The Bottom Line

September 25, 2014

Despite partisan differences in Washington, there's actually considerable bipartisan consensus around many elements of tax reform. That's the conclusion of a new report by the Center for American Progress (CAP). The report includes two dozen specific policies to raise $1.4 trillion of revenue over ten years that have been proposed by both Republicans and Democrats, although notably the proposals from Republicans were part of a fundamental tax reform plan that was revenue-neutral overall. Most of the consensus policies come from the President's budget and House Ways and Means Chairman Dave Camp's (R-MI) Tax Reform Act of 2014.

The report outlines a number of reductions in tax expenditures and other policies to raise revenue. On the corporate side, policies include eliminating accelerated depreciation, requiring businesses to write off half of advertising costs over ten years, eliminating last-in first-out accounting, implementing a big bank tax, and restricting earnings stripping and transfer pricing manipulation. The corporate income tax policies raise over $750 billion over ten years.

On the individual side, policies include limiting the benefit of exclusions and deductions for high earners, increasing rates on capital gains and dividends, reducing the mortgage interest deduction, and eliminating the break for "like-kind" exchanges. The report also proposed a few tax cuts through an expanded Earned Income Tax Credit (EITC); in particular, the report would extend the 2009 EITC expansions for married couples and families with three or more children and expand the credit for childless workers. On net, the individual tax policies would raise more than $550 billion, although the report suggests that the EITC expansions could be paired with some of these policies to form a revenue-neutral package.

September 24, 2014

Some lawmakers appear poised to push an unpaid-for permanent "doc fix" during this year's lame-duck session of Congress, potentially adding nearly $200 billion to the debt, according to a CQ Roll Call article. Although some lawmakers are looking for offsets, adding the cost to the debt is misguided, especially with so many health care options available which can improve the health care system while also lowering costs.

With a number of deadlines approaching, the lame-duck session after the midterm elections promises to be busy. Lawmakers will have to deal with appropriations again with the current continuing resolution set to expire on December 11, and decide whether to renew a host of predominantly business tax breaks -- known as "tax extenders" -- and whether to continue increased Medicaid payment rates to primary care physicians.

So far, the Senate Finance Committee has passed a two-year extension of almost all of the tax extenders at an $85 billion price tag. Adding a permanent doc fix would increase the cost of the bill to between $200 and $300 billion. Instead, lawmakers should offset the costs of both these bills (and/or pare them down) rather than bundling them together in a fiscally irresponsible giveaway bonanza to special interests.

September 24, 2014

Treasury Secretary Jacob Lew proposed administrative rules this week that would limit the benefits of tax inversions, where companies move their headquarters overseas for tax reasons. The rules target abusive practices where deals were often structured solely to skirt U.S. tax law. They eliminate some incentive for companies to invert, but many of the basic incentives to invert will remain until fundamental tax reform passes Congress and is signed by the President. 

Recent months have seen a wave of actual and proposed corporate "tax inversions," where U.S. companies merge with a foreign corporation to move their headquarters overseas and avoid the high statutory U.S. tax rate on corporate income. Inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years. The Obama Administration had been pushing for legislation to address the issue, but after Congress left town for campaign season without addressing the issue, the Treasury Department moved forward in areas where they believe they have clear legal authority.

While the proposal reduces some benefits to inversions and may cause some companies to rethink their plans, inversions are a small symptom of an outdated tax code.

September 24, 2014

A new bipartisan bill seeks to drive down prescription drug costs for consumers and the federal government.

The Fair Access for Safe and Timely Generics Act or FAST Generics Act (H.R. 5657) was introduced late last week by Rep. Steve Stivers (R-OH) and Rep. Peter Welch (D-VT). It's goal is to close a loophole in drug safety rules (Risk Evaluation and Mitigation Strategies, or REMS) that allows name-brand drug manufactures to withhold access to some drug samples from generic manufactures, who generally use these samples to help produce safe and cheaper generic versions of drugs.

