The Bottom Line
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%|
|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.
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.
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:
- 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.
- 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.
- 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.
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
|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
|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.
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.
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|
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.
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.
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.
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.
Note: This blog has been updated from its original posting to include the CBO score of the Senate Republican proposal.
With the current "doc fix" set to expire at the end of this month, Congress is scrambling to avoid the 24 percent cut to doctors' payments set to occur under the Sustainable Growth Rate (SGR) formula. Rather than settle for a temporary fix, this time Congress is looking for a permanent solution. A bipartisan, bicameral proposal currently under consideration would create a new payment formula designed to offer stability to physicians and reward quality over quantity. Yet Congress cannot agree on how to pay for the $140 billion cost of the bill, and many in Congress don't want to pay for it at all.
With health care costs expected to grow rapidly as the Baby Boomers retire, SGR reform should be seen as an opportunity to truly bend the health care cost curve. A recent proposal from Mark McClellan, Keith Fontenot, Alice Rivlin, and Erica Socke in Health Affairs, for example, suggested a package of savings that would include bundling payments to encourage coordinated care, encouraging competition to set market prices, restricting pricy Medigap plans, retooling Medicare's cost-sharing system, and increasing means-tested premiums to help pay for SGR reform.
Unfortunately, none of the proposals in Congress would take this approach. As we explained yesterday, the House Republican bill would pay for permanent SGR reform with temporary savings from delaying the individual mandate. This would reduce the deficit in the first decade by about $45 billion (including interest), since repealing the mandate would increase the number of uninsured and reduce the number of individuals collecting Medicaid or exchange subsidies. However, over the long run, this bill would add to the deficit, likely by over $200 billion in the second decade.
House Democrats reponded to this bill with one that relies on a far bigger gimmick – the war spending gimmick. As we've explained numerous times before, capping war spending at levels consistent with the troop drawdown that is already planned does not represent new savings, but it appears to do so due to a quirk in CBO projection methods that forces them to assume uncapped discretionary spending (such as war funding) grows with inflation. By relying on these phantom savings, the House Democratic bill would add over $160 billion to the debt (including interest) in the first decade alone.
And not to be outdone, the Senate Democrats are set to introduce a bill with no offsets at all. Senate Finance Chairman Ron Wyden recently dismissed the SGR as "budget fakery" that does not need to be offset at all. Worse, the Senate Democrats would extend various expiring health provisions (the "health extenders") along with the SGR reform – and thus it would add more than $200 billion to the debt over the next decade, including interest.
Only the Senate Republicans have a plan that would meet the basic test of fiscal responsibility. They would fully repeal, rather than delay, the indvidual mandate. CBO has scored the repeal as saving $465 billion over ten years, and the bill overall would save $285 billion over ten years. Its savings grow over time, reaching $37 billion in 2024, so it would also reduce deficits in the longer term.
Categorizing SGR Proposals
Caps war spending at levels in President's budget.
Relies on phony savings. Adds over $160b to the deficit this decade
Includes no offsets and continues "extenders"
Adds over $200b to the deficits this decade
Delays individual mandate for five years
Reduces deficits by $45b in first decade but would likely add over $200b in second decade
Permanently repeals individual mandate
Reduces deficits by $285b this decade
*All numbers include interest savings
The proposal began as a bipartisan, bicameral agreement to replace SGR, although there is not yet agreement on paying for it. It is disheartening that every proposal except the Senate Republicans’ fell to the temptation of using gimmicks and would increase deficits. So far, this conversation represents a missed opportunity for Congress to bend the health care cost curve and improve the long-term fiscal picture by negotiating a real SGR deal.
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.
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|
|Debt Held by the Public||-$12,028||-$11,332||-$10,174||-$9,060|
|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|
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.
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."
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.
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.
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.
We talked last week about several policies making their first appearance in the President's budget. What we didn't mention is that in addition to introducing new policies, the President has dropped a few old ones. Among the policies the President had previously proposed but did not include in this year's budget are:
- Adoption of the chained CPI government-wide.
- Increases in federal employee retirement contributions for workers hired before 2013.
- Two Medicaid reforms to keep states from gaming the system and simplify matching rates.
- Greater expansion in Medicare means-tested premiums.
- Elimination of the "check the box" rule for foreign entities.
