The Bottom Line
Yesterday was the 5th of November, also known Guy Fawkes Day in the UK. But in the US, this date also has special significance for being the day upon which President Bush signed the bipartisan Omnibus Budget Reconciliation Act (OBRA) of 1990 into law, the largest deficit reduction package (in real dollars) ever achieved through reconciliation. The reconciliation legislation contained nearly $750 billion (in 2013 dollars) of deficit reduction over 5 years, through a combination of revenue increases and spending cuts. It included the Budget Enforcement Act, which created caps on separate categories of discretionary spending and the pay-as-you-go (PAYGO) rule for taxes and mandatory spending that requires that any legislative changes that increase mandatory spending or reduce revenue are fully offset. The combination of those changes in policies and rules, as well as the following reconciliation bills, played a large role in acheiving budget surpluses at the end of the decade.
Budget reconciliation is a "fast-track" process that makes it easier for Congress to make changes to spending and revenues that would bring them in line with levels dictated by a budget conference agreement. Reconciliation legislation is given expedited consideration, including passage by a simple majority (a filibuster can be prevented with 51 votes instead of 60) and strict rules for debate and amendments. As we explained in our Q&A, a budget resolution cannot enact policy changes that would affect mandatory spending or revenue, but can set targets for the reconciliation process. The committees of jurisdiction then can decide what policy changes should be made to achieve those targets. Budget reconciliation bills cannot include policies that are not related to the budget and cannot increase the deficit outside the budget window. It was first used in 1980 to reduce the deficit by $8 billion in 1981 through some small changes to entitlement programs and taxes.
The 1990 bill is one of 20 budget reconciliation bills enacted into law, although an additional three bills were passed by Congress but vetoed by the White House. Of those 20, 16 reconciliation bills have reduced the deficit, with the most successful being the 1990 bill and the Omnibus Reconciliation Act of 1993. The graph below shows the 5-year deficit impact of every bill passed in part or in whole through reconciliation since the 1990 OBRA in 2013 dollars.
Source: Congressional Budget Office, Congressional Research Service
Note: Above figures are in 2013 dollars and are approximate
We argued in our recent report, "What We Expect from the Budget Conference Committee," that the conferees should use this opportunity to direct the committees of jurisdiction to achieve significant savings through the budget reconciliation process. History shows that lawmakers can be very successful when they use this tool in its intended way. Hopefully, Democrats and Republicans in Congress can use this moment to pass the largest reconciliation bill in the nation's history.
The Senate Finance and House Ways & Means Committees, last week, released a bipartisan, bicameral discussion draft of a proposal to permanently replace Medicare’s sustainable growth rate (SGR) formula, which is set to cut physician payments by nearly 25 percent next year. The new system would instead freeze physician payments through 2023, but also create a performance-based incentive payment program beginning in 2017 and provide additional bonus payments to health care professionals who join Alternative Payment Models (APMs) that take two-sided financial risk subject to quality metrics, such as some forms of Accountable Care Organizations (ACOs). The 10-year budget cost of the proposal is unclear, though it would likely be slightly above the $140 billion cost of a 10-year payment freeze.
The proposed framework primarily consists of 5 substantial delivery and payment system reforms:
1) SGR Repeal and Annual Update (Cost = $139 billion)
The proposal would permanently repeal the SGR mechanism and freeze base payment updates through 2023 (before any other bonuses or penalties). After 2023, health care professionals (including individual physicians, physician assistants, nurse practitioners, and clinical nurse specialists) participating in an advanced APM(s) would receive annual updates of 2 percent, while all others would receive annual updates of 1 percent. Beginning payment updates after the 10-year Congressional Budget Office (CBO) budget window will help to minimize the cost that must be offset through pay-as-you-go (PAYGO) rules, but lawmakers should be cognizant of the effects of policies over a longer-term horizon when our debt problems will become more severe. Offsetting policies, therefore, should be chosen with an emphasis on those with effects that grow over time.
2) Value-Based Performance (VBP) Payment Program (Cost ≈ $10 billion)
The plan would introduce a new, single budget-neutral program – the Value-Based Performance (VBP) Payment Programs – in 2017 to adjust Medicare payments to professionals based on performance, in place of three penalty programs currently in law. At the end of 2016, the proposal would sunset penalties based on the Physician Quality Reporting System (PQRS) and “meaningful use” of Electronic Health Record (EHR) technology, and the budget-neutral Value-Based Payment Modifier (VBM). The roughly $10 billion, according to the Committees’ estimate, that these would have saved would instead be added to the base off which the budget-neutral VBP adjustments would be made, therefore increasing the cost of the proposal.
The VBP program would adjust payments based on a composite score developed according to success on 1) quality; 2) resource use; 3) clinical practice improvement activities; and 4) EHR meaningful use. Professionals would be given the option to have their quality performance judged at the group level.
The VBP program would apply to: physicians beginning with payment year 2017; physician assistants, nurse practitioners, and clinical nurse specialists beginning with payment year 2018; and all others paid under the physician fee schedule (as the Secretary determines appropriate) beginning with payment year 2019.
