The Bottom Line
The first official meeting of the conference committee is expected to occur sometime next week, at which point the conferees will begin attempting to reconcile the Senate and House budget proposals. Both budgets were passed with largely partisan support, so both Democrats and Republicans will need to look toward compromises over the next two months.
The good news is that the first point of agreement appears to be putting debt on a downward path as a share of the economy. Both the House and Senate budget proposals achieved this mark, though they go about this in markedly different ways. However, the House and Senate budgets used different baselines, so earlier in the year, we developed the comparison table below in order to measure savings from a consistent standard.
Against our CRFB Realistic Baseline, the House budget retains sequestration and calls for $2.7 trillion in health savings, $960 billion in other mandatory savings, and $250 billion in further discretionary savings, with $165 billion in revenue from letting the 2009 refundable tax credit expansions expire. On the other hand, the Senate budget would cancel sequestration and calls for $275 billion in health savings, $75 billion in other mandatory, and $380 billion in additional discretionary savings, with $810 billion in revenue. Not surprisingly, revenues and health care appear to be the main points of contention.
Finding compromise between the two budgets will be difficult, but we've seen in past negotiations that the parties may be closer to an agreement than might first appear. Hopefully, the conferees can capitalize on this opportunity.
Citizens for Tax Justice has released a new tax reform plan which eliminates some tax breaks and uses some of the revenue to cut the top rate and simplify some tax provisions. In total, they estimate the package would raise $2.4 trillion in revenue over the next ten years, or $2 trillion in permanent revenue when temporary effects of a few policies (like accelerated depreciation) are excluded. Much of this revenue comes from eliminating business tax expenditures.
On the individual side, the plan would combine the 33, 35, and 39.6 percent brackets into one 36 percent bracket, and heavily increase taxes on investment by taxing capital gains and dividends as ordinary income and repealing step-up basis for capital gains at death. It would also adopt President Obama's proposal to limit the value of certain deductions and exclusions to 28 percent, reducing their value for people in the 36 percent bracket. Some of the revenue raised is given back by increasing the standard deduction by one-third and repealing some individual provisions that add complexity to the tax code: the personal exemption phaseout, the Pease limitation on itemized deductions, and the Alternative Minimum Tax. In total, their individual reforms raise about $475 billion over ten years.
The business reforms raise the bulk of the revenue, and most of the policies come from the Wyden-Gregg reform bill. The largest policies are to repeal the deferral of taxation on foreign subsidiaries' income so corporations are taxed on their worldwide income. The plan would also repeal accelerated depreciation, reduce the corporate interest deduction by the amount of inflation, and repeal the domestic production activities deduction. In addition, the plan would include smaller policies from Wyden-Gregg like repealing certain oil and gas tax preferences and repealing the lower-of-cost-or-market accounting method. The business reforms would raise $1.5 trillion when temporary revenue effects are excluded. The report also includes two illustrative estimates for reducing the corporate rate to 32 and 30 percent but does not include them in their revenue estimates for the whole plan. Check out our corporate tax calculator to see more examples of combinations of rate reductions and tax expenditure eliminations.
Source: ITEP, JCT
CTJ's plan is a helpful contribution to the tax reform debate. It is very helpful that they chose to separate out the temporary effects from the permanent effects of the policies. Hopefully, lawmakers will be similarly informed when they consider a tax reform package, which will help them avoid gimmicks that raise short-term revenue but hurt our long-term deficit situation.
Years of failed budget negotiations have illustrated the political difficulties of a big budget deal. Neither political party is willing to touch their preferred part of the budget without significant concessions from the other side. However, there may be a way forward. In a blog post featured in the Hill, Jim Kessler and Gabe Horwitz suggest that tackling Social Security reform may be a way to break the logjam.
We've written about the cost of delay of waiting to reform Social Security. The program will be insolvent by 2033, and the longer that lawmakers wait to address our entitlement programs, the harder they will be to fix. As an example, achieving solvency solely through benefit cuts would require a 40 percent larger cut in 2033 than if it were enacted today. We've released the interactive tool the Social Security Reformer to illustrate how Social Security could be brought back into balance.
Kessler and Horwitz argue there are two reasons why Social Security reform could help lawmakers break through the political impasse:
First, there is more agreement on Social Security solutions among Democrats and Republicans than meets the eye. And second, a deal to fix Social Security may be the only way to make progress on every fiscal issue that concerns Democrats and Republicans—from sequester to the debt ceiling—providing an incentive for both parties to act.
The solutions in Social Security may be easier because there are a limited number of reform options. The bipartisan plans suggested by Bowles-Simpson and Dominici-Rivlin have laid out the broad outlines of reform, combining modest tax and benefit changes with protections for low-income beneficiaries. As Kessler and Horwitz argue, arriving at a solution on Social Security could lead to progress in other areas of the budget, like "ending sequestration, increasing public investments, and reforming the tax code."
With hundreds of billions of dollars of new revenue locked in to preserve Social Security, suddenly solutions to other vexing fiscal problems fall into place. The pressure to find significant new revenue through tax reform is dramatically lessened. Chain-weighting the Consumer Price Index creates billions in program savings and increased tax revenue. That money can be used to increase discretionary spending held captive under sequestration, meaning Democrats get new spending on investments without adding a dime to the deficit. Finally, the debt ceiling could be hiked substantially, because fixing Social Security has the added benefit of improving our long-range fiscal outlook by trillions of dollars.
Lawmakers should address Social Security soon, as the program becomes more difficult to reform the longer they wait. But now, there is an extra reason to reform Social Security. It could be the key to unlocking a budget deal that could finally put our national debt on a sustainable downward path.
Click here to try our Social Security Reformer.
Shutdown Smackdown – The shutdown ended and a default was averted last week, but the fallout continues as voters express their displeasure with lawmakers through record-low approval ratings. A new poll says that 64 percent of Americans are pessimistic about Congress’ ability to deal with issues down the road because of the shutdown and debt ceiling fiasco. That could change if a budget deal can be reached that addresses our fiscal challenges and breaks the cycle of governing from crisis to crisis. However, voters aren’t hopeful that will happen; another poll says 72 percent aren’t optimistic that Washington will be able to avoid another budget crisis when the current agreement expires. There isn’t much time before we find ourselves on the brink of a shutdown and breaching the debt ceiling once again. The cost of the recent drama goes beyond denting the reputation of Congress. The economy took a hit as well, with Standard & Poor’s estimating a loss of $24 billion. With the rest of the government back to work, the Senate is taking this week off, but legislators have a lot of work ahead. Will Washington do the people’s business or will it be business as usual?
Budget Conference Ramping Up – The conference committee formed by the deal ending the shutdown is preparing to get to work. Senate Budget Committee chair Patty Murray (D-WA) and House Budget Committee chair Paul Ryan (R-WI) met over breakfast the day after the deal and their staffs have been laying the groundwork to begin negotiations. They are set to meet, along with the ranking members of their committees, on Wednesday and the full conference committee is planning to conduct its first meeting on October 30. The committee has until December 13 to reach agreement. The Washington Post has some helpful info on the conference committee.