- A more aggressive tax on financial institutions.
This list excludes policies that were overridden by legislative agreements, such as increasing tax rates for people making between $250,000 and $450,000 and taxing dividends as ordinary income.
Interestingly, if the President were to embrace these policies and add them back into his budget, they would generate by our estimate about $575 billion of additional deficit reduction through 2024 -- or slightly above 2 percent of GDP. That might not seem like a lot, but under OMB projections it would result in debt levels falling by 1.1 percentage point between 2023 and 2024 (adjusting for timing shifts) to 67 percent of GDP, rather than by 0.7 points to 69 percent.
And under our rough simulation of a CBO re-estimate, these policies would be the difference between a stable and upward debt path. Our simulation showed debt levels rising from 71.5 percent of GDP in 2018 to 73 percent in 2024 under the President's budget. With these additional policies, debt would remain stable at about 71 percent through the entire budget window. In fact, after accounting for the economic impact of immigration reform, debt would be on a modest downward path and fall to 69 percent of GDP by 2024.
In other words, were the President to re-embrace the deficit-reduction measures he previously proposed (the largest being chained CPI), it could make a big difference for the debt.
So what exactly are these policies? Below, we describe them.
Chained CPI: In last year's budget, the President called for using the chained CPI to adjust most inflation-indexed programs and tax provisions. The budget exempted means-tested programs from the change and included benefit enhancements for very elderly people on Social Security. According to CBO, last year's proposal would raise $100 billion of revenue, save $89 billion from Social Security and reduce $44 billion of other spending through 2023. Through 2024, the proposal as a whole would likely save about $285 billion. Although this has been removed from the President's budget, the White House does say that the President remains open to the policy as part of a bipartisan debt deal.
Federal employee retirement contributions: The President originally proposed to increase retirement contributions in his offer to the Super Committee, and would save $21 billion over ten years. Currently, civilian pension benefits cost the equivalent of 12.7 percent of wages, and the policy would increase the portion paid by current federal employees from 0.8 percent to 2.0 percent. This policy was included again in the FY 2013 budget and FY 2014 budget proposals. Shortly after the 2013 budget, Congress increased contributions by 2.3 percent for new workers to help finance a payroll tax cut, SGR, and unemployment extension. The Bipartisan Budget Act increased contributions by an additional 1.3 percent. However, both of these adjustments applied only to new workers, and after the first (which was the larger of the two), the President continued to support the increase for current workers. That policy is no longer part of the FY 2015 budget.
Medicaid reforms: In his offer to the Super Committee, the President called for several Medicaid reforms -- with substantial savings coming from two policies. First, the President proposed reducing what is called the "provider tax threshold" to make it harder for states to inflate their federal Medicaid match by simultaneously taxing and increasing payments to providers. Second, the President proposed replacing the multiple matching rates for CHIP, base Medicaid, and the Medicaid expansion with a single "blended rate" for all costs. Although these policies were included in the President's FY 2013 budget, they were not included in his FY 2014 budget -- in part due to concerns over their interacting with the Supreme Court decision to effectively make the ACA Medicaid expansion voluntary. Together, these policies would save about $55 billion over ten years according to OMB, and $85 billion according to CBO.
Means-testing of Medicare premiums: Currently, most Medicare beneficiaries are responsible for about one quarter of Part B and Part D costs; however, some higher-income seniors pay a larger percentage of 35, 50, 65, or 80 percent. These higher premiums begin at $85,000/$170,000 of income, and all the thresholds are frozen through 2019 (otherwise, they grow with inflation). Since the Super Committee offer, the President has proposed freezing the thresholds until 25 percent of beneficiaries are paying the higher premiums, up from about 5 percent currently, and increasing the premium percentages. In the FY 2013 budget, he increased the four brackets by about 15 percent each. In the FY 2014 budget, he increased the number of brackets to nine, still with a top bracket of 90 percent but higher brackets for most other beneficiaries. This year, the President's budget proposes five brackets, with most beneficiaries paying less than they would have under last year's budget and some paying less than under the prior year's budget as well. In other words, while the President's budget still calls for expanded means-testing, this year's proposal is not as aggressive as last year's. By our rough estimates, the difference results in roughly $15 billion less in savings.
|Means-Tested Premium Policies in the President's Budgets
|Income||Current Law||FY 2013 Budget||FY 2014 Budget||FY 2015 Budget
|Less than $170,000||25%||25%||25%||25%|
Source: Kaiser Family Foundation, Department of Health and Human Services
Note: Income brackets are for a married couple. They are half that for a single person.
