Late last week, David Rogers of Politico reported that there will indeed be a "second sequester," or a $1 billion scorekeeping adjustment due to OMB's determination that the continuing resolution exceeded the post-sequester discretionary caps. Congress was unaware of this magnitude of cut, caused by differences between CBO and OMB estimates of Federal Housing Administration receipts and by an error in a late amendment that prevented cuts to the Department of Agriculture's Food Safety and Inspection Program. The $30 million adjustment for the Food Safety and Inspection Program is made up for with across-the-board cuts throughout the domestic budget, instead of only affecting agricultural appropriations.

A White House report shows that budget authority for the Defense Department will be cut by $164 million for the remainder of FY 2014. Nondefense spending will also be cut further, including additional reductions to Labor, Health and Human Services, and Education appropriations ($325 million) and Transportation and Housing and Urban Development appropriations ($232 million), among others.

^{Source: OMB}

These additional cuts are small when compared to the overall reductions under sequestration or the needed $2.4 trillion in deficit reduction that would put debt on a clear downward path. But it does show that the sequester is not a smart way to achieve savings. Instead of identifying measures that could lead to greater efficiency, the sequestration mechanism simply cuts accounts across-the-board.  As Rogers explains in his article:

Altogether, the adjustments are surprisingly large and leave Washington still fiddling with the last six months of this fiscal year—just days before President Barack Obama rolls out an entirely new set of numbers next week for 2014.

The process illustrates how much power was shifted away from Congress under the Budget Control Act.

Getting Congress to take on tax reform will be difficult, but the two lawmakers in charge of the tax-writing committees seem to be committed to reforming our nation's inefficient and overly-complicated tax code. In a joint op-ed in today's Wall Street Journal, Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) write that despite the ideological differences between the two parties, there is a bipartisan agreement on the need for comprehensive tax reform. The op-ed is a very encouraging sign that the chairs continue to be focused on producing tax reform legislation.

In 2013, the federal government will forgo nearly $1.3 trillion in revenues from individuals and businesses due to the many tax expenditures that litter the tax code, according to the latest estimate from the Joint Committee on Taxation. Baucus and Camp point out that the last time Congress took a serious look at the tax code was more than 25 years ago, and many tax provisions have been added since then. Furthermore, there has been little review to see what provisions accomplish their intended goals effectively and efficiently. It is Baucus's and Camp's hope that by engaging the public, they can overhaul the tax code in a fair and rationale manner.

We've held more than 50 hearings and heard from hundreds of experts. The House Ways and Means Committee has released several discussion drafts on pieces of the tax reform puzzle and formed working groups so committee members can dive into the details of the code. The Senate Finance Committee is on a parallel track, reviewing discussion papers and collecting feedback from members and stakeholders.

In the coming weeks, we will give you the opportunity to provide your input as well. No need to travel to Washington. Through the use of social media, we will enable everyone to participate directly.

We are dedicated to writing bills in an open and transparent fashion. No cutting deals behind closed doors. You get a say, employers get a say, and our colleagues—your representatives and senators—will get a say.

In taking up reform, Baucus and Camp lay out three principles to guide the process. They elaborate:

The first is a boost for America's families. People don't mind paying their share as long as they know they're not getting the short end of the stick. Simplifying the code means regular families will be on a level playing field with those who can afford high-price tax advisers.

We've agreed that tax reform should result in a system that is as progressive as the current one. Tax reform will close special-interest loopholes to help lower rates. We will ensure that low-income and middle-income Americans will pay no more taxes than they do under current law.

The second principle is to level the playing field for U.S. employers. The current U.S. corporate tax rate is the highest in the world. Yet in recent years, some of America's largest corporations have paid zero tax. The current system picks winners and losers and puts the U.S. companies at a disadvantage in the global economy, a situation that hurts job creation. Tax reform must make our companies more competitive in the global economy.

The third principle is parity for small businesses. As a Montanan and a Michigander, we know that small businesses are the heart of most communities and of the American economy. We will work to ensure that any tax reform plan does as much to help a small family business create jobs and compete as it does for a large company.

