The Bottom Line

December 4, 2015

This blog is part of a series of "Policy Explainers" for the 2016 presidential election, where we explain some of the candidates' policy proposals that affect the federal budget.

This week, former Secretary of State and Democratic Presidential candidate Hillary Clinton released her infrastructure plan that proposes to invest $275 billion over five years in a broad range of projects including highway, rail, sea, air, and broadband expansion. This plan would directly invest $250 billion in projects and would provide $25 billion in seed money to create a National Infrastructure Bank. She also pledges to ensure taxpayer dollars stretch as far as possible by streamlining processes, promoting innovation, and encouraging private investment in American infrastructure. Clinton intends to fully pay for this plan with revenue-positive business tax reforms, although she doesn’t offer additional specifics on the tax reform proposal.

National Infrastructure Bank and Build American Bonds

Since the 1980s, various iterations of a National Infrastructure Bank have been proposed to encourage investment in infrastructure projects. This federally-created bank would offer credit assistance to state and local governments as well as private investors in the form of loans and loan guarantees at below-market rates to be used exclusively for infrastructure. State and local governments currently sell tax-exempt municipal bonds for infrastructure projects that are appealing for investors with high marginal tax rates but don’t attract investors who are exempt from federal income tax like international investors, pension funds, and endowments. With federal financing, tax-exempt entities may be more willing to make equity or debt investments in infrastructure.

Clinton’s plan doesn’t offer much detail about how her bank would be funded or how it would be structured. We do know that the bank would receive $25 billion in seed money to issue loans, loan guarantees, and other forms of credit, and would provide up to $225 billion in additional financing. Presumably, this additional $225 billion would come from private and state/local investment in infrastructure projects. This proposal appears to be similar to, albeit larger than, a proposal from President Obama to create a federal infrastructure bank with $10 billion in startup capital. The President’s plan would require that all government-issued loans be matched by the private sector or local governments to cover at least half of all project costs; it is not clear whether there would be a matching component in Secretary Clinton’s plan. 

Secretary Clinton would also restore the now-expired Build America Bonds (BABs) and charge the new infrastructure bank with administering them. BABs were created the American Recovery and Reinvestment Act of 2009 that offered state and local governments a direct 35 percent subsidy on the borrowing cost of taxable bonds in lieu of the traditional tax-exempt bonds, the goal being to expand infrastructure investment by attracting private capital. If designed in the same way as the original BABs, we estimate this would cost about $20 billion over ten years. 

December 3, 2015

Today marks the fifth anniversary of the National Commission on Fiscal Responsibility and Reform's (Fiscal Commission's) vote on the Simpson-Bowles plan, in which 11 out of 18 commissioners voted to support an ambitious plan to reduce 10-year deficits by $4 trillion (relative to a "current policy" baseline) by addressing virtually all areas of the budget and tax code.

Despite several rounds of negotiations in 2011 and 2012, Congress and the President unfortunately never agreed to a "grand bargain" of the scale or scope proposed by the majority of the Fiscal Commission. Yet substantial deficit reduction has been enacted through a piecewise approach; by our estimate, those measures (excluding legislation which has increased deficits) have totaled to over three-fifths of the deficit reduction the Simpson-Bowles report called for between 2012 and 2020. Unfortunately, these savings have come largely from near-term cuts in discretionary spending and not from gradual pro-growth tax and entitlement reform which the Fiscal Commission proposed in order to achieve long-term sustainability while promoting short- and long-term economic growth.

Indeed, according to our estimates, lawmakers have enacted nearly 130 percent of the defense and nondefense discretionary cuts proposed by the Fiscal Commission through 2020. Yet they have generated less than one-third of the revenue and done so entirely through higher rates rather than pro-growth tax reform. And they have enacted only one-sixth of the savings to mandatory programs, which represented a small share of the Fiscal Commission's savings through 2020 but grew over time and was the key to long-term fiscal sustainability. (See our methodology below for more information about the calculations.)

In other words, lawmakers have largely failed to address the nation's most pressing fiscal challenge: the large and growing cost of Social Security, Medicare, and Medicaid.

December 3, 2015

Congress is still considering a potential fiscally irresponsible deal to extend the 50-some tax breaks that expired at the end of the year, known as tax extenders. Although negotiations continue, press reports suggest an outline of an emerging deal that will cost around $700 billion, or $840 billion once interest costs are included.

Using those press reports, we have attempted to sketch our best understanding of the deal, which seems to build on House legislation passed earlier this year to permanently continue and expand various costly tax breaks. Paired with those tax breaks are extensions of tax credit expansions scheduled to expire at the end of 2017 and delays of some Affordable Care Act taxes.

