The Bottom Line

July 13, 2011

Talk of switching to the chained CPI for all inflation indexed elements of the federal budget has continued gaining much attention in the past few months, and the policy has been included in the ongoing debt ceiling negotiations (we'd like to think our policy paper had something to do with it). Predictably, it has come under attack from both the right and the left for raising taxes and affecting Social Security benefits, respectively. But people from across the political spectrum have also come to its defense.

On the right, Charles Blahous, a Social Security trustee, has defended the chained CPI as a justified technical change to keep with the government's goal of using a correct measure of inflation to adjust programs and provisions of the tax code.

Some federal policies (like the fixed income thresholds for the recently-enacted 0.9% Medicare surtax) aren’t indexed at all. Others (like Social Security’s benefit formula) are indexed to wage growth. But currently expressed policy in many other areas of the federal budget is to index for general price inflation, no more and no less. To use the best available measure of such inflation is therefore not a “benefit cut” or a “tax increase” as much as it is the most faithful available method of complying with the policy basis of various statutes.

On the left, Chuck Marr of the Center on Budget and Policy Priorities echoed our clarification of the distributional analysis of the tax impact of the chained CPI, in response to a Joint Committee on Taxation estimate. We argued that the JCT estimate both excluded the effects of AMT patches from the analysis and did not account for low-income people who do not file tax returns. Also, they used percent change in taxes paid, rather than the more commonly used percent change in after-tax income to measure the distribution. Here is Marr's take: 

The Tax Policy Center, which does not face the same current-law requirement, has conducted a parallel analysis that gives a more realistic assessment of how switching to the chained CPI would affect different income groups.  The results show that the percentage reduction in after-tax income — the best way of measuring the progressivity or regressivity of a tax policy change — is modest and nearly identical in all income brackets.

Many other individuals and groups have supported/defended the chained CPI: Donald Marron, the Washington Post editorial board, Reihan Salam, the Progressive Policy Institute, the Heritage Foundation, and Jared Bernstein. Also, the Center for American Progress included it in their Peterson Foundation fiscal plan.

As our policy paper on the chained CPI said:

Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment.

July 13, 2011

Update 7/14: Gov. Dayton and the legislature have reached an agreement to fund the government through the biennium.

The federal government narrowly avoided a shutdown in April, but one state has not been so lucky in its fight over the budget: Minnesota. New governor Mark Dayton (DFL--Democratic-Farmer-Labor) and the Republican-controlled legislature have been sparring over the correct way to close its estimated $5 billion shortfall for 2012-2013 (13 percent of projected spending over that period). Although we have already looked at Minnesota in talking about the attention they paid to tax expenditures, this blog will go through the broader budget showdown that has caught the nation's attention.

The back-and-forth started in February, when the legislature passed a bill that would cut $900 million of spending, mostly from local aid and public colleges. The bill got no DFL support in either house and Gov. Dayton vetoed it. He countered with his own budget proposal, which would balance the budget over the biennium. The proposal included $2 billion in spending cuts and $4 billion in tax increases, including a three percentage point income tax rate increase for people making over $150,000 and a three percent surcharge on top of that for people making over $500,000.

However, the Republican-controlled legislature rejected the tax increases. So, the state House and Senate spent the next few months working to pass the appropriations bills necessary to fund the government with an overall goal of limiting spending to expected tax revenue. As they were working, a number of policies from these bills became lightning rods of criticism for DFL legislators and Gov. Dayton: rolling back Medicaid coverage for childless adults, broad education cuts, a 15 percent reduction in the government workforce, and the aforementioned local government aid cuts. Given the polarized discussion that took place over these bills and united DFL opposition to them, it became clear that the two sides were far apart.

On May 16, Gov. Dayton offered to scale back his tax increase to $1.8 billion, matching the size of his spending cuts. The additional $1.4 billion of (presumably) spending cuts needed to close the budget gap would be negotiated. This offer was also rejected by Republicans, who reiterated their call for no tax increases. The need for compromise was underscored just a week after the offer when Gov. Dayton vetoed all eight budget bills and the tax bill that the legislature had passed. The sides came no closer to passing a budget throughout the next month, so the government had to shut down at the start of the fiscal year a few weeks ago.

New updates on the impasse have come in the past week. Last Wednesday, Gov. Dayton made himself open to other forms of taxation to raise revenue, such as "sin" taxes, instead of his preferred income taxes on high earners. Last Thursday, a bipartisan group led by former Vice President Walter Mondale and former Minnesota governor Arne Carlson released a proposal that contained $1.4 billion of tax increases and $3.6 billion of spending cuts.

Still, these proposals have gone nowhere. Republicans remain unwilling to consider revenue increases, whether on cigarettes or on higher-income earners, and DFL'ers will not accept the spending levels passed by the legislature. The roughly $2 billion difference between the two sides is making all the difference in the world for the citizens of Minnesota.

If you think Minnesota's story sounds like the tale of budgeting in Washington over the past six months, you wouldn't be far off. Hopefully, lawmakers in Minnesota, as well as those here in Washington, can agree on bipartisan plans to control future deficits in the very near future and, in Minnesota's case, actually keep the government running.

July 13, 2011

Yesterday, nearly five hundred business leaders and organizations sent a letter to the President and members of Congress joining the chorus of other concerned groups and citizens (including CRFB! Read more here) urging policymakers to raise the debt limit and also "agree to a plan to substantially reduce our long-term budget deficits with a goal of at least stabilizing our nation's debt as a percentage of GDP". Some notable signatories include: Vikram Pandit CEO of Citigroup Inc., John Chamber CEO and Chairman of Cisco, and Robert McDonald CEO of Proctor & Gamble Co. 

