The co-chairs of the President's fiscal commission today released the deficit reduction plan that members will be asked to vote on Friday. Alan Simpson and Erskine Bowles, co-chairs of the National Commission on Fiscal Responsibility and Reform, said they had tweaked some proposals slightly since they released their original Co-Chairs' proposal (read our analyses of the tax and spending sides of that proposal for more details). The overall savings number is roughly the same--now at about $3.9 trillion, up from about $3.8 trillion in the Co-Chairs' draft--and the spending cut to tax increase ratio largely remained the same at roughly two to one (excluding interest). The composition of the savings, however, changed somewhat.

CRFB has also updated our chart comparing all of the existing fiscal plans, which can be found here. (Note: This is also a great resource to compare the final Fiscal Commission plan to the Co-Chairs' proposal.)

Among the changes:

• Discretionary spending: The final proposal would freeze 2012 discretionary spending at 2011 levels and then cut it to inflation-adjusted 2008 levels by 2013. For the rest of the decade, discretionary spending would grow at half the inflation rate. Additionally, the final plan includes some proposals that were not included in the Co-Chairs' proposal, such as a 15 percent cut to White House and congressional budgets. The result: $200 billion more in savings over ten years, with about $50 billion more in 2020 alone.
• Tax reform: The plan still includes the "eliminate all tax expenditures and lower rates" option that would result in 8/14/23 percent income tax brackets and a 26 percent corporate tax rate, but it also includes a new illustrative option. This option would have 12/22/28 percent income tax brackets and a 28 percent corporate rate. At the same time, it would repeal the Alternative Minimum Tax, the personal exemption phaseout, and the limitation on itemized deductions; tax capital gains and dividends as ordinary income; and maintain the Earned Income Tax Credit, child tax credit, standard deduction, and personal exemptions. It also would keep, but also reform the mortgage, health, charitable giving, municipal bonds, and savings tax expenditures; and eliminate nearly all other tax expenditures. These options for reform raise about $35 billion more over ten years than the Co-Chairs' proposal. Most of the Commissioners at today's meeting lauded the focus on tax reform, especially on reforming tax expenditures. See our paper on the topic here.
• Health savings: Just as in the Co-Chairs' proposal, the so-called "doc fix" is paid for. The final plan specifically includes additional health care savings, rather than providing only illustrative options as the draft proposal did. Among the options included in the report were: ending Medicare payments for bad debts, reducing Medicaid taxes states can levy on providers, accelerating the home health cuts in health care reform, placing dual-eligibles (Medicaid and Medicare) in Medicaid managed care, eliminating provider exemptions from Independent Payment Advisory Board cuts, and reducing spending on Medicaid administrative costs. In addition, the plan introduces a pilot program to turn the Federal Employee Health Benefits program into a premium support system and it includes a repeal of the CLASS Act, which cost $75 billion through 2020 but likely would strengthen the long-term fiscal outlook. Because the CLASS Act would be repealed and because the new plan does not include an "additional $200 billion savings" assumption, total mandatory savings are about $175 billion less than the Co-Chairs' proposal.
• Process reform: Hurray! The final plan also dives deeper into budget process reform than the Co-Chairs' proposal. While the draft eliminates any mention of biennial budgeting, it calls for allowing spending cap adjustments for program integrity measures, reforming budget concepts (the way things are accounted for in the budget, such as GSEs), and having a better automatic trigger for extended unemployment benefits. These recommendations are in addition to a recommendation to establish a "debt stabilization process." For more info on budget process reform, check out the Peterson-Pew Commission on Budget Reform's recommendations.

Social Security, which was a major issue when the Co-Chairs' proposal came out, remains largely unchanged, except for a new "hardship exemption" for changes in the normal and early retirement ages.