3) Encouraging Alternative Payments Models (Savings/Cost = Unknown)
In order to further foster the formation of Alternative Payment Models, such as ACOs, starting in 2016, professionals who earn a significant share of their revenues from an APM(s) that involves two-sided financial risk and meets quality standards would receive a 5 percent bonus payment each year through 2021. The revenues thresholds to receive the bonus payment would increase every two years until 2020, at which point professionals would have to 1) receive at least 75 percent of their Medicare revenue through an advanced APM or 2) receive at least 75 percent of their total, all-payer revenue through an advanced APM, including at least 25 percent of their Medicare revenue. Any professional qualifying for the bonus would be excluded from the VBP payment adjustment program.
The budgetary effect of this incentive program is unclear. On the one hand, the 5 percent bonus payments will cost money, although they do stop after 2021, which should depress the added cost in the second decade. If APMs are able to provide quality care for less money, however, the government would share in those savings and be partially protected against losses since the APMs must take two-sided risk.
Tying the incentives to an APM’s penetration system-wide may also generate additional federal savings if such models are able to offer lower cost health plans on exchanges and in the employer market. It also shouldn’t be overlooked that APMs have the potential to greatly improve the quality and coordination of care, even if the cost savings aren’t as significant as we hope (which is what occurred in the first year of the Pioneer ACO program).
Importantly, though, many details are still unclear from the discussion draft, which are critical to estimating this element’s budgetary effects. How exactly will the shared savings/losses be structured? Will there be a path to partial and/or full capitation? How will the benchmark payment rate be determined? Will APMs be given any tools to steer care to more efficient providers? What level of beneficiary engagement will there be?
4) New Payment Code for Chronic Care Management (Savings/Cost = Unknown)
The proposal would establish one or more payment codes for complex chronic care management services, beginning in 2015, similar to a rule that was recently proposed by the Centers for Medicare and Medicaid Services (CMS). Payments for these new codes could be made to professionals practicing in a patient-centered medical home or “comparable specialty practice.”
5) Reform the Relative Value Scale Update Committee (RUC) Process (Savings = Unknown)
In the wake of negative media attention this year, the Committees’ proposal would begin to reform the opaque AMA/Specialty Society RUC process and establish checks against its findings.
First, it would set targets starting in 2016 for identifying and revaluing misvalued services in a budget-neutral manner, allow for the collection of additional information to better determine the value of services under the physician fee schedule, and also task the Government Accountability Office (GAO) to study the RUC process. It would also “direct the Secretary to ensure that the global payment for the work component of surgical procedures accurately reflects the average number/type of visits following surgery,” which should produce modest budget savings.
This discussion draft is an important step on the path to finally replacing the flawed SGR formula with a long-term fix that focuses on paying for value and quality, rather than volume, of care. Over the long term, this proposal’s aim to move reimbursement away from fee-for-service can be an integral part of bending the health care cost curve, which is essential to reining in our debt.
Comments on the draft are due to the committees by November 12, after which they would release a more detailed proposal.
As the committees’ consider ways to improve the bill, they should weigh whether the final bill provides strong enough incentives for providers to form and participate in APMs and how best to structure incentives to produce improvements in quality and efficiency of care. Given that the current discussion draft would begin positive payment updates after the ten-year budget window, lawmakers may want to condition those updates on the APMs, chronic care management, and other delivery system reforms achieving certain benchmarks for cost savings.
As the SGR replacement continues to take shape, lawmakers must soon also turn to the more politically difficult task of crafting reforms to offset the added costs. First and foremost, they must avoid using gimmicks such as counting savings from the in progress war drawdown or timing gimmicks such as the “pension smoothing” provision that was considered in the recent government funding debate.
Thankfully, numerous bipartisan health reform proposals have been put forth over the past few years, from the Simpson-Bowles Bipartisan Path Forward, to the Bipartisan Policy Center, to the National Coalition on Health Care, to a recent collaboration between the National Coalition on Health Care and the Moment of Truth Project. Lawmakers should ideally focus on structural reforms that improve incentives and have the potential to “bend the cost curve.”
With conference committee meetings underway, many are weighing in with their take on what should be accomplished. On Friday, Fareed Zakaria at CNN compiled a wishlist for Congress, with the help of commentators, analysts, and policy makers. The 12 contributors all had different takes on what the conference committee should address.
- Create a national infrastructure bank: "This would create a mechanism by which you could have private sector participation in raising money, investing, and operating roads, trains and airports." – Fareed Zakaria, CNN
- Put the sequester on hold: "Turn off the destructive sequester for a year or two, without insisting all of it be paid for in the same time period. Set realistic spending caps, mandatory spending adjustments, and revenues consistent with that objective." – Thomas E. Mann, Brookings Institution
- Jobs, jobs, jobs!: "Cancel the sequester cuts that are set to destroy up to 1.6 million jobs for teachers, police, medical researchers, national security personnel, construction workers and others across the country. Include training programs to close the skills gap and needed upgrades to infrastructure, education, and energy systems." – Rep. Frederica Wilson (D-Fla.)
- Give our military resources it needs: "Reversing disastrous cuts and providing our military with the resources it needs to execute its missions should be the paramount objective of any budget negotiation." – Rep. J. Randy Forbes (R-Va.)