These are solid goals for reform, and ideally it would also raise more revenue to put the debt on a downward path as a percent of GDP. Other tax reform plans, such as those from the Fiscal Commission and the Domenici-Rivlin Task Force were able to broaden the tax base, lower marginal rates, and raise significant revenues as well. We know that our current trajectory of debt is unsustainable and it will be difficult to put debt on a downward path without a mix of both additional revenue and spending reductions. We commend Baucus and Camp on their effort and hope more members of Congress follow their lead to simplify the code, promote growth, and get our fiscal house in order.

The FY 2014 President's Budget will not be released until next Wednesday, April 10th, but already some details about what will be in the budget have been surfacing.

According to early reports, we can expect this budget to be a little different than the President's past budgets in that the FY2014 proposal will incorporate a many of the policies in the President's final offer to Speaker John Boehner during the fiscal cliff negotiations. Some of these provisions reported so far include:

• The chained CPI: Reports have indicated that the President's Budget will include a more accurate measure of inflation, the chained CPI, for indexing provisions in the tax code, Social Security, and other spending programs. CBO has estimated that this could save $390 billion over ten years (including interest), although savings would be less if protections for the most vulnerable were included, which seems to be the case in the budget.
• Universal Pre-K and other spending initiatives: The President is expected to propose new initiatives for early childhood education, as he previewed in his State of the Union remarks. The additional spending would be paid for by increasing in the cigarette tax, limiting individual retirement accounts (IRAs) to $3 million, and not allowing people to collect both unemployment insurance and disability insurance at the same time.
• Repeal of sequestration: Full repeal of the sequester is expected to cost over $1.2 trillion (including interest) over the next ten years.
• $600 billion in additional revenues from tax reform: Revenue would be raised by limiting the value or eliminating various tax expenditures, including a previously proposed 28 percent cap on deductions and exclusions. Other reports indicate that total new revenues, including reforms to the corporate tax code and other provisions, could be greater than $600 billion and possibly as high as $1 trillion.
• $200 billion in other mandatory savings: Mandatory savings will be achieved by reducing farm subsidies, enacting federal retirement reforms and postal reform, and other provisions.
• $200 billion in discretionary cuts (after the repeal of sequestration): These cuts will likely be split evenly between defense and non-defense.
• Roughly $400 billion in health care savings: Health savings are expected to include expanding Medicaid drug rebates to Medicare Part D, increasing means-testing of Medicare premiums, and reducing certain provider payments, among others.

Of course, we will have to wait until the actual budget is released for many of the final details. These early indications suggest the President's Budget will be a bit different than the budget resolutions produced by the House and Senate last month, in that it will contain much more specifics. We will follow up on the release next week with an in-depth analysis of many aspects of the President's budget. Hopefully, it will follow the trend of the FY 2014 budget proposals released so far and put debt on a downward path, but also avoid the use of budget gimmicks and demonstrate a willingness to compromise.

Click here to see what The Campaign to Fix the Debt hopes to see in the President's Budget.

Over the last week, we’ve highlighted two potential area of common ground on Medicare reform: cost-sharing reforms and raising the Medicare age with a buy-in. Even more momentum is building behind Medicare cost-sharing reforms. The Washington Post editorial board has endorsed the idea and called on President Obama to take the lead by including it in his budget proposal.

There are ways to generate meaningful savings that don’t involve either abolishing Medicare “as we know it” or perpetuating the status quo. Among the best ideas is to revise Medicare’s illogical, fragmented structure, so as to present beneficiaries with a streamlined, transparent program that both protects them better and saves medical resources.

…

No doubt there would be political opposition. But it’s a good sign that House Majority Leader Eric Cantor (R-Va.) has publicly embraced this kind of Medicare reorganization. So far, Mr. Obama has not — though he has offered other ideas, such as increasing premiums on upper-income beneficiaries, that could work in tandem with the combination of Parts A and B.

