The Bottom Line

December 10, 2015
Senators Baldwin, King, Whitehouse, Reed, and Warren Sent Letter to Finance Committee

Last week Senators Tammy Baldwin (D-WI), Sheldon Whitehouse (D-RI), Jack Reed (D-RI), Angus King (I-ME), and Elizabeth Warren (D-MA), sent a letter to Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) making the argument that tax extenders legislation should be paid for by closing tax loopholes.

This excerpt captures the argument of the letter spearheaded by Sen. Baldwin (full letter here):

Last month, Republicans and Democrats were able to come together in a bipartisan manner to pass legislation preventing harmful cuts to federal programs for two years. However, that legislation also included a variety of spending cuts and revenue increases to ensure that the federal spending would not add to the deficit. Therefore, extending expired tax breaks, or making them permanent, without offsetting the cost is a troubling double standard whereby tax cuts and credits don’t need to be paid for but investments in education, job training, infrastructure, research and innovation must be paid for. Not requiring the same standard for these mostly business tax cuts is not only unfair, it would also add to the deficit and increase pressure to make additional cuts to domestic programs.

Instead of passing tax cuts and credits that increase the deficit, we urge you to offset the cost of extenders by closing loopholes in the tax code.

December 10, 2015
Tax Extenders Deal Could Undermine the ACA

Loren Adler, Research Director for the Committee for a Responsible Federal Budget, wrote a guest post that appeared on the RealClearPolicy blog. It is reposted here.

It's sadly no surprise that lawmakers are working on an irresponsible package of tax cuts without any pretense of caring about the massive $700 billion cost, but hidden in that negotiation is an attempt to undermine the Affordable Care Act's cost-control efforts and deal a huge blow to workers' pocketbooks.

The deal reportedly includes a two-year delay of the excise tax on high-cost, employer-provided insurance plans — commonly referred to as the "Cadillac tax" — along with a similar delay of the medical-device tax, in exchange for fully funding the ACA's "risk corridor" program (which limits insurers' losses if their costs to cover enrollees end up significantly exceeding the premiums charged, and vice versa). On top of that, last week, the Senate voted 90-10 to fully repeal the Cadillac tax.

Ironically, this news comes not long after the Congressional Budget Office detailed just how costly ACA repeal would be, adding $5 trillion to the debt over the next 20 years, and amid growing evidence that the ACA is playing a role in the current health-care spending slowdown. Controlling health-care costs, as the ACA sought to achieve, will prove critical to our ability to afford other priorities like a strong social safety net and important investments.

December 9, 2015

As we face an end-of-the-year legislative crunch that promises to be fiscally irresponsible, former Research Director of the Committee for a Responsible Federal Budget Jason Peuquet advises us not to lose sight of the importance of the federal budget process. The budget debates are an annual opportunity to evaluate spending priorities across the full spectrum of federal programs.  Discretionary spending programs are the primary focus of the federal budget, and reconciliation measures provide a chance to debate most entitlement spending programs (except for Social Security). 

With discretionary spending declining and entitlement spending on the rise, Peuquet also discusses the need to invite stakeholders for all federal spending programs to offer their positions in order to ensure a robust and complete debate on spending priorities. 

December 9, 2015

As Congress appears to be closing in on a fiscally irresponsible tax extenders deal that's expected to cost $700 billion in the next decade and as much as $2.3 trillion over 20 years, we have released a new infographic showing other ways to spend $700 billion. For their priorities, conservatives could use this money to repeal the Affordable Care Act's employer health insurance mandate, remove the remaining defense sequester, and double border security funding. And liberals may be excited to know that they could double National Institutes of Health (NIH) research spending, provide debt free college, and increase highway spending for the same cost as well. More important than spending $700 billion on any of these would be to responsibly offset the cost of any year-end tax extenders deal.

 

December 9, 2015
Congress Should Pay for Any Extension of Tax Breaks

Kent Conrad, former Chairman of the Senate Budget Committee, wrote a commentary in The Hill. It is reposted here.

Just under three years ago – in my waning days serving this country in the Senate – Congress and the president enacted an important down payment to fixing our debt by asking the top 1 percent of earners to contribute an additional $600 billion to deficit reduction over a decade. Just three years later, Washington is working toward a bipartisan agreement to give all that revenue away and accelerate the explosion of our national debt.

According to press reports, lawmakers are currently negotiating a package to restore many of the so-called tax extenders which expired last year. Extending these 50-some tax breaks for businesses and individuals for just two years would cost nearly $100 billion – but negotiators want to go way further than that; they are eying a $700 billion package.