*Premium increases from 52.5% to 65% at the midpoint of this income range
Check-the-box rule: In 1997, the IRS adopted a regulation, known as check the box, intended to simplify the way that domestic businesses could classify themselves. Rather than using a six-factor test, businesses could check a box to determine whether they wanted to be taxed as a corporation or a pass-through business. Unintentionally, this rule encouraged multinational corporations to avoid taxes by shifting profits to low-income countries. A corporate subsidiary could elect to be treated as a "disregarded entity" and its income would not be taxed by the United States. Thus, if a subsidiary was in a low-tax or no-tax jurisdiction, it would avoid most tax. The President's first budget for FY 2010 proposed undoing check the box for foreign entities by requiring that the parent company and subsidiary be organized in the same country to be treated as a disregarded entity. OMB estimated that this change would raise $87 billion over ten years, although JCT only anticipated $31 billion. This change did not show up in any subsequent budgets.
Bank tax: Starting with the FY 2011 budget, the Administration has proposed a "financial crisis responsibility fee" both to cover the costs of actions to assist the financial sector in recent years and to discourage excessive risk taking. The original fee applied a .015 percent tax to the covered liabilities of banks with $50 billion or more in assets and raised $90 billion over ten years, but the fee has been modified to raise less in subsequent budgets. In the FY 2015 budget, it is a .017 percent tax on certain liabilities and only a .0085 percent tax on liabilities which are "more stable sources of funding." The current version of the tax only raises about $55 billion.
There is no rule that says once a President proposes something he must continue to propose it into the future. However, the above analysis shows that if the President were to restore many of the policies he previously supported, it could make a real difference in improving our fiscal situation. This is especially true over the long run, where policies such as the chained CPI and Medicare and Medicaid reforms could produce growing savings over time.
The Earned Income Tax Credit (EITC), which provides low-income taxpayers with a refundable tax credit that increases up to a certain point along with wages, has garnered bipartisan attention over recent weeks for its ability to encourage work. The credit has been around since the 1970s, and throughout its history has generally been supported by members on both sides of the aisle.
In a report released last week that was generally skeptical of many overlapping anti-poverty programs, House Budget Chairman Paul Ryan concluded that the EITC was effective at increasing labor force participation, rewarding work, and raising millions out of poverty. Greg Mankiw, the former Chairman of the Council of Economic Advisers under President George W. Bush, wrote an op-ed arguing that raising the EITC is a better way to help low-income individuals than raising the minimum wage.
Many Democrats have also recently promoted the EITC as an effective way to encourage work and address poverty. Treasury Secretary Jacob Lew said in a statement earlier this year that "the EITC is a valuable program that lifts millions of families above the poverty line each year," and that "making the EITC available to more low-wage workers without children by raising the maximum credit they can receive is an important part of our effort to restore the middle class." Lew also penned an editorial in Politico this week reaffirming his support for the EITC, stating that the EITC is "one of the most effective anti-poverty programs we have seen," and that it "helps about half of all parents at some point."
This broad-based support has translated into multiple specific proposals in the last months. Senator Marco Rubio, Ways and Means Chairman Dave Camp, and President Obama have each put forward proposals to reform the EITC.
Enacted in 1975, the EITC provides low-wage workers with a refundable tax credit (meaning they receive the value of the credit even if they owe no taxes) that grows with income up to a certain point. In the years since, it has been expanded numerous times under presidents of both parties, most recently as part of the 2009 stimulus package.
At very low incomes, the credit increases along with wages, effectively increasing take-home pay for these workers and encouraging them to work. The credit provides different levels of benefits and phases out at different income thresholds based on the number of children a worker has. Currently, eligible taxpayers with no children can receive a maximum credit of $487, and taxpayers with three of more children can receive the maximum credit of $6,044. The credit starts phasing out at $7,970 ($13,310 for married filers) for childless taxpayers, and $17,530 ($22,870) for taxpayers with children. In 2009, the American Recovery and Reinvestment Act expanded the EITC for married couples and for families with three or more children. These expansions expire after 2017.