This bill comes on the heels of a report by Matrix Global Advisors that estimated:

[the] delay [in] generic market entry for these products totals $5.4 billion in lost savings to the U.S. health care system annually. The federal government bears a third of this burden, or $1.8 billion… Among government health care programs, Medicare, which accounts for nearly 26 percent of total U.S. prescription drug spending, experiences lost savings of $1.4 billion annually. The economic cost to Medicaid (both federal and state) totals $400 million.

A version of this policy proposal was also contained in a 2012 bill (S. 2516) by Senator Tom Harkin (D-IA), which CBO estimated at the time would reduce deficits by $753 million over ten years.

September 23, 2014

The Urban Institute last week released its eighth annual Kids’ Share report summarizing data and trends in federal, state, and local spending on children. The report’s findings highlight a troubling trend: unless we reign in growth in entitlement programs and control the debt, spending on entitlements and interest payments will squeeze out funding for most other programs in the next decade, including investments in children. As a result, spending in all other programs will decrease as a percentage of the total federal budget.

In 2013, the federal government spent $464 billion on children, mostly through Medicaid, tax provisions – such as the Earned Income Tax Credit (EITC), the child tax credit, and the dependent exemption – and the Supplemental Nutritional Assistance Program (SNAP, formerly known as food stamps).

Spending on Children in FY 2013
 

While federal funding for children increased slightly from the $460 billion (in 2013 dollars) spent in 2012, it is still 7 percent below the $499 billion spent in 2010, although that peak reflects some temporary spending in the 2009 stimulus. But trends show that under current law children’s programs will face significant pressure in the future.

September 22, 2014

As we have been reporting, many reforms to the Social Security Disability Insurance (SSDI) program could improve its effectiveness, fairness, and sustainability. One potential area for improvement is program integrity. The Office of the Inspector General (OIG) recently published a report on preventing and detecting fraud in the Social Security Disability Insurance (SSDI) system. The report summarizes existing recommendations to reduce fraud in light of recent cases in New York, Puerto Rico, and West Virginia.

Over the past decade, the number of SSDI applications, awards, and beneficiaries has increased substantially as baby boomers have reached an age range with a higher probability of disability. Benefit payments have increased, but revenue coming into the system has not. As a result, the Disability Insurance Trust Fund is projected to run out of funds in late 2016.

The increase in applications and beneficiaries poses organizational challenges for the Social Security Administration (SSA), which must review applications in a reasonable timeframe while preventing fraud. The report outlines vulnerabilities and recommendations throughout the benefit process.

September 19, 2014

The resolution setting next year's budget continues this year's levels of war spending, despite the fact that the federal government was supposed to spend much less after reducing troop levels in Afghanistan. It contains war spending at an annualized level $26 billion higher than requested by the President. Even if some funds are spent on operations against the Islamic State terrorist group, billions are still being appropriated above what is needed for overseas operations without a clear purpose.

Broadly, the continuing resolution extends last year's spending level of $1.012 trillion for regular discretionary spending. (See our blog House Resolution Continues Last Year’s Spending, Mostly for the exceptions). In addition, Congress designates an amount for Overseas Contingency Operations (OCO) not restricted by the same discretionary spending caps. The resolution continues OCO funding at the FY 2014 level of $92 billion, $26 billion higher on an annual basis than the Administration's $66 billion request.

Since the resolution only covers two-and-a-half months, continuing spending at the FY14 rate would provide about $5 billion more than requested for the length of the CR. The decision to continue funding for OCO at the last year's levels could be even more significant if Congress continues this policy when revisiting a long-term CR or omnibus bill after this CR expires in December.

September 19, 2014

A new paper suggests that tax cuts that add to the deficit provide little boost to economic growth and may actually hinder it. Last week, the Tax Policy Center (TPC) put out a paper entitled “Effects of Income Tax Changes on Economic Growth,” summarizing the academic literature.  According to the authors, Bill Gale from Brookings and Andrew Samwick from Dartmouth, the net economic impact of a deficit-financed income tax cut is either small or negative, with the negative effects of additional debt likely overwhelming the economic benefit of lower rates, particularly over the long term.