Many Republicans want to make permanent and even expand many of these tax breaks, particularly those for businesses. Democrats, meanwhile, want to extend and possibly expand several financial crisis-era low-income tax breaks scheduled to expire in 2017. The compromise, sadly, is to do both – and add the entire cost to the nation’s debt.

With interest, the emerging tax deal could add nearly $850 billion to the debt this decade and $2.3 trillion by 2035. That’s well on the way to giving away all the revenue we’ll raise over the next ten years from the higher taxes on upper-income earners that we passed just three years ago, or most of what we are supposed to save from the so-called sequester.

December 9, 2015

The Conservative Reform Network and Americans for Tax Reform recently hosted a forum where representatives from the Republican presidential campaigns of Gov. Jeb Bush, Sen. Ted Cruz, Gov. John Kasich, Sen. Rand Paul, and Sen. Marco Rubio discussed their candidates’ tax reform proposals. You can read our brief summaries of the candidates' tax plans here.

Cruz and Paul both advocate for flat tax proposals combined with what is essentially a value-added tax, while Bush, Kasich, and Rubio propose reforms to lower corporate and individual rates while broadening the tax base. Bush’s primary goals for tax reform are growth and increasing workforce participation. Cruz wants to fix the broken system with a simplified tax regime. Kasich proposes a three-part test for tax reform: it should increase jobs, growth and freedom; it should be able to pass Congress; and it should unite the Republican Party. Paul argues for eliminating the payroll tax for workers, taxing business on what they produce, and taxing imports while exempting domestic production. Rubio promotes a pro-family policy that also establishes parity among all corporate and non-corporate businesses.

December 8, 2015

The Brookings Institution’s Center on Children and Families recently held an event to discuss issues for the 2016 presidential candidates to emphasize during their campaigns.  Eight papers were presented on topics that will be of significance during this coming election cycle, including one on the federal debt by CRFB president Maya MacGuineas and Concord Coalition executive director Bob Bixby.

Alice Rivlin and Robert Reischauer, board members for the Committee for a Responsible Federal Budget, also wrote about important health care topics in their piece Health Policy Issues and the 2016 Presidential Election, which offers three recommendations for candidates during the campaign season. The paper advises candidates to put forward specific ideas to address the impending insolvency of the Medicare Trust Fund, address healthcare costs that are projected to accelerate in the coming years, and offer firm, cost-effective proposals to improve or replace (depending on the party) the Affordable Care Act.

December 8, 2015
To Keep Expiring Tax Cuts, Congress Considers Another Borrowing Bonanza

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

Congress is contemplating massive borrowing for a year-end bonanza that would make permanent a number of expiring tax cuts. The price tag? $700 billion over the next decade. And this is on top of a year in which Congress already added $245 billion to the debt.

December 8, 2015

Here we go again, again. With government funding set to expire at the end of the week and no deal on the table, it is possible that the government will shut down for the second time in three years or at least require another Continuing Resolution. While the Bipartisan Budget Act of 2015 set topline spending levels above the previous sequester caps, there is no set agreement on exactly how that money should be spent and which policies ought to accompany it in an omnibus appropriations bill. To help prepare for a possible shutdown, CRFB has released an updated primer on what happens in and the the consequences of a government shutdown.

The primer, Q&A: Everything You Should Know About Government Shutdowns, goes through the funding process and the budgetary, economic, and administrative consequences of a shutdown.

December 7, 2015

There were many legislative developments in the past week, including the passage of a five-year highway bill and continued negotiations on a tax deal, and among them was the Senate's narrow passage of a reconciliation bill to repeal many key provisions of the Affordable Care Act. There were several amendments considered, but one of the more discouraging adopted amendments was a 90-10 vote to repeal the Cadillac tax (the original legislation instead delayed its start date to 2025). Over the weekend, the Washington Post editorial board rightly criticized the vote as a backwards step for health care policy.

The editorial gives a good summary of some reasons to claw back the tax preference for employment-based health insurance, as the Cadillac tax would do.

Current law provides a tax exclusion for employer-paid insurance. This is how nearly half the public gets insurance, but the exclusion subsidizes overutilization of health care, causes “job lock” by linking work and insurance, and redistributes income upward because tax breaks increase in value for higher income brackets. According to the Congressional Budget Office, 34 percent of the benefits go to the top 20 percent of income earners.

Repealing the exclusion would have been a progressive way to curb health-care costs and raise revenue for coverage expansion. Taxing high-value plans was a second-best solution that would claw back $87 billion in revenue between 2018 and 2025, according to the CBO.