It was great work by the Commission to actually develop a plan. Now comes the hard part--finding the 14 votes needed to approve the plan. As we argued yesterday in a release:

“The members of the Fiscal Commission have the critical task of leading the nation in a discussion about how to fix our budget challenges before credit markets turn against us and force more painful actions. Supporting a plan need not mean that a member supports every aspect of it, but rather that they understand that real leadership will require compromise.”

As it stands, seven members have pledged support for the plan, one member--Rep. Jan Schakowsky (D-Ill.) , who offered her own alternative a few weeks ago--explicitly opposed the plan, and eight members did not declare their intentions. Two members, Sen. Max Baucus (D-Mont.) and Rep. Dave Camp (R-Mich.), were absent from the meeting.

Many Commission members at the meeting said that regardless of how they vote, the proposal represents a good framework for discussion and debate. Congressional leaders have agreed to consider the proposal if it garners 14 Commission votes. With support halfway there,  we hope  the Commission can reach that goal. But more importantly, we're hoping this excercise, one way or another, will spur action soon in Congress. 

The President's National Commission on Fiscal Responsibility and Reform will meet this morning to discuss the deficit reduction proposal they will vote on this week. Watch live video here and check out our live-Tweeting of the meeting at http://twitter.com/budgethawks

View the report here.

Rep. Mike Quigley (D-IL) released a report today proposing 15 ways that the federal budget process could be improved to give a clearer picture of the fiscal situation and more focus on achieving long-term stability.

1. All taxpaying Americans should receive an itemized receipt from the federal government that shows how their tax dollars are being spent.
2. This receipt should include information on both the revenue side and the spending side.
3. The Congressional Budget Office and the Joint Committee on Taxation should analyze the second decade budget impact for any bill that they score for Congress.
4. The CBO and JCT should provide a net present value (NPV) estimate for any major pieces of legislation for which costs escalate outside the 10-year budget window.
5. The Office of Management and Budget should issue an annual report examining our un-budgeted fiscal exposures.
6. The President’s Budget and the Congressional Budget Resolution should include specific long-term deficit and debt sustainability targets.
7. The OMB should issue a Quadrennial Fiscal Sustainability Review.
8. Upon submission of the President’s Budget, the President should be invited to deliver a “Fiscal Sustainability State of the Union” address to a joint session of Congress.
9. All tax expenditures that are enacted should  “sunset”  inside the 10-year budget window.
10. The Department of Treasury, in conjunction with the OMB and the relevant federal agency, should issue regular performance reviews of all tax expenditures.
11. There should be more data made public evaluating tax expenditures.
12. The Department of Defense should be audit-ready by 2014 and required to pass a comprehensive audit by 2015 so that policymakers can conduct effective oversight of Department expenditures.
13. All federal spending on security—including military, homeland security, and foreign engagement—should be considered under one unified security budget.
14. The Department of Defense should resolve internal control weaknesses and other uncertainties in long-term cost estimates for environmental liabilities.
15. More up-front information should be required about the costs of environmental liabilities that would be incurred with the purchase of new assets.

It is good to see that other great minds are working on how to improve the budget process. Many of Rep. Quigley’s recommendations closely parallel those made by the Peterson-Pew Commission on Budget Reform in its latest report, Getting Back in the Black. The result in either case would be a budget process that is more disciplined, forward-looking, and transparent. Notably, like the Commission’s report, Rep. Quigley addresses the need for better information and more transparency regarding the long-term fiscal outlook. Like the Commission, he would have the President present a report annually on the long-term fiscal challenges and how his budget would address them. Rep. Quigley also calls for closer review of “tax expenditures,” the provisions of the tax code that provide special treatment and function much like spending, noting that revenue losses from these provisions now total over $1 trillion annually.

Some of Quigley’s proposals go beyond what the Peterson-Pew Commission has recommended. For example, he would require that the Congressional Budget Office and the Joint Committee on Taxation provide a net present value (NPV) estimate for any major pieces of legislation for which costs escalate outside the 10-year budget window. Additionally, he would have all tax expenditures expire within 10 years of enactment. Another interesting idea--he would have all taxpaying Americans receive an itemized receipt from the federal government that shows how their tax dollars are being spent.