Tax cuts have the potential to grow the economy, but their benefit depends on how they are structured and financed. For tax changes to promote growth, changes should encourage work and investment through lower rates, efficiently encourage new economic activity (rather than providing a windfall for previous investments), reduce economic distortions, and create minimal (if any) increases in the budget deficit.

The key question is, how do you pay for tax cuts?  If tax cuts are deficit-financed, the negative economic effects of debt will crowd out investment, which can outweigh any positive growth impact from the tax cut. CBO has found that an “Alternative Fiscal Scenario” representing roughly a $2 trillion increase in deficits over ten years would lead to a 7.5 percent smaller economy in 25 years, while a deficit reduction plan of $4 trillion would increase the size of the economy by 2 percent. Increased revenue has been a key part of many bipartisan plans for deficit reduction, including Simpson-Bowles and Domenici-Rivlin.

Importantly, however, the lack of growth from deficit-financed tax cuts is distinct from the effects of either tax reform, which pairs rate reductions with base broadening, or tax cuts that are financed through simultaneous spending reductions to reduce government consumption. Using base broadening to pay for lower rates avoids crowding out other investment, but would likely temper the economic gains because some base broadening can push up effective marginal tax rates on taxpayers who were taking advantage of the closed loopholes.

September 18, 2014

In a commentary published today in Roll Call, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) argue Congress should take a closer look at Social Security Disability Insurance (SSDI).

As they explain, the looming 2016 deadline, when the program’s trust fund is projected to become insolvent and result in an immediate across-the-board cut in benefits, will force Congressional action. Given the importance of the SSDI program, they worry about the dangers of waiting until the last minute. They are calling for a constructive debate on SSDI well in advance of the insolvency date, saying "if policymakers wait until the last minute to start cobbling together solutions, they could make things far worse."

In an effort to help inform the debate on potential reforms to the SSDI system, they joined forces to launch the bipartisan McCrery-Pomeroy SSDI Solutions Initiative.

September 18, 2014

Retirement saving policy took center stage Tuesday on Capitol Hill and in the policy world. The Senate Finance Committee held a hearing to discuss ways to improve savings incentives and policies, and Third Way proposed one way to do so.

The Senate Finance hearing featured five witnesses from a broad array of perspectives. All agreed that the current system could be improved. Many witnesses agreed on simplifying retirement account rules, expanding the number of small businesses that offer retirement plans, and promoting the benefits of auto-enroll plans where workers are automatically enrolled in their company's retirement plan until they opt out. Beyond that recommendation, witnesses and lawmakers had serious disagreements how retirement savings should be improved.

The witnesses were:

    • John Bogle, Founder and former CEO of Vanguard
    • Brian Reid, Chief Economist of the Investment Company Institute
    • Scott Betts, Senior Vice President of the National Benefit Services
    • Brigitte Madrian, professor at the Harvard Kennedy School
    • Andrew Biggs, Resident Scholar at the American Enterprise Institute

Chairman Ron Wyden (D-OR) started the hearing by noting skewed tax incentives for retirement saving. As he explained, these incentives cost the federal government $140 billion per year, yet millions of Americans do not have adequate retirement savings. He noted that some taxpayers use the tax-free accounts to accumulate multimillion dollar balances, a practice that has attracted attention in recent years. Ranking Member Orrin Hatch (R-UT) described the bipartisan history of support for retirement tax incentives and hoped that lawmakers could continue without resorting to partisan slogans.

The witnesses disagreed on the effectiveness of current tax incentives.

September 17, 2014

The Centers for Medicare and Medicaid Services released some mixed news on Tuesday for health care reformers -- the results of two different Medicare Accountable Care Organization (ACO) programs in 2013. Twenty-three Pioneer ACOs and 220 ACOs in the Medicare Shared Savings Program (MSSP) generated somewhat modest savings of $372 million for Medicare while qualifying for shared savings payments of $445 million. Both programs performed better on quality benchmarks and patient experience compared to fee-for-service (FFS) Medicare. ACOs are one model that many reformers hope will provide a path forward for better coordinated, higher quality, and more affordable care delivery.

