version, based on a proposal by the Hamilton Project, would instead provide a 20 percent deduction of the second earner's first $60,000 of income (for a maximum deduction of $12,000) but would restrict it to families with a child under the age of 12. It would also phase out the deduction between the income ranges of $110,000 and $130,000, coinciding with when the child tax credit phases out.

According to Murray's office, these tax cuts would cost $145 billion over ten years. They would be paid for with two variants on policies that were included in the tax reform discussion draft produced by House Ways and Means Committee Chair Dave Camp (R-MI). The first would end exceptions to the $1 million limit on the deductibility of executive compensation. Currently, performance bonuses and stock options are generally not subject to the limit. The policy would also broaden the limit to apply to all current and former employees, not just the CEO and the four other highest-paid employees. A similar policy introduced last year in the Senate was estimated to raise $50 billion over ten years.

The second policy would tax multinationals with low overseas tax rates. Currently, multinationals can defer taxation on profits earned abroad until the money is returned to the United States. The proposal would tax profits in the year they are earned if the profits are subject to a foreign tax rate less than 15 percent (effectively creating a 15 percent minimum tax). The Camp discussion draft included a similar provision, raising $115 billion over ten years, but set a rate of 12.5 percent and only included it in the context of switching to a territorial system (which would eliminate U.S. taxation on active foreign income). The Murray version could raise somewhat more.

It is good to see lawmakers finding offsets for new proposals at a time when that has often not been the case. Some version of these proposals could be components of comprehensive tax reform as well.

March 27, 2014

Congress is considering another 12-month doc fix, averting a 24 percent cut in Medicare physician payments scheduled for April 1. While the SGR patch contains several serious reforms that would reduce future health care costs, it contains one big accounting gimmick that accounts for about one-fifth of the bill's savings. The gimmick takes advantage of CBO's ten-year budget window to essentially move savings from 2025 (outside the window) into 2024. Though the bill is scored as saving $1 billion, the legislation would actually cost about $4 billion through 2024, after removing the fake savings from this gimmick.

A little background: due to the 2011 Budget Control Act, the 2013 Ryan-Murray deal and a 2014 bill affecting military COLAs, certain mandatory programs are subject to sequestration through 2024, and Medicare providers and plans are subject to a 2 percent payment cut. Some of the 2024 cuts, however, actually occur in Fiscal Year (FY) 2025 (FY 2025 runs from October 1, 2024 through September 30, 2025).

The recent SGR legislation would replace a 2 percent payment cut for the whole year in 2024 with a 4 percent payment cut for the first half of the year.  The effect of this would be to reduce Medicare spending in FY 2024 – a year which CBO measures in its ten year budget window – but increase Medicare spending by almost the exact same amount in FY 2025. This produces no savings overall, but by shifting cuts that would otherwise occur in FY 2025 into CBO's ten-year window, it appears to save $5 billion, offsetting approximately one-fifth of the bill's cost. This timing shift is rightly likely prohibited by PAYGO rules.

We've warned about this type of gimmick before, because it undermines fiscal responsibility.

Luckily, there is still time to replace this gimmick with real savings. Any number of relatively modest health care changes could replace the $5 billion cost (see the table below). Alternatively, the duration of the doc fix could be shortened – enacting a doc fix through the end of December instead of the end of March would reduce the cost of the legislation so it is roughly budget-neutral.

Possible Offsets to Replace the Gimmick in the Protecting Access to Medicare Act of 2014

Policy 2015-2024 Savings (Billions)
Impose Part A premium on people making above $200K/$250K beginning in 2020 $5
Extend freeze for means-tested Part B and D premium thresholds for one year $4
Post-Acute Care
Freeze home health payments for one year $8
Freeze Skilled Nursing Facility (SNF) payments for one year $4
Freeze Inpatient Rehabilitation Facility (IRF) and Long-Term Care Hospital (LTCH) payments for one year $3
Implement 75% rule for IRFs $1
Equalize certain payments in IRFs and SNFs $1
Make site-neutral payments for evaluation and management $10
Equalize payments for certain procedures conducted in hospital outpatient departments and freestanding physician's offices $10
Better align graduate medical education with costs $7
Reduce Medicare coverage of bad debts from 65% to 55% $5
Reduce Critical Access Hospital (CAH) payments to 100% of reasonable costs $1
Prohibit CAH designation for facilities within 10 miles of nearest hospital $1
Medicare Advantage
Align employer group waiver plan payment with average MA plan bids $6
Increase levy authority for payments to Medicare providers with delinquent tax debt $1
Move up Cadillac tax start date to 2017 $6
Change ASP+6% reimbursement for Part B drugs to flat fee equivalent of ASP+3% $5
Accelerate brand drug discounts in closing Part D donut hole $5
Ban "pay-for-delay" agreements $4
Change payment formula for biosimilars in Part B and modify exclusivity available under approval pathway $3
Increase prescription drug rebates for Medicaid $10
Limit Medicaid durable medical equipment reimbursement $4
Reduce provider tax threshold to 2011 levels $10
Reduce duplicative administrative funding already covered by TANF $3
Reduce waste, fraud, and abuse in Medicaid $2
Increase TRICARE enrollment fees and pharmacy copayments $6
Exclude certain services from in-office ancillary services exception $2
Freeze Prevention and Public Health Fund at current level $4
Cap rental period for oxygen concentrators at 13 months $10
Offer an FEHBP+Self One option and domestic partner benefits $1

Source: OMB, CBO, MedPAC, CRFB calculations

For all the problems with the current SGR, it has at least led Congress to enact real health care reforms over the years. In fact, lawmakers have enacted $140 billion of deficit reducing policies, almost entirely health savings, while paying for the cost of the annual doc fixes. Partially relying on gimmicks instead of real savings represents a step backwards, and one that should be avoided.



March 31: 2014: The graph in this post was updated to show only savings sequestered from Medicare sequester. A previous version showed sequestered from all mandatory programs.

March 26, 2014
Patch Includes Many Serious Reforms and One Big Gimmick

(Updated to incorporate new information from the Congressional Budget Office's score of the doc fix bill)

In lieu of a permanent agreement and with the deadline approaching in five days, new legislation has emerged in the House to extend the "doc fix" and other health extenders for a year. This legislation would avert a 24 percent cut in Medicare physician payments due in April from the Sustainable Growth Rate (SGR) formula, instead freezing physician payments through March 2015.

The end goal remains a permanent replacement of the SGR formula, but with no agreement reached on pay-fors and three of the four proposals either offsetting the costs with gimmicks or simply ignoring its costs altogether, lawmakers appear ready to move a host of smaller Medicare reforms to pay for another temporary patch.

The one-year doc fix and health extenders package would cost about $21 billion, according to the Congressional Budget Office (CBO), but on paper, these costs would paid for with $22 billion of savings from more targeted health care reforms. Notably, though, $5 billion of the $22 billion is the result of a timing gimmick that was also used in the previous three-month doc fix for some of its savings. The other $17 billion, however, consists of a host of legitimate offsets through health care reforms, some of which are structural changes, if small, including:

  • Establishing a value-based purchasing program in Medicare for Skilled Nursing Facilities that would take into account re-admission rates ($2 billion);
  • Setting Medicare payments for clinical lab tests equal to the median payment from private insurers, in place of the current uncompetitively high, administratively set rates ($2.5 billion);
  • Allowing the Department of Health and Human Services to use data on values of physician services to more accurately set Medicare payments, with a target reduction in spending of 0.5 percent per year ($4 billion);
  • Undertaking a number of steps to encourage quality and appropriate use of imaging in Medicare, including requiring prior authorization for physicians who order an unusually high number of advanced imaging tests ($200 million);
  • Updating the Medicare end-stage renal disease prospective payment system ($1.8 billion);
  • Eliminating limits on deductibles for small group health plans; and
  • Extending the Medicaid Disproportionate-Share Hospital (DSH) payment reductions first passed in the Affordable Care Act for an additional year to 2024 ($4.4 billion).

The gimmick, though, damages the fiscal credibility of the bill. Rather than having the Medicare sequester cut payments by 2 percent uniformly in 2024, the bill increases cuts in the first half of the year to 4 percent and eliminates them in the second half. The bill, therefore, would result in lower spending in FY 2024 that would be completely offset by higher spending in FY 2025, effectively shifting spending outside the ten-year budget window. This produces no savings overall, but by shifting cuts that would otherwise occur in FY 2025 back into CBO's ten-year window, it makes the bill ostensibly deficit-neutral over ten years.

This gimmick is problematic because it simply uses a deficit-neutral timing shift to pay for real costs. Even more problematic is the fact that the gimmick is larger this time: whereas the three-month doc fix set the payment cuts at 2.9 percent and 1.1 percent in the first half and second half of 2023, respectively, this bill would make the payment cuts in 2024 4 percent and 0 percent in the first and second half of the year, respectively. This makes the size of the gimmick much larger and enables lawmakers to pay for a more expensive or longer doc fix.

This gimmick also likely runs the bill afoul of PAYGO rules, as it appears to fall under statutory PAYGO's prohibition of "timing shifts." Specifically, the PAYGO statute states that "The Director shall not count timing shifts, as that term is defined at section 3(8) of the Statutory Pay-As-You-Go Act of 2010, in estimates of the budgetary effects of PAYGO Legislation." Without the "savings" from sequester realignment, the bill would not be offset for purposes of PAYGO, adding roughly $4 billion to deficits through 2024. To avoid this problem, the bill includes special language to exclude its effects from counting on the PAYGO scorecard.

Obviously, a permanent doc fix would be ideal, especially given the bipartisan, bicameral agreement on the replacement payment system. A permanent replacement can encourage care coordination and help move the health system further toward paying for quality and value rather than just the quantity of services provided. And plenty of options exist to offset its costs.

One-year patches can be useful, though, and this bill importantly follows in the tradition of past doc fixes by including some legitimate reforms to improve health care policy, but the $5 billion gimmick means that the bill falls short of being paid for.