Lots of Work Ahead – The continuing resolution funding the government expires January 15, 2014 and the extension of the debt limit expires February 7, though “extraordinary measures” by the Treasury Department will be able to prolong the date in which action will be required. While short-term deals are not the optimal way to run the country, historically they have often led to bigger budget deals. One of the main goals of the conference committee will be to replace the automatic, across the board cuts of the sequester that are unpopular with just about everyone. We offer some principles to follow in approaching sequestration replacement: at a minimum, don't worsen the deficit; replace mindless cuts with smart reforms; replace temporary savings with permanent deficit reduction; and aim for a permanent sequester solution. Achieving a real solution will require policymakers to work together and make some tough decisions, but as former Defense secretary and Office of Management and Budget director Leon Panetta said at a recent event hosted by our partners at the Campaign to Fix the Debt, “Hopefully, having been through this experience of a shutdown and the implications of not increasing the debt ceiling, that will be a sufficient enough incentive for them to now turn to governing.”
Lots of Ideas and Support to Work With – The budget conference committee won’t be starting from scratch. Plenty of ideas have been put forward, including several budget proposals. As we point out, every budget put forth this year put the debt on a downward path, so any deal from the conference committee should do the same. In addition, Fix the Debt offers some principles through its Citizens’ Plan. And a new poll from Fix the Debt shows that there is broad public support for a comprehensive debt plan. Fiscal Commission co-chairs Erskine Bowles and Alan Simpson also offered ideas earlier this year in “A Bipartisan Path Forward to Securing America’s Future”. Now you can devise your own budget using a new tool based on their approach.
Time for Tax Reform – Tuesday marked the 27th Anniversary of the signing of the Tax Reform Act of 1986, the last major reform of the tax code. It’s definitely time for change and the effort in Congress to modernize the tax code continues. Senate Finance Committee chair Max Baucus (D-MT) says his work with House Ways and Means Committee chair Dave Camp (R-MI) will proceed on a “parallel track” along with the work of the budget conference committee. The conference committee could boost their efforts by crafting budget reconciliation language allowing tax reform to be considered without the threat of a filibuster. There is plenty of room for reform. Follow our ‘Tax Break-Down’ series examining various tax expenditures that are ripe for change.
Key Upcoming Dates (all times are ET)
October 23, 2013
- House Armed Services subcommittee hearing on impact of continuing resolution and sequester on military acquisition and modernization at 3:30 pm.
October 30, 2013
- Bureau of Labor Statistics releases September 2013 Consumer Price Index data.
November 7, 2013
- Senate Armed Services Committee hearing on the impact of sequestration on national defense at 9: 30 am.
- Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.
November 8, 2013
- Bureau of Labor Statistics releases October 2013 employment data.
November 20, 2013
- Bureau of Labor Statistics releases October 2013 Consumer Price Index data.
December 13, 2013
- Date by which the budget conference committee must report to Congress
January 15, 2014
- The continuing resolution funding the federal government expires
- 2014 sequester cuts take effect
- First set of IPAB recommendations expected
February 7, 2014
- The extension of the statutory debt ceiling expires
On this day 27 years ago, President Ronald Reagan signed into the law the Tax Reform Act of 1986, which stands as the last major overhaul of the US tax system. The law serves as the ultimate example in this country of tax base-broadening and tax rate-lowering reform and is often cited as the inspiration for many tax reform plans today. The Act consolidated individual income tax brackets from 15 to 2, reducing the top individual rate from 50 to 28 percent and the top corporate rate from 46 to 34 percent. To help low earners, the standard deduction and earned income tax credit were increased and indexed for inflation.
In addition, a number of tax expenditures and other tax provisions were reduced or eliminated, including the deductibility of consumer interest (other than mortgage interest), the investment tax credit, the meals and entertainment deduction, and the state and local sales tax deduction. There were also many revisions to depreciation schedules, accounting methods, and other rules. Overall, the Act was revenue-neutral, with the individual tax system receiving a $120 billion tax cut over five years and the corporate side getting a $120 billion tax increase over the same period. According to the Joint Committee on Taxation, the Act in total was slightly progressive in terms of the distributional effect.
Last year, we pointed to a Third Way report showing how the tax code had changed since 1986. Some of the tax breaks that were eliminated have been re-instated in some form or another, while many other new tax expenditures have been enacted. In addition, while the American Taxpayer Relief Act resolved some of the temporary nature of the tax code, there are still a number of often narrowly-targeted "tax extenders" which are renewed every year or two en masse.
This time of year usually renews calls for a comprehensive overhaul of the tax code. This year was no different, as Dave Cote and Keith Stephens in the Arizona Republic called for reform to simplify the tax code, reduce economic distortions and lower rates. About the problems of our current code, the two wrote:
Our current tax code is needlessly complicated and globally uncompetitive. Our complex tax system has real consequences that cost real jobs and slow productivity. With so many arcane provisions in the code, companies often face perverse incentives to focus on reducing their tax liability to save money rather than engaging in some economy-expanding endeavor.
The 1986 Act can provide an example for lawmakers today, although given our debt situation we should be looking to make reform revenue-positive. They should also take a lesson in how long it took for the Act to come together. President Reagan originally called for his Administration to develop a tax reform plan in his 1984 State of the Union Address. The first iteration of the plan was released shortly after the 1984 election, and another version came out in May 1985. It took another year and a half before Congress was able to get a bill through as they worked out many policy aspects and political disagreements. Still, the effort showed that with enough commitment on the part of major stakeholders, a major reform plan can become reality.
While the tax-writing committees have been working diligently on compiling options and drafts on different parts of the tax code, it will take a while to formulate a viable bill. However, as our Tax Break-Down series and our corporate tax calculator show, there are a lot of options already out there to reform the tax code and boost economic growth. Even if tax reform will be difficult, its potential for economic growth and deficit reduction is well worth it.
The Campaign to Fix the Debt has recently released the results of a new national telephone poll that found broad support for a comprehensive deficit reduction plan that includes tax reform, sequester replacement, and structural changes to Social Security and Medicare. The bipartisan poll was conducted by Anzalone-Liszt-Grove Research and Voter Consumer Research with 800 likely voters.
Voters clearly see the need for reform – the poll found that the budget deficit is tied with the economy as the number one issue for Congress to address. This is a significant shift from a July CBS poll, which had the economy beating out the debt as a priority by 24 points.
Not surprisingly, respondents were initially resistant to Social Security and Medicare changes, with only 34 percent in favor of general entitlement reform in the abstract. But when the poll noted that any reforms would be phased in gradually, that support jumped to 55-35 percent. Entitlement reform as part of a comprehensive plan was even more popular -- 61 percent of voters responded favorably to entitlement reform alongside cuts to wasteful spending and increased revenue from closing tax loopholes.
