The Bottom Line

August 12, 2014

Both the Government Accountability Office (GAO) and Senator Tom Coburn's (R-OK) office have released new reports on a tax credit that rewards banks for investing in low-income communities. Both reports raise questions about whether the money is being used as effectively as it could be. The GAO report raises some concern with the credit's complexity and effectiveness, finding certain cases where investors are receiving many sources of federal money for the same project. Senator Coburn's report goes farther, identifying several places where the credit has been used for questionable purposes and calling for the credit's elimination. As his report explains:

The federal New Markets Tax Credit program was created to steer taxpayers dollars into banks that would in turn funnel financial assistance to businesses and developers in low-income communities to help create jobs. Yet, virtually every neighborhood, from Beverly Hills to the Hamptons, could qualify for the program. The New Markets Tax Credit (NMTC) has subsidized wealthy investors in nearly 4,000 projects, including car washes, bowling [alleys], parking lots and breweries. Many of these are wasteful and not a federal priority – such as an ice skating rink and a car museum - while others are corporations in little need of taxpayers’ handouts – such as chain restaurants like Subway and IHOP.

Since 2000, the New Markets Tax Credit (NMTC) has given investors, mostly large banks and financial institutions, a 39 percent credit for loaning money to businesses in low-income communities. Investors claim the credit over seven years.

GAO notes the financial arrangements used to claim the credit have become much more complex.

August 12, 2014
We've got to fix Social Security

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote an op-ed distributed via McCatchy wire service that appeared in several papers around the county, including today's Providence Journal. It is reposted here.

August 11, 2014

The Social Security Trustees recently showed what it would take to make Social Security solvent over 75 years: immediately raise everyone’s taxes by over 2.8 percentage points, immediately cut everyone’s benefits by 17 percent, or cut benefits for new beneficiaries immediately by 21 percent. They also warn that those costs will go up substantially if our leaders in Washington procrastinate. Indeed, waiting until 2033 will increase the needed adjustments by 50 percent. As they explain:

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033.

The Trustees make clear that there are two costs to waiting.

August 11, 2014

CBO's July Monthly Budget Review brings us ten months into the fiscal year, and it's time to update our tracking of the slow growth of Medicare so far in 2014. Through June, Medicare growth totaled 1.2 percent over the first nine months of FY 2014, or 3.6 percent when removing the effect of a number of temporary* or phased-in policies, mostly from the Affordable Care Act (what we refer to as the "underlying" growth rate).

August 11, 2014

Before leaving town for August recess, Congress passed additional VA funding and a short-term patch to the Highway Trust Fund. However, more deadlines are approaching quickly, and Congress will have many "fiscal speed bumps" next year – all of which present firm deadlines for action.

The end of the fiscal year is September 30. At that point, Congress needs to have passed appropriations bills or a continuing resolution for next year to fund the government. Since Congress has not yet passed any of the 12 appropriations bills and are only in session a little over two weeks in September, it seems likely that a continuing resolution will be needed to avert a government shutdown. (See Appropriations 101 for an explanation of the process).

Beyond that, there will be pressure to revive tax extenders, a package of over 50 tax breaks. Although they expired at the end of 2013, they can be reinstated retroactively without much difficulty if done this year. The House and Senate have taken different approaches to the extenders (though both would add to the deficit), but they would need to come to agreement before the end of the year.

Next spring, several of this year's extensions will expire: The debt ceiling will need to be raised when it goes back into effect on March 16, and Medicare provider payments will be cut by 24 percent unless a "doc fix" is enacted by March 31. By the end of May, Congress will need to shore up the Highway Trust Fund and re-authorize the fund's spending. As part of a long-term highway fix, Congress will either need to raise highway revenues or cut spending as we explained in our paper, Trust or Bust: Fixing the Highway Trust Fund.

August 8, 2014

In the recent Social Security Trustees report, the issue of same sex marriage made a surprising appearance. Without calling much attention to it, the Trustees assume that all states will eventually legalize same-sex marriage. And while this would increase spending somewhat, they estimate the financial impact would be minimal.

August 7, 2014
Seven Highlights in JCT's New Tax Expenditure Estimates

As lawmakers fight over whether to extend and expand expired tax breaks or create new ones, the Joint Committee on Taxation (JCT) this week updated its estimate of the already existing tax breaks for 2014-2018. Adding up the individual costs of tax expenditures shows a total of $1.2 trillion for 2014, more than two-thirds of total projected income tax revenue this year. These totals do not include the effect of tax extenders that expired at the end of the last year, so that total could grow depending on the actions of lawmakers (although those costs would likely be recorded in 2015 and beyond). JCT's total is slightly less than the $1.3 trillion that the Office of Management and Budget (OMB) estimates.

To some extent, changes in JCT's estimates of each tax expenditure over time can help point out broader economic trends. Here's some of the highlights of the changes between JCT's estimates last year and this year.