CBO Estimate of One-Year Doc Fix Bill (billions of dollars)
Policy 2014-2024 Savings/Costs (-)
Spending Increases
Extend doc fix for one year -$15.8
Extend health extenders and certain other provisions for one year -$4
Create demonstration program for community mental health services -$1.1
Offsets $17.2
Re-arrange Medicaid DSH payments and extend ACA reduction through 2024 $4.4
Revise payments for over-valued physician services $4.0
Set clinical lab payments equal to private payor rates $2.5
Eliminate SGR transition fund $2.3
Implement value-based purchasing program for SNFs $2.0
Update prospective payment system for end-stage renal disease $1.8
Other provisions $0.2
Subtotal, Excluding Gimmicks
Shift Medicare sequester in FY2025 into FY 2024 $4.9
Total $1.2

Source: CBO

March 26, 2014

This is the sixteenth post in our blog series, The Tax Break-Down, which analyzes and review tax breaks under discussion as part of tax reform. Previously, we wrote about the Charitable Deduction, which lets itemizers deduct the amount they donate to charity. Read more posts in the Tax Break-Down here. This blog examines the provisions that expired at the end of 2013.

Among the unfinished business that Congress did not address in 2013 was a collection of over 50 tax provisions that expired at the end of the year. Most of these "tax extenders" have been extended before, usually a year or two at a time. The perennial use of these extenders creates unnecessary uncertainty for individuals and business, obscures their true budgetary cost, and will likely push debt levels higher going forward. If Congress chooses to extend any of these provisions, they should be fully offset by savings elsewhere in the budget. Ideally, Congress would resolve the quasi-permanent status of these extenders as part of tax reform, evaluating each one and either making it permanent or letting it expire.

The provisions that expired in 2013 contain a hodgepodge of different types of tax breaks. Some are not normal tax extenders but meant to be temporary stimulus efforts, such as the ability of underwater homeowners to write off forgiven mortgage debt or bonus depreciation allowing business to write off new capital spending. Others are relatively longstanding elements of the tax code, like a credit for research or a deduction for teachers who spend their own money on school supplies. Some are broadly available, like a deduction for sales taxes paid, while some are narrow tax breaks for specific industries, such as the wind production credit or special depreciation for NASCAR tracks and racehorses. The appendix below describes the biggest and most often discussed extenders.

The last time the extenders expired was at the end of 2011, but they were not addressed until the fiscal cliff legislation at the beginning of 2013. At that time, several provisions were allowed to expire, including ethanol credits and energy grants, and other provisions like bonus depreciation were scaled back. As a result, the total size of the extenders package decreased by about one-third. The others were extended for one year (and retroactively for 2012). Retroactive extensions up to a year are possible because most individuals do not file their tax returns until the next year. However, some provisions that are taken throughout the year (like the monthly transit benefit taken out of paychecks) are difficult to claim retroactively.

Over the last 15 years, Congress has increasingly relied upon temporary provisions, with the number of expiring provisions annually quadrupling between 1998 and 2010. The number decreased after 2010, when the 2001/2003 tax cuts were first scheduled to expire.

Source: Joint Committee on Taxation documents, American Enterprise Institute

What Are The Drawbacks of Having Provisions That Expire?

In theory, there may be good reasons to enact a tax provision on a temporary basis. For instance, a provision could be enacted briefly to measure its effectiveness. A short-term provision may be appropriate in response to a natural disaster or economic downturn. Unfortunately, most extenders are not reviewed regularly and are often extended one year at a time simply to hide their budgetary cost.

Many critics argue that tax extenders are not meaningfully evaluated, create unnecessary uncertainty, and are less effective than a permanent provision. Although temporary provisions theoretically force Congress to look at the costs and benefits of each measure before deciding to extend it, critics argue that “no real systematic review ever occurs,” since the extenders are grouped and passed as a “package of unrelated temporary tax benefits.” Further, the uncertainty whether a provision will be extended diminishes its usefulness as an incentive. Retroactive extensions complicate financial accounting and are much less effective at incentivizing behavior, mostly providing a windfall to reward behavior that has already occurred. In several cases, such as the tax credit for research and experimentation, the uncertainty makes it difficult for companies to engage in long-term planning.

Further, classifying these quasi-permanent provisions as tax extenders distorts the budget picture. Under the law used to make budget projections, the Congressional Budget Office assumes that temporary tax provisions are just that—temporary. However, Congress almost always extends these provisions by adding to the deficit. (Past years have also included the expensive AMT patch, which has since been enacted permanently.) The extensions therefore make the budget picture worse than CBO’s official budget projections shows. If Congress extends these provisions without paying for them, the debt at the end of the decade would be nearly 4 percent of GDP larger.

Not Paying for Tax Extenders Increases Long-term Debt 

How Much Do They Cost?

If all of the expired tax provisions were extended for one year, it would cost approximately $35 billion over the next ten years, or $40 billion when bonus depreciation is included. The vast majority of the money, about 85 percent, is for business or energy provisions. Not all of these extenders are equally sized; most of them cost under a billion dollars. Five provisions, less than a tenth of them, make up two-thirds of the total cost of a one-year extension.

If the provisions were extended for two years (retroactively for 2014 and forward for 2015), the bill would cost about $75 billion, or almost the same as the fiscal cliff deal last year. Permanently extending the provisions would cost approximately $470 billion through 2024, or $770 billion including bonus depreciation. Business extenders make up two-thirds of the total cost.

Cost of Extending the Tax Extenders (2014-2024)
Policy One-Year Extension Two-Year Extension Permanent Extension
Individual Tax Provisions
Sales Tax Deduction $3 billion $6 billion $35 billion
Mortgage Forgiveness Exclusion $1 billion $2 billion $15 billion
Charitable Donations of IRAs $0.5 billion $1 billion $10 billion
Tuition and Fees Deduction $1 billion $2 billion $2 billion
Other individual tax provisions $1 billion $1 billion ~ $20 billion
Total, All Individual Provisions $6 billion $12 billion ~ $80 billion
Business Tax Provisions  
Research and Experimentation Tax Credit $7 billion $15 billion $80 billion
Active Financing Income $6 billion $10 billion $70 billion
Section 179 Expensing $1 billion $2 billion $70 billion
Other Business Tax Provisions $5 billion $10 billion ~ $90 billion
Total, All Business Provisions $20 billion $35 billion ~ $310 billion
Energy Tax Provisions
Renewable Energy Production Tax Credit $6 billion $12 billion $30 billion
Biodiesel Blending Credits $1 billion $2 billion $20 billion
Other Energy Tax Provisions $3 billion $4 billion ~ $30 billion
Total, All Energy Provisions $9 billion $18 billion ~ $80 billion
Grand Total, Traditional Tax Extenders
$36 billion ~ $65 billion ~ $470 billion
Bonus Depreciation $5 billion $10 billion $300 billion
Grand Total, All Expired Provisions
$41 billion ~ $75 billion ~ $770 billion

Source: CBO Expiring Tax Provisions, and JCT revenue estimate from the American Taxpayer Relief Act of 2013, CRFB calculations. Totals may not add due to rounding. Estimates are based on available scores or very rough CRFB estimates.

What Have Other Plans Done?

Various tax reform plans make different decisions about which extenders to extend and which to let expire. For instance, the Domenici-Rivlin plan keeps an extender dealing with the international income of financial firms while eliminating most other tax breaks. The Center for American Progress would extend the research & experimentation credit permanently, while assuming the rest expire or are offset with other revenue. And the Simpson-Bowles plan assumes most of the extenders are allowed to expire (though only a few are mentioned explicitly).

The President's Budget permanently extended some provisions while remaining silent on many others. Among the extended provisions were the research & experimentation tax credit, a credit for renewable energy production, incentives for energy efficiency, and certain hiring incentives. Encouragingly, the President paid for all the extensions he included in the budget. The provisions he did not mention are implicitly assumed to either expire or be paid for in the context of business tax reform.

Ways & Means Chairman Dave Camp's tax reform draft makes a responsible choice to evaluate each of the extenders and pay for the ones it retains. The draft repeals dozens of extenders, but permanently extends a modified research credit and a write-off for small businesses making capital investments, as well as several of the smaller provisions. The few provisions that he temporarily extends persist for several years. A provision allowing financial firms to defer taxation on overseas income continues until 2019, when a lower corporate rate takes effect. The renewable energy production tax credit is reduced, but continues until 2024.

What Happens Now?

Though the tax extenders have been expired for over three months, Congress can restore them retroactively through at least the end of the year. Last year, the chairmen of the tax-writing committees did not address tax extenders, wanting to include them as part of an effort to reform the tax code. However, with tax reform efforts stalled, both the Senate Finance and House Ways & Means Committees seem prepared to address extenders on a separate track.

In late December, Senate Majority Leader Harry Reid (D-NV) proposed a bill (which was never voted on) that would have extended all the provisions en masse, including the costly bonus depreciation, without paying for any of them. At the time, we called it an irresponsible tax extender package, and the Center on Budget and Policy Priorities also stated the bill should be fully paid for.

More recently, new Senate Finance Chairman Ron Wyden (D-OR) has suggested that he would address these provisions "sooner rather than later," and is expected to consider the extenders as early as next week. While Wyden has not yet detailed his specific approach, we expect that most but not all expired provisions will be included in the initial package. Chairman Wyden has spoken favorably about the need to extend renewable energy provisions. Meanwhile, House Ways & Means Chairman Dave Camp (R-MI) is proposing to move forward on permanently extending certain provisions as “incremental progress towards full reform.”

The tax extenders are one of the few pieces of legislation that Congress is expected to consider in 2014. It will be an important test of fiscal responsibility to see which tax preferences are extended and whether the costs are offset or if the provisions are added to the nation's credit card.

Where Can I Read More?

* * * * *

Policymakers should take a careful look at each and every expiring provision – preferably as part of tax reform – rather than simply rubberstamping the continuation of all the extenders. Many of the provisions would not pass a cost-benefit analysis and should be reformed, phased out, or allowed to expire; other provisions may indeed be merited and should be made permanent; and there may even be some provisions where a temporary extension is warranted. In any case, whatever is continued should be fully offset with new revenue or spending cuts so as not to add to the national debt.


Appendix: Explanation of Select Extenders

Although there are over 50 provisions that expired at the end of 2013 (a full list is available here), below we describe some of the biggest, most popular, or most discussed provisions. Some of these provisions are the "normal tax extenders," provisions that have been enacted year after year and are almost a fixture in the tax code, while others are temporary stimulus measures passed in 2007 and 2008.

