The Bottom Line

September 17, 2015
Cost of This Year's Legislation Reaches $1 Trillion

The House Ways & Means Committee today approved tax and health breaks costing nearly $420 billion over ten years, or almost $520 billion with interest. Most of these provisions are part of the "tax extenders" that are routinely extended and most recently expired at the end of 2014. These bills would revive and permanently extend the breaks, with the revenue loss added to deficits. Taken together with other tax bills approved by the Ways & Means Committee earlier this year, they would cost about $1 trillion (or $1.2 trillion) with interest.

About two-thirds of the costs arise from the permanent extension and expansion of bonus depreciation. This provision, enacted in 2008 as a temporary stimulus measure and then repeatedly continued, would cost over $280 billion in lost revenue over the next ten years. We've written previously about how bonus depreciation should be treated separately from the rest of tax extenders because its rationale was to provide stimulus when the economy was weak. We've also pointed out that making it permanent is best done in tax reform because of interactions with other parts of the tax code.

Two other provisions being made permanent allow American corporations to defer paying taxes on their overseas profits, and a third continues a deduction for teachers who buy school supplies.

September 17, 2015

Alan Auerbach and William Gale at the Tax Policy Center recently released their frequently-updated budget projections. Their new outlook is familiar to those following the official CBO numbers: a somewhat stable near-term outlook but continuously rising debt over the long term. Beyond the overall debt numbers, their report contains a number of interesting tidbits about the composition of the budget and considerations for policymakers in addressing deficits and debt.

Auerbach and Gale's projection shows debt remaining at around 75 percent of GDP over the next three years before rising steadily to 81 percent by 2025. This is somewhat higher than CBO's 2025 debt level of 77 percent of GDP largely due to different policy assumptions the authors make. Specifically, they assume that temporary tax provisions -- including the tax extenders that expired at the end of last year -- are permanently extended and that lawmakers will grow appropriated spending with inflation rather than having it limited by the sequester-level caps. On the other hand, it assumes that war spending is drawn down rather than increased with inflation.

The authors make a number of observations about this ten-year outlook. Maybe most notable is the fact that unlike previous large debt run-ups, like those during wars, the current outlook does not show debt returning to a more normal level after the increase following the Great Recession; debt will continue increase from its already high level.

September 16, 2015
CRFB Releases Sequester Offset Solutions Plan

On October 1, lawmakers will have to pass new appropriations or a continuing resolution, or the government will shut down for the second time in two years. This is one part of the four-part "gathering storm" that lawmakers face over the remainder of the year. One of the sticking points in funding the government is the return of the sequester-level spending caps, which will essentially hold FY 2016 spending to the previous year's level. Both parties have proposed higher spending levels, but have done so in different ways. To show a way around the impasse, CRFB has released the Sequester Offset Solutions (SOS) plan, which provides $300 billion of sequester relief that is fully offset.

The SOS plan consists of four parts:

  • Sequester Relief: The plan repeals about half of the sequester over the next two years, then allows the spending caps to grow with inflation after 2017. This provides $300 billion of sequester relief in total with smaller amounts of relief over time.
  • Offsets for Two-Year Relief: To offset the $90 billion cost of the two-year sequester relief, the plan outlines $110 billion of savings split roughly equally between policies that build off the 2013 Ryan-Murray deal and targeted mandatory program savings and receipts from the President's budget. The savings are slightly higher than the cost to account for the interest costs associated with the upfront relief.
September 10, 2015

Presidential candidate Governor Jeb Bush (R-FL) announced his tax reform plan to trim deductions and lower tax rates yesterday. It is one part of his self-described plan to raise economic growth to 4 percent per year. The "Reform and Growth Act of 2017" cuts taxes for both individuals and corporations, lowering tax rates while reducing or eliminating some deductions. According to four different estimates, the plan would reduce taxes on net and would increase deficits over a decade by between $1.2 and $7.1 trillion, depending how it is estimated.

