The Bottom Line

January 27, 2015

Yesterday, CRFB published an analysis of CBO’s latest Budget and Economic Outlook. The six-page document summarizes the forecasts and emphasizes the return of trillion-dollar deficits over the next ten years. Although CBO projects slightly decreasing deficits over the next two years, there will be a jump from a 2016 low of $467 billion to a $1.09 trillion by 2025.

January 26, 2015

Trillion-dollar deficits are coming back in 2025. That's one of the many stories told by the new budget update released today by the Congressional Budget Office. The deficit, which had fallen to a post-recession low of $483 billion (2.8 percent of GDP) last year, is projected to fall slightly more this year to $468 billion (2.6 percent of GDP), but increase to reach $1.09 trillion (4.0 percent of GDP) by 2025.

Debt will also grow substantially in nominal dollars, from $13 trillion today to $21.6 trillion by 2025. As a percent of GDP, debt will remain stable near its current post-war record of around 74 percent of GDP through 2020, but then it too will start rising quickly, reaching nearly 79 percent of GDP by 2025 and continuing to grow thereafter. As CBO explains, this continuing long-term growth would not be sustainable:

Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.


 

January 23, 2015

Today CRFB released a new paper as part of our Better Budget Process Initiative titled "Improving Focus on the Long Term."

The budget process focuses on the short term, often at the expense of longer-term considerations (like how our long-term debt problem is far from being solved). This distortion allows policies to be crafted in ways that mask their true costs and contributes to results that downplay looming fiscal challenges.

The short-term focus contributes to many poor outcomes, such as emphasis on short-term deficit reduction (with little improvement in the long-term fiscal outlook), the use of “timing gimmicks” designed to obscure the budgetary impact of policy choices, and the reliance on one-time savings to ensure “deficit-neutrality” within the budget window but deficit increases beyond it. It also often causes policymakers to undervalue policies which achieve modest savings over the ten-year window but much greater savings after that to help "bend the debt curve" over the long term. (For more on looking beyond the ten-year window, see our prior paper on the subject)

In addition, the short-term focus has made it conducive for many in Washington to brag that the fiscal situation is under control based on a short-term improvement in the deficit, despite the fact that the debt is projected to grow faster than the economy for the medium and long term.

January 23, 2015
Brookings Event Discusses Effect of the Sequester

The biggest piece of deficit reduction that lawmakers have accomplished so far is the series of caps on annually appropriated discretionary spending through 2021. The Budget Control Act specified spending caps that would reduce spending by more than $750 billion over ten years. It also put in place a sequester which would further reduce those caps by roughly $90 billion per year if the Super Committee did not agree on $1.2 trillion of deficit reduction. The Super Committee did indeed fail, and the sequester went into effect in March 2013. After partial sequester relief in 2014 and 2015, the discretionary cuts will return in full force in fiscal year (FY) 2016. As a result, discretionary spending will fall to a record low share of GDP in ten years.

With the sequester hanging over the appropriations process, the Brookings Institution held an event last week discussing the sustainability of these caps. The event brought together a panel of four experts with different perspectives on the caps, including:

    • Robert Hale, Former Under Secretary for Defense (Comptroller) and Senior Fellow at Booz Allen Hamilton
    • Ron Haskins, Senior Fellow of Economic Studies at Brookings
    • Michael O' Hanlon, Foreign Policy Director of Research at Brookings
    • Alice Rivlin, former Congressional Budget Office (CBO) and Office of Management and Budget (OMB) director and Senior Fellow of Economic Studies at Brookings
January 22, 2015

The House Energy and Commerce (E&C) Health Subcommittee yesterday held the first of two hearings on the Sustainable Growth Rate (SGR) formula for Medicare physician payments. Set to cut those payments by 21 percent in April 2015 when the latest "doc fix" runs out, the SGR will be one of the first "Fiscal Speed Bumps" the new Congress will confront this year. Fixing it permanently could cost at least $140 billion through 2025.

Yesterday's hearing focused on replacing the formula as well as whether and how to pay for the cost, featuring health care policy experts and policymakers. The session today featured representatives from various provider groups.