The specific policies that could be included in a comprehensive deficit reduction plan all tested favorably. Chained CPI, increasing the ages, means testing, and cost sharing reforms polled with majority support in the context of including protections for low-income populations, cutting waste, and phasing reforms in gradually. Tax reform also polled very well, especially the idea of closing tax inefficient and unfair tax loopholes.
The chart below demonstrates the broad support for provisions that could be included in a "grand bargain" on fiscal issues.
This new poll is encouraging news as Congress prepares to begin the budget conference process. Lawmakers should heed this call from voters to enact a comprehensive deficit reduction plan that makes structural changes to ensure the solvency of Social Security and Medicare, overhauls or eliminates wasteful tax expenditures to promote fairness and simplicity, and replaces the across-the-board sequester cuts with more targeted reforms.
Yesterday, the Campaign to Fix the Debt unveiled its Citizens' Plan for lawmakers to consider over these next two months of budgetary debates. Lawmakers should take three steps: Stop the madness and end the crisis-to-crisis approach, start working together, and solve our debt problem by developing a comprehensive plan that would include entitlement and tax reform.
The release of the plan is fitting given most American's views on the budget outlook and the decisions that must be made:
The public is concerned about the debt, and is willing to accept the tough choices and the compromises needed to come up with a viable plan. We have a unique opportunity to take action with the current budget conference. What is required now is leadership.
The "Stop, Start, Solve" plan the Campaign puts forward would be a welcomed approach for most Americans. And there are models that lawmakers can follow when developing a comprehensive plan, like the recommendations from the Fiscal Commission, Domenici-Rivlin Deficit Reduction Task Force, and the Bipartisan Path Forward. Specifically, the Citizen's Plan calls for a plan that would:
- Take steps to bring the debt down off of its current unsustainable path.
- Replace some or all of the blunt mindless sequestration cuts with better targeted, longer-term reforms.
- Significantly slow the growth of federal health care spending and improve the health care delivery system so that it is less of a drain on our economy and the rest of the budget.
- Reduce and reform other areas of spending such as farm subsidies, federal employee retirement programs, and duplicative, wasteful, or low priority areas. We should also fix the way we measure inflation, by switching to the more accurate chained consumer price index.
- Enact comprehensive tax reform by eliminating, reducing, and reforming tax preferences, lowering tax rates to grow the economy, and generating revenues.
- Fix Social Security through a balanced plan or by establishing a bipartisan process on a separate track to restore the program’s financial health and strengthen it for future retirees and generations.
- Address the debt ceiling either by increasing it or by fixing it on a more permanent basis, possibly by indexing it to a debt plan or to economic growth.
- Grow the economy by implementing a thoughtful and well-targeted plan in a reasonable timeframe that allows the recovery to strengthen while dealing with the nation’s dangerous debt trajectory.
Of course, agreeing upon such a plan will be hard and require tough choices. But the problem requires that kind of leadership and the American people should demand action from our leaders:
Lawmakers should not be allowed to continue to use the same tired excuses that there is no time, it is too hard, or that the public does not want compromise. The public wants solutions. It wants to remove short-term crises in favor of long-term certainty and stability. It wants–and needs–true leadership.
Click here to read the release.
As the dust begins to clear from this month's political battle over the debt ceiling and government shutdown, there have many reports of businesses waiting to make key investments until political stability returns. Today, in a new op-ed in the Financial Times, BlackRock CEO and Chairman Larry Fink notes the partisan wrangling in Washington may been doing real, lasting damage by weakening investor confidence in the stability of our political system. Even with some economic fundamentals suggesting that the recovery is taking hold, Fink argues that economic uncertainty is doing damage:
The market environment is still challenging. Uncertainty is high and political wrangling is pushing the fundamentals to the backburner. You cannot overestimate the impact of this on confidence at a time when business leaders should be making decisions that drive growth. It has put the US economy in a holding pattern that, if it persists, could lead to a global slowdown.
As others have written, one way that political uncertainty threatens growth is when businesses choose to put off on investing in new facilities, employees, or equipment for a more stable fiscal climate. When that politically-cautious attitude moves to the bond market, Fink argues, the impact is far worse:
Many foreign investors are rethinking their approach to investing in US debt. Even a marginal change in the willingness of governments, pension funds, insurance companies and other institutions around the world to buy America’s bonds will incrementally raise interest rates and drive up the costs of financing our deficits. That will not only worsen the fiscal situation at federal, state and local levels; it will also mean higher borrowing costs for anyone buying a house or other big-ticket items. The end result: slower growth."
But Fink also notes that lawmakers can avoid further endangering US political credibility by coming together and compromising during the upcoming budget conference.
"The short-term damage has been done; the next round of budget discussions needs to show that the American political system still works. If our leaders can return to the standards of good faith, civil deliberation and mutual respect that have always provided the foundation of our global economic leadership, we can restore the confidence of all Americans – as well as business leaders, investors and markets worldwide – and with that the potential for a long-term US economic resurgence.
A positive economic impact would be a major benefit of successful bipartisan negotiations over the budget -- the capital that companies have been keeping "on the sidelines" would help speed the recovery, and a healthy bond market will help drive foreign investment in our economy over the long term. Fink's arguments suggest that dealing with the debt will have an expansionary impact on the economy, creating jobs and building a prosperous future.
Click here to read the full op-ed.
Now that the government shutdown and debt default threat are in the rearview mirror (for now), analysts have been taking time to survey the economic damage, in particular the more quantifiable effects of the shutdown on the economy and the budget deficit. The results, of course, are not good and highlight the need to avoid confrontations like this in the future and not wait until the eleventh hour to find a solution. Since we will back in a similar position again at the beginning of next year, we will see soon if policymakers have learned their lesson.
Perhaps the most widely cited number on the economic cost of the shutdown is from Standard & Poor's (S&P), who estimate that the shutdown reduced GDP growth by $24 billion, or 0.6 percent in the fourth quarter of 2013. Macroeconomic Advisers estimates an effect of about half that size. The economic hit comes from the lost demand as employees did not receive pay checks and certain government purchases and services were not completed. IHS Global Insight also estimated that lost wages alone knocked $3.1 billion off GDP, and they lowered their 4th quarter growth forecast by 0.6 percentage points. Granted, some of this may simply be consumption deferred until the first quarter of next year, but some of it is permanent output loss, particularly the effect on federal contractors who did not receive back pay.
And the hit did not stop when President Obama signed the law funding the government. In an interview in the Washington Post, Office of Management and Budget director Sylvia Mathews Burwell, who by now is as familiar as anyone with the technical messes of recent budget policy, noted that in addition to the backlog of work that awaited affected workers when they got back, there could definitely be an effect on employee morale and future recruitment. If there is significant uncertainty about how the federal government will operate -- and consequently whether employees will have uneven paycheck schedules -- fewer people will be willing to work for it.