Individual Income Tax Reform

On the individual (and "pass-through" business) tax side, Gov. Bush's plan would reduce the number of tax brackets from seven rates between 10 percent and 39.6 percent to three rates of 10 percent, 25 percent, and 28 percent.

In addition to the lower rates, the plan has several other tax cuts, including:

  • Repeal of the Alternative Minimum Tax (AMT)
  • Near doubling of the standard deduction
  • An increase in the Earned Income Tax Credit (EITC)
  • A reduction in the top capital gains and dividends rates from 23.8 to 20 percent (interest would also be taxed at 20 percent, instead of as ordinary income)
  • Repeal of two provisions that limit tax benefits for high earners – the Personal Exemption Phase-out (PEP) and the Pease limitation on itemized deductions
September 9, 2015

This blog is part of the “Fiscal FactCheck” series designed to examine the accuracy of budget-related statements made during the 2016 presidential campaign.

Claim: Tax Reform Can Signifcantly Accelerate Economic Growth

Since the 2016 Presidential campaign began, a number of candidates have touted tax reform – either overhauling or replacing the current income tax – as a way to promote economic growth. In fact, well-designed tax reform can and probably would promote economic growth; though perhaps not by as much as some of the candidates claim.

Both the Joint Committee on Taxation (JCT) and Department of Treasury have attempted to measure the economic impact of tax reform. Depending on the type of tax reform, official estimates suggest the size of the economy can be boosted by between 0.1 and 2.4 percent on average over 10 years. This is equivalent to a 0.02 to 0.5 percent change in the annual growth rate, which would increase projected average real economic growth to somewhere between 2.35 and 2.8 percent over the next decade.

Tax reform could help to promote growth in several ways. Most significantly, it can improve incentives to work and invest (increasing labor and capital supply, respectively) by reducing effective marginal rates and can reduce the crowd-out of productive investment by increasing revenue collection for deficit reduction. Tax reform can also eliminate distortions in the tax code to help money flow to activities and investments which produce more welfare or yield greater economic returns, reduce the cost of tax compliance and avoidance, encourage certain pro-growth activities such as research and development, or improve America's global competitiveness.

September 8, 2015

The New York Times Editorial Board's Teresa Tritch posted a piece last week on short-term solutions to avert next year's depletion of the Social Security Disability Insurance (SSDI) trust fund reserves. She opposes interfund borrowing that would loan money from the Old-Age and Survivors' Insurance (OASI) trust fund and instead supports reallocating tax revenue from one to the other. Although we don't have a stance on which is better, we couldn't help but notice that Tritch used many misleading claims to support her position, many of which we previously discussed in Dispelling Common Myths in the SSDI Debate and Debunking 8 Social Security Myths on its 80th Birthday.

Below, we correct the record where Tritch relied on myths:

  1. Reallocation "would enable both funds to pay full benefits until 2033, plenty of time" for action on long-term program health.
  2. Tritch is basically correct that reallocation would ensure combined solvency for about 20 years, with the Social Security Trustees estimating insolvency in 2034 and the Congressional Budget Office estimating around 2029. But there is not "plenty of time" for long-term action. The earlier that a plan is enacted, the more it can protect vulnerable beneficiaries, introduce changes gradually, and give people time to prepare. As the deadline gets closer, it becomes more difficult to avoid steep benefit cuts or tax increases. As we explained in Delaying Social Security Changes Ties Policymakers' Hands, a shortfall that could be solved with a 2.6 point tax increase or 16 percent benefit cut today would require a 4.0 point tax increase or 23 percent benefit cut if delayed until the date of insolvency. Indeed, if lawmakers wanted to protect current beneficiaries, it would be impossible to achieve solvency – even with fully eliminating benefits for new beneficiaries – by 2034. Even waiting ten years will hamstring the ability of lawmakers to make gradual changes which give beneficiaries time to plan and adjust.