- Fix the budget process: "Everything should be on the table, including repealing or replacing the debt limit, redesigning the structure of congressional committees, and rethinking the ban on earmarks." – Donald Marron, Urban Institute
- Invest in basic research: "It’s time to reverse the March sequester, which will cut federal spending on R&D by $95 billion by 2021." – Bhaskar Chakravorti, Fletcher School, Tufts University
- Reform Social Security and Medicare: "Let seniors keep current benefits, but alter the programs for those who retire in 2023. Medicare needs to be reformed through competition. The retirement age for Social Security therefore needs to be gradually raised, and the indexing of benefits changed to reflect a more accurate level of prices in the economy rather than wages." – Diana Furchtgott-Roth, Manhattan Institute
- Drop the high stakes showdowns: "Any agreement that showed an ability of Congress to compromise, and provided some degree of automaticity to the debt limit extension, even for a period of time would be an important achievement." – Robert Kahn, Council on Foreign Relations.
- Major tax reform: "Tax reform should include family-friendly reforms and severe curtailment of popular tax breaks; corporate tax reform which significantly lowers the corporate rate (down to zero, ideally); and an increase in discretionary spending on socially valuable infrastructure, basic research, and other public goods." – Michael R. Strain, American Enterprise Institute
- Invest in high quality preschool: "Modernizing our deteriorating infrastructure and delivering high-quality preschool to all children are two of the best investments we can make in our future." – Harry Stein, Center for American Progress
- Slash farming ‘welfare’: "The current Direct Payments program and a related shallow loss program known as ACRE should be terminated. Crop insurance subsidies should be rolled back to pre-2001 levels and capped at $40,000 per farm." – Vincent Smith, Montana State University
- Tackle short and long term together: "For the short run, return government spending to pre-sequester levels and provide a modest level of additional stimulus by raising infrastructure spending. For the long run, take serious steps to reform Medicare and Social Security. Reform the tax code but also bring marginal rates to the vicinity of Clinton era levels." – Mark Gertler, NYU
- Put the debt on a downward path as a share of GDP
- Set sustainable and responsible discretionary spending levels
- Use reconciliation to produce real deficit reduction and reform
- Focus on the long term
- Fix Social Security on a separate track
- Avoid budget gimmicks
The Obama Administration made an administrative change today to rules regarding Flexible Spending Accounts (FSAs) that could cost taxpayers hundreds of millions or even billions of dollars over the next 10 years. The rule change permits employers to allow employees to now roll over up to $500 of unused funds from year to year, in contrast to the "use it or lose it" rule that previously prevailed, which was intended to prevent people from sheltering income in FSAs even if they had no intent of using the money that year.
Our recent Tax Break-Down on FSAs took an in depth look. Only some employers offer them, but contributions to FSAs avoid taxation and are used for medical expenses that are not covered by insurance or dependent care. The Affordable Care Act reduced the maximum amount that could be contributed to FSAs from $5,000 to $2,500 starting this year. That change apparently prompted the Administration to make this rule change, since the tax benefits of FSAs have been reduced significantly.
Still, the change does not come without a cost. Last year, CBO scored a bill with a similar but more expansive policy as costing $4 billion over ten years, with $3 billion coming from income taxes and $1 billion from payroll taxes. Our FSA blog shows that allowing unlimited rollovers would cost $10 billion. Repealing FSAs entirely would save $60 billion over ten years.
Proponents of FSAs argue that they strengthen federal support for health care by providing more complete insurance coverage, and treating contributions as pre-tax dollars puts their treatment in line with other fringe benefits. Opponents of FSAs, however, highlight that the subsidy is regressive since its tax benefit depends on a person's tax rate, and that they encourage higher and perhaps wasteful health care spending. On the latter point, this change would have offsetting effects -- people would contribute more to FSAs, but it would limit the amount of wasteful spending at the end of the year to draw down their funds -- but it would likely on net increase health care utilization. Most major bipartisan fiscal proposals, such as Simpson-Bowles and Domenici-Rivlin, would eliminate the tax-preferred status of FSAs altogether.
As lawmakers look to replace the sequester with smarter deficit reduction, it may be tempting to look for easy ways out. Unfortunately in recent months and years, that has led some elected leaders to turn to the war gimmick because of the sheer size of the phony savings. Both lawmakers and outside groups have suggested using the war gimmick to "pay for" sequester repeal, a permanent "doc fix," and transportation spending. Any such efforts to use the war gimmick this fall and winter as the budget conference committee works toward a bipartisan agreement must be avoided at all costs (or actually, at no cost to the budget).
What Is the War Gimmick?
Funding for the wars in Iraq and Afghanistan is treated in its own budget category known as "overseas contingency operations," which are not subject to spending caps like the non-war defense budget and domestic discretionary spending programs are. In making its budget projections, CBO is required to assume that un-capped discretionary funding, such as war spending or emergency aid provided in response to Superstorm Sandy last year, will grow each and every year based on the rate of inflation.
However, it has been anticipated for years -- and already happening -- that the U.S. will draw down its commitments in Iraq and Afghanistan. Thus, the difference between the drawdown war spending path and the higher spending projections in CBO's current law baseline lead some people to incorrectly claim "savings" from the drawdown. All three major budgets this year -- from the House, Senate, and the President -- called for a continued drawdown of the wars, albeit with different paths. What is very worrying, however, is that some budget proposals actually count this toward their savings totals.
Source: CBO, OMB, SBC
It could be potentially argued that the initial change in plans by the Obama Administration several years ago to speed up the drawdown of the wars, compared to existing plans at the time, could be considered as savings. However, saying that just because we're spending less on wars which were always going to be temporary and which were unpaid for in the first place somehow qualifies as savings is a bit of a leap at best. CRFB president Maya MacGuineas analogized this perfectly in a press release on the President's budget last year:
Drawing down spending on wars that were already set to wind down and that were deficit financed in the first place should not be considered savings. When you finish college, you don’t suddenly have thousands of dollars a year to spend elsewhere – in fact, you have to find a way to pay back your loans.