The United State's economic future is inextricably linked to the nation's budget.  A predictable long-term deal will likely provide business leaders with a renewed sense of confidence and certainty regarding future tax and spending levels, which could help create additional investment and job growth. It is essential for policymakers to put aside partisan differences and act in the nation's best interest by avoiding default and agreeing to a comprehensive long-term deal that will set the United States on a sound fiscal footing.

As the letter says:

"First, it is critical that the US government not default in any way on its fiscal obligations. A great nation - like a great company - has to be relied upon to pay its debts when they become due...

Second, our political leaders must agree to a plan to substantially reduce our long-term budget deficits with a goal of at least stabilizing our nation's debt as a percentage of GDP - which will entail difficult choices. The resulting plan must be long-term, predictable and binding. As businesses make plans to invest and hire, we need confidence that, in the absence of a crisis, our government will not reverse course and return to large deficit spending."

 

July 12, 2011

It's the budget that's been stuck in limbo. Sen. Kent Conrad (D-ND), chairman of the Senate Budget Committee, has reportedly been working on a Senate Democratic budget for months, seemingly having held off to see what happens first with the Gang of Six and now with the debt ceiling negotiations. While there has been no official release yet, we do have some broad outlines of what the budget looks like from a speech Sen. Conrad gave yesterday on the floor of the Senate.

The overall budget looks to save $4 trillion over ten years, roughly comparable to the House budget, but with half of the savings coming from increased revenue. The deficit would be put on a downward trajectory, reduced to 2.5 percent of GDP in 2015 and 1.3 percent of GDP in 2021. Although Sen. Conrad only gives a gross debt path for the plan, based on his deficit numbers we roughly estimate that public debt would be 68-70 percent of GDP in 2021, compared to 91 percent of GDP under the CRFB Realistic Baseline. Here are the major components of the savings:

  • Revenue Increases: The Conrad budget slightly alters the formula of the "Obama plan" for the tax cuts by extending them for people making less than $500,000/$1 million. The estate tax is set at 2009 parameters and the AMT is patched. In addition, the budget assumes $2 trillion in new revenue above that from cutting tax expenditures. The exact policies are not specified, but it seems that the plan's logic is that cutting tax expenditures should raise $2 trillion and any rate cuts on top should be paid for with further tax expenditure cuts. Also, though the plan doesn't increase revenue, there is corporate tax reform which cuts the rate to 29 percent and eliminates unspecified tax expenditures.
  • Defense Savings: Again, the specific changes that the budget makes are not yet known, but the Conrad budget aims to be more aggressive than either the President's Budget Framework or the House Budget in this area. This budget saves $886 billion in total security spending, equal to the savings from the Fiscal Commission plan. Whether these savings are accomplished through caps--like the Fiscal Commission--or with specific policy changes (for example the Sustainable Defense Task Force) remains to be seen.
  • Other Domestic Savings: These are a number of small measures such as freezing Congressional pay, freezing White House and Congressional budgets, reducing printing and travel costs, and reducing the number of contractors. Considering the topline savings and the size of the other areas of savings, this is not likely to be a big area of cuts.

Social Security is not touched in this budget, consistent with many of the other budgets that have been released this year. In addition, however, health care also appears to be left untouched (or at least there hasn't been any information about health-care changes). We will have to wait for the release of the final budget to be sure; for now, it sounds as if Sen. Conrad's plan is taking the "wait and see on health care reform" approach.

While we are eagerly awaiting the full details and numbers of Sen. Conrad's budget, we also hope that the White House and Congressional leaders can agree to a debt ceiling increase and the beginnings of a comprehensive plan as soon as possible.

July 11, 2011
A Weekly Update on Fiscal Policy Developments

Clutch Goals -- The U.S. Women’s Soccer team scored an improbable victory over Brazil on Sunday in the Women’s World Cup, overcoming a scoring and manpower deficit with a last-minute goal and sealing the victory through penalty kicks. A similar storyline is playing out in Washington involving a different deficit -- the federal budget deficit. It looks as if negotiations to raise the statutory debt limit and reduce the deficit will also come down to the wire. Hopefully, a last-minute deal can be achieved that averts the catastrophe of default, but it is difficult to score when the goals cannot be agreed upon. The cause was dealt a setback over the weekend as House Speaker John Boehner (R-OH) said a grand bargain including $4 trillion in deficit reduction would not be possible because his caucus could not support the tax increases involved. Negotiators, as they meet again today, must still decide how long of a debt-limit extension and how much deficit reduction they can agree upon in a quickly-diminishing timeframe. The Treasury Department says it cannot hold off a default past August 2, and the White House wants a deal soon to provide enough time to draft and enact the legislation codifying the agreement. CRFB recently offered its thoughts on what needs to come out of the talks and reiterated its position that a multi-year plan to stabilize the debt should accompany a debt ceiling increase last week in a statement. Let’s hope Team USA can pull out another dramatic win.

AMT…CPI…TBD – There is growing talk that a debt limit/deficit reduction deal will include a fix of the Alternative Minimum Tax (AMT) and a change to the Consumer Price Index (CPI). An AMT fix that keeps the tax from affecting the middle class while being offset by revenue increases elsewhere, such as through eliminating or reducing certain tax expenditures, could gain enough support on both sides to pass. And switching to an alternative CPI, which measures inflation and is used to adjust federal benefits like Social Security for cost of living changes year to year as well as certain tax breaks, could also find bipartisan support and produce significant deficit savings. A recent paper makes the case for how a switch to ‘chained CPI’ can reduce the deficit.

Ethanol Deal Fuels Tax Expenditure Reform Hopes – A bipartisan trio of senators announced late last week that they reached agreement on a measure to end tax subsidies for ethanol production. The deal reached by Sens. Amy Klobuchar (D-MN), John Thune (R-SD), and Dianne Feinstein (D-CA) will abolish the ethanol tax credit and dedicate two-thirds of the estimated $1.3 billion in savings to deficit reduction, with the rest going to promote alternative fuel development. The agreement underscores the increased scrutiny tax expenditures are receiving as lawmakers look for ways to reduce the deficit. See here and here for more on reforming tax expenditures.