Lawmakers shouldn't be patting themselves just for narrowly avoiding default and getting out of the shutdown. The economic pain was unnecessary, and the shutdown will hurt the confidence of people in the government going forward, whether they are employed by it or not. Lawmakers should work well ahead of the deadlines next time to avoid these stand-offs.
The shutdown may be over and fears of a default adverted for now, but the reality remains that we still haven't made any progress on our debt problem. CRFB President Maya MacGuineas writes in zpolitics that with a few months before we approach the next fiscal hurdles, lawmakers should get busy and begin to work toward a permanent solution.
As we finally emerge from what was simply the most recent in a long series of short-term fiscal crises, it is abundantly clear what our leaders in Washington should do to prevent themselves from governing on the edge of a cliff in the future: they must stop the madness of shutdowns and showdowns, start earnest bipartisan negotiations and solve the problem of our unsustainable national debt once and for all.
The just-concluded fiscal near-disaster proves that short-sighted political gamesmanship produces very few winners, and a whole bunch of losers. Worse still, such crises divert attention from the real issues that are driving our debt over the long term – namely our outdated tax code and our ever-more-costly entitlement programs.
If lawmakers needed any more reason to work for the problem, the voters clearly view solving the debt problem as our most important priority:
Moreover, Americans understand that the national debt is problematic. In a recent poll we commissioned with prominent Democratic and Republican pollsters, a plurality of respondents said that the debt was the single most pressing issue Washington must tackle – more than jobs, immigration reform or health care.
We need to take advantage of this opportunity, especially with the conference committee beginning to negotiate. If we do not, we can we expect more of the crisis to crisis approach that has plagued us so much in the past. Write MacGuineas:
The time for our elected leaders to be worrying about short-term political gains has long since passed – if it ever existed at all. Now, they must use this latest opportunity to stop all of the fruitless chicanery, start honest negotiations and solve our fiscal problems – before they get even worse than they were last week.
Click here to read the full article.
"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.
Recent reports have suggested the new budget conference committee may focus its attention of a deal to replace sequestration. A recent paper from the Center for American Progress suggests a set of principles that any sequester replacement should meet; yet that set, unfortunately, ignores the importance of maintaining fiscal responsibility and fixing our long-term debt.
The four principles CAP outlines are:
- Keep it manageable: Replace the sequester for three years.
- We have already paid for 60 percent of the sequester in the fiscal cliff deal, so we should only offset 40 percent of any repeal costs.
- Balance is a necessary component: Savings should consist of revenue increases as well as spending cuts.
- Focus on the economy: Include further short-term jobs measures in addition to sequester repeal.
We do agree that fixing the debt will require deficit reduction from both tax and entitlement reform and that economic growth should be a central concern in any fiscal deal. However, we worry CAP's proposal to replace only three years of sequester will fall short of what is needed, and their proposal to offset only 40 percent of the costs threatens fiscal responsibility and credibility.
While a three-year replacement of sequester could help the short-term economy and modestly improve the long-term fiscal picture, it would unnecessarily leave the threat of sequester in place, would be too small to put our debt on a downward path, and would make sequester replacement that much harder next time.
More troubling is CAP's proposal to offset only 40 percent of sequetration. As we've explained before there is no basis to count the revenue from the fiscal cliff deal (which was a revenue loss compared to current law) against the sequetration:
[T]here were no serious offers during the Super Committee which would have turn off most of sequestration and extend most of the tax cuts without a much larger deal. Indeed, had the Super Committee agreed to pass $4 trillion in tax cuts and $800 billion of sequester reductions for only $800 billion of revenue, such a deal would have been incredibly irresponsible.
While the CAP paper argues we've already accomplished some of the Super Committee's goal, in many ways the opposite is true. As it turns out, the sequester only contains two-thirds of the savings in the original Super Committee target. A return to the Super Committee's goal would therefore mean offsetting 150 percent of the costs of sequester, not 40 percent.
CAPs sequester principles, unfortunately, do not pass the basic test of fiscal responsibility. Policymakers should adopt an alternative set of principles which more closely match the following:
- At Minimum, Don't Worsen the Deficit: Lawmakers should put in place a plan large enough to put the debt on a clear downward path; but at absolute minimum they must abide by Pay-As-You-Go (PAYGO) principles to replace every dollar of sequester relief with a dollar or more of gimmick-free deficit reduction.
- Replace Mindless Cuts with Smart Reforms: We've extensively explained the problems with the mindless, abrupt, across-the-board spending cuts. Replacing them with gradual, targeted, and pro-growth deficit reduction measures could be a win-win both in the short and long term.
- Replace Temporary Savings with Permanent Deficit Reduction: Sequestration expires after 2021 and would technically produce no long-term savings, even though our greatest fiscal problems are long-term. Policymakers should replace these temporary cuts with permanent savings -- particularly with provisions that grow over time or address growing health costs and the aging of the population.
- Aim for a Permanent Sequester Solution: Rather than dealing with sequestration one year at a time, policymakers should agree to a sustainable set of caps on a longer-term basis, accompanied by long-term deficit reduction to replace sequester.
Few would argue that sequestration is good policy or that it truly restrains long term debt growth. Yet repealing it without replacing it would both worsen our fiscal situation and send a message that our policymakers cannot credibly keep to their fiscal committments.
Sequestration should be replaced, but only if done so in a fiscally responsible manner.
With President Obama's signature on Thursday morning, the nation went from the brink of default to having a least a little elbow room on the debt ceiling for a few months. The actual date on which the nation would default (the "X date") is uncertain given the question of whether extraordinary measures will be available, but the bill will at least prevent a breach of the debt ceiling through February 7. With extraordinary measures, the Bipartisan Policy Center estimates that Treasury would be able to delay the X date until sometime between late-February and mid-March.
Although lawmakers need to address our unsustainable long-term debt, bringing the nation to the precipice and threatening default are not the way to do so. With enough lead time to avoid scaring markets, however, short-term debt ceiling increases in the past have helped to foster negotiations and achieve significant deals. Extending the nation's borrowing authority through at least February 7 should give lawmakers more time to work out the details for a comprehensive deal to reform entitlements, restore investments, and reform our tax code. The graph below shows that in at least five different budget deals, temporary debt limit increases bought time for and preceded the final deal.