Why It Reflects Irresponsible Budgeting
The very concerning problem with the war gimmick is that some lawmakers try to count the phony savings toward a deficit reduction target or (more worrying) try to count it as an offset for other costs.
- Counting the war gimmick toward a deficit reduction target: The first method was particularly concerning during the Super Committee discussions, when using the war gimmick would have reduced the need for finding other legitimate savings to reach its $1.5 trillion target. But the Super Committee was unable to find any savings. Additionally, as lawmakers look to enact another $2+ trillion in savings to put the debt on a downward path as a share of the economy, in order to reach a total of $4-$5 trillion in cumulative savings, the war gimmick could detract from finding real savings. Unfortunately, the President's budget claimed $508 billion in "savings" through 2023 by reducing war spending. We let him know loud and clear that this was very irresponsible.
- Using the war gimmick to offset new tax cuts or spending: Even more worrying would be for lawmakers to use phony war savings to offset new tax cuts or spending -- thereby making future deficits and debt worse. Again, unfortunately the President's budget would set aside $167 billion of war "savings" to fund new surface transportation projects. Also, the Senate unveiled a proposal earlier in the year to replace parts of the sequester with war "savings". Again, we called it out as irresponsible. And in the past, some have called for using the war gimmick to offset the costs of replacing the Medicare SGR. This would again be a terrible gimmick, especially given the many health care options out there to offset the SGR with.
Note: Numbers are based on January 2012 baseline, so they are not up to date for the current baseline.
* * * * *
Using the war gimmick to offset other costs or to count toward deficit reduction would send a message to the American public and our investors that we are not serious about controlling the debt. In fact, it would send the message that not only are we not serious, but we are going to try to trick everyone that we're actually doing something productive on the deficit. That's the height of irresponsibility.
We encourage lawmakers to put a cap on war spending to better reflect actual policy and prevent defense budget gimmickry but not to claim savings for it.
Update: This blog has been updated to clarify how war spending is accounted for in the budget.
As if we needed more proof that the country is ready to deal with our debt problem, the Peterson Foundation today released the results of a new poll that showed both Democrats and Republicans would support a bipartisan solution for the debt. Of the over 1,000 registered voters that were sampled, 95 percent wanted to see Democrats and Republicans work together to solve the country's fiscal problems.
Also notable was the support for a long-term plan for dealing with the country's debt problem. Among the findings:
- 94 percent of voters believed that lawmakers needed a long-term plan to deal with the debt instead of relying on short-term fixes in times of crisis
- 90 percent of voters believed that the lack of a long-term plan was creating uncertainty and having a negative effect on the economy
- 88 percent of voters believed that the budget conference committee must reach an agreement and 89 percent of voters believe the conferees should focus on the long-term problem
The results are encouraging and not surprising. Just one week ago, the Campaign to Fix the Debt released a poll with findings showing that Americans are supportive of a comprehensive debt deal. When included in a comprehensive deal, entitlement and tax reform received strong support. This is even true for specific policies that have often been suggested for a bipartisan deficit reduction package, with the chained CPI, Medicare means-testing, caps on tax expenditures for higher earners, and raising the taxable maximum for Social Security all receiving support from a majority of those polled.
The Peterson Foundation and Fix the Debt polls should send a strong message to the budget conferees, who began meeting this week. Said President and COO of the Peterson Foundation Michael Peterson:
Despite Congress’ inability to reach bipartisan compromise, a majority of Americans in both parties are willing to agree to difficult policy changes to achieve a long-term plan on our national debt...The Committee should use this opportunity to put America’s fiscal and economic future above politics, and move our great nation past these short-term fire drills once and for all.
The American people support compromise. It's up to lawmakers to see it through.
Click here to see the topline numbers from the Peterson Foundation/Global Strategy Group poll.
Two weeks ago, we responded to a Larry Summers op-ed calling for a focus on growth rather than deficits. Yesterday, Wall Street Journal economics editor David Wessel also responded, breaking down the arguments into three and taking them on one by one. He agrees with us that the short-term deficit isn't the issue, but the long-term deficit is. It cannot be hand-waved away, and it would be wise to take action sooner rather than later even if the changes in the legislation don't take effect right away. Wessel outlines his piece as follows.
Summers Argument 1: The deficit isn't an immediate problem; growth is.
Wessel agrees with the main thrust of this point, that the short-term deficit is not a concern. He points out that the deficit is coming down for now, and the federal government currently can borrow at low interest rates. And given that the economy is far from reaching full employment and potential GDP, measures like the sequester do harm to short-term growth right now.
Summers Argument 2: We've done enough.
An argument that essentially flows from Summers' argument one is the fact that just by increasing growth, we can make the long-term fiscal picture sustainable. Summers claimed that additional annual growth of 0.2 percentage points would do so, a calculation that we disagreed with. Wessel also points out that ignoring the debt because debt would be on a downward path for the next five or so years is problematic. The debt could actually be a problem sooner than one might think:
The CBO also says government debt is now higher than at any time in U.S. history except for World War II. It's nearly double what it was before the recession. That gives the U.S. much less maneuvering room were it to be hit by another financial crisis or terrorist attack. Mr. Summers says we can, as he puts it, "reload the fiscal cannon" later when the economy is stronger. But "later" to elected politicians often turns out to be "too late" or "never."