Defense Spending Getting Harder to Defend – The House passed the FY 2012 Defense spending bill last week. Although it passed easily and is the only 2012 appropriations bill to increase rather than decrease spending over the previous year, votes on amendments presage Pentagon spending battles to come. For example, an amendment that would have shifted $200 billion in funds from reconstruction in Afghanistan to deficit reduction was narrowly defeated in a 210-217 vote.

Balanced Budget Amendment Gets Its Moment – House Majority Leader Eric Cantor (R-VA) announced that the House will vote on a balanced budget amendment to the Constitution next week. Senate Minority Leader Mitch McConnell (R-KY) also wants a vote in his chamber that week. The proposal preferred by Republicans will not only require that the President submit a balanced budget annually, but would also cap spending at 18 percent of GDP and require a two-thirds supermajority vote in Congress to raise taxes. The Peterson-Pew Commission on Budget Reform has offered its own blueprint for improving the budget process towards facilitating debt reduction in Getting Back in the Black. The Commission also recently produced a Fiscal Toolbox that summarizes and compares ideas like balanced budget amendments, spending caps, and debt triggers. Both publications are part of a one-stop online resource created by the Commission to help policymakers, media, and the public better understand the fiscal tools that are being discussed regularly.

Eyeing IPAB – The Independent Payment Advisory Board (IPAB), an entity created by the health care reform law to help constrain the rise of Medicare costs, will come under intense scrutiny this week with two congressional hearings. Both the House Energy and Commerce Committee and House Budget Committee will look at the agency. Lawmakers on both sides have raised concerns about the board because they claim it usurps congressional power. CRFB sees IPAB as essential to controlling health care costs and offered suggestions to strengthen it in a paper last year.

Ideas for Social Security Reform – The House Ways and Means Committee held a hearing on Friday on Social Security’s finances. CRFB board member Gene Steuerle was one of the witnesses and offered ideas to reform the program to ensure its long-term solvency. Among his recommendations were to increase the retirement age and capping expected lifetime benefits. See here for ideas from CRFB for strengthening the program’s long-term finances.

Key Upcoming Dates

July 11

  • Meeting between White House and congressional leaders towards a deal to raise the debt limit and reduce the deficit. President Obama is scheduled to give a press conference at 11 am ahead of the meeting.

July 12

  • House Budget Committee hearing on “Medicare’s Future: An Examination of the Independent Payment Advisory Board” at 10 am.

July 13

  • House Energy and Commerce Committee hearing on “IPAB: The Controversial Consequences for Medicare and Seniors” at 9 am.
  • House Budget Committee hearing on “Medicare and Social Security: The Fiscal Facts” at 10 am.
  • Federal Reserve Chairman Ben Bernanke testifies before the House Financial Services Committee at 10 am.

July 14

  • Senate Finance Committee hearing on “Perspectives on Medicaid from Select Governors” at 2 pm.

August 2

  • Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.
July 11, 2011

In her latest commentary for CNN Money, CRFB president Maya MacGuineas urges Washington lawmakers to go big on the debt ceiling. She also lays out what we should be looking for in a debt-ceiling deal, and says that "the bottom line is that any real deal needs to be large, specific and passed this year to be seen as credible. Out of this debt ceiling negotiation, we should expect no less."

 

Click here to read the full commentary.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

July 8, 2011

Coverage of the so-called "chained CPI" has been heating up recently, due to rumors that it might be included in the latest round of debt negotiations. The Wall Street Journal reported that it could be a potential "link to a budget deal", as the idea of switching to the chained CPI has won support from both the left and the right. The Hill and Bloomberg covered the story as well, with the latter quoting CRFB’s own Marc Goldwein who stated that "It’s a no-brainer. We’re measuring inflation wrong now and it’s obvious we should measure it right--especially if it’s going to reduce the deficit."

For a little background, a number of federal programs and provisions of the tax code are indexed to inflation -- but they are indexed to a measure which overstates cost of living increases. Switching to the more accurate inflation measure known as the Chained CPI is not only good policy, but would reduce the deficit by over $250 billion over the next decade. 

Yet a recent distributional analysis from the Joint Committee of Taxation pours some cold water on this policy by suggesting that, according to a press release from Congressman Sander Levin, switching to chained CPI "would hit middle- and low-income Americans hardest."

Looking at JCT's tables without any context does indeed suggest that low-income individuals (particularly those making between $10,000 and $20,000 per year) are hit hard by this policy. However, a more complete analysis of the distributional affect from the Tax Policy Center shows the change to be close to distributionally neutral. 

JCT's estimates are limited in a few ways, including that they look at percent of taxes paid (so if someone pays $10 a year and this policy increases it to $12 that is a 20 percent tax increase) rather than percent of income and that they do not account for the many low income individuals who do not file tax returns. In addition, they assume the continuation of current law where a very large number of taxpayers are hit by the Alternative Minimum Tax (AMT) rather than the regular income tax -- even though Congress enacts AMT  "patches" every year. Taxpayers subject to the AMT are not affected by the changes in indexation of tax brackets or deductions from chained CPI, and the chained CPI would not affect a significant number of higher income earners because they are pushed into the AMT. Under a baseline which assumes continuation of an AMT patch, which prevents a dramatic increase in the number of taxpayers subject to the AMT, chained CPI would have a much greater impact on the top two quintiles. Looking at the above graph, taxpayers earning between $100,000 and $200,000 would be affected the most by a change to the chained CPI compared to a baseline that patches the AMT.

The Tax Policy Center analysis looks at the impact of chained CPI relative to current policy, and finds that pretty much everyone (except the very rich and very poor) would see their taxes go up by about 0.2 percent of income by 2021 -- compared to current projections.