December 7, 2015

The Centers for Medicare and Medicaid Services (CMS) released its National Health Expenditure (NHE) numbers for 2014 today, showing an expected pickup in overall spending growth from 2.9 percent in 2013 to 5.3 percent in 2014. This growth rate comes after annual health care spending growth remained in the 3 to 4 percent range since 2009, an unusually low level of spending growth. The growth acceleration in 2014 (as they reported this summer) was fueled by the coverage expansions in the Affordable Care Act, which had been predicted since the legislation passed, along with a large jump in prescription drug spending buoyed by new expensive Hepatits C drugs coming to market.

The 5.3 percent 2014 growth represents the first time health care spending has grown noticeably faster than Gross Domestic Product (GDP) growth since 2009 (GDP grew at 4.1 percent in 2014). As a result, spending as a share of GDP increased from 17.3 percent for most of 2009-2013 to 17.5 percent in 2014. Per-person spending grew by 4.5 percent in 2014, clearly up from 2013's 2.1 percent growth rate and 2-3 percent growth that has prevailed in the past five years.

December 4, 2015

This blog is part of a series of "Policy Explainers" for the 2016 presidential election, where we explain some of the candidates' policy proposals that affect the federal budget.

This week, former Secretary of State and Democratic Presidential candidate Hillary Clinton released her infrastructure plan that proposes to invest $275 billion over five years in a broad range of projects including highway, rail, sea, air, and broadband expansion. This plan would directly invest $250 billion in projects and would provide $25 billion in seed money to create a National Infrastructure Bank. She also pledges to ensure taxpayer dollars stretch as far as possible by streamlining processes, promoting innovation, and encouraging private investment in American infrastructure. Clinton intends to fully pay for this plan with revenue-positive business tax reforms, although she doesn’t offer additional specifics on the tax reform proposal.

National Infrastructure Bank and Build American Bonds

Since the 1980s, various iterations of a National Infrastructure Bank have been proposed to encourage investment in infrastructure projects. This federally-created bank would offer credit assistance to state and local governments as well as private investors in the form of loans and loan guarantees at below-market rates to be used exclusively for infrastructure. State and local governments currently sell tax-exempt municipal bonds for infrastructure projects that are appealing for investors with high marginal tax rates but don’t attract investors who are exempt from federal income tax like international investors, pension funds, and endowments. With federal financing, tax-exempt entities may be more willing to make equity or debt investments in infrastructure.

Clinton’s plan doesn’t offer much detail about how her bank would be funded or how it would be structured. We do know that the bank would receive $25 billion in seed money to issue loans, loan guarantees, and other forms of credit, and would provide up to $225 billion in additional financing. Presumably, this additional $225 billion would come from private and state/local investment in infrastructure projects. This proposal appears to be similar to, albeit larger than, a proposal from President Obama to create a federal infrastructure bank with $10 billion in startup capital. The President’s plan would require that all government-issued loans be matched by the private sector or local governments to cover at least half of all project costs; it is not clear whether there would be a matching component in Secretary Clinton’s plan. 

Secretary Clinton would also restore the now-expired Build America Bonds (BABs) and charge the new infrastructure bank with administering them. BABs were created the American Recovery and Reinvestment Act of 2009 that offered state and local governments a direct 35 percent subsidy on the borrowing cost of taxable bonds in lieu of the traditional tax-exempt bonds, the goal being to expand infrastructure investment by attracting private capital. If designed in the same way as the original BABs, we estimate this would cost about $20 billion over ten years. 

December 3, 2015

Today marks the fifth anniversary of the National Commission on Fiscal Responsibility and Reform's (Fiscal Commission's) vote on the Simpson-Bowles plan, in which 11 out of 18 commissioners voted to support an ambitious plan to reduce 10-year deficits by $4 trillion (relative to a "current policy" baseline) by addressing virtually all areas of the budget and tax code.

Despite several rounds of negotiations in 2011 and 2012, Congress and the President unfortunately never agreed to a "grand bargain" of the scale or scope proposed by the majority of the Fiscal Commission. Yet substantial deficit reduction has been enacted through a piecewise approach; by our estimate, those measures (excluding legislation which has increased deficits) have totaled to over three-fifths of the deficit reduction the Simpson-Bowles report called for between 2012 and 2020. Unfortunately, these savings have come largely from near-term cuts in discretionary spending and not from gradual pro-growth tax and entitlement reform which the Fiscal Commission proposed in order to achieve long-term sustainability while promoting short- and long-term economic growth.