September 4, 2015

The Washington Post published an editorial Sunday defending the “Cadillac tax,” a part of the Affordable Care Act, in the face of a legislative effort to repeal it before it can even take effect.

The provision is an excise tax of 40 percent levied on employer-provided health-care plans with values over a certain threshold, which are all currently tax-exempt. The tax will affect individual plans exceeding $10,200 in value and family plans exceeding $27,500, with the thresholds indexed to inflation. If health-care costs continue to rise faster than inflation, the tax will be more noticeable over time. We’ve written previously about how the tax is an important tool to slow health care spending growth.

The editorial cites a report by the non-partisan Kaiser Family Foundation finding that a quarter of employers offer at least one plan that would be affected if no changes are made to their offerings. It is no surprise, then, that “unions, insurers, chambers of commerce and other interests will resist reduction in the subsidies they benefit from,” the paper comments.

As the editorial explains, the current tax subsidy for employer-sponsored health-care premiums causes employers to overspend on health-care at the expense of other forms of compensation:

September 4, 2015
Protecting the Legacy of Social Security for Future Generations

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a guest post for the Social Security Administration's blog. It is reposted here.

September 3, 2015
Wimpy's Approach to Budgeting

A recent press report (paywall) indicates that Republicans may be looking to pay for increased defense spending next year by promising defense cuts starting in 2022. This type of approach to sequester-level cap replacement is at best disingenuous and at worst a blatant gimmick.

The report suggests the possibility of sequester relief in Fiscal Years 2016 and 2017 paid for with extended and lowered caps from 2022 to 2025. Although the press report didn’t specify how this sort of trade off would work, there are three basic possibilities:

The first would be to offset cap increases in 2016 and 2017 by extending the spending caps beyond 2021 below the level the Congressional Budget Office (CBO) assumes (the 2021 cap adjusted for inflation). While this could be technically argued as a legitimate offset, there is little reason to believe that Congress would reduce discretionary spending below an extension of the sequester-level caps in future years when they want to raise those sequester-level caps today. This would be the budgetary version of Wimpy's “I’ll gladly pay you Tuesday for a hamburger today.”

The other two possibilities would rely on an even more blatant gimmick by claiming savings relative to an artificially-inflated baseline. One of these approaches would involve using the President’s budget assumption that discretionary spending bounces back to pre-sequester levels after 2021 and claim savings relative to that baseline.

September 2, 2015

Much of the press coverage of the updated projections issued by the Congressional Budget Office last week focused on the fact that the deficit would be $59 billion lower in FY 2015 than it was in FY 2014. But those headlines overlooked a major reason the deficit is projected to decline: Congress is waiting until after the fiscal year ends to revive a host of expired tax breaks. These tax breaks expired last year but are expected to be taken up by the end of the year, adding potentially over $150 billion to the 2016 deficit.

CBO's current law baseline, which assumes these "tax extenders" expire, shows deficits declining for the next two years. Given likely action on the extenders however, those projections may be unrealistic. If lawmakers continue the extenders for two years, as legislation approved by the Senate Finance Committee would do, the 2016 deficit would be about $150 billion (37%) larger than CBO's projections. Increased deficits means it's important to offset the cost for any action on extenders, unlike what lawmakers did last year.

Allowing these tax breaks to expire and retroactively extending them one or two years at a time is one way Congress masks the extenders' impact on the deficit. More than half of the deficit's drop between FY 2014 and FY 2015 is explained by the delay of Congress in extending these tax breaks beyond 2014. If the provisions had already been extended, the deficit would have only declined to $468 billion in FY 2015, instead of $426 billion. However, because the tax breaks will not show up on the government's balance sheet until FY 2016, their costs will be shifted. Ultimately, this would push the deficit in FY 2016 to $566 billion. One stimulus provision, bonus depreciation, represents 60 percent of the package's cost in the next two years.