This is not to say that reaching an agreement after a temporary increase is particularly easy, and this can no better be seen than the 1990 Omnibus Budget Reconciliation Act. Negotiations on a budget agreement began in mid-May of 1990. By August 9, a deal still had not been worked out, so the debt limit was temporarily extended to October 2. The initial agreement between President George H. W. Bush and Congressional leaders was rejected by the House, requiring further negotiations and five other debt ceiling extensions in October before a compromise could be reached. On November 5, President Bush signed the Omnibus Budget Reconciliation Act, which raised the debt ceiling by $915 billion, the largest increase in history at the time in nominal dollars. In total, negotiations went on for 139 days, but the result was a deal containing nearly $500 billion in deficit reduction over the next five years, including discretionary spending caps and the Pay-As-You-Go (PAYGO) rule. The agreement played a large role in the budget surpluses of late 1990s, so while the road may have been rocky, it provided significant fiscal gains.
A permanent deal by now would have been preferable, rather than a stopgap measure, but the worst possible outcome would be going over the brink and defaulting. The temporary increase buys some time for lawmakers to work on a fiscal deal, but it's up to them to use it wisely.
In additional to reopening the government and suspending the debt ceiling, last night, both the House and Senate agreed to go to Budget Conference. Both Houses named their conferees, and the conference leaders -- House Budget Committee chair Paul Ryan (R-WI), House Budget Committee ranking member Chris Van Hollen (D-MD), Senate Budget Committee chair Patty Murray (D-WA), and Senate Budget Committee ranking member Jeff Sessions (R-AL) -- had a breakfast this morning to discuss the best way forward. Under the agreement last night, the conference is supposed to submit a final report on December 13th. That final report should include a plan to put the debt on a clear downward path relative to the economy.
Essentially, the conference committee will be looking to reconcile the House and Senate budget resolutions which passed their respective chambers earlier this year. While it may seem like those budgets have little in common, there was one overarching theme which was embodied not only in those two budgets (see a comparison here), but in every single budget resolution proposed this year. All of the budget proposals -- including from as far left as the Congressional Progressive Caucus and as far right as the Republican Study Committee -- put the debt on a downward path as a percent of GDP. Where these budgets succeeded, the conference must succeed as well.
Source: HBC, SBC, CBC, CPC, RSC, CRFB calculations
Note: Debt numbers are adjusted for changes in CBO's baseline and GDP numbers since the plans were released
The upcoming budget conference offers a real opportunity to agree to a package of deficit reduction. Although their recommendations are by no means bindings, they can put forward a process ("reconciliation") and create the political space (through a bicameral bipartisan agreement) to allow Committees of jurisdiction to enact comprehensive debt reduction.
Both parties have released a number of plans which put debt on a downward path and as a result of the many plans that have been put in recent years, there are many options that could be accepted on a bipartisan basis. The foundation for a deal is there. Now both sides have to come together in the spirit of principled compromise to truly address the country's long-term finances. For this budget conference, failure should not be an option.
This is the eleventh post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Our last post was on the American Opportunity Tax Credit, which provides a credit for undergraduate tuition.
Intangible drilling costs are one of the largest tax breaks available specifically to oil companies, allowing companies to deduct most of the costs of drilling new wells in the United States.
In order to determine taxable income, U.S. businesses can normally deduct expenses from revenues so they are only taxed on profits. Under normal income tax rules, a company that pays expenses in order to make future profits would need to deduct the expenses over the same time period as profits. The costs for drilling exploratory and developmental wells would need to be deducted as resources are extracted from the well.
The break for intangible drilling costs (IDCs) is an exception to the general rule. Independent producers can choose to immediately deduct all of their intangible drilling costs. Since 1986, corporations have only been able to deduct 70% of IDCs immediately, and must spread the rest over 5 years.
Intangible drilling costs are defined as costs related to drilling and necessary for the preparation of wells for production, but that have no salvageable value. These include costs for wages, fuel, supplies, repairs, survey work, and ground clearing. They compose roughly 60 to 80 percent of total drilling costs.
The deduction for intangible drilling costs has been permitted since the beginning of the income tax code, in order to recognize the risks involved in drilling developmental wells—not every well strikes oil. Only IDCs associated with domestic or offshore wells may be deducted; foreign wells cannot be expensed in this way.
How Much Does It Cost?
According to the Joint Committee on Taxation (JCT), the tax break for intangible drilling will cost roughly $1 billion in 2013, and $16 billion over the next decade. This is the largest tax preference specifically for oil and gas and totaled about 8 percent of the total value of tax preferences for energy and natural resources in 2013. In contrast, expensing for exploration and development costs for nonfuel minerals (like coal) will cost $0.1 billion in 2013, and $1 billion over the next decade.
What are the Arguments For and Against the Deduction for Intangible Drilling Costs?
Supporters of the deduction argue that oil and gas and exploration and development is a high-cost industry, and allowing expenses to be recovered immediately encourages companies to invest. They explain that altering the deduction could result in job losses, since wages are included in the deduction.
More broadly, supporters point out that the oil and gas industry receives the same treatment that other manufacturing or extractive industries receive, and are merely a target because of the now-controversial nature of reliance on fossil fuels. Finally, supporters of energy independence often support the IDC deduction, as it promotes further exploration and development of wells within the United States.
Opponents argue that since this tax provision was introduced over a hundred years ago, technology has advanced to the point where dry wells are less of a problem. The success rate of striking oil (or gas) is about 85%, which means producers are spending less on exploring wells that won’t become profitable.
More generally, opponents say that oil prices are expected to remain high, and that demand continues for oil and other fossil fuels. They believe there is no need to subsidize an industry that is already booming.
What are the Options for Reform?
President Obama has continually proposed repealing the break for intangible drilling costs in his yearly budgets, a proposal also suggested by Senator Sanders and Representative Ellison. Fully repealing this tax break would raise $14 billion through 2023, though importantly would largely represent a timing shift, and raise only about $100 million in 2023 alone. A number of other tax reform plans, including the Domenici-Rivlin plan, the Simpson-Bowles plan, and the Wyden-Gregg/Coats plan would also repeal the preference for IDCs.
Alternatively, the deduction could be repealed for most wells, but still allow a company to deduct costs for unproductive dry wells, raising $10 billion. Or, the deduction could only be eliminated for the five biggest oil companies, raising $2 billion over ten years.
If the deduction were repealed, drilling costs would need to be treated like other depletable property, deducted over the life of the well.
|Options for Reforming the Expensing of Intangible Drilling Costs|
|Options||2014 - 2023 Revenue|
|Repeal expensing for all extractive industries, including oil, gas, coal, and other hard mineral mining||$18 billion|
|Repeal intangible drilling cost expensing for oil and gas companies completely||$14 billion|
|Repeal intangible drilling cost expensing for oil and gas companies, only for C-Corporations||$10 billion|
|Repeal expensing for the 5 largest oil producers||$2 billion|
|Keep expensing only for dry wells||$10 billion|
Where Can I Read More?