Indeed, according to our estimates, lawmakers have enacted nearly 130 percent of the defense and nondefense discretionary cuts proposed by the Fiscal Commission through 2020. Yet they have generated less than one-third of the revenue and done so entirely through higher rates rather than pro-growth tax reform. And they have enacted only one-sixth of the savings to mandatory programs, which represented a small share of the Fiscal Commission's savings through 2020 but grew over time and was the key to long-term fiscal sustainability. (See our methodology below for more information about the calculations.)

In other words, lawmakers have largely failed to address the nation's most pressing fiscal challenge: the large and growing cost of Social Security, Medicare, and Medicaid.

December 3, 2015

Congress is still considering a potential fiscally irresponsible deal to extend the 50-some tax breaks that expired at the end of the year, known as tax extenders. Although negotiations continue, press reports suggest an outline of an emerging deal that will cost around $700 billion, or $840 billion once interest costs are included.

Using those press reports, we have attempted to sketch our best understanding of the deal, which seems to build on House legislation passed earlier this year to permanently continue and expand various costly tax breaks. Paired with those tax breaks are extensions of tax credit expansions scheduled to expire at the end of 2017 and delays of some Affordable Care Act taxes.

If press reports reflect the actual deal, we estimate approximately three-fifths of the package will go to businesses, mostly due to an expanded research credit, provisions allowing businesses to deduct expenses more quickly, and two tax breaks for multinational corporations. The remainder would go to individuals, largely from continuing stimulus-era tax credits that expire in 2017.

Even though the deal largely extends expired tax breaks, it also contains some new and expanded policies, as we described in Tax Deal Goes Beyond Simple Extensions. And while most costs are due to tax revenue loss, the deal also contains increased spending. Outlays include the continuation of renewable tax credits that provide payments to low-income families with no tax liability, increased interest payments as a result of the deficit-financed tax bill, and payments to insurers in the health exchanges who insure higher-cost patients.

December 2, 2015

Congressional negotiators this week released a conference agreement on highway spending authorization that will largely settle the issue of highway spending and funding for five years. However, the funding that the bill uses is largely a gimmick, and the spending increases contained in the bill will make future shortfalls larger. Though the bill is slightly less gimmicky than if it had simply adopted the House bill's offsets, it still falls far short of being fiscally responsible.

Overall, the Congressional Budget Office (CBO) estimates that the bill saves $71 billion over ten years to finance a $70 billion transfer to the Highway Trust Fund, which will keep the fund solvent through Fiscal Year 2020. At the same time, the bill would increase highway contract authority by $25 billion above the baseline over the next five years, or nearly $65 billion if that amount of spending were extended out for ten years. But there are problems with both the funding sources and the spending levels.

First, of the $71 billion of offsets, $53 billion comes from a reduction in the Federal Reserve's capital surplus account, which technically brings in revenue to the federal government but ultimately results in no change in federal debt. This version is slightly better than the House version (which claimed to save $59 billion) because the Fed is allowed to keep $10 billion in the account rather than emptying it, providing less of the savings than the House version did. To make up for the lost savings, the conference agreement reduces the Fed's dividend payments to member banks, lowering the rate from 6 percent to the ten-year Treasury note rate (currently around 2.2 percent and projected to reach 4 percent by 2018). This makes the conference agreement slightly more responsible, but still mostly reliant on a gimmick for its offsets.

December 1, 2015

Congress is in the process of negotiating a potential $700 billion deal that would extend several tax provisions that expired at the end of 2014 known as tax extenders. The deal could cost up to $840 billion over ten years when interest costs are included. However, that deal would go beyond what typical year-end tax extenders bills do. Rather than simply reviving expired tax breaks, the deal would reportedly also expand some of these provisions, create new policies, and include policy riders unrelated to expired tax provisions that will increase the bill's cost by one-sixth, or about $110 billion.

While the deal is being developed, the precise contours of the deal remain unknown, but there are some indications in the press what it could include. For instance, a permanently extended research credit would cost $109 billion over the next ten years, according to the Joint Committee on Taxation. Yet, an expanded – and more expensive – version of the research credit passed by the House at a cost of $182 billion is rumored to be included in the deal.

December 1, 2015
"100 Ways the Government Dropped the Ball"

Senator James Lankford (R-OK), former Sen. Tom Coburn's (R-OK) successor, is maintaining the Debt Doctor's legacy with his Federal Fumbles book published Monday. Lankford examines federal programs, agencies, and regulations to come up with 100 "fumbles" that he thinks could be corrected in order to enhance efficiency and cut government waste while streamlining the essential services that government can and does provide. Not only does Lankford provide descriptions of each misstep, he also proposes a solution for each of them.