Tax Credits for Individuals

Sales Tax Deduction - One of the largest permanent tax breaks is the state and local tax deduction, which allows filers who itemize to deduct the amount paid in state or local income tax. However, people who live in states with no income tax cannot take advantage of this deduction. This provision created a deduction for sales tax states by allowing an individual to deduct either the amount they paid in sales tax or income tax since 2004.

Charitable Donations from an IRA - Under this provision created in 2006, retirees age 70.5 and older could donate up to $100,000 tax-free from their IRA each year to charity. Normally, the donation would be eligible for a charitable deduction, but this provision converts the deduction to a complete exclusion, which allows retirees to make their required IRA withdrawals without triggering a tax a Social Security benefits for retirees with income other than Social Security.

Tuition and Fees Deduction - This deduction, in place since 2001, allows filers with incomes less than $65,000 a year ($130,000 if filing jointly) to deduct up to $4,000 of tuition and fees paid for higher education. This provision was for filers who did not claim one of the other educational credits, and it phased out entirely for filers with incomes over $80,000 ($160,000 if filing jointly).

Educators' Out-of-Pocket Expenses - With this provision, originally enacted in 2002, teachers could deduct up to $250 of out-of-pocket expenses for classroom materials.

Parity for Commuter Transit Benefit - Before this provision expired, commuters could spend up to $245 a month of tax-free income for either transit or parking. After the expiration, the amount for transit has dropped to $130 a month, while the amount for parking rose with inflation to $250 a month, meaning that those who drive to work are now subsidized more than those who use public transit. The transit benefit originated in 1993 and became equal to the parking benefit in 2009.

Mortgage Debt Forgiveness - Normally, forgiven debt counts as taxable income. In response to the housing crisis, homeowners could exclude up to $2 million of canceled debt ($1 million if married filing separately) on their principal residence. The forgiveness must be directly related to a decline in the home’s value or the taxpayer’s financial condition. This provision was passed as temporary stimulus measure in 2007.

Tax Credits for Businesses

Research and Experimentation Credits - The R&E credit is one of the longest lasting tax extenders, having been extended 15 times since 1981. Currently, there are four separate credits. The main credit allows companies to claim a 14 percent credit for research expenses that are more than half of their three-year average, or 6 percent if the company had no research expenses for the past three years. The idea behind comparing a company's research spending with previous years is to only subsidize incremental research that would not already be undertaken by the company. This credit can also be carried forward 20 years.

Active Financing Exception for Subpart F - Normally, business income earned overseas is not taxed until it is repatriated to the United States, but "passive" income like rents, interest, and dividends are taxed immediately. The active financing exemption, in place since 1999, allows banks and financial institutions to treat the interest and dividends they receive like business income and not pay tax until they bring the money back to the United States.

Small Business Expensing (Section 179) - Generally, companies that make large capital purchases must deduct the cost over several years according to a set of depreciation schedules. Section 179 allows small business owners to immediately write off most depreciable assets, up to a certain limit. Section 179 has been allowed since 1958, but the limit has changed over time. In 2013, small businesses could write off up to $500,000 of purchases, an amount that phased out when total purchases exceeded $2.5 million. When this extender expired, total deductible expenses dropped to $25,000 (phasing out after $200,000 of purchases).

Special Depreciation Schedule for Motor Tracks - This provision, in place since 2004, allowed motor sport complexes to be depreciated over seven years, the same as amusement parks. Without this extender, these structures would be written off over 39 years, like most other buildings.

Special Depreciation Schedule for Racehorses - Without this extender, racehorses had different depreciation schedules depending when they started training: seven years if they started training before age two and three years otherwise. Under this tax provision, all racehorses have been depreciated over three years since 2009.

Immediate Expensing for Film & Movie Production - Since 2004, movie production studios had been able to deduct up to $15 million in expenses if more than 75 percent of the production occurred in the United States, or up to $20 million if produced in a low-income community.

Bonus Depreciation - Bonus depreciation (different from permanent accelerated depreciation) allows companies to immediately write off a certain percentage of their purchases. It is not one of the normal tax extenders, but has been enacted frequently as a stimulus measure, most recently as part of the 2008 Economic Stimulus Act, when it was reinstated at a level of 50 percent. It was increased to 100 percent (also known as immediate expensing) in 2010, and reduced again to 50 percent for 2012 and 2013. Because bonus depreciation is largely a timing shift, a one year extension would have substantial immediate costs that would be largely recovered over time – though a permanent extension would be quite costly.

Tax Credits for Energy

Renewable Energy Production Tax Credit - The federal renewable electricity production tax credit has been in place since 1992, but it has sometimes lapsed and been later extended. Sellers of renewable energy can claim a credit for every kilowatt-hour of energy produced. The most used is for wind energy, which receives a credit of 2.3¢/kWh. The credit has been partially responsible for the rise of new wind energy in the United States, as illustrated by the reductions in construction when the credit lapsed in 2000, 2002, and 2004. Former Senate Finance Chairman Baucus recently released a tax reform discussion draft focused on energy policy which would extend this credit, make it available to all types of clean energy, and phase out once the average unit of electricity is 25% cleaner than it is today.

Biodiesel Blending Credits - There are a number of different biodiesel credits, depending on whether the fuel is sold pure or blended, and whether it is made by a small producer. Generally, this provision provided $1.00 per gallon of pure biodiesel (or other renewable diesel fuels). These biodiesel credits have been in place since 2003 and 2005.

Energy Efficiency Credits - Several different energy efficiency credits expired, including a $2,000 credit for contractors building an energy-efficient home and a credit for each energy-efficient appliance manufactured. Some of these credits had existed since 2007, but many were created or expanded in 2009.

March 25, 2014

The House Financial Services Committee held a hearing this morning on "Why Debt Matters," which included testimony by Honeywell CEO Dave Cote, former CBO and OMB director Alice Rivlin, former CBO director and American Action Forum president Douglas Holtz-Eakin, and former economic adviser to Vice President Biden and current Center on Budget and Policy Priorities fellow Jared Bernstein. They discussed the major drivers of the national debt, policy options to address it, and the implications of failing to act.

The witnesses spelled out several reasons why high and growing levels of national debt matter, including:

  • Crowding out of other areas of the budget due to rising interest payments
  • Leaving the U.S. vulnerable to shifts in investor preferences and hindering foreign policy flexibility when large amounts of debt are held by foreign governments
  • Decreased policy flexibility to respond to unforeseen domestic and foreign events
  • Reduced hiring and investment from firms today anticipating a high-debt, low-growth economy
  • Public sector borrowing crowding out private investment

During the hearing, Rivlin said that while there is very little chance of the United States facing a debt crisis in the near term, responsible measures to address the long term debt often take time to phase in, so action should be taken soon. Cote stressed that rising government debt can have an effect on business decisions today, as employers who expect a low-growth economy will cut back on hiring. There was also a consensus among all four witnesses that failure to address the debt would disproportionally hurt low- and middle-income earners more than high-income groups.

A "grand bargain" could be the answer to the long term challenge of growing public debt levels. Rivlin praised plans like Simpson-Bowles and Domenici-Rivlin that reduced deficits in a bipartisan manner. These plans slowed the growth of health care spending, shored up Social Security's finances, reformed the tax system by broadening the tax base and lowering rates, and capped the growth of discretionary spending. Crucially, they back-loaded the changes, limiting immediate deficit reduction to avoid derailing the fragile economic recovery while slowly phasing in reforms in entitlements and taxes to put debt on a downward path as a percent of GDP.

Cote's testimony included a similar call for long term entitlement and tax reform while stressing the importance of making public investments in education and infrastructure.

We need to increase our investments and decrease our entitlements if we’re going to compete. Changes made now can have a big effect in the second decade and allow people and systems time to adjust so it’s much less onerous.

Unfortunately, actual policy since 2010 has been the opposite. While discretionary spending is expected to fall to record low levels, policymakers have yet to make the necessary changes to taxes and entitlement programs that would put the debt on a sustainable path.

March 25, 2014

A new rule proposed by the administration's Department of Health and Human Services (HHS) would effectively eliminate the sequester for another portion of the Affordable Care Act (ACA), just days after the administration exempted the health care law's cost-sharing subsidies from the sequester. Identified by Inside Health Policy [gated], the rule proposes to interpret the sequester of risk adjustment and reinsurance payments as effectively delaying the cuts by a few months rather than cutting the payments – as the sequester does to other mandatory spending programs.

Specifically, the rule states that the "funds that are sequestered in fiscal year 2015 from the reinsurance and risk adjustment programs will become available for payment to issuers in fiscal year 2016 without further Congressional action." (p. 17) That is, the $1 billion that the administration had just announced will be cut from these two programs in FY 2015 because of the sequester will instead be temporarily withheld until "as soon as possible" in FY 2016. Because the payments were scheduled to go out in the summer of 2015, they would end up only delayed a few months, until after the new fiscal year starts in October. As long as the sequester of mandatory programs remains in place (it is currently in law through 2024), this delay would occur each year instead of an actual cut.

Notably, both the risk adjustment and reinsurance programs were set up to be budget-neutral. Risk adjustment is explicitly intended to transfer money from insurance plans who end up with a healthier risk pool to those with a less healthy one. And reinsurance payments are explicitly limited to the amount of contributions from insurance companies and self-insured plans. With the payment delay, the full contributions are still ultimately available to be distributed.

Unlike the legal decision to exempt the ACA's cost-sharing subsidies (which increased the size of sequestration cuts to other programs, including risk adjustment and reinsurance), however, this change would reduce the total size of the sequester and therefore increase deficits.

If the change had been an exemption, other mandatory programs would face slightly larger reductions to make up for the amounts no longer being cut from risk adjustment and reinsurance payments. However, the sequester calculation will remain the same under this new rule since the programs are not technically exempted.

Ultimately, the proposed rule erases the savings from the cuts that would have occurred without replacing them with cuts made to other mandatory programs. By our estimate, the sequester's budget savings will be reduced by about $6 billion over ten years.

