The Bottom Line

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 eshoo.house.gov/federal-budget-workshop 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

  House
Senate
Democrats

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

Republicans

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.

March 12, 2014

Earlier today, we wrote that the the House Republican SGR bill would add to long-term deficits by using a timing gimmick to pay for permanent costs with temporary savings. It turns out, a Democratic alternative introduce by Rep. John Tierney (D-MA) would replace this gimmick with another – the war spending gimmick.

Specifically, the amendment would cap war spending for FY2016 through FY2021 at about $30 billion – which totals about $70 billion annually below the CBO baseline. Yet as we've explained before in our gimmicks paper, budget gimmicks chartbook, and various other blogs, these savings aren't real. By convention, CBO assumes uncapped discretionary spending grows with inflation; but there is already a drawdown underway and reducing spending down to already-planned spending levels represents a phony offset.

As far as budget gimmicks go, this one is arguably far worse than the House Republican amendment. That bill would at least not add to the debt until 2027, whereas the Democratic alternative will begin adding to the debt immediately. The savings outlined in the Democratic alternative are almost completely imaginary, measured against spending levels which in no way reflect our current course. Any modest spending reductions they might cause by reducing war spending on the margins will be tiny and uncertain.

CBO itself has said:

Placing caps on appropriations for overseas contingency operations that are below the amounts in CBO’s baseline would result in estimated savings relative to those baseline projections. Such savings, however, might simply reflect policy decisions that have already been made and that would be realized even without such funding constraints. Moreover, if future policymakers believed that national security required appropriations above the capped levels, they would almost certainly provide emergency appropriations that would not, under current law, be counted against the caps.

Others from across the political spectrum have agreed. Jim Horney of the Center on Budget and Policy Priorities has said that drawing down war spending does not represent real savings, and House Budget Committee Chairman Paul Ryan (R-WI) has said that "an honest budget cannot claim to save taxpayers' dollars by cutting spending that was not requested and will not be spent."

Finding offsets for the cost of replacing the SGR should be a great opportunity to make reforms to bend the health care cost curve rather than a burden to be avoided at all costs. Both of the main proposed offsets are gimmicky in their own ways. Instead, lawmakers should invest their energy in finding acceptable bipartisan reforms to make Medicare more efficient, cost-effective, and financially sound.

Update 3/14/14: In a floor speech yesterday, Finance Committee Chairman Ron Wyden (D-OR) proposed repealing SGR by either a gimmick reducing war spending or without being paid for. In a statement, CRFB President Maya MacGuiness criticized the three SGR plans – that of House Republicans, House Democrats, and Senate Democrats – saying "By putting the bill on our national credit card, or covering up the true costs, our leaders are only making the problem worse."

March 12, 2014

While the relevant congressional committees recently reached agreement on a bipartisan plan to replace the Sustainable Growth Rate (SGR) formula with a payment structure to better incentivize high-quality, higher-value care, the question of how to pay for that reform remains unresolved. Today, though, the first legislative proposal to offset the costs of the SGR fix was introduced in the form of an amendment to the House bill (H.R. 4015). This amendment, introduced by Ways and Means Chairman Dave Camp (R-MI), would delay the Affordable Care Act's (ACA) individual mandate for five years. And although this bill would reduce deficits over the first decade, paying for permanent costs with temporary savings would inevitably increase debt over the long run.

The Congressional Budget Office estimates that the amendment would save $159 billion through 2024, enough to offset the $138 billion cost of the replacement physician system. And because of its front-loaded savings, interest savings to service our debt would also accrue, resulting in total savings of $45 billion through 2024. Unfortunately, though, not only does the amendment miss a critical opportunity to enact structural reforms to help bend the health care cost curve, but by relying on very front-loaded savings, the bill would increase deficits in the second decade likely by over $200 billion (and potentially significantly more).

The $159 billion of direct savings over the first ten years accrues from delaying the implementation of the individual mandate until 2019. Recall that eliminating or delaying the individual mandate has a number of cross-cutting effects. Of course, the government would forgo collecting the revenue from the penalty, projected at about $15 billion through FY 2018. More importantly, though, many fewer people would obtain coverage through Medicaid, the health exchanges, or their employer. Fewer people enrolling in Medicaid and the health exchanges would save the federal government significant money, and fewer people receiving coverage through their employer would increase revenue as those employees received compensation in the form of taxable wages rather than non-taxable health insurance benefits. In addition, employer mandate penalties would increase while small business tax credits would decrease.

Because the mandate delay is temporary, while the measure as a whole would save $94 billion through 2019, with interest, it would actually increase deficits by $49 billion from 2020-2024. The bill would likely start adding to the debt in 2027, and by increasing amounts thereafter. Offsetting permanent costs with temporary savings, as this bill does, is one of the budget gimmicks we recently warned against.

The proposed offset is most disappointing because health reforms should be focused on saving significant money over the longer term, when those savings are most needed. Instead, this bill would only reduce deficits in the short term and be a long-term debt increaser.

March 12, 2014

The administration’s Office of Management and Budget (OMB) released its report to Congress on Monday detailing the sequester’s impact on mandatory spending programs for Fiscal Year (FY) 2015, and it shows a notable about-face on the fate of the ACA’s cost-sharing subsidies. The OMB had previously indicated that they were subject to sequestration just last year.