EITC Credit Amounts by Income
In the State of the Union, the President spoke about reducing inequality and helping families through the EITC, and called for strengthening the credit. His FY 2015 budget reflected these statements; he proposed making permanent the current expansion for families with three or more children, as well as expanding the credit for childless workers. For childless workers, the President proposes doubling the maximum credit and raising the beginning of the phaseout range to $11,500 ($17,000 for joint filers). He also proposes to expand eligibility for the credit by expanding the ages of eligibility from 25-65 to 21-67.
Ways & Means Chairman Dave Camp
As part of his comprehensive tax reform proposal, Chairman Camp proposed both enhancements and reductions in the EITC. He would make the credit refundable against payroll taxes, as opposed to income taxes. This provision would not alter the witholding amounts of payroll taxes, and would be administered as a credit when an individual files income taxes. Camp would also increase the phaseout levels to $20,000 for single filers with children and $27,000 for joint filers but reduce the amount of the credit for all beneficiaries and index those amounts to the more accurate chained CPI rather than the typically faster-growing CPI-U.
Senator Marco Rubio
Senator Marco Rubio recently proposed replacing the EITC with a low-income wage subsidy. He describes it as an enhancement for low-wage jobs that provides an "enticing alternative to collecting unemployment insurance." While there aren’t many details available about Senator Rubio’s proposal, like the EITC, low-income wage subsidies generally aim to increase the monetary return to low-wage work, although they would likely be delivered as an enhancement to each paycheck rather than all at once at the end of the year.
* * *
The EITC is the fifth largest tax expenditure (costing $67 billion in 2014 and nearly $680 billion over the next ten years) and one of the government's largest anti-poverty programs. For comparison, the child tax credit will cost about $590 billion over ten years, Temporary Assistance for Needy Families will cost about $170 billion, and Supplemental Security Income will cost $635 billion.
As tax reform discussions continue, Congress will have to seriously consider how best to deliver the EITC's benefits.
This post was updated March 11 to better reflect Chairman Camp's EITC proposal.
Gene Steuerle, Richard B. Fisher chair and Institute Fellow at the Urban Institute, wrote a post on the Tax Policy Center's blog, TaxVox. It is reposted here.
By proposing a far-reaching and detailed rewrite of the Revenue Code, House Ways and Means Committee Chair Dave Camp (R-MI) did something very few elected officials have done in recent years: He stuck out his neck and proposed radical reform. The initial press response has focused on politics and concluded that neither Republicans nor Democrats will be able to take on the special interests, that there is too much partisan gridlock, and that the plan is going nowhere.
But such responses largely ignore the history of successful reforms and forget that some policymakers do care about policy. If the goal is to conquer a mountain, someone has to start by building a common basecamp.
Almost any major systemic reform that does more than give away money creates losers. Someone always has to pay for whatever new use of resources the reform seeks—in this case, tax rate reduction and a leaner code with fewer complications. But politicians hate identifying losers. We voters punish them for their candor, which is why they nearly always increase deficits to achieve their goals and leave it to a future Congress to identify the losers who pay the bill.
With his full-blown tax reform proposal, Chairman Camp decided to lead and proposed repealing many popular tax breaks. There’s a lot I like and some things I don’t like in his proposal, but the simple fact is that a well-designed comprehensive alternative to current law can change the burden of proof. Change a few items, and each interest group argues that it was unfairly picked on. Put forward an alternative that takes on almost all preferences, and each interest then needs to justify why it deserves special treatment not accorded others.
The prospect for any reform is nil if no leaders do what Camp did and step up to the plate. The process is not one of instant epiphany. Rather it slowly builds support. Those who first propose change may increase the odds of success from 5 percent to 10 percent. Others who follow further improve those odds. If we reject out of hand all ideas that start with less than a 50 percent chance of success, we’d probably never reform anything.
It often takes modest support by others to move the process forward. In 1985, President Reagan and House Ways & Means Committee chair Dan Rostenkowski started the legislative process that yielded the Tax Reform Act of 1986 by simply agreeing not to criticize each other while the measure went through committee. Like Speaker Boehner today, Speaker O’Neill wasn’t enthusiastic about reform then, but Rostenkowski was able to proceed anyway.