August 6, 2014

Rep. John Larson (D-CT) earlier in the summer unveiled his plan to reform Social Security, a plan that has now been evaluated by the Social Security Administration's Office of the Chief Actuary (OACT). The reform would fully close Social Security's 75-year shortfall and about three-quarters of the 75th year deficit, meaning that it would ensure 75-year solvency but not sustainable solvency.

First, thank you. It is tremendous to see a Member of Congress addressing Social Security’s challenges with real fixes. As we have pointed out, the longer we delay, the harder those fixes will be.

The plan is certainly a useful contribution to the debate, recognizing not only the magnitude of the changes that will have to be made to close Social Security’s gap, but also that increasing scheduled benefits, as the plan does, will require significant revenue increases that go beyond just higher taxes on the wealthy.

The plan has a number of parts. It would:
  • Raise the payroll tax rate by 2 percentage points to 14.4 percent, phased in over 20 years
  • Apply the payroll tax to income above $400,000 unindexed (the current taxable maximum would catch up around the mid-2040s due to indexation) and credit benefits for that income through a special lower "AIME+" benefit factor
  • Increase the income threshold for the taxation of Social Security benefits to $50,000/$100,000
  • Increase the lowest PIA factor in the benefit formula from 90 to 93 percent
  • Use the faster-growing CPI-E for cost-of-living adjustments (COLAs)
  • Create minimum benefit of 125 percent of the poverty line for people who have worked 30 years or more
  • Invest one-quarter of the trust fund in equities
  • Re-allocate revenue to the DI trust fund to keep it solvent 
August 5, 2014

In a letter to the editor submitted to The New York Times, CRFB president Maya MacGuineas rebutted NYT columnist Paul Krugman on his criticism of Sen. Rob Portman's (R-OH) op-ed in The Wall Street Journal on CBO's long-term budget outlook. MacGuineas pointed out numerous factual errors in Krugman's post and noted the dangerous implications of the debt in CBO's projections, which Krugman seems to dismiss. The letter is posted below in its entirety.

August 5, 2014

As we have discussed numerous times, the Social Security program is on an unsustainable path, and its combined trust fund will be depleted within the next 20 years. If Congress does not act to reform the system, all beneficiaries will see a 23 percent benefit cut upon the exhaustion of the funds. The Disability Insurance portion of the fund is in more immediate danger: it is expected to be insolvent by 2016, triggering an immediate 19 percent cut in disability benefits.

On Tuesday, Ben Ritz of the Concord Coalition published an article entitled "Impending Crisis Should Force Action on Social Security in the Next Congress." He warns of the looming insolvency and details a commonly offered but insufficient solution to the issue:

August 5, 2014

The release of the Social Security Trustees Report just two weeks after CBO released its long-term outlook gives us a good opportunity to compare how the two reports differ in their projections. Overall, CBO anticipates Social Security will be in greater financial trouble than the Trustees do, forecasting an exhaustion date for the combined trust fund three years earlier in 2030 and a 75-year actuarial shortfall that is more than one-third higher. But there is more going on here than meets the eye.

Specifically, CBO projects a 75-year actuarial shortfall of 4 percent of taxable payroll compared to the Trustees' figure of 2.9 percent; as a percent of GDP, these figures are 1.4 and 1 percent, respectively.

August 4, 2014

In his blog this weekend, Paul Krugman suggested the cost of waiting to address our mounting national debt is relatively minor. He asks “why, exactly, is [cutting future entitlement costs] something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.”

August 1, 2014

The Social Security Trustees Report showed a largely similar outlook compared to the report last year, though it was slightly worse. Trust fund exhaustion dates were similar other than the date for the separate Old-Age and Survivors' Insurance (OASI) fund, which was brought forward one year to 2034. In addition, the 75-year actuarial shortfall increased slightly from 2.72 percent of taxable payroll to 2.88 percent, largely the result of changes in economic assumptions and shifting the 75-year period over one year.

As a percent of payroll, the change is entirely concentrated on the spending side, but this appears to be more a factor of payroll shrinking than nominal dollar spending increasing. Social Security revenue is the same at 13.9 percent of payroll over the 75-year period, while spending is 0.2 percentage points higher than last year at 16.8 percent.

Looking back further, as we noted in our analysis of the report, the outlook for the program has deteriorated in each of the last four reports. Below, we show the assets in the trust fund over time as projected in the 2010, 2012, and 2014 Trustees reports.

While the change in Social Security projections this year is relatively small, there are some interesting sources for those changes, some of which may have implications for future changes in Trustees forecasts.

Same-Sex Marriage

July 31, 2014

The recent CBO Long-Term Budget Outlook confirmed that our long-term debt problems remain far from solved, with debt projected to exceed the size of the economy within 25 years. Federal spending, especially the mandatory portion of the budget, will continue to outpace revenue collected, running up debt and interest payments on that debt. Spending on Social Security and health care programs will grow by almost half from 9.8 percent of GDP today to 14.3 percent of GDP by 2039. Two factors are reponsible for major portions of the increase in mandatory spending: an aging population and "excess cost growth," when health care costs are growing faster than the rest of the economy.