Just weeks ago, the Affordable Care Act was facing roughly $16 billion in sequester cuts. But with this regulation and the legal decision to declare the cost-sharing subsidies exempt, the Affordable Care Act will now be almost entirely shielded from the sequester. Despite Congress' growing propensity to continue extending the mandatory sequester (now in effect through 2024), administrative action has made sure the ACA stays out of harm's way.

March 25, 2014
Federal budget deficit: Despite short-term improvement, Americans must continue pressing for solutions to long-term problem

Jason Peuquet, research fellow at the Committee for a Responsible Federal Budget, has an op-ed with Joshua Gordon of the Concord Coalition in the San Jose Mercury News. It is reposted here. 

Despite what you may hear from many members of Congress and the White House about falling deficits and the desire to focus on other issues, make no mistake – our rising national debt remains a pressing concern.
In just a few years, the debt – already quite high by historical standards – is projected to rise as a share of our economy again and to continue doing so indefinitely after that. Having rising deficits and debt even after the economy recovers from the recession is very worrisome.
Such high federal debt will threaten the nation's economic future and reduce its ability to respond to national emergencies. For the people of San Jose, a rising debt would mean lower standards of living and financial instability while saddling their children and grandchildren with excessive government debt.
This is not a fringe concern; the consensus among economists and budget experts is that rising federal debt comes with serious risks.
The recovering economy, along with several steps taken by lawmakers, have reduced deficits over the past few years and will do so through next year. However, elected officials have promised heavy cuts to the part of the budget that invests in future economic growth and productivity.
And even these savings are dwarfed by the long-term budget shortfalls, which are driven by an aging population and retirement programs, health care costs and an outdated tax code. Unfortunately, few of the steps taken so far have addressed these larger problems.
Luckily, there are some encouraging opportunities both in Washington and California to put the conversation about unsustainable debt back on the agenda, along with some specific ideas on how to solve the problem.
Recently, Rep. Dave Camp, who leads the House committee that oversees the tax code, put forward a bold plan to reform individual and corporate taxes by reducing many "tax expenditures," or special provisions, deductions, etc., in the tax code that make it more complex and reduce revenue.
The president's budget also proposed policies to limit these tax expenditures. While neither plan is perfect, they are big steps forward.
On the spending side of the budget, Congress has been close to agreement on a bipartisan proposal to fix the broken formula that determines how Medicare pays doctors. This change would attempt to reward doctors for their patients' outcomes instead of the number of visits and procedures.
But lawmakers disagree on how to pay for the change. There are many ways to do so that could reduce health care costs over the long term. But there is a risk that Congress will again either resort to gimmicks or kick the problem down the road.
Many other pieces of the budget and tax code need to be examined to help put federal borrowing on a sustainable path. Many San Jose residents plan to join Rep. Anna Eshoo, The Concord Coalition and the Fix the Debt Campaign on Friday to do just that: examine all parts of the federal budget and decide on ways to reduce future borrowing.
Working in small groups, participants will consider possible changes in health care programs, Social Security, the tax code and many other federal programs.
The budget exercise will be held from 10:30 a.m. to noon Friday at the Campbell Community Center. For information and to reserve a seat, see or call Eshoo's office at (650) 323-2984.
There is no perfect plan to reform the federal budget. But everyone will need to make some sacrifices. If the San Jose exercise succeeds, it could help point the way toward meaningful bipartisan compromises in Washington.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
March 24, 2014
Measure Should Be Evaluated Separately From Other Tax Extenders

In the coming weeks, both the House and Senate are expected to begin discussing what to do with a number of expired tax provisions known as the "tax extenders." Most of these provisions are extended year after year and have become, in many ways, a fixture of the tax code. Bonus depreciation does not fall into this category.

First passed in the Economic Stimulus Act of 2008 and later extended in 2009, 2010, and 2012 when the economy took longer than anticipated to return to strength, bonus depreciation was meant as a temporary stimulus measure.

While it would be a mistake to extend any of the expired tax provisions without paying for them, it would be particularly problematic to lump temporary stimulus with provisions that are generally passed year after year. Instead, Congress should evaluate the effectiveness and continued necessity of this provision to determine whether it should be allowed to expire or else phased out as the economy returns to strength. This was the approach Congress took in 2004, when it allowed bonus depreciation to expire on schedule after the bursting of the tech bubble and the economic shock of 9/11, and this is the same approach Congress should take now.

Treating bonus depreciation like the other tax extenders makes little economic sense, but presents a serious problem for the budget. Normal tax extenders are typically extended for one or two years at a time, a fact which already masks their cost. For instance, continuing the normal tax extenders for one year would cost around $40 billion through 2024, while continuing them permanently would cost about 11 times as much, or $465 billion (before interest). Because bonus depreciation changes the timing of taxes paid, the difference between a temporary and permanent extension of bonus depreciation is far more drastic.

A one-year extension of bonus depreciation costs about $5 billion ($9 billion with interest), since the upfront costs are mostly offset with savings in later years as businesses are no longer writing off the cost of equipment. But a permanent extension would cost $300 billion ($380 billion with interest), 40 to 60 times as much as a one-year extension.

If policymakers intend to make bonus depreciation a more permanent part of the tax code, they need to weigh the benefits against this steep cost.

In theory, bonus depreciation encourages upfront business investment, since it allows businesses to write off half the cost of a new purchase immediately, rather than deducting it over time. However, many experts argue that that bonus depreciation is a fairly ineffective form of stimulus. For example, Mark Zandi estimates it will only providing 25 cents of economic actively for every $1 of cost, while CBO’s central estimate is only about 50 cents.
Moreover, even if bonus depreciation is effective stimulus for a weak economy, there is a case it may no longer be needed at this point in the recovery. Recent Census Bureau figures show that business investment climbed to $1.4 trillion in 2012, exceeding the pre-recession high set in 2008.
If bonus depreciation is extended and deficit-financed, our long-term debt problems look much worse. Under current law with a war drawdown, debt is expected to reach almost 77 percent of GDP by the end of the decade. It exceeds 80 percent of GDP when both bonus depreciation and the normal tax extenders are continued without offsets. Notably, bonus depreciation is about four times more expensive than the largest normal tax extender, the research and experimentation tax credit.

Bonus depreciation was enacted as a temporary stimulus measure and should not be automatically extended for one year like the other extenders may be. Policymakers should weigh the merits of providing bonus depreciation and consider either letting it expire or phasing it out. If policymakers do think bonus depreciation deserves to be a permanent part of the tax code – rather than a stimulus measure as was intended – they should make it permanent and acknowledge the substantial cost. Regardless of what path lawmakers choose, they should fully offset the costs of extending tax breaks to avoid making our deficit problem worse.

March 24, 2014

House Minority Whip Steny Hoyer (D-MD) called on Congress to lay the groundwork for a budget grand bargain. Speaking this morning, Hoyer urged members of Congress to embrace common ground to achieve "a sustainable long-term budget outlook." He described the need for a comprehensive budget bargain and highlighted several specific areas where progress can be made, such as passing comprehensive immigration reform, addressing the expired tax extenders, and shoring up the highway trust fund.

We Still Need a Grand Bargain

As Hoyer correctly said, the country still requires a large deficit reduction plan to ensure long-term economic growth and stability. Currently, the national debt is on an unsustainable long-term trajectory. CBO projects that the debt will rise from 73 percent of GDP today to 100 percent of GDP by 2038, and twice the size of the economy by 2075. High and rising levels of debt will hurt our international competitiveness and act as a drag on economic growth. "A big deal is the best way for Congress to achieve a fiscally sustainable outlook that can inject certainty into our economy and help us invest in competitiveness, job growth, and opportunity."

Hoyer argued that now is the best time for a well-reasoned debate about how to achieve deficit reduction. "It’s at this moment – when we don’t have a crisis breathing down our necks – that we have the best chance to make the hard decisions that we need to make," he said in his speech at a budget discussion organized by Third Way. Reasonable and intelligent savings enacted now can lock in smart long-term deficit reduction rather than waiting to make larger changes later. Hoyer argued that enacting a plan to address our debt was not in conflict with making necessary investments for long term growth; in fact he suggested that having a long term plan for fiscal sustainability in place would make it easier to fund investments in the near term.

Currently, 70 percent of our budget goes to mandatory programs and interest payments, and this share will continue to increase. As a result, "Our current outlook leaves little room for America to lead the global economy for the next generation, where they keys to success will be innovation, a skilled workforce, and the efficient movement of goods and services across oceans and continents," he said. "And it's not a recipe for growing and strengthening our middle class either."

Opportunities for Near-Term Progress

In looking towards more short-term developments, Hoyer stressed the need for responsibly addressing the set of expired tax provisions known collectively as the "tax extenders." He said the extenders should be a part of comprehensive tax reform – as House Ways and Means Chairman Dave Camp recently proposed. "Failure to offset the cost of these provisions could add over $900 billion to deficits over the next decade, according to the Congressional Budget Office," he said, "That’s larger than the remaining sequester cuts." We have repeatedly called for responsible action on the tax extenders urging Congressional leaders to either find offsets for each provision or let the provision remain expired.

He cited comprehensive immigration reform as a means of achieving deficit reduction and called on the House to take up the bill this year. CBO has estimated the immigration reform passed by the Senate last year would achieve $158 billion in savings over ten years.

He additionally expressed the need for responsible investments in our nation's transportation infrastructure. This includes reauthorizing surface transportation programs and addressing the highway trust fund shortfall. The highway trust fund is set to go bankrupt next year. Hoyer called for a dedicated revenue stream for the highway trust fund.

Hoyer said Congress will need to reach an agreement on how to replace the sequester cuts. The Murray-Ryan deal reduced the sequester for two years, but lawmakers will need to decide where to set discretionary spending levels after that. Responsibly replacing these cuts by addressing the long-term drivers of our debt would contribute to meaningful deficit reduction.

* * * * *

Rep. Hoyer made a valuable point with his speech: The need for long-term fiscal sustainability is still urgent, despite the fact that we are not facing a government shutdown or a debt limit increase. He concluded, "Moving forward, we ought to embrace and maximize every chance to set our fiscal house back in order and restore America's strength."

March 19, 2014

The Congressional Budget Office (CBO) released a new estimate of the fiscally irresponsible Senate “doc fix” bill, showing it would increase Medicare spending by $180 billion over the next ten years, adding $215 billion to the debt by 2024 when interest costs are included.