The White House view of entitlement reform in general, and Medicare reform specifically, is that it is to be traded for Republican agreement to higher taxes. No doubt the GOP has to move on that front as well. But it would be a badge of leadership for Mr. Obama to take the lead on this idea, rather than ceding it to Mr. Cantor — perhaps by including a version in his forthcoming budget plan. If Medicare reform is in the national interest, and it is, it’s up to the president to say so.

The Post's endorsement comes on the heels of reports that the Administration is planning on including some $400 billion in savings from health programs in the budget proposal, along the lines of his fiscal cliff and sequester offer.

It’s unclear whether cost-sharing reforms will be included in the President’s budget; however, a Wall Street Journal article suggests the President has been open to it in previous negotiations. The article also highlights some of the recent bipartisan support for cost-sharing reforms:

Senior House GOP aides said it was among the deficit-reduction options the White House and Republicans have discussed in the past. They also said President Barack Obama indicated he was open to the idea when he met recently with House Republicans on Capitol Hill.

Sens. Mark Warner (D., Va.) and Tom Coburn (R., Okla.) have pushed it among their colleagues, and a Democratic aide said many Senate Democrats are open to the idea. House Republican leader Eric Cantor of Virginia touted it in a high-profile speech earlier this year.

As we’ve said before, it’s going to take more than just one of these policies ideas to put federal health spending on a more sustainable path. But the growing consensus around these entitlement reform options is a promising step forward toward a broader bipartisan deficit reduction plan.

As reported in The Hill over the weekend, a proposed change to the United States’ yearly budgetary process is gaining steam in the Senate. An amendment to the Senate-passed budget, which passed by a bipartisan 68-31 vote, would create a deficit-neutral reserve fund for changing the federal budget process to a biennial budget system. Biennial budgeting means that instead of having to propose a new budget and pass appropriations bills every year, the Congress would only have to do so every other year, with intervening years used to improve budgetary oversight. CRFB has been supportive of the idea of before (Senator Johnny Isakson (R-GA) has proposed such legislation each year since 2005), but the idea is worth revisiting given the new momentum it has gained recently.

The purpose of the legislation is essentially to afford some respite from the nitty-gritty of the budget battles that occur each fall -- or sometimes throughout the year -- and instead provide legislators with enough time on the off-years to take a deeper dive look into how the budget actually functions. This could have a number of benefits, enabling better oversight, planning, and reform. Furthermore, with a longer view of the budget, lawmakers may also look at longer-term budget targets that will be necessary to get our debt on a sustainable path.

A 2009 staff working paper from the Peterson-Pew Commission (PPC) discusses a few other pros and cons of the process. One pro of the budget process is that having a two-year cycle allows budgetary decisions to be made in off-election years, potentially reducing partisanship in the process. In terms of oversight, an "off" year would allow legislators the time to perform the vital process of combing through spending programs (and tax provisions as well) to better determine which policies are working properly, which ones are not, which ones need improvement, and which ones should be expanded.

When putting biennial budgeting into practice, however, we should use caution. As noted by the Center on Budget and Policy Priorities, it is possible that changing circumstances would lead agencies to need to submit frequent revisions and requests for supplemental appropriations. In fact, if department heads chose to ignore the biennial budgetary process, they could simply continue submitting revisions each year; this could actually lead the budget process to be more piecemeal than before, making matters worse instead of better. This could be addressed, however, by implementing special rules on when supplemental appropriations are suitable, and what constitutes an "emergency" for emergency budget revisions. Another drawback that the PPC paper brings up is that it could make discretionary spending on somewhat of an autopilot like mandatory programs are if lawmakers do not take advantage of the time to conduct oversight.

While there may be both benefits and issues with budgeting biennially, one thing is clear: the current budget process is broken. Reforms to the budget process that give our government better insight into how our budget functions and how to effectively implement strategy and achieve policy changes should be explored. Biennial budgeting is one such reform that offers some promise.