- Joint Committee on Taxation – Description Of Present Law And Select Proposals Relating To The Oil And Gas Industry
- Internal Revenue Service – Intangible Drilling Costs Deduction
- American Petroleum Institute – Repeal Intangible Drilling Costs (Discussion)
- Center for American Progress – Big Oil’s Misbegotten Tax Gusher
- The Atlantic – America’s Most Obvious Tax Reform Idea: Kill the Oil and Gas Subsidies
- American Enterprise Institute - The Truth About All Those "Subsidies" for "Big Oil"
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The deduction for intangible drilling costs allows oil and gas producers to deduct most of the costs associated with finding and preparing wells. When the deduction was created in 1913, it was intended to attract business to the costly and risky business of oil and gas exploration. Some argue that technology has advanced enough that locating wells is no longer as costly, and this deduction is an unneeded subsidy to a profitable oil industry. Others argue the deduction is an important way to support the domestic energy industry and promote energy independence. As part of tax reform, policymakers will need to decide whether to keep this incentive for energy production, or repeal it in favor of lower tax rates or a lower deficit.
Read more posts in The Tax Break-Down here.
Yesterday, former Defense Secretary and CRFB board member Leon Panetta headlined a press conference at the National Press Club on the need for our lawmakers to come together and work toward a comprehensive debt deal. Panetta was joined by CRFB President Maya Macguineas, former Director of the Office of Management and Budget and Congressman Jim Nussle (R-IA), President & CEO of US Hispanic Chamber of Commerce Javier Palomarez, Executive Director of Leaders Engaged on Alzheimer's Disease Ian Kremer, President of the National Small Business Association Todd McCracken, President of the Association of American Universities Hunter Rawlings, and President & CEO of Research!America Mary Woolley.
Panetta said that at a very least lawmakers shouldn't take actions that cause harm. Of particular note given his background as Secretary of Defense, Panetta argued that the combination of this shutdown and the sequester was hurting national defense by "virtually hollowing out our military." From ships and infantry that could not be deployed because of the sequestered to the furlough Department of Defense workers, Panetta explained that the "negotiate-by-crisis" approach taken by lawmakers was having real consequences.
On today's agreement in the Senate, former OMB Director Nussle was pleased but emphasized the need to do more. "We have an opportunity, cooler heads did prevail," he said. But in order to take advantage of this second fact, lawmakers needed to begin to look at entitlement and tax reform - and that would require tough choices. "No one is going to agree 100 percent of the time" said Nussle. But he added that everyone should be able to find some areas of compromise.
MacGuineas called for lawmakers to move forward on a comprehensive plan to put debt on a downward path. She said that the nation would only get its fiscal house in order after taking a hard look at entitlement programs, other spending, and the tax code. That was a common sentiment among the other speakers, with many expressing frustration of the failure of lawmakers to protect key investments as we work to address the national debt.
It's always important to remember that fiscal responsibility is hard, and requires difficult choices on the behalf of lawmakers. But for Panetta, that is part of the job description and lawmakers needed to trust the other people in the room. Panetta reflected on his own experience:
It was tough. Not easy. It took courage, and there were risks involved. But that’s what governing’s all about. That’s why we elect people. We don’t elect people to simply serve blind in office. We elect people to make the tough choices of governing this country. Hopefully, having been through this experience of a shutdown and the implications of not increasing the debt ceiling, that will be a sufficient enough incentive for them to now turn to governing.
The budget deal has at least averted disaster, but the hardest work lies ahead. Hopefully, lawmakers hear the message that was delivered today.
Click here for video of the event.
Ending the Shutdown and Cranking Up the Debt Limit – It’s been an up-and-down past couple of weeks. The federal government has been shut down since October 1 and the U.S. loses its borrowing authority on October 17 absent a deal to increase the statutory debt ceiling. Several times there have been hopeful signs of an end only to fizzle out. But on Wednesday a deal was announced to end the short-term crises, albeit temporarily. With the political and economic toll of the shutdown and prospective default coming into focus, Standard and Poor’s said the shutdown took $24 billion out of the economy and congressional ratings dropped, policymakers finally stepped up and addressed the short-term crises, only to create more in a few weeks. And the longer-term fiscal challenges still remain. Will they continue to kick the can down the road?
The Lowdown on the Deal – On Wednesday Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell announced an agreement to reopen the government and extend the debt ceiling. The deal will fund the government at current spending levels through January 15, 2014 through a stopgap continuing resolution (CR) and extend the debt ceiling through February 7, 2014. A bicameral conference committee will also be appointed to hash out a budget for the rest of the fiscal year as well as a longer-term spending and deficit reduction plan. The committee must report by December 13. The Senate and House approved the deal late Wednesday and the President will sign it, meaning that federal employees will return to work and a default will be averted, for now.
Americans Stood Up for a Solution – In the run up to the deal, Americans made clear they were sick and tired of the gridlock and posturing. Starbucks sponsored a petition that customers could sign at stores or online to demand that policymakers reopen the government; pay our debts on time to avoid another financial crisis; and pass a bipartisan and comprehensive long-term budget deal by the end of the year. In addition, our partners at the Campaign to Fix the Debt initiated a national advertising campaign calling for short- and long-term solutions, featuring Fiscal Commission co-chairs Alan Simpson and Erskine Bowles. Fix the Debt also recruited a bipartisan group of forty former governors who also called for swift and meaningful action. These efforts helped put pressure on policymakers to stop the games and start working together to end the stalemate.
Rising Up to Address the Debt Ceiling – Just before the agreement was announced, markets, creditors and economists began expressing concern that failure to increase the debt limit would cause a national default that would have widespread economic consequences. America’s biggest foreign creditors, Japan and China, urged the U.S. to act. In addition, credit rating service Fitch put the country on Rating Watch Negative, warning that a default would likely cause the U.S. to lose its AAA credit rating status with the service. The country lost its AAA rating with Standard & Poor’s during the last debt limit standoff. Need to learn more about the debt limit? Check out our debt ceiling FAQ.
Deadlines Moved Down the Road (Slightly) – While the deal will reopen the government and prevent an immediate default, it will only move back the deadlines a few weeks. We need a more comprehensive budget plan to stop the cycle of mini crises and fiscal speed bumps. The conference committee offers an opportunity to devise a broader approach that addresses the long-term fiscal challenges, or at least puts in place a credible process for doing so. No doubt replacing the automatic, across the board cuts of sequestration will be a priority. While that is important, it is imperative that policymakers recognize that savings from the sequester itself are not enough to put the country on the right track. Additional savings, phased in over a longer period of time, will be required to put the debt as a share of the economy on a downward path over the long haul. As Robert Litan of Bloomberg Government points out, the long-term fiscal challenges remain. And contrary to what some may say, addressing the long-term debt remains a priority. There are plenty of ideas that have been put forth by bipartisan commissions and other efforts that can inform the committee’s work. While plenty of bad ideas have been put forward, there are also many good ideas as well that can be drawn from. House Budget Committee chair Paul Ryan (R-WI) and former Senate Budget Committee chair Kent Conrad (D-ND) offered some ideas recently in separate op-eds. So did former White House economic adviser Michal Boskin. Fix the Debt provided a framework to stop the madness of government shutdowns and risks of default, start talking on a bipartisan basis, and solve our long-term economic and budget problems. It can lead the way to finding common ground through common sense solutions. Fix the Debt’s Congressional Fiscal Leadership Council also provided ideas to include in a comprehensive package.