As we showed last week, 98 percent of doc fixes since 2004 have been fully paid for with savings elsewhere in the budget, generating $140 billion of deficit reduction. It would be a costly mistake to break that precedent now, as the Senate Democrats would do explicitly and House Democrats and Republicans would do implicitly through the use of budget gimmicks.

The Senate Democrat bill would avoid a scheduled 24 percent cut in physician payments and replace the Sustainable Growth Rate (SGR) formula for Medicare physician payments with a new system designed to better encourage quality over quantity of care. In addition, it would make permanent a host of temporary provisions often referred to as the “health extenders.” Doing so without offering offsetting savings adds $40 billion to $140 billion to the cost of SGR reform. Interest costs add another $35 billion, for a total cost of $215 billion over the next ten years.

The $215 billion that the legislation adds to the debt is not only far more than current law, but it is a substantial increase over the $145 billion cost (with interest) of freezing physician payments for ten years as is assumed in the baseline of the President’s budget.

To meet the minimum test of fiscal responsibility, lawmakers should work to offset the cost of the legislation. $180 billion of non-interest savings may sound like a lot, but nearly every major health care reform proposal issued in recent years has recommended budget savings far in excess of this amount.

The legislation could be offset by using 45 percent of the health savings recommended by the President, for example. Or 65 percent of what the Senate Democrats supported just last year in their budget. Or just 40 percent of the health savings recommended in a joint proposal from former Senators Domenici, Daschle, Frist, and Alice Rivlin (25 percent if their health-related revenue proposals are included).

 Health Savings vs. Cost of Doc Fix Bill
Plan Ten-Year  Health Savings (billions)* Percent of Health Savings Needed For Doc Fix Bill
President's FY2015 Budget $400 45%
Senate FY2014 Budget (Dems) $275 65%
House FY2014 Budget (GOP) $940 20%
Domenici-Rivlin-Daschle-Frist $435/$700^ 40%/25%^
Bipartisan Path Forward $585 30%
Center for American Progress $385/$485^ 45%/35%^
National Coalition for Health Care $220/$495^ 80%/35%^

Note: Numbers include Medicare and non-Affordable Care Act Medicaid savings only except where noted.
*Ten-year windows vary across plans and are not adjusted to be in the same timeframe.
^Second number includes health care-related revenue.

Policymakers could pick and choose from these plans and others. There are plenty of options to choose from in properly offsetting a permanent doc fix, not only from these plans but from the Congressional Budget Office, MedPAC, and numerous other sources.

The CBO score of the Senate bill should underscore the importance of paying for a permanent doc fix. Failing to do so would be a costly break with precedent and a completely unnecessary one.

March 19, 2014

As we showed last week, OMB projections show the President's budget will put the debt on a downward path this decade with deficits below 2 percent of GDP toward the end of the decade. This is true despite an aging population, growing health care costs, almost no changes to Medicaid and Social Security, and real but modest reductions to Medicare.

So how does the President's budget keep deficits at manageable levels despite continued growth of entitlement programs? Essentially, he allows discretionary spending as a share of GDP to fall to historic lows, and revenue to rise to historic highs.

Under the President's budget, the combination of the economic recovery, new taxes from the Affordable Care Act and Fiscal Cliff deal, increased revenue from real "bracket creep," over $1 trillion in net tax increases, and over $450 billion of additional revenue from immigration reform will lead revenue to rise from 17.3 of GDP in 2014 to 19.9 percent by 2024. This matches the previous record set in 2000, when an economic boom and stock market bubble helped bring revenues up to 19.9 percent of GDP.

Meanwhile, the discretionary reductions from the Budget Control Act, the drawdown in war spending, and the President's proposal to replace sequestration with a discretionary path that moves spending near to post-sequester levels by the end of the decade put downward pressure on discretionary spending as a share of GDP. In total, discretionary spending will fall from 6.8 percent of GDP in 2014 to 4.5 percent in 2024, the lowest is has been since before World War II.

Importantly, these discretionary reductions are occurring both on the defense and non-defense side. Total defense spending (including on the wars) under the President's budget is slated to fall from 3.5 percent of GDP in 2014 to 2.8 percent by 2024. By comparison, defense spending has averaged 4.5 percent over the past four decades, and has not been less than 3 percent since 2001. Meanwhile, non-defense spending—which includes everything from education to the National Park Service to the State Department to the federal workforce—is projected to fall from 3.2 percent of GDP in 2014 to 2.3 percent by 2024, which would be the lowest level on record. Over the last 40 years, non-defense spending has averaged 3.8 percent of GDP.

Many analysts and policymakers on both sides of the aisle have questioned the desirability and sustainability of allowing discretionary spending to fall so low or revenues rise so high. Yet in the final analysis, these changes highlight the consequences of failing to address the growth of our entitlement programs.

Had policymakers begun work to make Social Security and Medicare more secure at the beginning of this century, record-high revenues and record-low discretionary levels might not be necessary to put the debt on a more sustainable path. And even today, failure to address growing entitlement programs inevitably requires revenue and discretionary spending to be a greater contributor to debt stabilization.

This is not to say that discretionary reductions and revenue should not represent part of the solution—we've written many times before that they will have to be. But policymakers must recognize the inherent trade-offs. Without structural entitlement reforms that truly slow the growth of our health and retirement programs, discretionary programs will keep shrinking, tax burdens will keep rising, and it is unlikely we will be able to address our long-term debt growth.

March 19, 2014

While Ways and Means Chairman Dave Camp's (R-MI) Tax Reform Act of 2014 (TRA) misses a critical opportunity to use tax reform to slow the unsustainable growth of the federal debt, his proposal should be commended for abiding by pay-as-you-go rules and responsibly paying for the set of expiring tax provisions often called the "tax extenders" and certain temporary expansions of refundable tax credits.

Although many of these provisions—such as the research and experimentation tax credit—have technically already expired due to a lack of Congressional action, they are often extended retroactively and often without being paid for. Extending all of these provisions permanently without offsets, as some in Congress have proposed, would be irresponsible and would reduce revenues by between $630 billion and almost $1 trillion over the next 10 years. With interest costs, debt would be 3.0 to 4.4 percentage points of GDP higher than scheduled in 2024.

By abiding by PAYGO based on current law (under which all of these provisions would expire and thereby increase federal revenue), the TRA at least maintains revenue at currently projected levels. It should not be taken for granted that revenue will stay at projected levels, as many policymakers from both parties have advocated extending tax cuts and putting the bill on the nation's credit card.

Broadly, these expiring provisions could be thought of in three categories:

  1. Refundable Credits. Three refundable tax credits (the American Opportunity Tax Credit, Earned Income Tax Credit, and Child Tax Credit) were expanded in the 2009 stimulus bill, and were extended in 2010 and 2012. However, these expansions are set to expire at the end of 2017.
  2. Normal tax extenders. A host of temporary provisions, such as the research and experimentation credit and incentives for alternative energy production, expire every year or two and are continuously renewed on a temporary basis. Currently, most of these measures are expired but can be renewed retroactively.
  3. Temporary economic stimulus. A number of temporary tax provisions were implemented during the Great Recession to help support the fragile economy. Two measures—bonus depreciation rules intended to boost business investment and tax relief for mortgage debt forgiveness—were in the tax code in 2013 and could be renewed retroactively

If all three categories of provisions were extended without offsets, deficits would be nearly $1 trillion higher over ten years (or $1.2 trillion with interest). Even if the temporary stimulus provisions were allowed to expire as currently scheduled, deficits would be $620 billion higher ($750 billion with interest). Thus, the draft would raise $620 billion more than if the rest of the "extenders" and refundable credits are extended without offsets. The TRA, at least represents a significant improvement over the current modus operandi in Congress—financing tax cuts with larger deficits.

Under current law assuming a war drawdown, debt is expected to reach 76.7 percent of GDP by the end of the decade. The Tax Reform Act is revenue-neutral, which means that debt ends up in nearly the same place. However, if all of the expiring tax provisions were extended without offsets, debt would be 4.4 percentage points higher, at 81.1 percent of GDP.

The draft deals with these various provisions in different ways (as shown below), but importantly, no extension or expansion is allowed to add to the debt. Given our perilous fiscal trajectory, however, it is not sufficient to avoiding digging a deeper hole. Hopefully, lawmakers can work together to improve upon the TRA, and also use tax reform as an opportunity to reduce our indebtedness.

Costs of Major Tax Extenders (2014-2024, Billions)

Provision Tax Reform Act Cost of Fully Extending Tax Reform Act Policy
Expired in 2013
Bonus Depreciation (half of new investments can be written off immediately, instead of deducted over time)
$0 - $296 Allowed to expire
Research & Experimentation Credit - $40 - $77 The main R&E credit was extended permanently and slightly modified. Of the three other research credits, two were repealed, while the last credit for research payments was reduced from 20 to 15 percent.
Active Finance Exception (financial companies are treated like other multinationals—they can defer tax by keeping profits offshore)
- $18 - $71 Extended for 5 years, until the lower corporate rate takes effect in 2019. Limited with a new minimum tax; financial companies must pay at least 12.5 percent in foreign tax to be able to defer U.S. tax. 
Section 179 (a small business can immediately write off up to $500,000 of investments) - $58 - $69 Made permanent at lower 2009 levels. A small business can immediately write off up to $250,000, phasing-out once the business buys more than $800,000 of property.
Sales Tax Deduction $0 - $34 Repealed along with the deductions for property and income taxes paid to states and local governments
Wind Production Tax Credit $11 - $28

Reduced by a third, repealed after 2024

Controlled Foreign Corporation Look-Through (allows a company to make payments between its subsidiaries without being taxed)
- $15 - $20 Made permanent
Expires in 2017
American Opportunity Tax Credit (credit for undergraduate tuition) - $8 - $68

Made permanent and reformed. More refundable, but not as available to high-income households. Part of a broader education reform that repealed many provisions. As a whole, education reforms save about $20 billion.