It’s Back – The long wait finally ended on Sunday as the HBO hit series "Game of Thrones" debuted its third season, gratifying those who have longed for the intrigue, action and, ahem, certain other pleasures of the show. Congress returns next week, with plenty of intrigue, but lacking the other stuff. Immigration and gun control will be high on the agenda, but the federal budget and national debt will also continue to occupy center stage with the release of the President’s budget and more outreach to Congress to work towards a debt deal. In the show's season premiere, Sansa Stark offered some insight that may explain why the issue has been difficult to address, “the truth is always either terrible or boring.” It can sure seem that way with the debt. There is no easy solution and the details can get quite tedious, but it won’t go away on its own. Hopefully, it won’t take White Walkers to spur action.

Budget Is Coming – The White House confirmed that it will release its Fiscal Year 2014 budget request on April 10, more than two months after it was due by law. The White House says the fiscal cliff drama at the end of last year delayed the process. That evening the President will also sit down for dinner with Republican senators as part of his congressional outreach to get a bipartisan "grand bargain."

Pieces to a Deal Emerge – Getting a debt deal has appeared to be harder than reuniting the Seven Kingdoms of Westeros, but all is not lost; encouraging signs remain. Reports are that President Obama will offer some entitlement reforms in his budget that can acheive bipartisan support, possibly a fix to how inflation is measured known as the chained CPI. This comes as some Republicans like Sen. John McCain (R-AZ) have expressed a willingness to accept some increased revenue from closing tax loopholes known as tax expenditures in exchange for savings from entitlements. Read more about switching to Chained CPI here and some tax expenditure reform ideas here and here.

Tax Reform Marches On – Like Robb Stark's army, tax reform continues to move forward. Senate Finance Committee chair Max Baucus (D-MT) remains committed to fundamental reform and is convinced he can get a bipartisan deal that lowers tax rates and the deficit. Meanwhile, the RATE Coalition sent a letter to Baucus and other tax-writing committee leaders calling for corporate tax reform that makes the U.S. more internationally competitive. Yet, some businesses are wary of reform that will get rid of tax breaks they enjoy. You can create your own corporate tax reform plan using our tool.

Deese Tapped as Hand to the OMB – President Obama recently announced that he will nominate White House economic adviser Brian Deese to be deputy director of the Office of Management and Budget (OMB), which is responsible for preparing the federal budget.

Key Upcoming Dates (all times are ET)

April 5

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.

April 10 

• The White House is expected to release its FY 2014 budget request.

April 15

• Congress must pass a concurrent budget resolution as specified in the Congressional Budget Act.
• Tax Day! Federal tax returns due by this date.

April 16

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.

April 26

• Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.

May 3

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 employment data.

May 16

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.

May 19

• The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.

May 30

• Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.

In a surprising move yesterday, the Centers for Medicare and Medicaid Services (CMS) announced a reversal in their previous plans to cut payments to Medicare Advantage (MA) plans by 2.2 percent in 2014. Instead, CMS announced MA plans will now receive a 3.3 percent increase in payments next year. So, what changed their position so dramatically?

The answer boils down to a technical interpretation of whether or not MA payments should be based on current law or current policy. Read: whether or not they expect Congress will enact another doc fix at year's end. The surprise is not that the Sustainable Growth Rate (SGR) formula is presenting yet another headache for policymakers, but rather that this is the first time CMS has changed its position of basing payments on current law to now incorporate the assumption that Congress will override the 25 percent provider cut the SGR calls for. This action results in an interesting discussion on the budgetary impact and the need to reform the SGR.

For background, payments to MA plans,which cover nearly one in four Medicare beneficiaries, are based on a comparison of each health plan's bid (or projected cost of covering Medicare services) and the local benchmark which represents the maximum amount CMS will pay plans in that service area. If they are below the benchmark, plans get paid their bid amount plus a share of the difference, but if they’re higher than the benchmark then they have to charge the excess to their beneficiaries. Most recently, the ACA changed the way benchmarks are calculated by making benchmarks lower in higher Medicare spending areas and higher in lower Medicare spending areas and adjusting them based on quality. In calculating these benchmarks, CMS must assume spending levels which would greatly change if the 25 percent physician fee cut from the SGR went into effect on January 1, 2014 as it is scheduled to under current law.