Farm Bill Moves Back Up the Agenda – Lost amid the shutdown and debt ceiling crises, some movement has occurred on the farm bill. A conference could begin deliberations next week to resolve differences between the House and Senate. The $500 billion bill has significant implications for the budget. Key issues involve cuts to SNAP (food stamps), farm subsidies and conservation programs.
Key Upcoming Dates (all times are ET)
October 30, 2013
- Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.
December 13, 2013
- Date by which the budget conference committee must report to Congress
January 15, 2014
- The continuing resolution funding the federal government expires
February 7, 2014
- The extension of the statutory debt ceiling expires
After a few weeks of government shutdown and a nerve-wracking lead-up to hitting the debt ceiling, the Senate leadership announced today it had come to an agreement to resolve the current crisis. Under this deal the government would be funded through January 15 at the FY 2013 level of $986 billion and the debt ceiling would be suspended through February 7 (though extraordinary measures would extend the default date past then). The leaders have also agreed to set up a budget conference committee that would be instructed to report recommendations by December 13. The agreement still needs to be passed by both the Senate and House, although Speaker Boehner has indicated he will bring it to the floor and urge Republicans to vote for it.
While there had been speculation about what other policies would be thrown in to the deal, particularly those related to the Affordable Act, reports suggests only one made it into the final deal. The agreement would require income verification for the Affordable Care Act subsidies in state-run exchanges starting in 2014, after the Administration delayed this verification until 2015 this summer.
In response to the announced agreement, Maya MacGuineas, President of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt issued the following statement:
The Campaign to Fix the Debt is relieved that leaders in the Senate have agreed to a plan to re-open the government and avoid a dangerous default. We encourage Congress to pass and the President to sign this plan, and immediately turn their attention to the critical issue of how to put the nation on a sustainable fiscal path.
It is incredibly disheartening that we are once again relying on last-minute deals that merely delay the real issues instead of addressing them. Playing with default was an incredibly dangerous game, but continuing to delay confronting our debt is letting a fire burn that could get out of control at any moment. We have to be able to expect more from our leaders – we cannot continue to lurch from one crisis to the next. If we do not change course, we will be dealing with these same issues all over again in only a few months’ time.
This agreement provides for a process, through the appointment of budget conferees, to deal with the fact that the country is operating without a budget. Congress and the President must use this opportunity to put in place the long - overdue changes of making our entitlement programs more sustainable, reforming our tax code, replacing sequestration with smarter reforms, and putting the debt on a sustainable downward path.
Both houses should act quickly to stop the madness, start bipartisan discussions, and solve our debt problems once and for all.
The prolonged government shutdown and debt ceiling debate are a clear indication that our government is not functioning as it should. Furloughed workers, closed national parks, and shuttered government offices are the byproduct of an unwillingness to compromise by our elected officials. In an editorial in the South Bend Tribune, CRFB Senior Policy Director Marc Goldwein takes our leaders to task for failing to address the national debt, projected to rise uncontrollably over the long run. Goldwein explains that lawmakers have only scratched the surface of what needs to be done to ensure fiscal sustainability:
As my old boss Erskine Bowles likes to explain, our leaders have done the easy stuff -- raising taxes on the top 1 percent of Americans. They've done the sneaky stuff -- capping defense and non-defense discretionary spending so future lawmakers can identify the specific cuts. They've even done the stupid stuff -- allowing a deep, abrupt, across-the-board cut to all the programs not causing our debt to grow through something called "sequestration."
What our leaders haven't done is the hard stuff. What they haven't done is worked together to reach principled compromise on a plan that neither side loves, but both know would be a win for the American people.
We've always known what reforms were needed and how important it is to address the long-term growth of debt before it's too late. Any serious deal must encompass both entitlement and tax reform, as Goldwein notes. He believes that by working together to create a bipartisan plan, lawmakers can responsibly tackle our biggest challenge:
The solutions are relatively straightforward: bend the health care cost curve by improving the way we pay for medicine and changing incentives for providers and beneficiaries; make Social Security solvent by slowing the growth for wealthier beneficiaries, adjusting for growing life expectancy and bringing in new revenue from those who can afford it; reform the tax code by cutting many of the $1.3 trillion of annual tax preferences and using the money to lower rates and deficits; and replacing the mindless cuts of the sequester with thoughtful cuts to wasteful and low-priority programs.
But those solutions are hard. They require Democrats to take on their base and pursue entitlement reforms. They require Republicans to break their pledges and support new revenue. And they require both sides to put the next generation ahead of the next election.
Despite the hard choices required, Goldwein remains hopeful that lawmakers can rise to the challenge:
We face before us a choice. Either both sides can stop the blame game and come together on a plan to fix the debt. Or we can keep jumping from crisis to crisis without ever solving the problem. We are a great nation, and it is time we start acting like one. The alternative is to continue walking toward oblivion.
Click here to read the full article.
Yesterday, Former Treasury Secretary and director of the National Economic Council Larry Summers argued that “budget deficits are now a second-order problem” and the focus should instead be on economic growth. Although the piece is in many ways insightful, it could perpetuate the myth in Washington that our debt problems are either solved or are no longer a pressing concern. In addition, Summers’ piece suggests that deficit reduction and “growth strategies” are in conflict – when in fact they are complements. Below, we respond to a number of the arguments in the FT piece.
Our Debt Problems are Far From Solved
In his piece, Summers argues that deficits need not be a major concern given that they will fall to 2 percent of GDP by 2015. While it is true that deficits are falling and debt is projected to decline from 72.5 percent of GDP now to 69.5 percent by 2018, this decline is only temporary. After 2018, debt levels will again begin to rise – reaching the size of the economy by 2035 under CRFB's Realistic Baseline, and doubling it by the 2060s. Although these levels have fallen significantly as a result of the deficit reduction enacted over the past few years, they are nonetheless unsustainable.
Even if this unsustainable growth in debt levels were stopped, moreover, more would need to be done to reduce the debt from its extraordinarily high levels. Debt as a share of GDP is currently twice its historic average and highest they have ever been since the aftermath of World War II. Once the economy recovers, these high levels of debt are likely to “crowd out” investment and growth; and are certain to reduce our fiscal flexibility. It is not clear that, under these levels of debt, the United States would have the capacity to appropriately respond to another recession, a war, or another large-scale national emergency.
Our debt problems remain far from solved, by our estimates, and an additional $2.2 trillion in deficit reduction to put debt on a downward path as a share of the economy this decade alone.