The report is an excellent contribution to the essential conversation on reforming the budget process. It is good to hear another voice observing that the current budget process is not up to the task of supporting the big policy adjustments needed to stabilize the federal debt. Rep. Quigley’s ideas are ones that members of both parties can endorse. We applaud the Congressman for producing such a detailed and thoughtful document and hope it presages a healthy debate and prompt action on reforms such as these.

CBO has issued new numbers for the total costs of the Troubled Asset Relief Program (TARP). CBO now estimates that TARP will cost $25 billion over the life of the program. This is down $41 billion from CBO's previous estimate of $66 billion in their August 2010 Budget and Economic Outlook, $84 billion less than CBO's March 2010 estimate, and $88 billion less than OMB's most recent analysis (which relies on data up to May 31, 2010).

CBO gives the reasoning as to why the cost estimate has gone down over the past year:

"...additional repurchases of preferred stock by recipients of TARP funds; a lower estimated cost for assistance to AIG and to the automotive industry; lower expected participation in mortgage programs; and the elimination of the opportunity to use TARP funds for new purposes (because of the passage of time and the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act."

Additionally, CBO found that:

"...the outcomes of most of the transactions made through the TARP were favorable for the federal government."

CRFB welcomes this bit of good news. Each new estimate seems to bring TARP's overall cost lower and lower, and we can only hope that continues. Even so, however, $25 billion is an incredibly low cost number for a program that likely prevented the U.S. economy from going into freefall.

Pete Davis over at Capital Gains and Games joined the Announcement Effect Club over the weekend and FDIC head Sheila Bair came very close.

In a blog post at CG&G, Davis called for a fiscal plan to put our debt on a sustainable trajectory. But how soon?

I wouldn't wait past next summer, HOWEVER, I would delay the effective dates until 2012 or 2013 to get the market benefit of the anticipation of deficit reduction without endangering our fragile recovery.

Classic Announcement Effect.

Bair shook off the turkey to join the So Close Club with an op-ed in Friday's Washington Post. Her comments are important in a broad perspective, as she emphasizes the role of confidence in economic performance. Her remarks are below.

Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.

The quiet confidence of the American public in the FDIC's deposit insurance guarantee was one of the bulwarks that helped to stem the tide in the recent crisis and avert even greater economic calamity. But we must never take public or investor confidence for granted. In the end, that confidence is only as great as the resolve shown by our government in identifying emerging risks and taking concerted action to head them off.

Her comments in the first paragraph are almost Announcement Effect Club material, but she doesn't state that taking action now could help the economy in the short term.

But it's the second paragraph that should really make an impression. Bair makes a great point: yes, we may have the confidence of investors right now, with interest rates very low on federal debt, but that is no reason to test the boundaries of our borrowing capacity when we can instead head off the risk of a fiscal crisis. Just because we may have more breathing room than, say, EU countries doesn't mean we should wait to act.

Martin Feldstein has an interesting op-ed in today's Washington Post on tax expenditures. Tax expenditures -- the list of special tax credits, deductions, and exemptions written into the tax code -- constitute over $1 trillion in lost revenues every year and distort economic activity. In our recent paper on the deficit reduction plans, CRFB noted that a common theme among the plans was in reducing the tax expenditure budget (click here to read CRFB's plan for tax expenditure reform). Feldstein has his own unique and interesting approach.

Feldstein proposes capping the credits, deductions, and exemptions that individual taxpayers can use from itemizing, thus limiting the revenue impact of tax expenditures. In response to other proposals that cut or eliminate specific tax expenditures, or nearly all of them, he does not believe that it is politically feasible to do so as people would be strongly opposed to changes affecting them while others, benefitting other people, were left in place.