That brings us to yesterday’s announcement. The Secretary has until April 1 to review and set these MA rates for the following year. In the past, CMS based their formula on current law, assuming cuts from the SGR, and made modifications once Congress enacted a doc fix. This time, CMS was pressured by insurers and lawmakers from both parties to take into account a doc fix when calculating the benchmark for MA payments. Even the Medicare Payment Advisory Commission (MedPAC) weighed in, citing uncertainty and confusion to beneficiaries and providers.

Just last week, the Congressional Research Service (CRS) released a legal memo that said the Secretary could have the authority to base benchmarks on current policy instead of current law, and could change her past position on a "reasonable basis" considering the SGR’s 11-year history of being overridden by Congress.

Here's the tricky part. If for whatever reason Congress doesn’t pass a doc fix, then it may become a bigger legal and budgetary issue.  According to the CRS memo:

The Antideficiency Act, prohibits federal payments from being made in excess of available appropriations. The Act may be implicated if funds are expended for unauthorized purposes, which would arguably be the case if the Secretary’s assumption concerning future legislation ended up being incorrect. On the other hand, if the Secretary’s interpretation that she has the authority to incorporate assumptions concerning future congressional actions were found by the courts to be reasonable, and not arbitrary or capricious, or contrary to the statute, then the Antideficiency Act may not be implicated.

Many argue the Secretary would probably have a strong case considering Congress’s track record. Prior to changing their position, CMS also sought public comment about the challenges of using current law. Additionally, CMS accounts for the possibility of a doc fix in their actuarial assumptions when determining Medicare Part B premiums and advising MA plans on bid submissions.

Overall, we won’t really know what impact CMS’s decision will have until Congress considers legislation for a doc fix. More importantly, this reminds us of the real world impact of the broken SGR formula and the dire need to reform it. We've discussed the need for reform many times before, and included a list of potential reforms in our Health Care and Revenue Savings Options report. As MedPAC said in their letter to CMS:

The effect on [MA] may be an unintended consequence of the timing of Congressional action and CMS administrative actions, but it is another very real effect of the delay in action to repeal the SGR and replace it with a more rational system.

Today, the RATE Coalition sent a letter to the chairs and ranking members of the House Ways and Means and Senate Finance Committees, urging them to take up corporate tax reform which lowers rates in order to make the tax code more competitive. As they write:

Twenty five years ago, the U.S. had one of the lowest corporate tax rates among members of the Organization for Economic Cooperation and Development (OECD). Today, at 35 percent, the top federal statutory corporate tax rate is 10 percentage points above the OECD average and nearly 15 points higher when state and local taxes are included. The costs to our economy are significant and already being realized. According to a new Ernst & Young study, GDP in 2013 is expected to be between 1.2 and 2.0 percent lower as a result of our OECD-leading corporate tax rate. Simply put, the U.S. can no longer afford to stand still.

We are big believers in corporate tax reform, but much or perhaps all of the economic benefit of lower corporate rates would be lost if we financed them by increase deficits and debt. To this end, we've argued that any corporate tax rate reduction should be fiscally responsible, paid for with a broader corproate tax base. Last year, we wrote a detailed report on this very topic.

So how would one pay for a reduction in the corporate tax rate? To answer this question we created a tax reform calculator that allows users to design their own plan. Users can set a revenue target, pick a number of options for base-broadening or, in a few cases, deficit-increasing provisions, and see what corporate rate allows them to satisfy both parameters. The base-broadening options include a number of tax expenditures and a few non-tax expenditure deductions that could also be changed. 

Reforming the corporate tax system is one way policymakers can "Go Smart" in a the context of a broad deficit reduction plan. As the RATE Coalition argues, there is a real opportunity to pursue this reform:

It has been more than a quarter century since comprehensive tax reform was last enacted and, like in 1986, we face a divided government with many doubting our chances of success. However, we are confident that bipartisan reform – reinforced by your leadership – will put us on a path that leads to broad economic growth and job creation. President Reagan and Speaker of the House Tip O’Neill achieved meaningful reform and we believe that it is possible again today.

Click here to use the corporate tax reform calculator and click here to see our report on reform.