Indeed, those making over $100,000 a year, according to TPC's analysis, will bear nearly 60 percent of the burden from switching to chained CPI (compared to 30 percent using JCT's current law numbers). The top quintile alone will pay more than 40 percent of the additional taxes.

More to the point, though, chained CPI is a more accurate measure of inflation and even if the distributional impacts were less favorable it would not change that. But if policymakers are concerned about the distributional impact of the chained CPI on certain taxpayers, any number of changes can be made to the tax code to achieve a desired distributional outcome in a far more targeted and efficient manner, just as the impact of chained CPI on certain Social Security beneficiaries could be offset by targeted policies such as an old-age benefit bump-up. Take the Fiscal Commission's tax plan which not only enacts the chained CPI but also raises an additional $1 trillion in revenue -- and yet actually reduces taxes for the bottom quintile.

Bottom line: there is no reason to maintain a $450 tax windfall for those in the top quintile just to protect a $25 windfall for those in the bottom quintile -- something like a $25 increase in the EITC or even child tax credit would be far cheaper and better targeted.

We have a tremendous debt problem ahead which will require at least $4 trillion in deficit reduction over the next decade alone. As we wrote recently, "addressing our fiscal challenges will require many tough choices and policy changes – but switching to the chained CPI represents neither."

July 7, 2011

In an op-ed today in The Washington Post, Sen. Mark Warner (D-VA) pleads with lawmakers to act quickly to raise the debt limit and to seek a comprehensive $4+ trillion deficit reduction package that looks at all areas of the budget. Warner writes, "Everything I learned about our economy and the financial markets as a businessman and as a governor tells me that we cannot wait much longer."

We have similarly called for lawmakers to raise the debt limit and fix the budget by agreeing to at least $4 to $5 trillion in deficit reduction, and recent reports suggest that is what the President and leaders in Congress will be discussing in the coming weeks.

Here is the full op-ed by Sen. Warner:

Every serious observer knows that we need to increase our country’s debt ceiling and get behind a comprehensive, balanced, bipartisan solution to our $14 trillion debt and our $1.5 trillion annual deficit.

So what are we waiting for?

The Arizona senator (mis)interprets American voters.

We are waiting for politicians to quit drawing lines in the sand and admit that solving this gigantic problem in a time of divided government means that both sides will have to give ground.

We are waiting for business leaders to stop talking vaguely about the need to get our balance sheets in order and to call out elected leaders who stand in the way of doing it.

We are waiting for the leaders of Wall Street to speak out. They have recovered far more quickly than most Americans from the market meltdown of 2008, but they at least should understand the repercussions of playing Russian roulette with the debt ceiling.

I’m glad that President Obama has invited congressional leaders to the White House Thursday to discuss possible solutions to our country’s fiscal crisis. We add more than $4 billion to the national debt every day that we fail to act, and the Treasury’s Aug. 2 deadline on the debt ceiling is fast approaching.

For months, we have known that no plan will succeed if it just slashes programs such as Medicare or imposes big hikes in tax rates. We’ve known that we need a plan that eliminates at least $4 trillion in debt over the next decade, slows the growth in entitlement programs and raises new revenue through tax reform.

Everything I learned about our economy and the financial markets as a businessman and as a governor tells me that we cannot wait much longer.

Business leaders all tell me the same thing: Failing to raise the debt ceiling will increase interest rates, gut consumer confidence, and drag down business investment and job creation. Every one-point increase in interest rates increases the national debt by $1.3 trillion over a 10-year period, and who knows how much rates could increase.

Yet with few exceptions, our business leaders have not demanded an end to the political brinkmanship. Wall Street, too, has been strangely silent.

Two years after a near-collapse of our financial markets, even with ominous credit-watch pronouncements issued last month by Moody’s, Fitch and Standard & Poor’s, many business leaders yawn as some elected officials prepare to punt on the full faith and credit of the United States.

Maybe business leaders think that this debate is just political theater and assume that a deal will emerge. Maybe they don’t believe politicians who declare that they will never vote to raise the debt ceiling or casually rule out entitlement reform or a penny of additional revenue.

If we don’t act boldly before Aug. 2, working from both sides of the balance sheet, the smart money soon will begin to bet against us on world financial markets. Add that to financial upheaval in Europe, and you have a recipe for an economic disaster far worse than we faced in 2008.

Unlike 2008, however, our nation has already used the traditional economic tools available to us. The Federal Reserve slashed interest rates, and Congress passed a fiscal stimulus, but the U.S. recovery remains weak. And still the debt grows.

These are the facts that demand tough choices: Federal spending is at an all-time high of 25 percent of our GDP, and our government revenue is about 15 percent of GDP, a 60-year low.

It doesn’t take an MBA to recognize that the only way to close that gap and restore fiscal stability is to attack both sides of the ledger. We must cut spending, including defense and entitlements, and we must find reasonable ways to increase revenue.

In six months of increasingly tough negotiations as part of the Senate’s “Gang of Six,” I’ve learned that failing to embrace a bold, comprehensive, bipartisan plan will wreck our economic recovery, kill jobs and place our country at a competitive disadvantage for decades.

The president’s bipartisan fiscal commission called its report “The Moment of Truth.” Here is the truth: We need to raise the debt ceiling and ignore irresponsible politicians who would let us default.

To regain fiscal health, we need a plan that cuts our debt by at least $4 trillion. It can achieve that only with spending cuts and greater revenue.

Elected leaders who ignore the truth and business leaders who indulge them will be responsible if we fail.

The writer, a Democrat, is a member of the Senate’s Banking, Budget, Commerce and intelligence committees. He is a co-founder of Nextel and was governor of Virginia from 2002 to 2006.