Child Tax Credit N/A - $74 Expanded and extended. The 2009 expansion reduced the income floor on claiming the credit from $10,000 to $3,000. TRA further reduces it to $0.  As a whole, the TRA increased the size of the credit, costing $550 billion.
Earned Income Tax Credit N/A - $23 Mixed. In 2009, the EITC was expanded in two ways, by reducing the marriage penalty for claiming the EITC and increasing the credit for families with three or more children. TRA further reduces the marriage penalty, but eliminates the increase for families with three or more children. As a whole, the EITC is dramatically reduced, saving almost $220 billion.

Negative numbers increase the deficit. Source: Joint Committee on Taxation, Congressional Budget Office, CRFB extrapolations.
The two savings numbers are not apples-to-apples, as they are measured against different tax codes with different rates.


March 19, 2014

The Congressional Progressive Caucus (CPC) kicked off the Congressional budget season last week by releasing its "Better Off Budget." This release marks CPC's fourth published alternative to the official House Budget. The progressive budget generally offers a more liberal alternative than that proposed by either party or the President.

The Progressive budget proposes both higher taxes and greater amounts of spending in most areas of the budget. The budget calls for about $5.9 trillion of higher tax revenue and $3.6 trillion per year in higher spending over ten years, resulting in $2.7 trillion of deficit reduction over the next decade including interest savings. This deficit reduction would be sufficient to put debt on a clear downward path; it would decrease from 74 percent of GDP today to 65 percent of GDP in 2024. In contrast, we found that debt under the President's budget would be 73 percent – or about where it is today – if it were estimated using CBO's economic assumptions, instead of OMB's rosier economic projections.

Under the Better Off Budget, revenues would rise to 21.5 percent of GDP by 2024, more than 3 percent higher than under current law. Outlays would reach 22.9 percent of GDP in 2024, or about 1 percent higher than under current law. As a result, deficits fall below 2 percent of GDP after 2016 and end up at just 1.4 percent of GDP at the end of the decade, which is lower than the President's budget.

The Progressive Caucus budget proposes new spending initiatives and tax credits as additional stimulus in 2014. It would extend expired unemployment benefits through 2016, when CBO projects the unemployment rate to be 6.1 percent, just slightly below the current rate. It would create a new refundable tax credit, giving up to $600 to workers making up to $95,000/$190,000 (single/married) in 2014 and 2015 modeled after the Making Work Pay credit. Additional stimulus includes a public works jobs program, $100 billion to hire teachers in K-12 schools, and block grants to the states for Medicaid, first responders, and other priorities.

Beyond the initial stimulus investment, the Progressive budget also envisions a dramatic increase in non-defense discretionary spending. It repeals both the sequester and the higher spending caps and increases discretionary spending by $1.5 trillion over those caps, further increasing nondefense spending.

The budget enacts several changes to tax rates and adopts several proposals. For very high earners, the budget raises rates: ranging from 45 percent for incomes over $1 million and rising to 49 percent for incomes over $1 billion. The budget would also tax capital gains as ordinary income. It also adopts the President's budget's proposal to expand the Earned Income Tax Credit (EITC) for childless workers as well as a surtax on very large financial institutions as proposed by House Ways and Means Chairman Dave Camp (R-MI).

Major Proposals in Progressive Caucus Budget
Deficit Reduction Proposals
Savings (2014-2024)
Increases tax rates on income above $250K $1,450 billion
$25/ton price on carbon $1,200 billion
Financial transactions tax $910 billion
Enact worldwide taxation system $620 billion
Repeal step-up basis & reform estate tax $530 billion
Cap the value of itemized deductions at 28% $530 billion
Prevent defense spending from growing beyond current levels $250 billion
Other deficit reduction proposals $1.2 trillion
Net Interest Payments $460 billion
Subtotal, Deficit Reduction $7 trillion
New Investment Proposals  
Increase Non-Defense Discretionary Budget Above Spending Caps - $2,040 billion
Increase Infrastructure Spending - $820 billion
Create new $600 tax credit for incomes below $95,000/$190,000 - $250 billion
Extend refundable credit expansions - $170 billion
Repeal mandatory sequestration - $150 billion
Repeal SGR - $140 billion
Extend research credit & enact green manufacturing credit - $125 billion
Other new investment proposals - $500 billion
Subtotal, New Investments  -$4.3 trillion
Total, Progressive Budget
$2.7 trillion
War Drawdown* $950 billion
Total, Progressive Budget $3.7 trillion

*As we've written before, the war drawdown tallies savings from a policy that is already underway. These savings would be counted in a CBO score, but do not represent new savings. By this metric, the progressive budget achieves $2.7 billion of real deficit reduction, but it would be counted as $3.7 trillion if it were scored by CBO.

We welcome this addition to the budget season proposals, and hope it sparks discussion about the budget process and policy proposals. While the CPC budget doesn't abide by Murray-Ryan level spending and does away with both the sequester and the caps, it still manages to raise money for deficit reduction, which is commendable. We hope that forthcoming budgets target deficit reduction as well, and look forward to continued proposals.

March 18, 2014
In Camp's Camp: Praising the Effort on Tax Reform

Kent Conrad, former Chairman of the Senate Budget Committee, wrote a commentary in Roll Call. It is reposted here.

The courage to tackle tough problems may be a rare commodity in Washington these days, but there are still a few members of Congress willing to advance fundamental change to overcome the country’s largest challenges. House Ways and Means Chairman Dave Camp, R-Mich., is one of those lawmakers. He recently released a comprehensive, detailed tax reform plan aimed at initiating substantive discussions focused on overhauling America’s broken tax code. The release of this draft represents a critical step forward in the process of comprehensive tax reform, a process that will benefit all Americans.

Many members talk about tax reform that broadens the base and reduces rates in the abstract, but far too many shy away when it comes to making the tough choices to eliminate or scale back specific tax breaks to make the math work. As a former tax commissioner and someone who served on the Senate Finance Committee, I can tell you that every tax break has a constituency that aggressively defends it. And while many have worthwhile goals, the cumulative effect is a tax code that is complex, inefficient and wasteful. The code is riddled with trillions of dollars in economy-distorting loopholes that cater to special interests and leave hundreds of billions of dollars on the table. If lawmakers are willing to take on special interests and reduce these tax expenditures, they can produce a tax code that is simpler and fairer, promotes economic growth and competitiveness, and reduces the deficit. Camp’s proposal is a valuable step toward this goal.

To be sure, the plan unveiled by Camp is not a plan I would write, and changes will be necessary to get bipartisan support. While I commend Camp for making tough choices necessary to achieve savings from tax expenditures to pay for lower rates and permanently address tax extenders, the draft fails to use any of those savings to reduce the deficit. With the burden that an aging society will place on the budget, we need tax reform to generate more revenues than the current tax code even with equally necessary reforms to control the cost of entitlement programs.

Likewise, while the plan is roughly distributionally neutral, some low- and moderate-income working families will pay more than they do today, and given the tremendous inequality in our nation, the plan should ask more from the wealthiest who have bounced back from the Great Recession faster than the rest of society. And while the draft takes on many tax expenditures, it could go further in limiting some tax expenditures, such as the health exclusion and various preferences for capital gains.

But these are all issues that can and should be addressed in a legislative process now that we have a starting point. Many of the specific provisions in Camp’s proposal have already come under intense attack from affected interests, and there has been talk about putting tax reform on the back burner because of the tough choices involved. But the reason tax reform wasn’t done long ago is because there will always be opposition because someone somewhere is benefiting from the status quo. We cannot simply scrap the idea of tax reform because a small group stands to benefit from a coveted expenditure or loophole and voices their opposition to a proposed change.

Claiming that tax reform is too complex to tackle and should thus be put off for another day is a tired and unacceptable excuse. We are a nation of doers and great achievers. It’s critical that lawmakers build on consensus where it exists and attempt to reach compromise on some of the thornier details of any comprehensive tax reform agreement. A frank discussion on tax reform could also pave the way for bipartisan cooperation on other critical issues, including much-needed reforms to control the growth of entitlement programs.

Let’s not let special interests and powerful lobbies impede progress on this issue any longer. It’s long past time to build an improved tax code that better positions America for economic prosperity for generations to come.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

March 14, 2014

Proposals to "pay for" (or not pay for) a repeal of the Sustainable Growth Rate (SGR) formula have come out this week, and the verdict has been mostly not good. In a timely letter to the Senate Budget Committee, the Centers for Medicare and Medicaid Services (CMS) actuaries have shown just how important responsibly offsetting a permanent doc fix can be for the long-term fiscal health of Medicare and our country.

The analysis looks at an illustrative permanent doc fix that would add $2.3 trillion on net to Medicare Part B spending over the next 75 years on a present value basis (notably, the illustrative fix is somewhat different -- and more expensive -- than the current legislation under consideration). The $2.3 trillion figure is the net result of $3.1 trillion of gross spending increases offset by $800 billion of increased premiums (since Part B premiums are determined as a percentage of program costs). That would increase the gap between Part B spending and dedicated financing by about 15 percent above the current law estimate.

Long-Term Effect of a Permanent Doc Fix (Trillions of Dollars)
  75-Year Present Value
Current Law Part B Financing Gap $15.7
Permanent Doc Fix $3.1
Part B Premiums -$0.8
Alternative Part B Financing Gap $17.9

Source: CMS

Again, note that this estimate is not an exact modeling of the current legislation under consideration. Whereas the prominent doc fix legislation would increase physician payments by 0.5 percent per year through 2018 and then freeze payments through 2023, the actuaries assume payments will increase 0.7 percent per year through 2023. Beyond then, the legislation would increase payments annually by 0.5 or 1 percent, whereas the actuaries assume payment updates will gradually increase to GDP per capita growth plus 1 percent by 2037 and remain there for the next 50 years.

Still, the analysis gives an idea of the magnitude of the spending increase involved and shows that simply writing off the cost of repealing the SGR is foolish. The Medicare Trustees have previously shown how much Medicare spending would increase as a percent of GDP (middle line in the graph below), and it is not insignificant: spending would be 0.7 percentage points of GDP higher in 2087.

The bipartisan, bicameral agreement on how to replace the flawed SGR formula to better reward quality over quanity of care is encouraging, but the centrality of Medicare to our nation's long-term fiscal sustainability demands that it not just be added to the credit card. Offsetting "doc fixes" to date has led to important, if small, reforms to Medicare, and a permanent fix offers lawmakers the chance to do even more to improve the program for its beneficiaries.