July 31, 2014

On Tuesday, the Committee for a Responsible Federal Budget hosted an event titled "Decoding the Social Security Trustees Report" to discuss the Trustees' latest update on Social Security's finances and policy options to reform the program. The event featured Social Security Chief Actuary Stephen Goss, Reps. Tom Cole (R-OK) and John Delaney (D-MD), and a panel discussion moderated by Damian Paletta of The Wall Street Journal.

July 31, 2014
CRFB President Signs Letter in Support

In late May, Representatives Tom Cole (R-OK) and John Delaney (D-MD) introduced the Social Security Commission Act of 2014, reflecting a bipartisan effort to extend the solvency of the Social Security program and make it more sustainable over the long term. On Monday, July 28, Committee for a Responsible Federal Budget President Maya MacGuineas joined Jim Kessler of Third Way, Andrew Biggs of the American Enterprise Institute, and Robert D. Atkinson of the Information Technology and Innovation Foundation in signing a letter in support of the bill.

According to the recent Social Security Trustees Report, the growing gap between spending and revenue will lead to trust fund exhaustion in the next 20 years. At that point, all beneficiaries will see a 23 percent cut in benefits if Congress does not act. The letter touched on this looming insolvency:

There is widespread recognition across the political spectrum that Social Security, on its current path, will be unable to pay full benefits to disabled beneficiaries in 2016 and to retired and survivors of American workers in 2034 (2033 under a combined Trust Funds scenario). For many American families, these would be catastrophic events.

July 30, 2014

Note: CBO has issued a more detailed score of the bill. The table has been updated to reflect these numbers.

July 30, 2014

Last night, the Senate passed legislation extending highway funding through December and offsetting the cost with a number of deficit reduction measures. The Senate approach, which is based on an amendment from Senators Tom Carper (D-DE), Bob Corker (R-TN), and Barbara Boxer (D-CA), is far more responsible than the House bill, which relies in large part on a gimmick called pension smoothing. As CRFB President Maya MacGuineas explained in a press release:

What we really need is a long-term highway funding solution, but in the meantime, the least we can do is responsibly pay for temporary bailouts of the Highway Trust Fund. There is no question that the Senate bill is the more responsible of the two highway bills.

Unfortunately, it turns out that the Senate bill's savings fall $2.4 billion short of the general revenue transfer, according to a new CBO score. This deficit is mostly the result of a drafting error which causes its customs fees to raise $2 billion less than intended. The House has rightly objected to this shortfall and also expressed concern with some of the revenue-related provisions in the Senate legislation. Fortunately, the House has the power to correct this error, modify this bill, and work with the Senate to pass a responsible highway funding bill.

Score of Senate-Passed Highway Bill
Policy Ten-Year Savings/Costs (-)
Extension of customs fees $1 billion*
Increased mortgage reporting requirements $2.1 billion
Clarification of 6-year statute of limitations for overstatement of basis $1.3 billion
100% levy on payments to Medicare providers with delinquent tax payments $0.8 billion
Other provisions -$0.5 billion
Transfer from LUST trust fund $1 billion
Total Offsets $5.7 billion
Total Transfer $8.1 billion
July 30, 2014

We have already released our analysis of the 2014 Social Security Trustees' report, which showed that the program's long-term finances are largely similar but slightly worse than projected last year. Now it's time to turn to the Medicare report, which showed some improvement in the finances of the Hospital Insurance (HI) trust fund for Part A (which covers inpatient hospital and post-acute care) and lower Medicare spending on an apples-to-apples basis. However, the improvement in the Medicare outlook does not mean that the program is out of the woods. Even with assumptions that the Trustees question as too optimistic, the report forecasts a significant rise in Medicare spending, and the HI trust fund is projected to be insolvent in 16 years.

Hospital Insurance Trust Fund Solvency

The Trustees now foresee the HI trust fund being exhausted in 2030, four years later than they predicted last year, at which point payments from the trust fund would be cut by about 15 percent. The 75-year actuarial shortfall narrowed by one-quarter of a percentage point, from 1.11 percent of taxable payroll to 0.87 percent. These revisions are similar to those of Congressional Budget Office (CBO) earlier this month.

As a percent of GDP, Part A spending will rise from 1.5 percent this year to 2.1 percent by 2035 and 2.4 percent by 2070. Meanwhile, revenue will rise more slowly from 1.45 percent this year to 1.7 percent by 2035 and 1.8 percent by 2070. The HI fund is projected to run surpluses from 2015-2020, which would be the first time since 2004. However, deficits will quickly return and rise to 0.5 percent of GDP by the late 2030s, stabilizing at that level after.

July 29, 2014

Eugene Steuerle is the cofounder of the Tax Policy Center, a senior fellow at The Urban Institute, a columnist for Tax Notes Magazine, and a CRFB Board member. This morning, he testified before the House Ways and Means subcommittee on Social Security. Below is a transcript of his spoken remarks, as posted on his blog.

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