July 7, 2011

CRFB has been calling pretty much continuously for a debt reduction package which puts everything on the table, addresses entitlement spending growth, and achieves a minimum of $4 trillion in savings over the next decade. So, you can imagine what a pleasant surprise it was to see a front-page article in today's Washington Post suggesting that President Obama will call for $4 trillion in savings instead of $2.5 trillion, and will additionally call for Social Security reform.

According to the article:

As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security...Rather than roughly $2 trillion in savings, the White House is now seeking a plan that would slash more than $4 trillion from annual budget deficits over the next decade, stabilize borrowing, and defuse the biggest budgetary time bombs that are set to explode as the cost of health care rises and the nation’s population ages.

We are hopeful that this "go big" strategy will be successful in getting both parties to agree to a package. As CRFB president Maya MacGuineas said in our release yesterday on the negotiations:

Settling for a "down payment" and punting the real choices on structural entitlement and fundamental tax reform until after the election should not be seen as enough. We need to lift the debt ceiling immediately and at the same time put in place plans to complete a full fiscal package by the end of the year. The only excuse for waiting any longer is an unwillingness by politicians to face up to the tough fiscal choices we obviously are going to have to face. Every bit of delay creates the risk that we will wait too long.

July 6, 2011

While much of the conversation on tax increases in a debt ceiling budget deal has seemed to focus on corporate jet owners, Sen. Jay Rockefeller (D-WV) has offered up a broader range of tax increases to reduce future deficits.

These tax increases focus almost exclusively on the wealthy, but they would raise a lot more revenue than the $3 billion saved from repealing accelerated depreciation for corporate jets. Some of the bigger ticket items (with ten-year savings relative to current law) are:

  • Repeal the 2001/2003/2010 tax cuts for people making over $250,000 at the end of 2011, instead of waiting until the end of 2012 for them to expire ($41 billion)
  • Raise capital gains rate to pre-1997 level of 28 percent ($125 billion)
  • Revert to pre-2001 estate tax parameters this year ($32 billion)
  • Cap itemized deductions at 28 percent ($300 billion)
  • Enact a three percent millionaires' surtax ($200 billion)
  • Repeal oil and gas subsidies ($35 billion)

Other small measures include a possible soda tax, repealing the ethanol tax credit, legalizing and taxing internet gambling, disallowing yachts to be claimed as second homes for the mortgage interest deduction, and repealing accelerated depreciation for racehorses and (yes) corporate jets.

Combined, Sen. Rockefeller's office claims that these measures would raise $1.3 trillion relative to current law; in other words, they could pay for roughly half of the extension of the 2001/2003/2010 tax cuts for people making under $250,000. That would certainly be an improvement over the December tax cut extension that fully extended the tax cuts (among other policies) without any offsets.

We applaud Sen. Rockefeller for coming up with specific revenue proposals. Sen. Rockefeller touches on closing some of the special credits, deductions, and exclusions in the tax code, but could make the code even simpler and fairer by taking an even harder look at the $1 trillion in tax expenditures. While his proposal would be a good start on deficit reduction, it will be impossible to get a grip on future deficits and debt if the rise in health care costs and retirement spending is not tackled. A balanced, comprehensive tax reform plan combined with spending cuts in all areas of the budget of at least $4 trillion in savings would be a great start. Nonetheless, Sen. Rockefeller has provided some individual provisions that could be useful for lawmakers to consider in current discussions.

July 6, 2011

At a press briefing yesterday, President Obama invited Congressional leaders of both parties to the White House tomorrow to continue ongoing debt ceiling negotiations. As the August 2nd deadline for raising the limit draws nearer, the President also stressed the need for lawmakers to be open to compromise, saying he hoped "that everybody is going to leave their ultimatums at the door."

As pressure intensifies and opposing parties continue to cast blame, using budget gimmickry as a quick fix to the problem probably seems like an increasingly appealing solution. However, as we stated in our recent paper What Needs to Come Out of the Debt Ceiling Negotiations, using budget gimmicks to avoid making the necessary tough choices is a huge DON'T.

While failing to raise the debt ceiling in time would be a serious mistake, so too would be failing to enact a credible plan to reduce and stabilize the debt. If the plan resulting from ongoing negotiations is seen as weak or ineffective in addressing long-term drivers of the debt, it could be perceived as a sign that Washington is unable to correct its fiscal imbalances, which could also damage the economy. Using budget gimmicks would undermine the credibility and effectiveness of any fiscal plan, and should be avoided.

Here are some potential budget gimmicks to look out for:

  • Manipulating the baseline: There are many reasonable baselines for policymakers to choose from. However, different baselines can make the total amount of savings bigger or smaller than the $4 trillion target we have called for -- so each baseline requires a different deficit target. Policymakers should focus on what levels they can get deficits and debt down to.
  • Counting war savings: Under current law, spending in Iraq and Afghanistan is technically projected to grow with inflation, despite plans for withdrawal being in place. While it may be sensible to apply budget controls to war spending, such savings (which could total more than $1 trillion) should not be counted towards the $4 trillion in total deficit reduction since policies to achieve them are already in place.
  • Expanding the timing window: Stabilizing and reducing the national debt will require at least $4 trillion in savings over ten years compared to our plausible baseline. Extending that time frame to more than ten years would result in insufficient deficit reduction and should be avoided.
  • Excessively back-loading savings: A sensible plan to stabilize the debt will implement policies gradually both to avoid disrupting a very fragile economic recovery and to give people time to adjust. However, excessive and arbitrary back-loading might be a sign that politicians are not serious about deficit reduction and are instead counting on future Congresses to override what they have put in place.
  • Assuming expiring provisions are paid for (or expired): When identifying a plan's effect on the debt and deficit, lawmakers must make realistic assumptions about the future. In assuming current law (under which the Bush tax cuts, the AMT, and the SGR either expire or revert to levels never allowed by Congress), lawmakers could greatly exaggerate the effectiveness of their plan.