September 1, 2015

CBO's recent budget projections show debt growing in the latter half of the decade as deficits widen. Entitlement spending will continue to grow as a result of an aging population and increased health care costs, and revenues are projected to remain relatively flat, leaving the budget with ever-growing deficits and increasing interest payments. By 2025, annual deficits will reach $1 trillion for the first time since 2012.

September 1, 2015

CBO’s latest budget baseline projects ten-year deficit numbers to be slightly smaller than previously estimated, despite the passage of legislation increasing the deficit. The biggest cause: a drop in projected interest rates, which lead CBO to revise down total interest spending by $385 billion, or about 7 percent, through 2025.

CBO now expects rates on three-month Treasury bills to be lower for the next three years before stabilizing at 3.4 percent in 2020, one year later than projected in January. CBO expects longer-term bonds to pay permanently lower interest rates, with ten-year notes ultimately reaching only 4.3 percent instead of 4.6 percent.

This downward revision represents the continuation of a trend we noted last year. Compared to its March 2011 projections, CBO now sees $2.2 trillion less interest spending over the 2011-2021 period, a drop of nearly 40 percent. About 90 percent of that drop is due to lower projections for interest rates and technical factors, and the rest is due to lower debt levels than projected in 2011.

August 31, 2015

The Bipartisan Policy Center (BPC) recently convened a Disability Insurance Working Group and released their recommendations to address the upcoming exhaustion of the Social Security Disability Insurance (SSDI) trust fund. The group brought together diverse stakeholders that spanned from disability community advocates and former policymakers to academics and business leaders to find consensus recommendations that involved tradeoffs from all perspectives of the situation in order to make a comprehensive proposal.

The Working Group, guided by 11 principles for their decision-making process, agreed that the immediate funding need would need to be addressed by reallocating payroll tax revenue from the Old-Age and Survivors' Insurance trust fund to the SSDI trust fund, and they also suggested the following program recommendations:

August 27, 2015

Our recent analysis of the Congressional Budget Office's (CBO) August baseline focused on CBO's official current law baseline projections, which show debt declining very slightly in the near term from 74 percent of Gross Domestic Product (GDP) this year to 73 percent by 2018 and then rising to 77 percent by 2025. As it turns out, however, the situation could be notably better or notably worse depending on how policymakers handle a few outstanding matters – many a part of the gathering fiscal storm Congress will face this fall.

If lawmakers ignore fiscal responsibility as they have been recently, debt will rise much more rapidly. In our paper we estimated an Alternative Fiscal Scenario (AFS) based on past assumptions CBO has used. The AFS extends expired and expiring tax provisions and permanently repeals the sequester-level discretionary spending caps. And under the AFS, debt will rise continuously every year from about 74 percent of GDP today to 78 percent by 2020 and 85 percent by 2025. Earlier this year, CBO estimated that this level of debt growth could shrink the economy by as much as 7 percent by 2040 compared to the baseline.

August 26, 2015

CRFB has released its analysis of CBO's latest ten-year budget projections, detailing the important facts from the report and how it has changed from previous estimates. As we noted earlier, the new baseline is very similar to the previous one released in March, showing a relatively subdued outlook for debt in the short term but growing deficits and debt for several years thereafter.

Click here to read our analysis.

Debt is projected to decline slightly in the near term from 74 percent of GDP in 2015 to 73 percent by 2018 before rising to 77 percent by 2025. Extrapolating further, we estimate that debt held by the public would exceed the size of the economy by 2040.

There is a similar story for deficits, which will fall to a low of 2.1 percent of GDP in 2017 before rising to 3.1 percent in 2020 and 3.7 percent in 2025, when the deficit will reach $1 trillion. These widening deficits in later years are the result of spending rising – driven by increases in health care, Social Security, and interest spending – while revenue stays largely flat.

August 25, 2015

The Congressional Budget Office (CBO) just released its August baseline, updating budget projections from March and economic projections from January. CBO continues to show debt on an unsustainable path, rising continuously as a percent of GDP after 2018. Combined with its long-term projections released last month, the agency shows the clear need to enact deficit reduction to avert a huge rise in debt over the long term. 