Uncertainty is Not So Uncertain
In his piece, Summers argues that even if debt levels are projected to rise, those projections could be off as they are well within a margin of error. Yet while CBO’s estimates are certainly imperfect, there is little reason to think they are directionally wrong. While economic variables and health care costs are particularly hard to project, demographics are destiny. Over the next quarter century, 19 percent of the projected increase in entitlement spending is due to increased spending from the health law and 54 percent from population aging, which have long been baked in the cake. We've known about the retirement of baby boom generation for years now so forecasters can make better informed projections about demographics than they can about health care costs or economic growth.
Moreover, uncertainty is a double-edged sword. The fiscal situation could be far worse than projected as easily as it could be far better. And considering our high levels of debt and risk of unattainability, it would be prudent to lock in a sustainable path now and relax enacted policies later if projections are too pessimistic. This is especially true given that most of the necessary entitlement changes will have to phase in slowly, meaning they will need to start soon to have a significant impact when they are needed most.
Growth is Not Enough
One common myth surrounding the nation's debt problem is we can grow our way out of the problem. Summers, in fact, suggests that an increase of just 0.2 percent in annual growth would be enough to close the gap. Although we do not have access to Dr. Summers’ calculations, our math suggests that 0.2 percent faster growth would be far from sufficient. While it is true that economic growth would increase revenues, it would also increase spending in a number of areas such as Social Security and thus reduce the budgetary improvement. In CBO's Long-Term Outlook, a 0.5 percentage point increase in productivity growth still resulted in debt levels that debt would still be between 65 and 77 percent of GDP in 2038, and on an upward path. We used these results to roughly approximate the effect of a 0.2 percentage point increase in productivity growth, under current law, and found that debt levels would remain on a clear upward track – reaching between 89 and 94 percent of GDP by 2038. Or in other words, growth certainly helps but will not solve the problem alone.
Long-Term Deficit Reduction is a Growth Strategy
In his piece, Summers rightfully calls for pursuing “growth strategies.” Yet long-term deficit reduction is a growth strategy, and is an important complement to many other growth strategies. Because lower debt levels reduce “crowd out,” of investment, deficit reduction on its own is likely to promote growth. CBO's recent Long-Term Budget Outlook found that a $2 trillion illustrative plan would increase real GNP by 0.8 percent by 2023 and 4 percent by 2038.
In addition to this direct impact, a comprehensive plan to reduce the debt may be the best avenue for pursuing a number of other growth strategies. For example, most plan to reduce impact of sequestration – which is currently reduced GDP by 0.6 percent in the fourth quarter of 2013 alone – would rightly do so by offsetting the cost through future deficit reduction. In addition, a comprehensive debt deal offers one of the best opportunities to pursue individual and corporate tax reform, which could increase the size of the economy significantly by offering lower rates and a broader base to better encourage work and investment while reducing various distortions. On the spending side, policies which reprioritize public investment over consumption and encourage work and investment can also promote growth. And finally, just the announcement of a comprehensive plan could have some positive growth impact by offering households and businesses increased certainty, stability, and confidence in the nation's economy.
At the end of the day, deficit reduction remains a first-order concern exactly because it is the key to economic growth. Or at least it can be if it focuses on putting in place the gradual tax and entitlement reforms which are so sorely needed.
Bipartisan discussions over how to end the partial government shutdown and raise the debt ceiling are coming down to the wire as this week begins, with only three days left until October 17 -- the date that Treasury Secretary Jack Lew says the U.S. government would be left with a dangerously low amount of cash on hand and default could potentially be imminent.
There are a number of good ideas out there for breaking the impasse, but there are also a number of bad ideas. As policymakers negotiate over how to re-open the government and lift the deal celing, they should avoid the following fiscally irresponsible policies:
- Waiving sequestration (without offsets): There is currently broad agreement in Congress to continue funding government at current levels of $986 billion on a temporary basis -- which is about $20 billion higher than what is called for under sequestration. Although ideally policymakers would work to replace the sequestration with more intelligent spending cuts, there are some rumors that they may waive sequestration without other spending cuts. As we previously explained, any reduction in the sequestration cuts not accompanied by offsets would send the message that Washington is not committed to controlling deficits and debt and that it cannot responsibly stick to already enacted savings.
- Repealing or delaying the medical device tax (without offsets): A number of policymakers have suggested accompanying a continuing resolution with a repeal or delay of the 2.3 percent medical device tax established by the ACA ("Obamacare"). As we've explained before, repealing or delaying this tax would add to the deficit to the tune of $3 billion per year. Policymakers should avoid making any changes to the medical device tax -- or any other deficit-increasing policies -- without fully offsetting the cost of doing so.
- Using pension smoothing as an offset: Several policymakers have suggested a change in pension contributions rules to help offset the costs of other policies. As we've explained before, this "pension smoothing provision" would represent a timing shift that would raise revenue in the short-run but lose revenue over the long-run. Using temporary revenues from a timing shift to offset a permanent reduction in revenues or increase in spending would be a budget gimmick.
- Enacting a year-long Continuing Resolution: Some proposals have called for funding the government on a long-term basis -- for six months to a year. Yet continuing current funding levels on a long-term basis would be a mistake on a number of fronts. For one, it would lock in the mindless across-the-board sequestration cuts implemented in March of this year. It would also lead to a second $20 billion defense sequester in January. Ultimately, policymakers must agree to a sustainable level of discretionary spending and then pass appropriations bills which make the hard choices as to how to allocate funds within that level. Cuts should be focused on low-priority spending, not applied across the board.
- Repealing IPAB: Particularly in the House, there is bipartisan support for repealing the Independent Payment Advisory Board (IPAB) established under the ACA; and some rumors suggest this could be part of a broader deal to raise the debt ceiling and open the government. Yet IPAB provider an important backstop if Medicare grows quicker than anticipated by automatically implementing targeted provider savings when costs grow too fast. Although there is plenty of room to improve IPAB, it should not be repealed unless replaced with an alternative mechanism to control long-term Medicare growth.
- Offsetting Sequestration with a Repatriation Holiday: The idea of replacing part of sequestration with revenues from a repatriation holiday for multinational companies has been floated in recent days. While a repatriation holiday would generate more revenue in the short run, it would likely reduce revenues later in the decade and over the long term. Although a broader discussion over how to reform international taxation is long overdue, using short-term revenue from a repatriation holiday to finance spending increases would be a serious gimmick.
- Waiting until the last possible moment to gain leverage: The country is only days away from exhausting all of our borrowing authority. After Thursday, the Treasury would only be able to pay bills with the cash it has on hand, greatly increasing the risk of a default. At the same time, the government shutdown continues to drag on and certainly is not helping give consumers and businesses the confidence they need to spend and invest and is taking money out of the economy. Taking the United States to the brink might result in a better outcome for one side over the other but at the expense of the U.S. economy. It isn't worth it.
Lawmakers need to stop the madness, start discussing responsible solutions, and solve the debt problem.