The debt ceiling offers lawmakers an opportunity to begin dealing with deficits and debt. Let's hope they avoid resorting to budget gimmicks.

July 5, 2011

At 4:40pm today, the President will brief the press on the state of the budget negotiations and the next steps. See the live streaming video here -- starting now.

July 5, 2011
A Weekly Update on Fiscal Policy Developments

More Fireworks in Store – Washington, DC celebrated Independence Day on Monday night with its annual fireworks display on the National Mall. Though the traditional pyrotechnics may be out of the way, lawmakers returning to work today could produce more fireworks in the nation’s capital. The Senate cancelled its planned recess this week to tackle debt limit negotiations, but leaders still appear to be no closer on the matter of whether taxes will be included in a package pairing a debt ceiling increase with deficit reduction. President Obama asked Congress to stay in Washington until a debt limit agreement is reached in a White House press conference on Tuesday. He also called for a balanced approach that includes reductions in defense spending, entitlements, and “spending in the tax code,” also known as tax expenditures. To put it all in perspective, CRFB last week updated its Long-Term Realistic Baseline, which now shows the national debt reaching 88 percent of GDP in 2020 and 140 percent by 2035.

Heading Towards a Short Term Debt Limit Deal? – The Declaration of Independence remains an enduring document 235 years after its adoption. Those negotiating a debt limit increase have a much shorter timeframe in mind, perhaps very short. With no signs of the impasse over taxes being lifted, an increase of a few months is looking more likely. Former President Bill Clinton urged Obama to take such an approach if Republicans don’t budge on taxes, and Sen. John Cornyn (R-TX) hinted on Sunday that things may go in that direction. CRFB offered its thoughts on what the debt limit negotiations should accomplish in a recent paper.

Declaring Independence from Tax Breaks – Tax expenditures have become a popular topic on Capitol Hill as policymakers look for revenues to include in a debt limit deal. President Obama specifically singled out tax breaks for oil and gas companies and corporate jet owners in his Tuesday press conference. Senate Majority Leader Harry Reid (D-NV) said he may schedule a vote on ending a particular tax expenditure or package several together for a vote. Meanwhile, Sens. Amy Klobuchar (D-MN), John Thune (R-SD), and Dianne Feinstein (D-CA) are working on legislation to pare back tax subsidies for ethanol. Also, Sen. Kent Conrad (D-ND) suggested that coupling tax increases with permanent relief from the Alternative Minimum Tax (AMT) could achieve Republican support. See here and here for ideas for eliminating and reducing tax expenditures.

Democratic Budget on Deck – Like throwing burgers on the grill, we can soon add another budget plan to the heat of scrutiny. Sen. Conrad, who is chairman of the Senate Budget Committee, will share his long-awaited budget proposal with his fellow Senate Democrats this week. Conrad says it will contain over $4 trillion in deficit savings over the next decade. But there are still no plans for a committee mark-up because Conrad wants to reserve the budget resolution as a vehicle for a possible debt limit deal. Compare the fiscal plans that have already been released using CRFB’s comparison tool.

Appropriations Bills March Forward – With the House back from its recess, the parade of FY 2012 spending bills will continue. Floor action on the Defense appropriation measure will resume with votes on amendments and final passage expected this week. The Energy-Water spending bill is next in line for floor consideration. On the other side of the Capitol, the Senate Appropriations Committee adopted its first spending bill (Military Construction-Veterans Affairs) last week, with a price tag of $142 billion. But work on other bills is not expected as the chamber has yet to agree on a top-line spending figure to guide the process. With the budget process becoming more drawn out, the ideas offered by the Peterson-Pew Commission on Budget Reform for making the process more functional in Getting Back in the Black are becoming more essential.

More Warnings on Debt Limit – Like Paul Revere making his famous ride, there are plenty of voices warning of the perils of the forthcoming debt limit deadline, which the Treasury Department reaffirmed is August 2. Bond rating firm Standard & Poor’s warned that failure to increase the debt ceiling would result in a swift lowering of the U.S. credit rating. And a detailed analysis by the Bipartisan Policy Center illustrates the effects on government operations that will ensue if the limit is not raised by early August. Check out CRFB’s ongoing Debt Ceiling Watch to stay abreast of the “extraordinary measures” being taken by the Treasury Department to avoid breaching the limit.

Medicare Changes Considered – The New York Times reports that the White House is offering Medicare and Medicaid cuts as part of a debt limit deal, contingent on if Republicans agree to revenue increases. In addition, last week Sens. Joe Lieberman (ID-CT) and Tom Coburn (R-OK), introduced Medicare reform legislation designed to strengthen the program’s long-term finances and save over $600 billion over ten years. See some ideas from CRFB for health care savings.

Spending Cap Bill Introduced – While many removed their caps at some point this weekend for the national anthem, Sen. Pat Toomey wants to put on a cap, namely a cap on federal spending. He unveiled legislation last week that divides federal spending into six categories with different caps. For example, non-discretionary defense spending would be reduced to $435 billion in 2012, frozen at that level for seven years and then indexed to inflation thereafter. CRFB has provided a handy Fiscal Toolbox that summarizes and compares various budget tools being discussed to reduce the national debt, such as spending caps and debt triggers. See more budget resources here.

Promoting Bipartisanship – Just as the signers of the Declaration of Independence cast aside ideological differences in agreeing on the document, Sen. Mark Udall (D-CO) is seeking that same spirit in addressing the debt. He is circulating a letter for signatures supporting a bipartisan approach to addressing the national debt using the recommendations from the White House Fiscal Commission as a template. Meanwhile, the Moment of Truth Project, which is led by Fiscal Commission Co-chairs Sen. Alan Simpson and Erskine Bowles and “aims to use the Fiscal Commission’s findings to spark a national discussion on the need to implement a comprehensive budget fix, and to help further develop the policy reforms to improve the nation’s fiscal outlook,” launched its new website last week, along with an updated estimate of the Commission’s proposal.