Feldstein uses the following example to illustrate his proposal:

"To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction. The idea is not to single out a particular tax expenditure."

Feldstein then uses the example of a cap on all tax expenditures equal to a person's adjusted gross income. Feldstein says that such a cap would reduce the deficit by $262 billion in 2011, which would be 1.7 percent of GDP or one third of the projected deficit. Doing so would move more people to the standard deduction which would thus simplify the tax code (the actual cap amount would thus be crucial in having the correct incentive effects). Feldstein notes that an additional dollar cap would have larger deficit reduction effects.

As Feldstein puts it:

The cap would not discriminate among taxpayers who benefit from various forms of tax expenditures. It would, however, reduce the deficit by hundreds of billions of dollars a year without raising tax rates and thus without reducing the incentive to work, to save or to expand businesses.

Overall, CRFB applauds Dr. Feldstein for his excellent idea on tax expenditure reform. We sincerely hope that if (hopefully "when") Congress gets around to deficit reduction, tax expenditures will be part of any plan.

As Thanksgiving approaches, we at CRFB wanted to take a moment to reflect on what we are thankful for. We are most thankful for the Simpson-Bowles preliminary debt reduction plan, which has set a new bar in Washington for what serious fiscal plans should acheive, and led to a flurry of other plans. Additionally, over the past year fiscal year the deficit has come down (well, that’s good), lawmakers took some important first steps in controlling health care cost growth (very good, though it is problematic that the rest of the bill was so costly and at a time when we should be scaling back, not increasing, entitlements), and the economy has so far avoided a double-dip back into recession (also very good). And… let’s see….

Okay, now we’re scroungin’.

Have lawmakers acted in a bipartisan manner to tackle our fiscal challenges down the road head on instead of continuing to punt the issues further down the road? (Sigh) Nope. But at least we’re starting to see some real progress taking root on the specific kinds of policies and the magnitude of changes necessary to get our country out of the red and back into the black!

We hope that the growing momentum in Washington around the need to address our longer-term fiscal challenges continues gaining traction in coming months. Lawmakers must be prepared to offer their specific proposals for controlling the growth in U.S. debt, and they must ultimately come together around a plan that builds a consensus among both political parties. Those are our wishes.

We hope that everyone has a terrific Thanksgiving. See you next week!

Talking Turkey – Congress takes a break this week for Thanksgiving. Lawmakers can be thankful for the brief respite, but the time is quickly coming when they can no longer speak in sound bites and generalities on fiscal matters and must get down to business. When they return next week they will have to face up to some deadlines, promises, and reality.

McConnell Gets Off the Omnibus – One deadline facing Congress is the December 3rd date when the current continuing resolution expires. Legislators must either pass another stopgap measure or enact the appropriations bills to fund government operations by then. Senate leaders have been working on an omnibus bill rolling up all twelve spending bills into one massive piece of legislation, but Senate Minority Leader Mitch McConnell (R-KY) last week seemingly put the brakes on the omnibus when he declared he would not support it. This likely means another continuing resolution will be required, perhaps into next year. Congress has failed to enact any of the bills to finance the government for the fiscal year that began October 1; the latest example of how dysfunctional the budget and appropriations process in Washington is. The Peterson-Pew Commission on Budget Reform recently unveiled detailed recommendations for reforming the process in the report, Getting Back in the Black.

Ideas Keep Coming – Another looming deadline in Washington is the December 1st date by which the President’s National Commission on Fiscal Responsibility and Reform must report its recommendations. If 14 of the 18 members of the panel agree on a proposal, congressional leaders have promised to consider it. Policymakers have no dearth of ideas to work from in considering how to put the country on a sustainable fiscal course. Many have heeded CRFB’s calls to get specific. Last week the Deficit Reduction Task Force unveiled a plan, as did Congresswoman Jan Schakowsky (D-IL), a member of the president’s commission, who presented a progressive alternative to the plan offered recently by the commission’s co-chairs. Other progressive plans are expected at the end of the month. CRFB President Maya MacGuineas developed a plan with Bill Galston of the Brookings Institution. Check out our ongoing Let’s Get Specific series. The question is: Will all these ideas inform a constructive dialogue that produces real solutions; or, like with the upcoming Thanksgiving dinner overload, will policymakers take a nap and make lots of turkey sandwiches afterwards?