And consider this: interest accounts for 6% of federal spending today. If the economy does as well as White House economists expect and if Congress takes every spending and tax suggestion the president has made, the White House says it'll be 14% of federal spending in 2023. That threatens the very investment spending Mr. Summers prizes.
Summers Argument 3: The future is so uncertain that acting now is unwise.
Summers made this point in his op-ed, arguing that we were within the margin of error of sustainability given the magnitude of the error in CBO's budget projections. We have addressed this point before, noting that projections could easily be much worse as well as much better -- a point that Summers acknowledged himself. His response is that we should wait until the evidence is clear that we need to act to put the debt on a sustainable path. We, of course, think that at that point it would be too late, and factors like demographics are relatively predictable over a long period of time. Wessel agrees, saying:
But there are risks of waiting, too. We've promised health, retirement and other benefits that will cost more than today's tax code is projected to produce. If we're very lucky, the economy will do so surprisingly well that those two lines will meet.
What if we aren't lucky? That'd make for some pretty abrupt and painful changes to Social Security, Medicare and Medicaid later. As with climate change, there's a case for taking precautions by legislating money-saving changes today that take effect when the economy is stronger.
Wessel concludes by saying that the only way we will be able to get right-minded fiscal policy which eases up now and makes our fiscal path sustainable over the long run is to do what we have been calling for: enact a large deficit reduction agreement. Not only would that be a good growth strategy for the short term, but it would also be a boon for the long term.
Update: This blog has been updated to include the Mid-Session Review and CBO projections for the 2013 deficit.
Yesterday, the Treasury Department and the Office of Management and Budget released final budget results for Fiscal Year 2013, which ended on September 30. The deficit fell to $680 billion - a drop of more than $400 billion from the $1.1 trillion deficit posted in 2009. Last year's deficit also came in substantially under the President's budget projections from April, which had projected the year-end deficit would be $919 billion, and the Mid-Session Review projection of $735 billion. It was also $40 billion above CBO's projection in May. Although this year's deficit has shrunk, deficits are projected to start growing again as a percentage of the economy after 2018 and the long-term debt problem driven by health care costs and an aging population has barely budged.
Treasury Secretary Jack Lew said in a statement that the deficit has fallen faster over the last four years than any period since World War II, but it's not coincidental that the fall comes off of the highest deficit since WWII, driven by the 2008 recession and stimulus spending. The deficit fell from 10.1 percent of GDP in 2009 to 4.1 percent of GDP in 2013, a drop of 6 percentage points. There was actually a larger drop in the deficit in the 1990s over a longer time period, from a 4.7 percent deficit in 1992 to a 2.4 percent surplus in 2000.
More to the point, this drop in deficits was largely a predictable result of a recovering economy. The year-end deficit of 4.1 percent was nearly the exact 4.2 percent deficit that the Congressional Budget Office predicted in May, or the 4.3 percent deficit predicted in January 2011 before any deficit-reduction agreements or sequestration. The new caps on discretionary spending enacted in the 2011 Budget Control Act saved money, but the savings were wiped out by additional spending and tax cuts enacted as part of the fiscal cliff deal last January.
Source: Congressional Budget Office
Even though our deficit is projected to shrink over the next few years, the predictions for the future decades have not gotten any rosier. Unlike World War II, when budget deficits were projected to decline dramatically due to a combination of ending the war, US global dominance, an expanding labor force, and decades of close-to-balanced budgets, our debt is now projected to rise unsustainably for the foreseeable future. Health care cost growth, an aging population, and rising interest costs all threaten to increase the debt, which is projected to rise to World War II levels by 2040. This rising path will be difficult to reverse unless lawmakers are willing to look at all parts of the budget, in particular entitlement and tax reform.
Source: Congressional Budget Office
The solution should not myopically focus only on short-term spending cuts like the sequester, which cut indicriminately, hurt economic growth, and only produce savings over the next few years without addressing the long-term drivers of our debt: health care costs and population aging. The solution should be focused on responsible, targeted, long-term savings, even if the short-term savings are more modest. The budget conference committee began negotiations yesterday, and hopefully will begin to tackle these issues. Along with agreeing to a budget for FY 2014, we hope they will focus on policies that can produce long-term savings to address our long-term debt challenges.
To see more of CRFB's recommendations, see our paper What We Expect From the Budget Conference Committee.
This is the thirteenth post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Our last post was on the Foreign Earned Income Exclusion, which benefits U.S. citizens living abroad.
The FICA Tip Credit allows restaurants and bars to receive an income tax credit for employer-paid payroll taxes on employee tips. By eliminating the amount of payroll tax that employers pay, the credit theoretically eliminates an employer’s incentive to hide or underreport tip income. As a result, more revenue is likely to be collected from the employee’s portion of the payroll tax and larger wages are counted for the purpose of calculating Social Security benefits.
Currently, employers and employees each pay payroll taxes on wages to fund Social Security and Medicare (generally 6.2 percent each for Social Security and 1.45 percent each for Medicare). In the restaurant industry, where much of the employee’s compensation is in the form of cash tips, it is harder to determine and report wages. Workers who receive more than $20 in tips per month are required to report these tips to their employer, who reports this income and withholds FICA taxes.