The witnesses at yesterday's hearing were:

    • Former Senator Joe Lieberman (D/I-CT)
    • Former OMB and CBO Director and current director of Brookings's Engelberg Center for Health Reform Alice Rivlin
    • American Institutes of Research Institute Fellow Marilyn Moon

In their opening statements, both E&C Chairman Fred Upton (R-MI) and Health Subcommittee Chairman Joe Pitts (R-PA) encouragingly stated that repealing the SGR must be paid for, with Pitts citing CRFB's finding that doc fixes have been paid for 98 percent of the time since 2004.

Both noted that there exist numerous options with bipartisan support to pay for a replacement. Upton went further, calling on lawmakers to not just fix the SGR but make Medicare sustainable.

January 22, 2015
CRFB Releases Budget Resolution Principles

Yesterday, the Committee for a Responsible Federal Budget released a one-page list of principles to help guide policymakers in crafting a budget resolution this spring. CRFB called on Congress to follow regular order by agreeing to a budget resolution conference report that lays out a framework for pursuing priorities and addressing issues in a fiscally responsible manner before making major decisions on spending or revenues. The principles include four primary criteria for a responsible budget resolution:

  • Put the debt on a downward path - The budget should include realistic, gimmick-free tax and spending levels sufficient to reduce the debt as a share of the economy in the medium and long term. You can learn about the unsustainable path of federal debt by reading our Report: Deficit Falls to $483 Billion, but Debt Continues to Rise.
  • Responsibly address upcoming "Fiscal Speed Bumps" - These are the upcoming budget-related deadlines -- such as the impending cuts required by the Medicare Sustainable Growth Rate, depletion of the Highway Trust Fund, and reinstatement of the debt limit -- that present lawmakers with an opportunity to add up to $3 trillion to the debt, or take the more fiscally responsible route. You can read more about them in our paper Fiscal Speed Bumps: Challenges, Risks, and Opportunities.
January 22, 2015
Fix the Debt and Concord Coalition Launch First Budget Initiative

Today, Fix the Debt and the Concord Coalition launched First Budget – an effort to engage voters and candidates in a discussion about the nation’s unsustainable budget during the 2016 presidential campaign.

First Budget's mission is to ensure that “the first budget that the next president submits to Congress must chart a more sustainable course that strengthens the nation, encourages growth and protects coming generations from excessive government debt.” Read the full press release here.

With a long history of advocating for fiscal responsibility, these two organizations hope to raise public awareness about the growing national debt and encourage candidates to make fiscal responsibility a top priority and put forward plans to deal with our long-term fiscal imbalance. With these goals in mind, First Budget will engage voters and mobilize volunteers, starting with the early primary states of Iowa and New Hampshire, to ask candidates directly about the debt and start a public discussion on the campaign trail.

January 21, 2015
President Obama’s Middle-Class Tax Message in the State of the Union

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

President Obama’s tax proposals for the middle class were a key element of his State of the Union address. But they represent only relatively modest efforts to create subsidies through the tax code rather than through other departments of government. Looked at broadly, many only tinker around the edges of tax policy and count on an overloaded and troubled agency, the IRS, to administer them.

January 20, 2015

Tonight at 9:00 PM, President Obama will address Congress and the nation in the State of the Union address. As he lays out his agenda for this year, CRFB will be following along and providing analysis of the budget-related policies he mentions. We hope the President will address our long-term debt problem in his remarks and set the stage for a bipartisan deficit reduction effort.

January 20, 2015

President Obama's State of the Union address is tonight at 9 p.m. In preparation of his speech, we've brought back our great State of the Union fiscal bingo game - DEBT-O!

Play with your friends and keep track of budget-related words and terms used by the President. Although the speech will cover many issues, President Obama should still address the nation's fiscal issues in his speech, and perhaps talk about how to handle the upcoming Fiscal Speed Bumps. Click here for a printable PDF of eight different boards.

January 20, 2015
A Big Bang on Tax Reform?

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

There is a growing consensus that one of the more fertile fields for possible bipartisan action between President Obama and this new Congress is tax reform.

This is logical.  

January 15, 2015

With tax reform heating up, House Ways and Means member Rep. Devin Nunes (R-CA) has gotten the ball rolling with a business tax reform plan called the American Business Competitiveness Act. The draft would dramatically overhaul and simplify the corporate tax code, broadening the tax base in many areas while lowering tax rates on businesses.