In 1985, Rostenkowski knew he could pass a Democratic bill. But he knew it would go next to the GOP-controlled Senate Finance Committee. Each party would have a turn and a final agreement would come from a bipartisan conference committee. If House GOP leaders let Camp mark-up his bill now, Democrats would have their turn, at least this year, in the Senate. At least so far, both President Obama and senior Ways & Means Democrat Sandy Levin (D-MI) have avoided any major criticism of Camp’s plan, but one wonders if Democrats aren’t going to forego an opportunity, once again joining Republicans in deciding in advance that nothing substantial can be done, so it won’t.
Leadership is seldom about achieving results that can be predicted with certainly. More often it requires using your clout to change the process or reframe the debate in ways more likely to serve the public. It’s certainly about more than protecting your party’s incumbents in the next election regardless of the policy consequences.
When I served as economic coordinator and original organizer of the 1984 Treasury study that led to the ’86 Act, it was a time when books declared major tax reform the “impossible dream.” Sound familiar? In the face of that dispiriting commentary, I tried to encourage the Treasury staff with what I call the “hopper theory” of democracy: the more good things you put in the hopper, the more good things are likely to come out. By this reckoning, Chairman Camp has already won.
"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.
On Tuesday, the President released his budget, detailing his priorities for the upcoming year and beyond. Facing declining federal investment, the President's new budget places an emphasis on restoring some of the sequester cuts to discretionary and mandatory spending passed in the Budget Control Act of 2011. In December, the budget agreement between Budget Committee Chairmen Paul Ryan and Patty Murray set discretionary spending levels for the next two years (FY2014 and FY2015) somewhat above sequestration levels, but left the lower sequester levels in place from 2016-2021 and actually extended the sequester of mandatory spending through 2023 (which has subsequently been extended through 2024).
For 2015, the President details how to live within the discretionary spending caps in last year's budget agreement, but also proposes raising them by $55 billion, equally divided between defense and non-defense. This increase would bring total discretionary spending to $1.069 trillion, $17 billion less than it would have been without the sequester and $74 billion higher than if the full sequester had gone into effect.
Even though the President's $55 billion increase is equally split between defense and non-defense, it affects the sides of the budget differently. The increase is enough to boost non-defense spending up to pre-sequestration levels of $520 billion. Yet the defense side gets cut more by the sequester, since some of the non-defense cuts go to the mandatory portion of the budget. Thus, an equal sized boost to the defense budget still falls $17 billion short of pre-sequestration levels.
And although the President's budget initially approaches pre-sequester levels, discretionary spending would increase at rates slower than inflation, bringing it close to sequester levels by the end of the decade. In total, the President's budget proposes spending over $400 billion more than sequestration levels on discretionary programs over the coming 10 years, or around $475 billion less than without the sequester. The budget would also completely repeal the sequester's cuts to mandatory spending, largely focused on Medicare providers and plans, and offset these restorations with spending cuts and revenue increases elsewhere in the budget.
Again, as for 2015, the effects on defense and non-defense discretionary funding would be different.
As a result of new laws and proposals, the President has revised his budget's discretionary spending downward over the last several years. The $1.069 trillion requested for 2015 is $12 billion less than the President had requested for the same year two years ago. By 2022, this year's budget request is $87 billion lower than his 2013 request.
On Tuesday, the President released his annual budget proposal, which details his priorities for FY 2015 as well as the coming decade. We published a paper analyzing the budget, and will continue to delve into specific parts of the budget in the upcoming week.
In addition, we released a chartbook which walks through different portions of the budget and highlights several of the budget's long-term projections.
A PDF version of this chartbook is available here. The individual charts, with descriptions, are also posted below.
Chart 1: The President's Budget and our Long-Term Debt
Under OMB's projections of the President's FY 2015 budget, debt would rise to 75 percent of GDP by 2015 and then fall to 69 percent by 2024. While these debt levels are too high -- the highest seen since World War II -- putting debt on a downward path would be an important accomplishment to help put the country on a sustainable fiscal path.
Chart 2: Ten-Year Projections of the President's Budget
The President's FY 2015 budget would decrease debt and deficits over time. Adjusted for timing shifts, deficits under this budget will fall from 4.1 percent of GDP in 2013 to 2.2 percent by 2017, and will remain around 2 percent through 2024. However, the budget increases both revenues and spending as a percentage of GDP relative to the PAYGO baseline (a current law baseline which removes the effects of the war drawdown).