As Lankford notes:

The purpose of this book is to highlight the work needed to make the federal government more fiscally responsible and less burdensome on the American people. It is not intended to collect dust on a shelf, sit in somene’s [sic] email to wait for later, or just receive honorable mention in the history books. It is truly a guide for next year—to guide us while we work through the federal budget, to encourage federal oversight, and to remind those of us who work in the federal government that we must be responsible servants of the people.

November 30, 2015
Campaigns must focus on debt before all else

Robert L. Bixby, executive director of the Concord Coalition, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt, wrote a commentary (paywall) that appeared in the Nashua Telegraph this past weekend. It is reposted here.

The next president will face an array of pressing issues. One issue, however, transcends them all: the unsustainable projected growth of the federal debt. No candidate's vision of the future, regardless of party or ideology, will be credible if it rests on the premise of more and more government borrowing.

Because annual deficits have dropped in recent years as the economy recovered from the Great Recession, candidates and voters may be tempted to conclude that our fiscal problems are behind us. That would be a mistake.

Deficits are projected to begin rising again as the next president takes office. Over the coming decade, the debt is on track to grow by more than $7 trillion and continue rising ever higher after that.

So we need to hear far more from the candidates in both parties about how they would shift the federal budget onto a more responsible path - one that would strengthen our nation and protect our children and grandchildren from inheriting a massive burden of government debt.

November 25, 2015

A fiscally irresponsible bipartisan deal is emerging to re-instate, make permanent, and in some cases expand many expired tax breaks known as tax extenders. According to several press reports (behind paywall), the deal could cost $700 billion over a decade. When interest is included, the emerging tax extenders deal could add nearly $850 billion to the debt this decade and $2.3 trillion by 2035.

Although details are scarce and negotiations ongoing, we have attempted to itemize our best understanding of the emerging deal. The deal would likely build on House legislation passed earlier this year to permanently continue various costly tax breaks and significantly expand one of the most expensive ones – the research and experimentation (R&E) credit. These tax breaks, which go largely to businesses, would be paired with the extension of low-income tax credit expansions scheduled to expire at the end of 2017. The deal would also reportedly include a two-year delay of the "Cadillac tax" on high-cost health insurance plans and the medical device tax.

By our estimate, this deal could increase the debt in 2025 by about $840 billion, bringing debt to GDP to 80 percent – 3 percentage points higher than currently projected.

Policy Ten-Year Cost
Extend and Expand Research Credit* $180 billion
Extend Refundable Tax Credits^ $195 billion
Extend Provisions for Multinational Corporations: Active Financing Exception and CFC Look-through $100 billion
Extend Section 179 Small Business Expensing $70 billion
Extend State & Local Sales Tax Deduction $40 billion
Delay Medical Device Tax and Health Insurance Cadillac Tax for Two Years $15 billion
Other Provisions $100 billion
Subtotal ~$700 billion
Interest Costs ~$140 billion
Grand Total ~$840 billion

All of these numbers represent very rough estimates due to uncertainty over which provisions are in the reported deal.
Estimates based on Congressional Budget Office and Joint Committee on Taxation projections.
*Press reports aren’t clear whether the deal includes the $70 billion House expansion, but it is assumed here.
^We assume the extension of all expiring refundable credits, though press reports only definitively include two of the three: the Earned Income Tax Credit and Child Tax Credit expansions, excluding the American Opportunity Tax Credit

November 25, 2015

By the end of the year, lawmakers will likely to try to revive the “tax extenders,” a set of more than 50 tax breaks that expired at the end of 2014 for individuals and businesses, ranging from broad breaks for research, renewable energy, and small businesses to narrower breaks for film production, teachers, and racehorses. Extending these tax provisions will further add to the debt if they are not offset, compounding the effects of the fiscally irresponsible budget deal that only offset half of its cost

The House and Senate have taken two different approaches to tax extenders. The Senate Finance Committee approved a bill in July that would cost almost $100 billion to temporarily extend most of them for 2015 and 2016, while the House has passed bills to permanently expand and extend a small amount of provisions.

Newly appointed House Ways and Means Chairman Kevin Brady (R-TX) has said he wants to permanently extend certain tax provisions, and the House has been working to do so in a piece-meal fashion. In mid-September, the Ways & Means Committee approved tax breaks costing nearly $420 billion over ten years, or almost $520 billion with interest. Along with other proposals approved earlier in the year, the Committee’s tax cuts would add about $1 trillion to the debt.

No matter which of these provisions lawmakers chose to keep, they should all be paid for. At this point, neither side of Congress appears willing to stand up for fiscal responsibility, as each chamber has shown it wants to extend the tax breaks without offsets. If these bills are not paid for, here are some of the problems that may result.

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