The Pioneer ACOs involve organizations and providers that are more experienced in coordinating care, so they are already on the second year of the program and have more ambitious savings targets. The Pioneers may share in savings if they exceed those targets but also face risk if they fail to meet them, unlike most MSSP ACOs. Overall, Pioneer ACOs saved $96 million, $41 million for the Medicare trust funds, and qualified for $68 million of shared savings payments. Eleven of the 23 ACOs qualified for those payments, while 3 had losses.

September 17, 2014
House to Vote on CR Today

Update: The House Rules Committee made in order an amendment by Armed Services Committee Chairman Howard McKeon (R-CA) to authorize funding to arm the Syrian opposition to fight the Islamic State terrorist group. The amendment does not appropriate new funding, it only allows the Department of Defense (DoD) to request transfers or reprogramming from existing Overseas Contingency Operations (OCO) funding for this purpose.

House Appropriations Committee Chairman Hal Rogers (R-KY) this week released the text of a continuing resolution, or CR, (see Appropriations 101 to learn more) to fund the federal government after September 30, 2014. The legislation, which will likely receive a vote in the House next week, continues funding for all programs, projects, and activities at current levels through December 11, 2014, with small changes. If this CR is signed into law,  lawmakers will need to revisit appropriations some time before December 11 to continue funding the government through enactment of full year appropriations or a further CR.

The CR includes changes such as an extension of the Temporary Assistance for Needy Families (TANF) program and an extension of Export-Import bank operations through June 30, 2015. There are also some funding increases, such as $88 million in new funding to address the Ebola outbreak and $59 million to address disability claims at the Department of Veterans Affairs. A small across-the-board cut along with select funding changes brings the overall budget authority under the FY2015 spending cap of $1.014 trillion, the same as topline spending level agreed to by the House and Senate, known as 302(a) allocations.

September 17, 2014

Earlier in the week, we highlighted a portion of CBO Director Doug Elmendorf's presentation at Cornell University highlighting the increased resources going to health care, Social Security, and interest spending to the detriment of the rest of the budget. In addition, the slideshow contained other helpful charts showing how the federal budget could change over the next decade, the choices policymakers face to alter the trajectory of debt, and a further look at the impacts of the Affordable Care Act. Here are some of the more interesting charts from that presentation.

Putting Debt on a Sustainable Path Requires Significant Changes

With debt set to continue to rise as a percent of GDP, simply maintaining the status quo will require significant changes. Keeping debt stable at its current elevated level of 74 percent of GDP for the next 25 years would require $2 trillion of savings over ten years, twice as much as the savings in the President's budget. Getting debt close to its historical average of 40 percent of GDP in 25 years will require $4 trillion in ten-year savings.

Individual Income Tax Revenue is the Only Growing Revenue Stream

CBO's ten-year projections show only a modest rise in revenue as a share of GDP over the next decade, from 17.5 percent to 18.2 percent, and in fact from 2015 to 2024 revenue will remain roughly flat.

September 16, 2014

Former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) today launched the McCrery-Pomeroy SSDI Solutions Initiative, a bipartisan effort to identify potential improvements to the Social Security Disability Insurance (SSDI) program.

The goal of the SSDI Solutions Intiative will be to solicit practical, implementable, and thoughtful ideas to improve the SSDI program through a "call for papers," a peer-review process, and an academic-style conference.