Before the credit in 1982, the IRS estimated that only 15% of tip income was reported. After the credit was enacted, the IRS still estimated that fewer than 40% of all tips were reported in 1998; roughly $9-$12 billion in unreported income. In 2010, the IRS estimated it received only a quarter of the tip disclosure forms it was supposed to receive.
In the seven states where tipped workers must be paid equally to non-tipped workers, the credit is simple: employers get a credit equal to the amount of FICA tax they paid on tips, essentially making the FICA tax free. In the other 43 states where tipped employees can be paid less than minimum wage, employers cannot claim the credit for the portion of tips that are needed to bring a server’s wage up to $5.15, the minimum wage that prevailed prior to 2007.
Prior to 1987, restaurant employers were responsible ofor FICA taxes on tips up to the minimum wage, while employees were taxed on all wages and tips. After 1987, the minimum wage ceiling for employers was removed, but the restaurant industry demanded concessions for this tax increase. The FICA tax credit was enacted six years later, in 1993. Because Congressional budget rules make it difficult to reduce Social Security revenues, the credit was structured as it is today: employers pay full payroll taxes on tips above the then-current minimum wage ($5.15) and receive a dollar-for-dollar credit on their income taxes. When Congress raised the minimum wage in 2007, they left the minimum at $5.15 for the purpose of calculating the FICA credit.
The credit is not refundable, so employers must owe some taxes in order to claim it, but unused FICA credits may be carried back one year or carried forward up to 20 years.
How Much Does it Cost and Who Benefits from It?
According to the Joint Committee on Taxation (JCT), the credit for employer-paid FICA taxes on tips will cost $1.3 billion in 2013, which would be the equivalent of nearly $17 billion over the next ten years. About 60% of the tax benefit goes to C-corporations; the remaining 40% accrues to pass-through entities and individuals, according to JCT.
According to CRFB’s Corporate Tax Reform Calculator, eliminating the credit would allow for a 0.1 point reduction in the corporate rate.
What are the Arguments For and Against the Credit for Employer-Paid FICA Taxes on Tips?
Supporters of the FICA tip credit argue that this tax provision actively encourages accurate tip reporting, as employers are incentivized to report all tipped income in order to maximize the credit. They claim that the tax break actually raises money from increased reported tip income more than the cost of the credit, addressing a small portion of the $14 billion in FICA taxes that go uncollected each year. Further, by reporting and paying taxes on their full income, employees maximize their future Social Security benefits.
Opponents of this credit argue that no other tip-driven industry receives a similar credit, which unfairly benefits restaurants over other service industries. This credit encourages income in the form of tips rather than in the form of wages and puts downward pressure on wages for restaurant workers. They further argue that employers should not receive a tax benefit for simply complying with their legal obligation to report income. This credit can also be seen as a back-door subsidy to Social Security: the government loses income tax revenue in order to encourage higher FICA tax revenue.
What are the Options for Reform and What Have Other Plans Done?
The FICA tip credit could be maintained in its current form, repealed entirely, or modified in a number of ways. Fully repealing the credit, according to JCT, would raise about $8 billion. The revenue is about half the value of the tax expenditure, since some of the revenue gained from eliminating the credit would be lost as a result of lower reporting. Alternatively, cutting the credit in half might retain much of the reporting incentive but at a lower cost to the taxpayer.
Other options to reduce the cost of the tip credit include: raising the minimum wage for the credit ($5.15) to the current federal minimum wage of $7.25; disallowing the credit against the alternative minimum tax (as it was prior to 2007); or reducing the carry-forward period from 20 years to 15 years (as it was prior to 1997). Each of these options would save less than $1 billion over a decade.
If lawmakers instead wanted to expand the credit, they could make it available to other tip-dependent businesses such as hair salons, hotels, taxis, or tour guides.
Neither the Bowles-Simpson or Dominici-Rivlin plans include the FICA tax credit on the short list of tax breaks they would keep, choosing to repeal it in favor of lower rates and deficits. The Wyden-Gregg plan keeps the tax credit for employer-paid FICA taxes on tips.
Where Can I Read More?
- National Restaurant Association – Testimony to the Ways and Means Committee on Reforming the Internal Revenue Code
- The CPA Journal – Unreported Tip Income: A Taxing Issue
- Internal Revenue Service – Bulletin
- Internal Revenue Service – Voluntary Compliance Agreements – Restaurant Tax Tips
- Department of Labor – Minimum Wage for Tipped Employees
- Marketplace – IRS keeping Tabs on Restaurant, Bar Tips
- Wall Street Journal – IRS Rule Leads Restaurants to Rethink Automatic Tips
- SS&G – Tax Issues Specific to the Restaurant Industry
The FICA Tax Credit offers restaurants and bars an income tax credit which exactly offsets the amount paid in payroll taxes, eliminating the incentive to pay tips under the table. Although the credit may enhance tip reporting, some argue that the credit unfairly benefits restaurants over other tip-based industries and gives employers a payout for simply doing what they are supposed to do -- complying with tax law. While reforming the tax code, Congress could choose to keep this break, reform it, or repeal it in favor of lower tax rates and/or deficits.
Yesterday, the Social Security Administration announced that beneficiaries will be receiving a 1.5 percent Cost-of-Living Adjustment (COLA) this year. Although this update is below the 1.7 percent increase provided this year and the 3.6 percent increase provided for 2012, it is reflective of the relatively low inflation experienced over the past year.