Promises to Keep – Many of the newly-elected members of Congress successfully campaigned on promises of fiscal responsibility and reducing the federal budget deficit and last week lawmakers took largely symbolic steps. Senate Republicans approved nonbinding resolutions within their caucus to cut spending to 2008 levels; ban earmarks and encourage Democrats to do the same; support a balanced budget amendment; freeze hiring of non-security federal employees; and cancel about $12 billion in unspent stimulus funds. House Republicans voted to continue their moratorium on earmarks. And a bipartisan group of senators led by Claire McCaskill (D-MO), John McCain (R-AZ), Mark Udall (D-CO), and Tom Coburn (R-OK) will attempt to force a vote on the Senate floor for a Senate-wide earmark ban. As CRFB wrote in a blog last week, earmark reform represents a good symbolic step, but won’t reduce the deficit. These recent actions are just the appetizers; lawmakers will have to get down to carving the turkey soon.

‘Poll’-ar Opposites? – Public opinion on what to do about the deficit is not bringing much clarity to the debate. A recent poll sponsored by the John D. and Catherine T. MacArthur Foundation found that 72 percent of those surveyed believe it is “very important” that “the next Congress take steps to reduce the national debt.” On the other hand, a NBC News/Wall Street Journal poll indicated that voters are not enthusiastic about the specific ideas put forth by Erksine Bowles and Alan Simpson, the co-chairs of the White House fiscal commission. Kind of like those who want to lose weight, but eat whatever they want over the holidays.

Setting the Table for Tax Reform? – Incoming House Ways and Means Committee Chairman Dave Camp (R-MI) last week promised to launch a battle for fundamental tax reform. He took particular aim at reducing tax expenditures and said that tax reform could play a significant role in reducing the deficit. Treasury Secretary Tim Geithner also called for tax reform, and Politico reported that the two met last week. [Update: Greg Mankiw also singles out tax expenditures for reform in the New York Times] Also, former White House and Treasury official, Glenn Hubbard, called for reform as well. Check out CRFB’s paper on tax expenditures.

Who is Coming to Dinner? – It is becoming clear who will be the key players in fiscal policy in the next Congress. Last week it was announced that Representative Chris Van Hollen (D-MD) will be the Ranking Member on the House Budget Committee. He will be the counterpart to incoming Chairman Paul Ryan (R-WI). In the Senate, Budget Committee Chairman Kent Conrad (D-ND) decided to keep his post; he had been contemplating taking the reins of the Agriculture Committee. Senator Jeff Sessions (R-AL) is set to be the Ranking Member. And Jacob Lew was officially confirmed last week to be the next director of the Office of Management and Budget after Senator Mary Landrieu (D-LA) withdrew her hold on his nomination over unrelated objections to the administration’s moratorium on offshore oil drilling.

Docs Get Short-Term Fix; Unemployed Still Hanging – The Senate approved a one-month extension of the “doc fix’ preventing a steep reduction in Medicare payments to physicians. While the $1 billion cost is paid for, we noted last week that the offset represented something of a gimmick. The House failed to extend expanded unemployment benefits for three months, which also expire at the end of this month. Agreeing on offsets continues to complicate progress on those and many other issues.

Of particular interest for us, Fed Chairman Bernanke noted the following in his speech today on “Rebalancing the Global Economy” at the European Central Bank’s conference in Germany:

“For their part, deficit countries need to do more over time to narrow the gap between investment and national saving. In the United States, putting fiscal policy on a sustainable path is a critical step toward increasing national saving in the longer term.”