Rockefeller Rolls Out Ideas – Sen. Jay Rockefeller (D-WV) has put forth his ideas for reducing the deficit. His 18 proposals, all on the revenue side, would reduce the deficit by $1.29 trillion over ten years, according to his office. Recommendations include eliminating tax breaks for oil and ethanol, ending the 2001/2003/2010 tax cuts for the wealthy, and capping itemized tax deductions.

Key Upcoming Dates

July 6

July 7

  • House Budget Committee hearing on “Budgeting for America’s National Security” at 10:00 am.

July 8

  • House Ways and Means Committee hearing on Social Security’s finances at 9:00 am.

August 2

  • Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.
July 5, 2011

After a sold-out presentation in Jackson Hole, Wyoming last week in which Fiscal Commission co-chair Senator Alan Simpson detailed the Commission's $4+ trillion long-term deficit reduction plan, over 200 Wyoming residents signed a letter urging their elected officials -- President Obama, Senators Enzi and Barrasso, and Congresswoman Lummis -- to endorse a compromise along the lines of the Commission plan, if not the plan itself. As a sign of bipartisan agreement on the letter, leading the signees are the chairs of the Democratic and Republican parties for Teton County (the county that Jackson Hole is in).

This letter is just one example of the support many citizens have for bipartisan action on a comprehensive plan that can set our nation on a sound fiscal path. The signers write:

"The political games must end. Everything needs to be on the table and compromise will be essential to success."

Sen. Simpson, a member of the CRFB board, spends much of his time on the road giving talks just like the one in Jackson Hole. With a little luck, he and other voices can help lead the discussion across the country toward promoting a long-term, comprehensive fiscal consolidation plan.

Check out the letter at the Concord Coalition's website here.

July 5, 2011

In a recent report, CBO estimated the base defense budget from 2012 out through 2030 using the Defense Department's Future Years Defense Program (FYDP) -- DoD's five-year plan for defense spending submitted to Congress in April 2011 -- to project future spending.

While the FYDP only provides for spending through 2016, CBO has extrapolated what defense spending would be if the budget were to be maintained through 2030, projecting the budgetary effects of decisions included in the near-term five-year window. For the 2012-2016 period, CBO estimates that the FYDP would grow defense spending by 1.8 percent annually after adjusting for inflation. Beyond 2016, the budget would have 0.5 percent real growth.

CBO expects that increases in operation and support costs will be the big driver of the increases in defense spending over the next few decades under this budget plan. This category basically breaks down into spending on military personnel -- compensation and health care -- and operation and maintenance. Both categories are expected to be on the rise through the next decade in the FYDP, taking up a larger share of the overall defense budget. We've broken down spending by category (in 2012 dollars) in the table below.

Defense Spending by Category (Billions of 2012 Dollars)

2012 2016 2021 2030
Operation and Maintenance $207 $226 $248 $284
Military Personnel $143 $144 $155 $175
Procurement $113 $140 $140 $110
Research and Development $76 $69 $69 $58
Military Construction $13 $12 $13 $13
Family Housing $2 $2 $2 $2
Total, Base Budget $554 $594 $625 $642

 

Compared to last year, the path is similar for the first decade, but growth rates diverge in the second decade. Based on the average growth rates, defense spending by 2030 in this year's FYDP is about $50 billion lower than last year's FYDP. In particular, the acquisitions portion of the budget is more restrained compared to last year's plan.

Of course, making projections for discretionary spending can be very difficult, given that lawmakers must appropriate funding each year and the unpredictability of future security needs. However, it is still useful to see what the Pentagon is looking to spend on defense over the long-term as we comb through the defense budget for savings. With this in mind, defense spending -- like all areas of the budget -- should be part of any fiscal plan to put our fiscal house in order.

July 1, 2011
Close the Tax Loophole for Online Retailers

In today's Washington Post, CRFB board member Dan Crippen makes the case for closing the tax loophole for online retailers.

Mr. Crippen argues that the tax break harms local retailers that pay state and local taxes, create jobs, and contribute to the local economy and community. He also points out that because online retailers can escape sales taxes, "state and local governments will be forced to rely more heavily on personal and corporate income taxes, undermining consumption taxes that economists mostly favor." He concludes:

"States are under enormous fiscal pressure. All states must balance their budgets, and the erosion of the sale tax base means less money for education, transportation, infrastructure and the myriad services that states uniquely provide.

There are thousands of organizations focused on Washington, trying to preserve federal funding for their specific programs while Congress tries to cut spending. Constituents might be well served if lawmakers closed this glaring loophole so states can collect what they are owed, and helped prevent the creation of other special-interest exemptions."

 Click here to read the full op-ed.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.

July 1, 2011

It’s hard to deny that Twitter has become an important medium, having recently surpassed 300 million registered users. The White House has recognized its emergence by scheduling its first Twitter Townhall for Wednesday, July 6. The topic will be the economy and there likely will be, and should be, questions on the debt limit and national debt in general. You can submit your own question via Twitter using the #AskObama hashtag.

CRFB has been active on Twitter as well with our @BudgetHawks account recently surpassing 1,000 followers. Among our recent followers is @DavidHasselhoff, “The Hofficial Tweet!” If you are not following us already, we encourage you to do so for the latest fiscal news, timely information and discussion on the federal budget and national debt.

July 1, 2011

As if we didn't have enough on CBO's Long Term Outlook last week, we have more long-term budget projections, this time in the form of CRFB's Realistic Baseline!