Nunes's draft would change business taxation to be a cash-flow tax, making it more closely related to businesses' actual inflows and outflows. Nunes has said that the plan would be deficit-neutral over ten years using conventional scoring, although he has not made the estimate publicly available. The main elements of the plan include:

  • Reducing the top tax rate to 25 percent for both corporate and non-corporate businesses, phased in over ten years
  • Allowing businesses to write off the full cost of investments immediately (known as expensing) rather than writing them off over the life of the investment (see here for background on depreciation rules)
  • Repealing deductions for interest expenses while reducing taxes on interest income to the dividend rate (20 percent)
  • Eliminating other business deductions and credits
  • Changing the international tax system to a territorial system, where U.S. companies' income earned outside the country is not taxed by the federal government
  • Repealing the corporate Alternative Minimum Tax (AMT)

One of the most unique aspects of the proposal is the move to full expensing and the repeal of interest deductions.

January 14, 2015

Stronger economic growth is one possible way to reduce deficits, but it is often difficult to identify which policies produce the strongest growth because advocates for any policy will contend that their approach is best. However, one way to encourage economic growth is by supporting policies that encourage the formation of startup companies. The University of Virginia's Miller Center released a report today with ideas to do just that, entitled Can Startups Save the American Dream?. The report was the product of the Milstein Commission on Entrepreneurship and Middle-Class Jobs, a part of the five-year Milstein Symposium initiative to advance innovative, nonpartisan, action-oriented ideas to help rebuild the American Dream. CRFB President Maya MacGuineas is a member of the Commission.

January 14, 2015

At an event at the Center for American Progress, House Budget Committee Ranking Member Chris Van Hollen (D-MD) unveiled an "Action Plan" to broadly cut taxes for the middle class. The reported $1.2 trillion cost of the plan would be offset with revenue from high earners and the financial sector. The details of the plan have not been completely spelled out yet, but it is encouraging that Van Hollen is committed to paying for the full costs. However, using increased revenues to pay for a middle class tax cut will make future deficit reduction more difficult.

Here are the major elements of Van Hollen's plan, including four parts that would cost money and three proposals to raise money.

Paycheck Bonus Tax Credit

The plan's centerpiece is a Paycheck Bonus Tax Credit, which would provide a $1,000 credit for single earners and $2,000 for couples. The credit would phase out at incomes of $100,000 and $200,000 indexed for inflation. Van Hollen indicated that the credit was not refundable, meaning that people with no income tax liability would not benefit, but that he intends to consider changes to make it at least partially refundable, which would be more expensive and provide more benefit to lower-income households. This credit is the plan's most expensive, potentially making up four-fifths of the plan's cost, depending on the exact details.

If taxpayers put at least half of their tax credit into a tax-preferred savings plan, they would qualify for an additional $250 Savers' Bonus credit.

January 14, 2015

The brand new 114th Congress is at it again. Only weeks into the term, a second fiscally irresponsible change to the Affordable Care Act (ACA) has been introduced -- a repeal of the law's 2.3 percent tax on medical devices sold in the U.S. that is expected to add roughly $25 billion to the debt over ten years.

The medical device tax was included in the ACA in order to help pay for the law's new health coverage subsidies and in part to compensate for the financial gains device companies could expect as a result of increased coverage.

Repeal of the tax, though, is one of the few ACA-related changes with bipartisan support -- an amendment to the FY 2014 Senate budget creating a deficit-neutral reserve fund for repeal passed by a 79-20 vote, with more than 30 Democrats joining every Republican in favor. Notably, this vote was different than outright repeal since the action was both non-binding and stipulated deficit-neutrality, but it indicated the support that repeal has in both parties. Yesterday, a bipartisan group of Senators introduced a repeal bill. If repeal is to happen, though, lawmakers need to make up the lost revenue.

Criticism of the tax generally focuses on the potential negative effects on the medical device industry, but there are also concerns about the economic inefficiency of selectively taxing one type of product and the Treasury's difficulty in administering the tax.