As we've explained before, the SSDI trust fund is projected to run out of funds in just two years – after which current law calls for a 20 percent across-the-board benefit cut. This could be avoided by borrowing or reallocating funds from the old-age system, but doing so would further strain the OASI trust fund, which also faces projected insolvency in the early 2030s. More importantly, the SSDI Solutions Initiative argues, it represents a missed chance to begin making improvements to various aspects of the SSDI program. They explain:

Instead of viewing the avoidance of trust fund exhaustion as a political liability, we believe policymakers should regard it as a policy opportunity. If provided with thoughtful and practical ideas to improve the SSDI program, policymakers could not only avoid insolvency but begin to reform the SSDI program for the better. This means identifying proposals well in advance of the deadline, rather than waiting for Congress to cobble together a last-minute, poorly conceived solution.

September 15, 2014

In a recent presentation at Cornell University, CBO Director Doug Elmendorf explained how the budget is projected to change over time. More resources will go toward health care programs, Social Security, and interest spending, while the portion flowing to everything else will decline.

Elmendorf noted two features that distinguish the current and future federal budget from previous ones: Federal debt will be much higher than at almost any other point in history, and spending on health care and retirement programs will take up a greater share of spending. In addition, as a result of mounting debt and rising interest rates, interest spending will climb significantly over the next ten years to a level rarely seen in modern history.

The growth of those three categories – health care, Social Security, and interest – is quite stark over the next decade, representing 85 percent of total spending growth over that time, in nominal dollars. The three factors will increase from 54 percent of total spending currently to 66 percent by 2024. Elmendorf attributed their growth to four factors:

    • The aging of the population
    • The health insurance expansions in the Affordable Care Act
    • The growth in per-capita health care costs
    • The rise of interest rates


Source: CBO

September 15, 2014

House Republicans plan to vote this week on a jobs package combining bills that would "build a robust economy and foster job creation." While promoting economic growth should be a top priority after a lackluster jobs report and a slow recovery, policymakers should also be fiscally responsible. Unfortunately, the House Republican approach would make the debt much worse. We've compiled the cost estimates for the various bills, and the package would cost more than $570 billion over ten years, before interest.

The package includes a combination of tax, spending, and regulatory changes, many of which could help to spur short or long-term economic growth. The majority of the costs in the legislation come from permanently extending and expanding a few expired tax provisions which focus on promoting research and investment. Unfortunately, the legislation would include over $570 billion of costs, but only $400 million worth of savings. Without offsets, the package will add substantially to the debt.

This increase in debt isn’t only bad for the fiscal situation; it also works against the exact purpose of the bill. As CBO has noted, a high national debt creates drag on economic growth by crowding out private investment, reducing output, and increasing interest rates. The package's care-free attitude towards increasing the debt will dampen any economic growth that would occur from the legislation.

As we've argued many times, if something is worth having, it is worth paying for. The fact that a package has the potential to promote growth does not mean we should allow it to add to the debt over the long run. In the past, we’ve suggested numerous offsets to pay for unemployment insurance, highway spending, extending tax provisions, veterans health care, or the Medicare "doc fix." Any of those, or any number of others, could be attached to this package to make it more fiscally responsible.

Provisions in the September 2014 House Jobs Package
Policy Ten-Year Costs, 2015-2024
Expand and make permanent bonus depreciation $269 billion
Expand and make permanent the research & experimentation tax credit $156 billion
Expand and make permanent 2013 levels of small business expensing (Section 179) $73 billion
Change the definition of full-time employment from 30 to 40 hours/week $46 billion
Repeal medical device tax $26 billion
Make permanent two expired tax breaks relating to S Corporations $2 billion
Exempt from the employer mandate servicemembers and veterans who already have health insurance $1 billion
Codify standards for regulations that create private mandates < $0.1 billion
Require agencies to submit a monthly report of proposed and final regulations < $0.1 billion
Require major regulations to get Congressional approval "significant"
Exempt most private equity financial advisors from SEC registration negligible
Exempt certain merger & acquisition brokers from SEC registration negligible
Streamline the process to obtain permits to extract critical and strategic minerals from public land negligible
Permanently ban states and localities from imposing taxes on internet access $0
Increase timber production on federal lands  - $0.4 billion [savings]
Total, House Republicans Jobs Package  $572 billion*
September 15, 2014

Former Pennsylvania governor and Fix the Debt Campaign co-chair Ed Rendell (D) has penned an op-ed arguing that progressive candidates should care about debt reduction. He explains that reducing the debt allows for funding other progressive priorities and helps hardworking families by improving the economy. If progressives ran on this issue, they can also reclaim the issue from "budget scolds" by proposing solutions other than "gutting welfare programs, slashing entitlements and imposing needless austerity."