The New York Times has an editorial criticizing switching to the chained CPI for Social Security cost-of-living adjustments (COLAs). Recall that the chained CPI is widely regarded as a more accurate measure of inflation because it better accounts for consumer substitution between different categories of related goods as relative prices rise or fall. As a technical matter, the chained CPI is the best available price index for accomplishing the goal in many spending programs and in the tax code of accurately accounting for inflation in determining various benefits.

The NYT's arguments are flawed for a number of reasons. Their main arguments against the chained CPI are:

• Deficit reduction should be held off until the economy has fully recovered.
• Social Security is not driving the deficit. It will not be able to pay full benefits in 20 years, but that is a separate issue which should not be dealt with in the context of deficit reduction.
• The chained CPI may be a more accurate measure of inflation for the working age population but it is not for the elderly population. Instead, the Bureau of Labor Statistics should develop a retiree-specific price index.

On the first point, the issue of when deficit reduction occurs is actually a strong point for the chained CPI. Because the savings compound over time, the deficit reduction associated with the chained CPI starts off small and is very backloaded. Of the $390 billion in total savings over the next decade from switching to chained CPI, only a miniscule $12 billion would arise in the first two years. Based on CBO's report on the macroeconomic effects of deficit reduction, that means an economic effect of 0.03 percent of GDP in 2015, essentially a rounding error.

^{Source: CBO}

On the second point, we have said before that whether one views Social Security as a stand-alone program or part of the federal budget, it leads to the conclusion that changes should be enacted sooner rather than later. The editorial appears to take the off-budget view of Social Security, but that view shows that small gradual changes made now can avoid abrupt and harmful changes later. Switching to the chained CPI would close about one-fifth of Social Security's 75-year funding gap. By the unified-budget approach, Social Security is the single largest government program currently. Although it isn't expected to grow as fast as Medicare and Medicaid, it is growing faster than eveything else, certainly much faster than the areas of the budget we have addressed in the spirit of deficit reduction so far.

^{Note: Numbers in the chart are out of date and should not be cited. This chart is being used as an example of the two views.}

On the third issue, the Times to their credit does call for a "statistically rigorous" index for elderly-specific inflation, rather than calling for using the Experimental Consumer Price Index for the Elderly (CPI-E). The CPI-E is not a fully developed price index (hence, the "experimental") and suffers from a number of methodological flaws, including its small sample size, its failure to account for senior discounts and other purchasing habits, and the question of whether the CPI actually measures health care inflation correctly. Still, even a robust version of the CPI-E would represent a policy change rather than a technical correction, since the current COLA, as with most other government programs and provisions, is based on overall inflation. If policymakers were to use a retiree-specific price index for Social Security, this would represent a benefit expansion that should only be done in the context of a plan to make the program solvent. And to be technically accurate, that retiree-specific price index would still need to be "chained."

Finally, it is worth pointing out that while The New York Times editorial is only about Social Security, switching to the chained CPI would actually result in savings throughout government. Indeed, while it would generate savings on the entitlement side it (as Republicans have called for), it would also generate new revenue (as Democrats have called for).

In total, Social Security only accounts for about one-third ($127 billion) of the ten-year deficit reduction ($390 billion), with revenue counting for another one-third and the rest from other spending programs and interest. Indeed, if accompanied with protections for the poor and very old as most chained CPI proposals would, an even smaller portion of the net package would come from Social Security. Maintaining overly generous COLAs for everyone makes little sense when protections can be targeted to the specific vulnerable populations.

Experts from across the spectrum agree that the chained CPI is the best available measure for overall changes in the cost of living. Improved accuracy of inflation measurement should be a goal even absent budgetary impact, but especially given the many tough tax and entitlement choices policymakers will be facing to put the debt on a clear downward path. That is why every serious bipartisan budget plan -- from Simpson-Bowles, to Domenici-Rivlin, to the forming Obama-Boehner plans -- has recommended it. We hope the President's budget follows suit.

Click here to read our full analysis of the chained CPI, "Measuring Up: The Case for the Chained CPI."