The estimated $8 billion in cost-sharing subsidies scheduled to be paid to insurers in FY 2015 will therefore be spared the sequester’s roughly 7 percent haircut, as will the $156 billion projected to be spent over the following nine years.

Although not as central to the law as the premium subsidies (which are exempt from sequestration because they are structured as tax credits), the subsidies designed to reduce cost-sharing (co-pays, deductibles, out-of-pocket caps) for individuals with incomes between the federal poverty level (FPL) and 250 percent of the FPL are also an important component. Their newly determined exemption from sequestration, therefore, could be considered a big win for the law, particularly given some complications in how the sequester would be administered. Over the coming ten years, this exemption effectively translates to about $10 billion in restored cost-sharing subsidies.

It is unclear precisely what changed OMB's opinion, but it may be basing the exemption on the fact that the low-income cost-sharing subsidies for Medicare Part D are explicitly exempted from sequestration.

Importantly, this exemption slightly increases the percentage reduction that other mandatory programs will face, including two of the three R’s intended to protect insurers against adverse selection in the health exchanges – risk adjustment and reinsurance payments. Together, these two programs, which help plans that end up with higher-cost enrollees, are set to be cut by nearly a billion dollars in FY 2015 as a result of the sequester. For a full description of the functioning and purpose of these programs, you can read this fantastic primer from the Kaiser Family Foundation. Given fears about insurers ending up with sicker enrollees than they were expecting and subsequently increasing premiums going forward, the sequester cuts to reinsurance payments, in particular, may be concerning.

The sequester would also reduce funding for grants to help states run their ACA insurance exchanges, by $61 million in FY 2015.

March 11, 2014

OMB just published additional information, explanations, tables, and projections related to this year's budget -- known as the Analytical Perspectives. As part of that information, OMB published long-term estimates for the federal budget under the President's policies. 

As we discussed last week, OMB projects that the President's budget would help to reverse the growth in the debt-to-GDP ratio, allowing it to rise to a post-WW II record of nearly 75 percent of GDP in 2015 but then fall continuously to 69 percent in 2024 (our rough estimates suggest CBO might be somewhat more pessimistic). According to OMB's longer-term projections released Monday, debt would remain just below 70 percent of GDP through 2040, but then begin to decline as a share of GDP.

Under OMB's "base" scenario, revenue would rise from about 17 percent of GDP this year to nearly 20 percent by 2024 and nearly 23 percent by 2080. Meanwhile, non-interest spending would fall slightly from nearly 20 percent this year to 18.5 percent by 2024 and remain between 18 and 19 percent of GDP for most of the years that follow. As a result, OMB projects the budget would reach balance by 2053 and debt would be completely paid off by 2072.

 

OMB also produces a number of alternative scenarios in which different assumptions are made with regards to economic growth, revenue growth, health care spending, etc. Each of the 10 scenarios can be viewed here. Under OMB's "optimistic" scenario, which assumes faster economic growth and lower health care costs, the budget would be balanced by 2034 and the debt paid off before 2050. Under its "pessimistic" scenario, the budget would never balance and the debt would reach 150 percent of GDP by about 2090.

Interestingly, OMB's numbers differ substantially from recent long-term projections from CBO. Whereas OMB projects the debt will be completely paid off by the early 2070s, CRFB's extrapolation of CBO's ten-year current law projections suggests they'll project debt levels of roughly 225 percent of GDP by that time. A portion of the difference comes from the policies in the President's budget, which reduce deficits by almost 1.3 percentage points of GDP in 2024 alone, compared to a CBO current law baseline.

However, the differences also appear to be driven by assumptions. CBO assumes discretionary spending will grow with GDP, whereas OMB assumes it will grow with inflation plus population -- falling from 6.8 percent of GDP this year to just 1.7 percent 75 years from now. On health care, OMB projects much slower excess cost growth. As a result, Medicare and Medicaid costs would increase from 4.6 percent of GDP today to 7.6 percent over the next 75 years under OMB's assumptions, compared to roughly 9.4 percent under our extrapolations of CBO's data.

The two agencies also project different long-term economic growth rates -- CBO projects annual growth of real GDP to average between 2.0 and 2.2 percent over the long term, while OMB projects about 2.3 percent average annual growth. By the 75th year, this results in GDP levels that are noticeably higher under OMB's projections than CBO's.

 

* * * * 

Long-term projections are extremely uncertain and very sensitive to the assumptions used. But instead of throwing them out the door, as some have suggested, it's useful to see the range of OMB estimates. It is encouraging that OMB projects a falling debt-to-GDP ratio over the long-term, but these projections should be viewed with at least some caution. Last week, we simulated how CBO might project the President's budget when it releases its re-estimates in the coming weeks and found that CBO could potentially estimate a rising debt path later this decade under the President's proposals -- with debt exceeding 73 percent of GDP in 2024 instead of the 69 percent that OMB projects. The trajectory of this difference could hold for long-term estimates as well.

In the face of so much uncertainty, it would be prudent to prepare for more pessimistic scenarios and then readjust expectations if events turned out to be more favorable. To that end, it is encouraging that the President's budget calls for further deficit reduction beyond what has been enacted, but additional reforms will likely be needed to put the debt on a clear downward path over the next two decades instead of a stabilized path. 

Syndicate content