If press reports reflect the actual deal, we estimate approximately three-fifths of the package will go to businesses, mostly due to an expanded research credit, provisions allowing businesses to deduct expenses more quickly, and two tax breaks for multinational corporations. The remainder would go to individuals, largely from continuing stimulus-era tax credits that expire in 2017.

Even though the deal largely extends expired tax breaks, it also contains some new and expanded policies, as we described in Tax Deal Goes Beyond Simple Extensions. And while most costs are due to tax revenue loss, the deal also contains increased spending. Outlays include the continuation of renewable tax credits that provide payments to low-income families with no tax liability, increased interest payments as a result of the deficit-financed tax bill, and payments to insurers in the health exchanges who insure higher-cost patients.

December 2, 2015

Congressional negotiators this week released a conference agreement on highway spending authorization that will largely settle the issue of highway spending and funding for five years. However, the funding that the bill uses is largely a gimmick, and the spending increases contained in the bill will make future shortfalls larger. Though the bill is slightly less gimmicky than if it had simply adopted the House bill's offsets, it still falls far short of being fiscally responsible.

Overall, the Congressional Budget Office (CBO) estimates that the bill saves $71 billion over ten years to finance a $70 billion transfer to the Highway Trust Fund, which will keep the fund solvent through Fiscal Year 2020. At the same time, the bill would increase highway contract authority by $25 billion above the baseline over the next five years, or nearly $65 billion if that amount of spending were extended out for ten years. But there are problems with both the funding sources and the spending levels.

First, of the $71 billion of offsets, $53 billion comes from a reduction in the Federal Reserve's capital surplus account, which technically brings in revenue to the federal government but ultimately results in no change in federal debt. This version is slightly better than the House version (which claimed to save $59 billion) because the Fed is allowed to keep $10 billion in the account rather than emptying it, providing less of the savings than the House version did. To make up for the lost savings, the conference agreement reduces the Fed's dividend payments to member banks, lowering the rate from 6 percent to the ten-year Treasury note rate (currently around 2.2 percent and projected to reach 4 percent by 2018). This makes the conference agreement slightly more responsible, but still mostly reliant on a gimmick for its offsets.

December 1, 2015

Congress is in the process of negotiating a potential $700 billion deal that would extend several tax provisions that expired at the end of 2014 known as tax extenders. The deal could cost up to $840 billion over ten years when interest costs are included. However, that deal would go beyond what typical year-end tax extenders bills do. Rather than simply reviving expired tax breaks, the deal would reportedly also expand some of these provisions, create new policies, and include policy riders unrelated to expired tax provisions that will increase the bill's cost by one-sixth, or about $110 billion.

While the deal is being developed, the precise contours of the deal remain unknown, but there are some indications in the press what it could include. For instance, a permanently extended research credit would cost $109 billion over the next ten years, according to the Joint Committee on Taxation. Yet, an expanded – and more expensive – version of the research credit passed by the House at a cost of $182 billion is rumored to be included in the deal.

December 1, 2015
"100 Ways the Government Dropped the Ball"

Senator James Lankford (R-OK), former Sen. Tom Coburn's (R-OK) successor, is maintaining the Debt Doctor's legacy with his Federal Fumbles book published Monday. Lankford examines federal programs, agencies, and regulations to come up with 100 "fumbles" that he thinks could be corrected in order to enhance efficiency and cut government waste while streamlining the essential services that government can and does provide. Not only does Lankford provide descriptions of each misstep, he also proposes a solution for each of them.

As Lankford notes:

The purpose of this book is to highlight the work needed to make the federal government more fiscally responsible and less burdensome on the American people. It is not intended to collect dust on a shelf, sit in somene’s [sic] email to wait for later, or just receive honorable mention in the history books. It is truly a guide for next year—to guide us while we work through the federal budget, to encourage federal oversight, and to remind those of us who work in the federal government that we must be responsible servants of the people.

November 30, 2015
Campaigns must focus on debt before all else

Robert L. Bixby, executive director of the Concord Coalition, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt, wrote a commentary (paywall) that appeared in the Nashua Telegraph this past weekend. It is reposted here.

The next president will face an array of pressing issues. One issue, however, transcends them all: the unsustainable projected growth of the federal debt. No candidate's vision of the future, regardless of party or ideology, will be credible if it rests on the premise of more and more government borrowing.

Because annual deficits have dropped in recent years as the economy recovered from the Great Recession, candidates and voters may be tempted to conclude that our fiscal problems are behind us. That would be a mistake.