He states:

This year, progressives will run on strengthening the economic recovery, reducing inequality, improving college affordability, promoting broad-based wage growth and making sure the most vulnerable among us are well cared for. And if we want all these to happen, we also need to campaign on fixing the national debt — not as budget scolds — but as the wing of the party that connects how growing debt is incompatible with the American dream.

As Rendell argues, rising levels of government debt will eventually hurt everyday families.

September 12, 2014

Senators Chuck Schumer (D-NY) and Dick Durbin (D-IL) have introduced legislation that would reduce the benefits to companies that choose to "invert," or move their headquarters overseas for tax reasons. The bill is very similar to a proposal included in last year's President's Budget, which would save about $3 billion over ten years by limiting tax deductions. It targets "earnings stripping," when companies with large amounts of cash borrow purely for tax reasons.

Recent months have seen a wave of corporate "tax inversions," where U.S. companies merge with a foreign corporation to move their headquarters overseas and avoid the high statutory U.S. tax rate on corporate income. Inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years.

Schumer and Durbin's proposal targets what they call “one of the most egregious practices of corporate inversions,” known as earnings stripping. This practice involves a foreign parent company lending to its U.S. subsidiary. Then, the U.S. subsidiary can send its profits to the parent company as interest. While this paper transaction doesn't change the company's overall financial position – it has the same income and debt levels as before – the loan provides two tax benefits. First, the U.S. subsidiary will have greater interest payments, which can be deducted as a business expense. Second, more of the company's income is "booked" outside the United States, where companies do not have to pay U.S. tax unless they repatriate the funds back to the U.S.

September 9, 2014

Note: Last updated 9/9/14. The status table below will be updated regularly throughout the FY2015 appropriations process.

The appropriations process was in full swing on Capitol Hill this summer with both the House and Senate working on individual bills. Unfortunately, none were signed into law before Congress left for the August recess. It now appears that Congress will pass a continuing resolution to extend current funding levels and avoid a government shutdown. The House is planning to vote on such package this Thursday.

The table below shows the status of each appropriations bill. To learn more about the appropriations process, read our report: Appropriations 101.

September 9, 2014

Tax breaks for homeowners are one of the largest categories of tax breaks offered by the federal government. A new report by the Corporation for Enterprise Development entitled "Upside Down: Homeownership Tax Programs" quantifies these tax breaks, showing that the majority of federal housing resources are given through the tax code. Because of their structure, these tax breaks result in an outsized benefit for the wealthiest homeowners.

The report profiles seven tax breaks given to homeowners, totaling $221 billion in lost annual revenue for the government. This cost is not only larger than the budget for the Department of Housing and Urban Development, but also nine other Cabinet level agencies combined. Incentives to support homeownership are also much larger than those for affordable housing, such as the Low-Income Housing Tax Credit.

Two of the largest preferences highlighted in this report are the mortgage interest deduction, which cost the federal government $69 billion in 2013, and the property tax deduction, which cost $29 billion. Both deductions are only available if a taxpayer owns their home and itemizes their deductions, which means they aren't available to the more than two-thirds of taxpayers that do not itemize. Because wealthier individuals are more likely to itemize and face higher marginal tax rates, they gain a larger benefit from the deductions. The average family in the top 1 percent of the income distribution received over $10,000 in benefits from these two deductions, while the average family in the bottom fifth received $3. In particular, the benefits of the property tax deduction grow rapidly at the top of the income scale since it is not capped like the mortgage interest deduction.

Syndicate content