Click here to read the letter.

March 14, 2014

It seems to be Gimmick Week in DC. After two of the Medicare physician payment bills offset their costs with gimmicks, the recently announced bipartisan Senate agreement on extending unemployment insurance (UI) benefits also partially pays for the extension with a timing gimmick. The agreement resorts to an old friend, the pension smoothing gimmick.

Last December, the maximum amount of unemployment benefits fell from 73 weeks to 26 when emergency unemployment benefits expired. This five-month extension of the maximum 73 weeks of UI benefits is made retroactive to December 28, so it will last through May. The $9.7 billion cost is paid for with some legitimate offsets, including extending customs fees through 2024 ($3.5 billion) and by allowing pre-payment of premiums to the Pension Benefit Guaranty Corporation ($190 million). In addition, the agreement prohibits millionaires from receiving UI benefits, although this provision only saves a negligible amount ($20 million when it was estimated in 2011).

However, the bulk of the savings ($6.1 billion) come from extending pension smoothing provisions in the 2012 transportation bill. By temporarily reducing pension funding requirements, the provision brings in revenue by increasing either businesses' or employees' taxable income in the short term but costs money over the long term when businesses must make up for the lower contributions. As a result, the bill as a whole saves $9.4 billion through 2019 but increases deficits by about the same from 2020 to 2024. Increased deficits would continue beyond the ten-year budget window. Unlike the House Republican physician payment bill, which paid for permanent costs with temporary savings, this bill would pay for temporary costs with temporary upfront savings that would turn into permanent costs. Congress may want to increase short-term spending, but they should make sure it is paid for over 10 years without completely abandoning the need for longer-term deficit reduction.

Savings/Costs (-) in the UI Extension (Billions of Dollars)
  2014-2019 2020-2024 2014-2024
UI Extension -$9.7 $0 -$9.7
Customs Fees $0 $3.5 $3.5
PBGC Premiums $0.2 $0 $0.2
Pension Smoothing $18.9 -$12.9 $6.1
Total $9.4 -$9.3 $0.1

 Source: CBO

The use of the pension smoothing is particularly disappointing since it is unnecessary – a number of legitimate propsals exist offset the relatively modest cost of UI. They could have reduced the number of weeks, enacted some form of the double-dipping provision preventing people from claiming disability benefits while being unemployed, or found $1 billion of UI savings by enacting proposals to reduce fraud and abuse in the President's Budget. Lawmakers could have also increased the offsets they did use, by further increasing PBGC premiums, for example. These policies could easily offset the ten-year cost and would have created permanent savings rather than permanent costs.

The use of pension smoothing is entirely unnecessary and will only further deteriorate the long-term fiscal situation. There are plenty of real offsets available, and lawmakers should use them.

March 13, 2014
98% of Doc Fixes Since 2004 Have Been Fully Paid For, Resulting in $140 Billion in Deficit Reduction

To bolster their case against offsetting the high cost of SGR reform, many have claimed that the Medicare Sustainable Growth Rate (SGR) is “budget fakery” and represents “savings that aren’t going to be realized.” Yet while it’s true most SGR cuts have not gone into effect as scheduled, that doesn’t mean the SGR hasn’t helped to control health care costs. In fact, through repeated temporary "doc fixes" to stave off the cuts by enacting more targeted savings elsewhere, the SGR has actually created nearly as much savings as it’s called for – albeit over a longer time period.

For a little bit of background, the SGR formula was created as part of the 1997 Balanced Budget Act to help control the rising cost of Medicare by essentially capping the growth of doctors’ payments. Since 2003, however, the SGR has called for cuts deemed too deep by Congress – and so they’ve used temporary “doc fixes” to replace these cuts with more targeted savings.

Despite these doc fixes, the SGR has actually done a great deal to control health care costs by keeping physician payment updates modest and pushing policymakers to offset the cost of avoiding cuts.

Lawmakers deficit-financed the first “doc fix” back in 2003, but since then have offset 120 out of the 123 months of doc fixes with equivalent savings. That’s 98 percent. Even ignoring the couple times small gimmicks were used, policymakers still paid for these delays 95 percent of the time – with almost all of those savings coming from health care programs.

The fact that we almost always pay for temporary doc fixes matters both for understanding the fiscal history of the SGR and in determining its future. Since 2003, the total cost of “doc fixes” has added to just over $150 billion through 2024 – a fact bolstered by those who suggest no harm in adding a new $150 billion to the credit card. Yet those advocates forget that lawmakers have enacted $140 billion in deficit reduction over the same time period – almost entirely from health care programs – to pay for the repeated delays.

And despite implications to the contrary, these offsetting savings have often taken the form of serious, if small, health care reforms, saving taxpayers more than $130 billion from health care programs. Reforms have included expansions of bundled payments, equalizing payments for the same services done at different sites of care, more accurate payments for hospital services, bringing payments to Medicare Advantage plans more in line with the costs of traditional Medicare, recapturing unintended Affordable Care Act (ACA) premium subsidies, and reduced overpayments for services like clinical labs and advanced imaging. And then some of the savings have come from extending health care cuts already in place.

In addition, the threat of large payment cuts and the need to pay for “doc fixes” each year has likely encouraged lawmakers to avoid overly-generous payment updates for physicians in Medicare. While doctors have not received the huge cuts called for under the SGR, their payments have grown at an average of only 0.7 percent annually. By comparison, the Medicare Economic Index (MEI) has averaged 1.8 percent annual growth over that period.

Had we provided MEI-level updates over the last decade, costs would have been another $60 billion higher, which would bring the total savings resulting from the SGR to $200 billion. Assuming a payment freeze for the next decade, total costs through 2024 will be about $150 billion lower than if the MEI was adopted.

The bottom line – while the SGR has not worked exactly as originally intended, it has certainly helped to control health costs.

To be sure, the SGR is a flawed formula. And the fact that it has controlled costs does not mean lawmakers should continue the disruptive practice of enacting temporary patches – often for only months at a time. That’s why the bipartisan, bicameral legislation to replace the SGR with more sensible payment incentives is so encouraging.

But in enacting SGR reform, leaders cannot throw out the baby with the bath water. The package under consideration would cost at least $140 billion over ten years.

Replacing the SGR all at once offers an opportunity to pursue more structural Medicare reforms instead of tinkering on the margins. By changing payment models and incentives on the provider and beneficiary side, policymakers would not only be generating savings to pay for SGR reform, but also helping to strengthen Medicare, improve the health care system, and bend the health care cost curve.

Failing to pay for SGR reform, on the other hand, would not only break with precedent, it would break the bank as well.


Update April 1, 2014: The tables and graphs in this post have been updated to reflect the 12-month doc fix that the Senate passed on March 31.


Methodology Notes: To calculate the cumulative savings resulting from policies enacted to offset delays to the Medicare Sustainable Growth Rate (SGR) formula ($140 in total from 2003-2024), we analyzed Congressional Budget Office (CBO) scores of the relevant legislation. We allocated savings to costs based both on the score and our understanding of legislative history. For instance, although the American Taxpayer Relief Act of 2012 increased the debt in total, lawmakers explicitly designated requisite health care savings to offset the costs of the "doc fix" included. In the multiple cases where deficit-reducing reforms were intended to offset both an SGR delay and a temporary extension of the various so-called "health extenders," we only counted the percentage of savings necessary to offset the SGR delay, and ignored the additional savings for the purposes of this analysis. The analysis does not incorporate the effects of doc fixes on federal interest costs. To estimate deficit savings beyond the 10-year windows estimated by CBO, we analyzed each policy separately, but for most we assumed that annual savings continued as the same percentage of their respective baseline. The estimates in this blog do not include either the savings achieved by the SGR reduction when it took effect in 2002 or the extrapolated costs of the deficit-financed SGR delay in 2003, due to a lack of data. Additionally, this analysis does not account for potential behavioral effects beyond those incorporated in CBO estimates that lower Medicare physician payment rates may have had in increasing the volume of physician services.

March 13, 2014

Note: This blog has been updated from its original posting to include the CBO score of the Senate Republican proposal.

With the current "doc fix" set to expire at the end of this month, Congress is scrambling to avoid the 24 percent cut to doctors' payments set to occur under the Sustainable Growth Rate (SGR) formula. Rather than settle for a temporary fix, this time Congress is looking for a permanent solution. A bipartisan, bicameral proposal currently under consideration would create a new payment formula designed to offer stability to physicians and reward quality over quantity. Yet Congress cannot agree on how to pay for the $140 billion cost of the bill, and many in Congress don't want to pay for it at all.

With health care costs expected to grow rapidly as the Baby Boomers retire, SGR reform should be seen as an opportunity to truly bend the health care cost curve. A recent proposal from Mark McClellan, Keith Fontenot, Alice Rivlin, and Erica Socke in Health Affairs, for example, suggested a package of savings that would include bundling payments to encourage coordinated care, encouraging competition to set market prices, restricting pricy Medigap plans, retooling Medicare's cost-sharing system, and increasing means-tested premiums to help pay for SGR reform.

Unfortunately, none of the proposals in Congress would take this approach. As we explained yesterday, the House Republican bill would pay for permanent SGR reform with temporary savings from delaying the individual mandate. This would reduce the deficit in the first decade by about $45 billion (including interest), since repealing the mandate would increase the number of uninsured and reduce the number of individuals collecting Medicaid or exchange subsidies. However, over the long run, this bill would add to the deficit, likely by over $200 billion in the second decade.

House Democrats reponded to this bill with one that relies on a far bigger gimmick – the war spending gimmick. As we've explained numerous times before, capping war spending at levels consistent with the troop drawdown that is already planned does not represent new savings, but it appears to do so due to a quirk in CBO projection methods that forces them to assume uncapped discretionary spending (such as war funding) grows with inflation. By relying on these phantom savings, the House Democratic bill would add over $160 billion to the debt (including interest) in the first decade alone.

And not to be outdone, the Senate Democrats are set to introduce a bill with no offsets at all. Senate Finance Chairman Ron Wyden recently dismissed the SGR as "budget fakery" that does not need to be offset at all. Worse, the Senate Democrats would extend various expiring health provisions (the "health extenders") along with the SGR reform – and thus it would add more than $200 billion to the debt over the next decade, including interest.