While debt will improve slightly in the near term, declining from last year's post-war record of 74 percent of GDP to 73 percent by 2018, it will then rise to 77 percent of GDP by 2025. Based on our calculations of the assumptions in CBO's Alternative Fiscal Scenario, debt will reach 85 percent of GDP by 2025. These estimates are very similar to the March projections.

Under CBO's current law projections, deficits will fall to $426 billion this year and a low of $414 billion in 2016, but then begin to rise with $1 trillion deficits returning in 2025. Over the course of the next decade, deficits will average 3.1 percent of GDP, including 3.7 percent of GDP deficits in 2025. By comparison, the 50-year historical average level for deficits is 2.7 percent of GDP.

August 24, 2015

On Tuesday, August 4, 2015, the McCrery-Pomeroy SSDI Solutions Initiative hosted its SSDI Solutions Conference, presenting the 12 papers commissioned by the initiative as well as various discussions around improvements that can be made both to the program and to the larger role that government plays in supporting people with disabilities. The day-long conference, attended by nearly 200 people and watched via livestream by over 900, featured remarks from Senate Finance Committee Chairman Orrin Hatch (R-UT) and Center for Budget and Policy Priorities (CBPP) President Bob Greenstein, panel discussions with the authors and disability research experts, and a closing panel discussion with the Co-Chairs and Social Security experts. With the Social Security Disability Insurance (SSDI) trust fund set to exhaust its reserves by the end of 2016, many experts have begun discussing long-term changes that could be paired with short-term funding options that alleviate the impending 19-percent across-the-board cut to benefits if nothing were to be done. The program for the event can be found here.

The event kicked off with opening remarks from Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND), co-chairs of the initiative, discussing the opportunity presented by the imminent legislative action needed on SSDI. Both stressed that no idea would be perfect nor would any idea alone solve the problems facing the program, but they envisioned these ideas as part of a broader discussion to improve SSDI both financially and effectively for the people who rely on it. While avoiding trust fund exhaustion may be the reason for the congressional action that will take place in the next year, the co-chairs reiterated their commitment to making the SSDI Solutions Initiative about helping people with disabilities.

August 24, 2015

CBO released its estimate of the economic effects of the President's budget late last week, doing dynamic scoring for the President's budget. Like last year, CBO finds that the budget would mostly affect the economy through immigration reform. Overall, the budget would increase real GNP by 1.1 percent on average over the next ten years and by 2.4 percent in 2025 alone. At the same time, it would reduce real GNP per capita by 0.7 percent by 2025 since the increase in population from immigration reform would outpace the real GNP effects.

Since CBO's original estimate already took the labor market effect of immigration reform into account, the primary new information is an analysis of other ways the budget affects growth (including other effects from immigration reform). CBO's estimate lists changes to other economic factors, including short-term aggregate demand, marginal tax rates on labor and capital, national saving, and interest rates.

August 24, 2015
Ensuring Social Security’s Future

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote a letter to the editor published in the New York Times as a response to a column by Paul Krugman. Gregg's letter is reposted here.

August 21, 2015
Could income-share agreements help solve the student debt crisis?

Mitch Daniels is the president of Purdue University, a former governor of Indiana, a former director of the Office of Management and Budget, and a co-chair of the Committee for a Responsible Federal Budget.  He wrote an op-ed that appeared in the Washington Post. It is reposted below.

Anyone who is unaware that we face a massive problem involving college student debt, contact Earth at your first convenience. The troubling facts are almost universally known: After tripling in 10 years, this debt totals more than $1.3 trillion, which is more than the debt for credit cards, auto loans and any other category except home mortgages. Default rates parallel those for the subprime housing loans of the financial crisis, and the debt numbers show no signs of decelerating, growing again this year by an estimated 8 percent.

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