Deficits are projected to begin rising again as the next president takes office. Over the coming decade, the debt is on track to grow by more than $7 trillion and continue rising ever higher after that.

So we need to hear far more from the candidates in both parties about how they would shift the federal budget onto a more responsible path - one that would strengthen our nation and protect our children and grandchildren from inheriting a massive burden of government debt.

November 25, 2015

A fiscally irresponsible bipartisan deal is emerging to re-instate, make permanent, and in some cases expand many expired tax breaks known as tax extenders. According to several press reports (behind paywall), the deal could cost $700 billion over a decade. When interest is included, the emerging tax extenders deal could add nearly $850 billion to the debt this decade and $2.3 trillion by 2035.

Although details are scarce and negotiations ongoing, we have attempted to itemize our best understanding of the emerging deal. The deal would likely build on House legislation passed earlier this year to permanently continue various costly tax breaks and significantly expand one of the most expensive ones – the research and experimentation (R&E) credit. These tax breaks, which go largely to businesses, would be paired with the extension of low-income tax credit expansions scheduled to expire at the end of 2017. The deal would also reportedly include a two-year delay of the "Cadillac tax" on high-cost health insurance plans and the medical device tax.

By our estimate, this deal could increase the debt in 2025 by about $840 billion, bringing debt to GDP to 80 percent – 3 percentage points higher than currently projected.

Policy Ten-Year Cost
Extend and Expand Research Credit* $180 billion
Extend Refundable Tax Credits^ $195 billion
Extend Provisions for Multinational Corporations: Active Financing Exception and CFC Look-through $100 billion
Extend Section 179 Small Business Expensing $70 billion
Extend State & Local Sales Tax Deduction $40 billion
Delay Medical Device Tax and Health Insurance Cadillac Tax for Two Years $15 billion
Other Provisions $100 billion
Subtotal ~$700 billion
Interest Costs ~$140 billion
Grand Total ~$840 billion

All of these numbers represent very rough estimates due to uncertainty over which provisions are in the reported deal.
Estimates based on Congressional Budget Office and Joint Committee on Taxation projections.
*Press reports aren’t clear whether the deal includes the $70 billion House expansion, but it is assumed here.
^We assume the extension of all expiring refundable credits, though press reports only definitively include two of the three: the Earned Income Tax Credit and Child Tax Credit expansions, excluding the American Opportunity Tax Credit

November 25, 2015

By the end of the year, lawmakers will likely to try to revive the “tax extenders,” a set of more than 50 tax breaks that expired at the end of 2014 for individuals and businesses, ranging from broad breaks for research, renewable energy, and small businesses to narrower breaks for film production, teachers, and racehorses. Extending these tax provisions will further add to the debt if they are not offset, compounding the effects of the fiscally irresponsible budget deal that only offset half of its cost

The House and Senate have taken two different approaches to tax extenders. The Senate Finance Committee approved a bill in July that would cost almost $100 billion to temporarily extend most of them for 2015 and 2016, while the House has passed bills to permanently expand and extend a small amount of provisions.

Newly appointed House Ways and Means Chairman Kevin Brady (R-TX) has said he wants to permanently extend certain tax provisions, and the House has been working to do so in a piece-meal fashion. In mid-September, the Ways & Means Committee approved tax breaks costing nearly $420 billion over ten years, or almost $520 billion with interest. Along with other proposals approved earlier in the year, the Committee’s tax cuts would add about $1 trillion to the debt.

No matter which of these provisions lawmakers chose to keep, they should all be paid for. At this point, neither side of Congress appears willing to stand up for fiscal responsibility, as each chamber has shown it wants to extend the tax breaks without offsets. If these bills are not paid for, here are some of the problems that may result.

November 25, 2015

As the House and Senate are conferencing their highway bills, a debate has broken out over how to spend the $78 billion of offsets. Setting aside the fact that the offsets themselves largely come from a budget gimmick, lawmakers have a choice between funding six years of spending at current levels or five years of spending at elevated levels.

Increasing highway spending in the context of the current bill, though, would be a costly mistake.

Although there is no problem with increasing infrastructure spending and paying for the costs, the proposal under discussion would effectively result in a permanent cost increase and pay for it only over the next five years. As a result, the future shortfall between highway spending and revenue, of which the largest contributor is the gas tax, would grow even larger than it is today.

At current spending levels, the Highway Trust Fund (HTF) faces a shortfall of about $150 billion through 2025. The House bill includes $78 billion of offsets (largely from a Federal Reserve gimmick) -- enough to continue current spending (adjusted for inflation) for six years. Yet some are pushing to instead spread the $78 billion over 5 years at a higher level.