January 9, 2015

Interest in increasing the gas tax appears to be heating up as policymakers realize the Highway Trust Fund is running on fumes, and an upcoming Fiscal Speed Bump offers the opportunity to change that. At the end of May, the latest highway bill will expire, and lawmakers will have to find a way to plug the $15 billion annual gap between highway spending and revenue.

Over the next ten years, that gap will total $180 billion, and the practice of filling the difference with general revenue and budget gimmicks is becoming increasingly difficult. Highway spending has exceeded dedicated revenues for most of the past 15 years, and since 2008, lawmakers have transferred $65 billion from the general fund to the trust fund to cover its shortfalls rather than adjust highway spending or revenue.

In the past, some policymakers have proposed raising the gas tax to close the gap structurally, but a major development may have made this possibility more likely: oil and gas prices plunging by more than half and two-fifths, respectively, leading to the lowest prices drivers have faced in six years. This plunge has led to speculation that the first gas tax increase in more than 20 years could now pass Congress (assuming the trend doesn't reverse in the next few months). For context, the 15 cent gas tax increase necessary to fully close the HTF shortfall is only one-tenth the size of the roughly $1.50 per gallon drop in gas prices.

January 9, 2015

Although the 114th Congress is just getting settled, it will have to move quickly to address a series of deadlines with serious policy and fiscal consequences. These "Fiscal Speed Bumps" present serious challenges and risks but also opportunities for policymakers, as we explain in a new paper.

The paper lays out the seven speed bumps -- six this year and one in 2016 -- that policymakers will have to (or should) address this year, what policymakers have usually done in the past, and the consequences of inaction for each. These speed bumps are:

January 9, 2015

The recently adopted House rules for the 114th Congress are getting attention in the budget world mostly for their requirement that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) take into account macroeconomic effects when scoring budget legislation, a process known as dynamic scoring. But that requirement isn't the only new rule with fiscal implications.

January 8, 2015

This week, the House approved a rule change related to dynamic scoring. Specifically, the rule would require the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to "incorporate the macroeconomic effects of 'major legislation' into the official cost estimates "to the extent practicable" used for enforcing the budget resolution and the other rules of the House." The rule also asks for a qualitative assessment of the impact of major legislation on the long-term budget and macroeconomic outlook.

Major legislation is defined as legislation that causes a gross budgetary effect of at least 0.25 percent of GDP in a given year. By this definition, it wouldn’t apply to appropriations bills or legislation subject to appropriations, including highway spending. Instead, it would apply to legislation affecting mandatory spending and revenue, so legislation repealing all or major parts of the Affordable Care Act, for example, would be subject to the requirement for dynamic scores. The rule is not clear whether it applies to off-budget effects such as changes in Social Security taxes and benefits.

If a law doesn’t have a large enough effect to qualify, it can still be designated as “major” by the Chairman of the Budget Committee (or for revenue legislation, by the House member serving as Chair or Vice-Chair of the Joint Committee on Taxation). 

January 7, 2015

The 114th Congress has barely even started and House Republicans are already proposing to explicitly ignore pay-as-you-go (PAYGO) rules that require deficit-increasing policies to be offset with other deficit reduction. The "Save American Workers Act of 2015" would change the definition of full-time work from 30 to 40 hours for purposes of enforcing the ACA’s employer mandate, which the Congressional Budget Office (CBO) projects will add $53 billion to the debt over the next ten years.

The bill attempts to reduce the incentive within the employer mandate to reduce part-time workers' hours below the current 30-hour threshold in order to avoid penalties. Additionally, the legislation could be seen as a way to minimize the impact of the employer mandate by applying it to less firms and workers.

The cost primarily stems from significantly fewer penalties ($55 billion over ten years) being collected from employers in violation of the mandate to provide their employees with health coverage. The new workweek definition would both reduce the number of full-time-equivalent employees (FTEs) a company is deemed to have in many cases – thus reducing the number of companies meeting the minimum 50 FTEs necessary to be subject to the mandate – and by exempting employers from any penalties for employees working between 30 and 40 hours per week.

CBO also expects this bill to reduce the amount of people receiving employer-based health coverage by roughly one million, with at least half and possibly all of them instead receiving coverage through an ACA exchange, Medicaid, or CHIP. As a result, this policy change would increase the number of uninsured by less than 500,000.

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