Some groups and commentators have suggsted that this COLA is too small relative to growing living costs, a claim that does not account for the fact that while some prices have gone up faster than 1.5 percent (for example meat prices rose by about 2 percent), others have grown more slowly or fallen (for example, gasoline prices have fallen by about 2 percent).
Other groups have used the COLA announcement as an opportunity to blast efforts to adopt a more accurate measure of inflation, or to call for indexing Social Security with an experimental senior-specific index known is the CPI-E. Because seniors spend more on health care and housing, they argued, their COLA should be measured with a senior specific index.
As we have pointed out before, however, the case for the CPI-E is quite weak. Among our concerns with adopting the CPI-E are:
- The CPI-E is highly experimental. The Burea of Labor Statistics, who publishes the CPI-E, has explained it is not ready for prime time.
- The CPI-E suffers from substitution bias, like the traditional CPI, and also suffers from a much more significant small-sample bias.
- The CPI-E does not apprioriately account for things like mail-order shopping or for senior discounts.
- The CPI-E likely overstates the impact of growing health prices by conflating increases in value with increases in price.
- The CPI-E misstates the impact of housing on cost-of-living by imputing rental value for homeowners. 80 percent of seniors are homeowners and 70 percent of them have paid of their mortgages (compared to 60 percent and 17 percent of non-seniors). When the value of their homes go up, the CPI-E measure this as if they face higher rental prices.
For these reasons and more, the CBO has questioned whether the elderly actually face higher inflation than the general population at all. And if they do, almost all evidence suggest it is by less than the CPI-E would suggest.
Adopting the CPI-E would also raise questions of fairness. What should happen to the non-elderly portion of the Social Security population? Should they get a smaller COLA? Should each inflation-indexed program and provision in the budget and tax code get its own index? Why should we adjust for a 0.2 percent claimed difference in inflation between seniors and non-seniors but ignore the 0.9 percent difference between New York and Detroit?
Ultimately, well-intentioned efforts to make government benefits more accurate and fair through the CPI-E would do the opposite, making them less accurate and less fair. Instead, policymakers should use the most accurate measure of economy-wide inflation available -- the chained CPI -- and use that measure to meet the stated goal of inflation indexing. It is our more accurate because, as our paper "Measuring Up" explained:
Moving to the chained CPI would address [upper-level substitution] bias by using a superlative index that updates expenditure weights and formulas in order to address consumer response to substitution between categories. As the Congressional Budget Office (CBO) explains, the chained CPI "attempts to fully account for the effects of economic substitution on changes in the cost of living... [It] provides an unbiased estimate of changes in the cost of living from one month to the next by using market baskets from both months, thus 'chaining' the two months together."
Other targeted concerns should be met with targeted reforms, not across-the-board mismeasurements. For example, the risk of outliving ones savings in very old age could be addressed with a benefit bump-up for the very old. And the risk of catastrophically high health care costs among a small group of seniors -- which appears to be responsible for much of the difference in health spending between seniors and the population at large -- could be addressed through cost-sharing reform that limits out of pocket costs.
Those focused on the COLA as a vehicle for making policy often forget what it is there for: to reflect cost-of-living increases over the previous year. The chained CPI best lives up to that goal.
Today was the first meeting of the budget conference committee negotiating over this year's discretionary spending levels. Although the first meeting was devoted to opening statements from the 29 lawmakers, it sets the tone for the debate over the next month and a half. Jim Nussle, a former House Budget Committee Chairman who shepherded six budgets through the committee process and CRFB co-chair, provided some recommendations today in Roll Call to the nation's first conference committee since 2009. First, lawmakers should take a piece of advice from last month's agreement over the debt ceiling: "congressional leadership staff wheeled in dozens of pizzas and, suddenly, sharply divided party lines melted away and a deal was reached."
Joking aside, Nussle notes that the two budget blueprints serving as the starting point for the conference committee are "starkly different." Although he admits the odds of the conference committee's success are not great, but they could be improved by adopting some lessons from Nussle's time as chair.
Procedurally, Nussle provided six recommendations for ground rules:
- Nothing is agreed to until everything is agreed to.
- Everyone involved must present a plan, as opposed to simply tearing down someone else’s.
- A conferee’s physical presence is required at meetings.
- Staff is limited to the technical experts.
- No grandstanding allowed.
- Both House and Senate Budget Committee chairs agree to listen to and support each other whenever possible.
On substance, Nussle recommended that the conference committee chairs do three things:
- Establishing goals for bottom-line numbers.
- Establishing a calendar of activities due Dec. 1.
- Assigning subconferences specific areas of focus, with deadlines to report back to the full conference.
On the last point, Nussle specifically recommended that the budget committee consider revenue growth from tax reform and hear recommendations from the chairmen of the tax-writing committees Dave Camp (R-MI) and Max Baucus (D-MT), although neither sit on the conference committee.
The next meeting of the budget conference committee is on November 13th. Hopefully, the committee members, particularly the chairs of the committee Congressman Paul Ryan (R-WI) and Senator Patty Murray (D-WA) will take some of Nussle's ideas and emphasize areas of agreement, rather then the differences between the two parties:
So my advice to the new committee is, start with the pizza. Sit down and get to know one another before starting the negotiations. Before digging in your heels and deciding that nothing can be accomplished, learn a little about each other and you’ll realize that you all love America and really do care about its future. You might find that you’re not as different as you think.
Read the full post here.
"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.