November 20, 2015

The Brookings Institution's Center on Children and Families held an event this week highlighting eight big issues the presidential candidates need to address in the 2016 campaign. Eight papers were prepared on the various issues by scholars in their relevant areas. One of the featured issues included the growing federal debt, which was addressed by Bob Bixby, executive director at the Concord Coalition, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt. Their paper, "Why the Federal Debt Must Be a Top Priority for the 2016 Presidential Candidates," points out why this issue transcends partisan agendas and why candidates should be putting forth proposals in preparation for becoming the next president.

November 16, 2015

Biennial budgeting was the subject of a recent Senate Budget Committee hearing, the second in a series on budget process. Testifying were Senator Johnny Isakson (R-GA), Senator Tom Carper (D-DE), and Representative David Price (D-NC), as well as Mr. William G. Batchelder, the former speaker of the Ohio House of Representatives, and Mr. Robert L. Bixby, the Executive Director of the Concord Coalition.

CRFB generally supports the concept of biennial budgeting, although it is not a substitute for the difficult policy choices that must be made to address the long-term debt. CRFB President Maya MacGuineas has testified on multiple occasions before Congress on the matter. This past spring, she published a letter praising legislation introduced by Rep. Reid Ribble (R-WI) and Rep. Kurt Schrader (D-OR). Rep. Ribble will testify when the House Budget Committee holds a hearing on biennial budgeting on Wednesday.

November 16, 2015

This blog is part of a series of "Policy Explainers" for the 2016 presidential election, where we explain some of the candidates' policy proposals that affect the federal budget.

Republican Presidential candidate Senator Rand Paul (R-KY) recently released his Fair and Flat Tax Plan. His plan would dramatically overhaul the tax code by eliminating most preferences and replacing existing income taxes with a 14.5 percent flat tax for individuals, businesses, and investments. He would also eliminate other taxes including payroll taxes, estate taxes, and tariffs. Two outside groups have evaluated the costs of his plan, finding a wide range of revenue losses between $1.8 trillion and $15 trillion.

Individual Income Tax Reform

On the individual side, the 14.5 percent flat tax would apply to wages, salaries, dividends, capital gains, rents, and interest. The plan would maintain the mortgage interest deduction, charitable deduction, the Earned Income Tax Credit, and the Child Tax Credit. It would increase the standard deduction and dependent exemption in such a way that a family of four would not be taxed on its first $50,000 of income (up from $28,600 now). By providing one flat rate of 14.5 percent, taxpayers currently in the 15 percent bracket would only see a very small reduction in their marginal rates, while the rates of the highest income individuals would fall by over 25 points.

November 12, 2015

This blog is part of the “Fiscal FactCheck” series designated to examine the accuracy of budget-related statements made during the 2016 presidential campaign.

Tuesday night's Republican presidential debate featured some of the first real discussions on how candidates would tackle the growing national debt. As with the previous three debates, we ran fiscal claims through Fiscal FactCheck, and during the debate, we followed along live on Twitter at @FiscalFactCheck. (You can check out our summary from the last debate here.) Our Fiscal FactChecks from this debate are summarized below:

1. John Kasich Has a Plan to Balance the Budget in Ten Years.

Moderator Maria Bartiromo asked Ohio Governor John Kasich what his specific steps to balancing the budget would be if he were elected. Kasich responded by highlighting his balanced budget plan, claiming that he would balance the budget by the end of his second term. While Kasich's plan lacks important details on how he would specifically slow Medicare growth and pay for tax cuts, it appears to add up to on-budget balance. On-budget balance most importantly excludes Social Security, which is expected to run deep deficits over the next 10 years. So while Kasich's plan may reach on-budget balance, it fails to achieve complete balance as he suggests it would.

Our Ruling: It's Complicated

November 12, 2015

The transportation bill that the House passed last week contains a budget gimmick worth almost $60 billion (Wall Street Journal Paywall). The provision eliminates the $29.3 billion in the Federal Reserve's capital surplus account and prevents surplus funds going forward from being used to replenish the capital surplus account, even though the federal government would have eventually received all of the Federal Reserve's profits anyway. This results in one-time savings on paper but no actual change in the amount of revenue the Treasury would receive over the long term.

Both the Washington Post Editorial Board and Former Fed Chairman Ben Bernanke have recently written that the liquidation of the Federal Reserve’s surplus account leads to no actual government savings. As Bernanke says, "the additional highway spending would be reflected dollar for dollar in increased current and future budget deficits."