Our projections use slightly different assumptions than both the Extended Baseline and the Alternative Fiscal Scenario (AFS). The resulting fiscal path just about splits the difference between the two baselines, which amounts to a wholly unsustainable fiscal outlook (if slightly less dire than the AFS). Under the CRFB Realistic Baseline, debt reaches 88 percent of GDP by 2020, 140 percent by 2035, and 437 percent by 2080. You can read more on the assumptions we made and the numbers that come out of it here.

But understanding why our baseline differs from CBO's other two scenarios requires understanding the difference between their current law scenario ("Extended Baseline") and their current policy scenario ("Alternative Fiscal Scenario"). Under the former, debt never exceeds 90 percent of GDP (and would fall to about 60 percent by 2050 if the wars were drawn down) while in the latter it exceeds 200 percent by 2037. The differences that lead to these disparate outcomes include:

  • Doc Fixes: Under current law, Medicare physician payments are scheduled to be cut by 30% as part of something called the Sustainable Growth Rate. The AFS (and CRFB's Realistic Baseline) assumes politicians freeze physician payments instead.
  • AMT Patches: The Alternative Minimum Tax is a secondary tax meant to capture high earners with low tax burdens. However, for a number of reasons, it now technically impacts middle-income families and so politicians pass annual "patches" to avoid this from occurring. Under current law, patches will stop while under the AFS (and CRFB's Realistic Baseline) they continue.
  • Tax Cuts: Under current law, the 2001/2003/2010 tax cuts expire at the end of 2012, as do a number of temporary "extenders". The AFS assumes that policymakers make both permanent (while CRFB's Realistic Baseline only assumes the 2001/2003/2010 tax cuts continue).
  • PPACA Cost Controls: The health reform law included a number of cost controls for Medicare and the exchange subsidies which are now part of current law but may prove unsustainable over the long-run. The AFS assumes that they are effective through 2021 but are overridden thereafter (CRFB's Realistic Baseline assumes they are partially overridden).
  • Discretionary Spending Growth: By budget convention, the current law baseline assumes discretionary spending grows with inflation through 2021 (as does CRFB's Realistic Baseline). The Alternative Fiscal Scenario instead assumes it grows with GDP.
  • Revenue Freeze: Were all the tax cuts (and AMT patches) to be renewed, revenue would still grow as a share of GDP due mainly to something called "real bracket creep" -- as well as due to the effect of the health care excise tax. However, the Alternative Fiscal Scenario holds revenue constant at 18.4 percent of GDP after 2021, essentially assuming that policy makers will enact future additional tax cuts.
  • War Drawdown: By  convention, CBO's current law baseline assumes all discretionary spending -- including for the wars -- will grow with inflation. However, the Alternative Fiscal Scenario (as well as CRFB's Realistic Baseline) assumes that troops will gradually be drawn down.

Here is a graphical bridge between the two scenarios (with the war drawdown added to current law).

Note: Interaction between the tax cuts and the AMT has been distributed among the two categories proportionally.

Not surprisingly, the tax cut extension contributes a significant chunk of debt to the AFS, although over the 75-year window, the assumption that revenue is frozen as a share of GDP plays a bigger role. AMT patches, discretionary spending growth, and the success of health reform's cost controls all play a big role as well.

The AFS and our Realistic Baseline paint a very bleak fiscal picture. However, as we pointed out earlier in the week, if lawmakers simply pay for any policy that diverges from current law, we will find ourselves in a much better situation.

July 1, 2011

June has come to a close. With that also comes an end of the second round of quantitative easing, known as QE2.

QE2 started off small in August 2010 after the promising early-year economic numbers had turned south. At the August 10th FOMC meeting, the Committee agreed to re-invest proceeds from maturing mortgage-backed securities and agency debt into long-term Treasury securities. The move would hold the size of the Fed balance sheet constant, instead of having it shrink as it otherwise would. The idea was that increased Fed holdings of long-term Treasuries would push down long-term interest rates, hopefully to help promote economic activity and investment now.

The "re-investment" stage of QE2 was only a small step. In the three months between its start in August and the second phase of QE2 in November, Fed holdings of long-term Treasury bonds rose by about $70 billion. Because the economic outlook continued to deteriorate into the fall and the specter of deflation seemed looming, the Fed found itself willing to act with more force three months later.

On November 3, the FOMC announced a plan to buy $600 billion of long-term bonds through June 2011 in addition to the re-investments it had already started making. Considering the subdued inflation numbers in recent months, the Fed wanted to move inflation back towards its implicit target of two percent, so they felt an expansion of the balance sheet was necessary.

Overall, it was expected that the Fed would end up buying an additional $800-$900 billion over that time period. The Fed has just about met that target, increasing its holdings of long-term Treasuries by about $750 billion since November 3rd and $800 billion since early August. Since November, the size of the overall balance sheet has increased by roughly $600 billion as expected.

 

 

 

 

What is the legacy of QE2? Certainly, the prospect of deflation has gone away, and inflation is running closer to the Fed's implicit target, so in attempting to achieve one part of its dual mandate, it has seemed to succeed. However, its impact on other economic indicators seems to have been limited, a point made in a well-publicized article back in April. Although hiring numbers this year have been improved compared to last fall, the improvement is not great and it is unclear whether the small progress is a result of QE2, the stimulus in the tax cut deal, or other factors. Others have defended QE2 (see here and, more recently, here) as having done what it was supposed to do--ward off deflation and boost financial markets--and that it shouldn't have been expected to bear the full burden of having to improve employment and growth numbers significantly.

As of right now, it does not seem as if QE3 is in the works. The FOMC did announce last week that it would continue re-investing its securities holdings as they mature to ensure the balance sheet does not shrink, but further expansion is not on the horizon yet. 

So, it seems we must bid farewell to quantitative easing. To continue to track changes in the Fed balance sheet, among other government efforts to stabilize the economy and financial markets, check out Stimulus.org.

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