Chart 3: The Composition of the Budget Changes over Time
Over the next decade, the composition of spending in the President's budget proposal changes dramatically. Social Security and health care spending both increase modestly as a percentage of outlays, and both mandatory and discretionary spending decrease. Net interest spending on debt service more than doubles as a percentage of outlays over this time period, reflecting both higher interest rates and a larger national debt.
Chart 4: Deficit Reduction in the President's Budget
Relative to OMB's "adjusted baseline," the President's FY 2015 budget would reduce the deficit by nearly $2.2 trillion over ten years. However, compared to the PAYGO baseline, the budget would only reduce the deficit by about $730 billion over ten years.
Chart 5: The President Proposes New Initiatives But Pays for Them
It is encouraging that the President abides by PAYGO in his FY 2015 budget and offsets the cost of new policies or costly changes to policies with legitimate offsets. For example, the President's proposal to fund universal pre-school is offset by his proposed increase in the cigarette tax. He also proposes paying for increased discretionary spending by combining a number of smaller policies, including reducing farm subsidies and limiting retirement accounts.
Chart 6: Discretionary Spending in the President's Budget
The President's budget would increase discretionary spending by $55 billion in FY2015 -- lifting non-defense discretionary $28 billion to pre-sequester levels and lifting defense discretionary by that same $28 billion. Beyond 2015, the budget would continue to grow discretionary spending, but more slowly than inflation. The result would be spending levels roughly half way between the pre- and post-sequester caps agreed to under the Budget Control Act of 2011 -- closer to the post-sequester levels in the later years.
Chart 7: Health Care Reform Proposals are Maintained
In this year's budget, nearly all of the health care reform proposals from his last budget are maintained, which is commendable. Three policies, in particular, achieve over 65 percent of the budget's health care savings: requiring drug companies in Medicare Part D to offer higher rebates to Part D plans; slowing payment updates for post-acute care providers, such as nursing homes and home health facilities; and further reducing subsidies to high-income Medicare beneficiaries.
Importantly, he also responsibly fixes the Sustainable Growth Rate by paying for it with savings elsewhere in the budget (the budget includes $400 billion of gross health care savings). The President suggests that the SGR be fixed in a manner along the lines of what the three relevant Congressional committees are proposing.
Chart 8: The President Raises Significant Revenue
The President's budget includes a number of proposals to increase total revenue. The largest of them would limit the value of most deductions and tax exclusions to 28 percent, effectively capping the value for those making above $250,000 a year. The budget would also institute a "Buffett Rule" to set a minimum 30% tax for those making over $2 million, impose a new tax on large financial institutions, raise estate taxes to their 2009 levels, and make numerous other changes. On the corporate side, President Obama calls for comprehensive rate-lowering, base-broadening reform which is revenue neutral over the long-term but raises about $150 billion in the short-term to fund transportation infrastructure.
Chart 9: Does the President's Budget Really put Debt on a Downward Path?
Although OMB projects the budget would put debt on a downward path, this is in part due to the specific economic and technical assumptions OMB has adopted. When the Congressional Budget Office re-estimates the President's budget, it may produce more pessimistic findings. In our rough attempt to simulate a CBO re-estimate, we predict that they will find debt levels to be modestly growing, rather than shrinking, by the end of the decade; and reach 73 percent of GDP rather than 69 percent. After accounting for immigration reform, we project debt levels would be stable at 71 percent of GDP.
Our main takeaways from the President's FY 2015 budget are mixed: he abides by many responsible budgetary practices, but it may not be enough to address our structural fiscal issues. We appreciate that the President's budget:
- Abides by PAYGO with specific offsets;
- Includes responsible tax and health reforms;
- Sets sustainable and affordable discretionary levels; and
- Puts debt on a downward path.
At the same time, we are concerned that the budget:
- Moves in the wrong direction on entitlements, removing rather than adding needed reforms;
- Leaves debt levels too high;
- Claims phony "war savings" that may also be unrealistically high; and
- May rely on overly optimistic projections to put debt on a downward path.
For more analysis of the President's Fy 2015 budget, be sure to read our full paper.