The surplus account is an off-budget account where the Federal Reserve holds treasury bonds as surplus capital. The money both provides working capital and is available to offset any losses from selling securities, which could be more relevant in the future as the Fed normalizes policy. Since this money is “off-budget,” transferring it to the Treasury appears to increase revenue. 

November 10, 2015

It's hard to believe that two weeks have already passed by and the next #GOPDebate is upon us. Tonight we will continue to keep the candidates honest by providing live Fiscal FactChecks and follow up on the fourth debate with a full analysis tomorrow.

Since our last debate analysis, we've added a few new Fiscal FactChecks, including:

November 10, 2015

With Rep. Paul Ryan (R-WI) being elected as Speaker of the House, the Ways & Means (W&M) Committee Chair has gone to Rep. Kevin Brady (R-TX). In an interview with the Wall Street Journal, Brady said that lawmakers should permanently extend a select group of tax extenders, the 50-plus provisions that expired at the end of 2014 that are temporarily extended year after year. It is quite possible that one of the policies permanently extended is bonus depreciation, which the Ways & Means Committee voted to permanently extend and expand in September. This provision, which has been used several times during recessions, was most recently reinstated in 2008 and has since been extended six times. It has cost over $200 billion through 2015 and will cost about $450 billion through 2025 if it is permanently extended.

Bonus depreciation allows businesses to write off 50 percent of the cost of capital investments immediately (the rest is deducted over time according to normal depreciation schedules). It was originally enacted and has been extended temporarily to provide stimulus while the economy is weak. Because bonus depreciation is largely a timing shift, a one-year extension would have substantial immediate costs that would be largely recovered over time, but a permanent extension would cost $245 billion over ten years (the W&M version costs $280 billion).

From 2008 through 2015, bonus depreciation has cost $200 billion (including interest), and that doesn't even include the cost of extending the provisions for 2015. If bonus depreciation remains expired, that cost would be partially recovered over time as businesses would not be able to take the deductions they have already accelerated, leading the total cost to fall to $135 billion by 2025. However, if it is extended permanently, bonus depreciation would cost nearly $450 billion through 2025.

November 9, 2015

In light of recent developments, the Congressional Budget Office (CBO) has updated its estimate of the health care reconciliation bill (previously described here) that has now passed the House. The previous estimate showed that the bill would reduce ten-year deficits by $79 billion, or by $130 billion if economic effects were included, but it also estimated deficit increases beyond the first ten years (we estimated a $400 billion deficit increase in the second decade). The latest estimate shows a similar story: the bill reduces deficits by $78 billion, or $129 billion when economic effects are included, but we estimate that it would increase total deficits by around $250 billion in the second decade.

The latest score updates a few aspects of the bill. The first involves repeal of the auto-enrollment provisions, which requires employers with 200 or more employees to automatically enroll their employees in a health insurance plan unless the employee opts out. This provision, which saves $8 billion over ten years, was included in the Bipartisan Budget Act that just became law, so it is no longer available for this bill. The second involves repeal of the Independent Payment Advisory Board (IPAB), the panel charged with controlling Medicare spending growth. Lawmakers dropped this provision and its $7 billion ten-year cost prior to passage due to concerns that it would jeopardize the bill's ability to be passed via reconciliation.

Rough Estimate of the House Reconciliation Package
  Ten-Year Cost/Savings (-)
Individual and employer mandate repeals -$181 billion*
Medical device tax repeal $24 billion
Cadillac tax repeal $91 billion
Prevention Fund repeal -$13 billion
Planned Parenthood defunding/Community health centers <$1 billion
Total -$78 billion
Memorandum: Dropped/Nullified Provisions
Auto-enrollment repeal -$8 billion
IPAB repeal $7 billion

Source: CBO, Joint Committee on Taxation
*Includes $12 billion of revenue from interaction between mandates and Cadillac tax repeal

November 9, 2015

CRFB’s new Fiscal FactCheck project released an infographic today comparing the costs of several GOP presidential candidates’ tax plans. So far, the Tax Foundation has scored plans from Bush, Cruz, Jindal, Paul, Rubio, Santorum, and Trump. Although these plans offer a number of thoughtful improvements to the tax code, they would also add trillions to the deficit. See how the candidates stack up below:

November 6, 2015

The Bipartisan Budget Act of 2015, signed into law earlier this week, is fully offset over the next ten years, according to the scoring conventions of the Congressional Budget Office. However, we showed that the deal truly offsets only half its cost if you include interest costs and exclude the savings from several budgetary gimmicks. This blog explains the five gimmicks used in the deal.

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