Only the Senate Republicans have a plan that would meet the basic test of fiscal responsibility. They would fully repeal, rather than delay, the indvidual mandate. CBO has scored the repeal as saving $465 billion over ten years, and the bill overall would save $285 billion over ten years. Its savings grow over time, reaching $37 billion in 2024, so it would also reduce deficits in the longer term.

Categorizing SGR Proposals


Caps war spending at levels in President's budget.

Relies on phony savings. Adds over $160b to the deficit this decade

Includes no offsets and continues "extenders"

Adds over $200b to the deficits this decade


Delays individual mandate for five years

Reduces deficits by $45b in first decade but would likely add over $200b in second decade

Permanently repeals individual mandate

Reduces deficits by $285b this decade

*All numbers include interest savings

The proposal began as a bipartisan, bicameral agreement to replace SGR, although there is not yet agreement on paying for it. It is disheartening that every proposal except the Senate Republicans’ fell to the temptation of using gimmicks and would increase deficits. So far, this conversation represents a missed opportunity for Congress to bend the health care cost curve and improve the long-term fiscal picture by negotiating a real SGR deal.

March 13, 2014

In the wake of the release of House Ways and Means Committee Chairman Dave Camp's (R-MI) tax reform discussion draft, some misconceptions have been spread about both its potential benefits and drawbacks. In this post, we will look into four of these misconceptions.

Misconception #1: The draft raises corporate taxes by $500 billion to pay for tax cuts for individuals.

At first glance, the draft seems to reduce individual income tax revenue by almost $600 billion while raising more than $500 billion from corporations and another $85 billion from a bank tax. However, the reality of the split between individuals and businesses is more complicated because of the treatment of pass-throughs -- businesses whose income passes through to the owners/shareholders and is taxed by the individual income tax. Pass-throughs are counted in two separate sections in the JCT revenue estimate: revenue lost from the rate cuts is shown with the individual provisions, while revenue gained from base-broadening is shown with the business provisions. Thus, looking at the revenue impact of each of those sections will overstate the tax cuts given to individuals and the revenue raised from businesses.

The exact extent of pass-through revenue is difficult to determine, although we can make some educated guesses. First, the rate cuts on the individual side also apply to pass-through entities. In 2007, pass-throughs paid about 15 percent of individual tax revenue. If that ratio holds true, 15 percent of the revenue from the rate cuts and Alternative Minimum Tax repeal would account for about nearly half the net revenue reduction in the individual score, which would suggest the net tax increase on businesses is closer to $200 billion than $500 billion.

Looking also at the corporate score, it is clear that a substantial portion of the net revenue comes from pass-throughs. As an example, one section called "Pass-Thru and Certain Other Entities" -- which changes tax laws relating mainly to pass-throughs -- raises $25 billion of revenue; there are other provisions which may only impact pass-through entities outside of that section. In addition, many of the corporate base-broadening measures raise revenue from both C-Corps and pass through entities. For example, previous estimates suggest that about 30 percent of the revenue from repealing accelerated depreciation – the biggest revenue raiser on the corporate side – comes from pass-through entities. A number of other provisions are also likely to include substantial pass-through revenue.

While the Tax Reform Act may indeed shift the tax burden from individuals to corporations, the total shift would likely be much smaller than the $500 billion number in the JCT score.

Misconception #2: The discussion draft reduces marginal tax rates for everyone.

One of the main arguments for pursue comprehensive tax reform has to do with the advantages of reducing marginal tax rates. The bill appears to reduce these marginal rates for everyone by cutting the statutory rates from 10, 15, 25, 28, 33, 35, and 39.6 percent to 10, 25, and 35 percent. Yet there is a difference between the statutory rates that are reflected in a tax bracket percentage and marginal rates, which reflect the amount of additional taxes one pays on an additional dollar of income.

The draft would reduce or maintain statutory rates at all income levels. It will reduce marginal rates for most people and on average, but due to phaseouts and other tax code changes, it will not reduce marginal rates for everyone.

There are a few reasons this is true. First, by indexing the tax code to the more accurate chained CPI in favor of the currently used CPI-U, individuals will move into higher tax brackets slightly faster: by 2023, a small number of individuals would face a marginal tax rate of 25 percent as opposed to 15 percent under current law. In addition, the plan essentially eliminates the head of household filing status, which benefits single people with children and would result in lower marginal rates for some people than would be the case under the draft.

Finally, and perhaps most importantly, the legislation includes a number of phase-outs which have the impact of increasing effective marginal tax rates. For example, the legislation phases out the standard deduction, 10 percent bracket, and child tax credit for higher earners. This effectively creates a set of “bubble rates” whereby some taxpayers in the 25 percent bracket face a marginal rate of 30 percent, and some in the 35 percent bracket face a marginal rate of 40 or 42 percent. Len Burman over at the Tax Policy Center discusses some of these higher effective marginal rates in detail – and also points to other phase-outs (for example, a phase-out of the exclusion of capital gains from home sales) which could further increase effective marginal rates.

To be sure, current law also has a number of phase-outs that raise current law effective marginal rates above the statutory rates. And on the whole, the tax reform draft would significantly reduce marginal rates. However, for some individuals marginal rates could increase.

Misconception #3: The draft makes the tax code less progressive.

Given the rate reductions, one might conclude that the discussion draft favors the rich. However, a number of regressive tax preferences were reduced or eliminated, including the state and local tax deduction, mortgage interest deduction, municipal bond exclusion, and charitable deduction. With these reductions, the plan is close to distributionally neutral overall. By 2023, JCT's distributional analysis shows that those making less than $30,000 and more than $100,000 see changes in their effective tax rate of less than half a percentage point, while those in the middle get an average reduction in their tax rates of close to 1 percentage point.

Misconception #4: The discussion draft will raise $700 billion in new revenue from economic growth.

JCT provided an additional analysis of the economic impact of the plan, finding that increased economic growth could raise up to $700 billion in revenue. This figure, however, is provided on a wide range between $50 and $700 billion as a result of GDP being 0.1 to 1.6 percent higher over ten years. The shaded area in the graph below represents the range of potential revenue the increased economic growth could bring, assuming the gains are distributed proportionally over the decade.

Encouragingly, the bill does not rely on the dynamic revenue for the purposes of making the reform revenue-neutral. This means that whether tax reform raises $50 billion or $700 billion from economic growth, that revenue will be used to help strengthen the fiscal situation.


There has been a lot of discussion of the Tax Reform Act since its release a few weeks ago. We will continue our analysis and fact-checking of the draft and the broader tax debate as they develop.

March 13, 2014

The Congressional Budget Office (CBO) isn't the only agency in town that does long-term projections. The Treasury Department annually releases the Financial Report of the United States Government, which shows a number of different measures of the federal government's fiscal health both in the past fiscal year and over the next 75 years. That report shows the U.S. government has over $56 trillion of unfunded liabilities over the next 75 years.

When looking at the past fiscal year, the Financial Report uses net operating cost rather than the budget deficit as its primary metric. Net operating cost accounts for the current fiscal year on an accrual basis, so it takes into account changes in future federal employee and veterans benefits and government asset valuations not shown by the budget deficit. Net operating cost typically exceeds the budget deficit, and in FY 2013 it totals $805 billion, almost a fifth more than the $680 billion deficit.

A long-term measure of the government's fiscal situation is net liabilities. This 75-year measure takes into account government assets, debt held by the public, net liabilities of the federal employee and veterans benefit systems, and the net liabilities of Social Security and Medicare. Adding all these up yields net liabilities of $56.6 trillion. Note that these liabilities only take into account dedicated payroll taxes and offsetting receipts and do not include discretionary and other mandatory spending.

The table below shows those projections for this year and from the reports for the previous three fiscal years.

U.S. Government Assets and Liabilities (billions)
  FY 2013 FY 2012 FY 2011 FY 2010
Assets $2,968 $2,748 $2,707 $2,884
Debt Held by the Public  -$12,028 -$11,332 -$10,174 -$9,060
Other Liabilities*  -$7,849 -$7,517 -$7,319 -$7,297
Net Position  -$16,909 -$16,101 -$14,785 -$13,473
Net Liabilities of Social Security  -$12,294 -$11,278 -$9,157 -$7,947
Net Liabilities of Medicare Part A (HI)  -$4,772 -$5,581 -$3,252 -$2,683
Net Liabilities of Medicare Parts B and D (SMI)^  -$22,530 -$21,593 -$21,320 -$20,130
Net 75-Year Social Insurance Liabilities  -$39,698 -$38,554 -$33,830 -$30,857
Total Liabilities  -$56,607 -$54,655 -$48,615 -$44,330

Source: Treasury Department
*Includes liabilities of federal employee benefits, veterans benefits, and other liabilities.
^Does not include federal general revenue transfers.

Liabilities can be projected using a number of different assumptions, so the Financial Report's numbers are just one measure. Robert Kaplan and Dave Walker estimated the unfunded liabilities number at $70 trillion for FY 2012. Using their assumptions, we estimate their number would be similar this year.

Adding in all other noninterest revenue and spending to the calculation shrinks the total net liabilities in the Financial Report to $4 trillion since general revenue exceeds non-social insurance spending. Of course, interest is a major expense over the long term, and that is borne out in the more traditional fiscal statistics, which show debt rising inexorably over the next 75 years.

In terms of more commonly used fiscal statistics, debt as a percent of GDP rises from 73 percent in 2013 to 112 percent of GDP in 2043 and 277 percent of GDP in 2088, a path that is very similar to CBO albeit slightly worse. The fiscal gap – the amount of non-interest deficit reduction needed annually to keep the debt in 75 years at current levels – is 1.7 percent of GDP.

Source: Treasury Department

The Financial Report also notes the cost of waiting to make changes. The fiscal gap grows from 1.7 percent to 2.1 percent of GDP if lawmakers wait ten years to make changes, and it grows to 2.6 percent if lawmakers wait twenty years. As the report itself states, "Subject to the important caveat that changes in policy are not so abrupt that they slow the economy’s recovery, the sooner policies are put in place to avert these trends, the smaller the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path."

We've shown before that the same fact applies to delaying changes to Social Security. We couldn't agree more that making changes to the budget sooner rather than putting off the necessary adjustments is the way to go.

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