The first meeting of the budget conference committee is today! The committee will have a month and a half to reconcile the House and Senate-passed budgets and come up with a longer-term solution on appropriations and the debt ceiling. You can watch the live proceedings on C-SPAN here right now.
At the same time, CRFB has published its expectations for what the conference committee should accomplish. Our six specific goals are:
- Put the debt on a downward path as a share of GDP
- Set sustainable and responsible discretionary spending levels
- Use reconciliation to produce real deficit reduction and reform
- Focus on the long term
- Fix Social Security on a separate track
- Avoid budget gimmicks
Click here to read the full paper.
Conference Calls – While many of us prepare for a spooky adventure Thursday night, the day before will mark the beginning of another eerie undertaking. Conference committees for both the budget and farm bill begin formal deliberations on Wednesday. While Americans will go door-to-door seeking treats and watch out for tricks, lawmakers will have to negotiate a lengthier and more complex journey with lots of potential for mischief and few treats in store. Besides the work of those committees and the fiscal deadlines immediately ahead, Congress isn’t planning to take on much else for the remainder of the year, with the possible exception of immigration reform. The Senate is back from last week’s recess and will work on several nominations, but the House plans to leave town after Wednesday and not return until mid-November. The agreements that the conferences make, or fail to make, will have repercussions that will be felt long after the candy sacks are emptied. Scary, indeed!
Can Negotiators Conjure Up a Budget Deal? – The budget conferees start far apart on appropriations in terms of spending levels. The House budget stays within the sequestration level while the Senate version does not, resulting in the Senate calling for $91 billion more in spending in fiscal year 2014, all on the non-defense side. As we point out, the two budgets also differ in how much they reduce the deficit and how the savings are achieved, although they both put debt on a downward path. The divide will not be easy to bridge. The two lead negotiators, Senate Budget Committee chair Patty Murray (D-WA) and House Budget Committee chair Paul Ryan (R-WI) start off with low expectations, with the focus on altering the automatic spending cuts of sequestration. But even that may be a heavy lift as there is little agreement on what changes to make. The White House has created a small opening by implying that additional revenue may not be required to get a limited deal to moderate the sequester. We offer a helpful reminder that, while economic growth is important to addressing the national debt, growth is not a panacea. Need to know more about the budget conference committee? Learn all you need to know with our new primer.
Can Lawmakers Finally Harvest a Farm Bill? – Agreeing to renew the farm bill has been akin to finding the Great Pumpkin. Another set of negotiators will meet Wednesday to begin the process of reconciling farm bills passed by the two chambers. In this case, the main difference is regarding food stamps, with the House bill calling for $35 billion more in cuts over 5 years than the Senate version. The program will already see a $5 billion cut beginning on November 1 because of the expiration of a 2009 stimulus provision which increased benefits. Crop insurance and subsidies for farmers are also key items eyed for changes in the farm bill. The previous farm bill expired last year.
Key Upcoming Dates (all times are ET)
October 30, 2013
- Budget Conference Committee meets at 10 am.
- Farm bill conference committee meets at 1 pm.
- Bureau of Labor Statistics releases September 2013 Consumer Price Index data.
November 1, 2013
- A $5 billion cut to food stamps will begin due to expiration of a stimulus provision.
November 7, 2013
- Senate Armed Services Committee hearing on the impact of sequestration on national defense at 9: 30 am.
- Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.
November 8, 2013
- Bureau of Labor Statistics releases October 2013 employment data.
November 20, 2013
- Bureau of Labor Statistics releases October 2013 Consumer Price Index data.
December 13, 2013
- Date by which the budget conference committee must report to Congress
January 1, 2014
- The "doc fix," temporary tax extenders, extended unemployment insurance benefits, and the farm bill expire.
January 15, 2014
- The continuing resolution funding the federal government expires
- 2014 sequester cuts take effect
- First set of IPAB recommendations expected
February 7, 2014
- The extension of the statutory debt ceiling expires
In an op-ed in POLITICO yesterday, former Senate Majority Leader Tom Daschle argued that the upcoming conference committee was the perfect time to enact entitlement reforms. While conventional wisdom has suggested that a bigger deal involving reforms may seem to be elusive, Daschle suggested that there is more agreement between the two parties than meets the eye.
There are two major reasons why this decision makes sense now.
First, as congressional negotiators renew their quest for a consequential budget agreement, there will never be a more opportune moment to look at federal entitlement spending, because there’s more common ground than ever before. While Democrats oppose all efforts to repeal or defund the ACA, most acknowledge and actually support efforts to reform and modernize Medicare and Medicaid — unlike a few years ago.
Daschle argued that policymakers should focus on making health care programs more efficient, both reducing costs and increasing quality, rather than shifting costs in the health care system from the federal government to others. He pointed to a number of reports that have come up with framework and policies to save hundreds of billions from health care programs in this manner.
We know how to do this: putting more emphasis on prevention and wellness, new payment models and evidence-based and value-driven delivery reforms, along with far more transparency, new technology and improved scope of practice are just a few of the concepts that have already proved effective in accomplishing this goal.
Much of the groundwork has already been laid. Over the past two years, at the Bipartisan Policy Center, the Brookings Institution and the Center for American Progress, I have worked with both Republican and Democratic health-policy leaders who have served in government, analyzing and considering these and other reform options for both major federal health programs. While none of us supported every specific component of the proposals, we found common agreement on major improvements in quality and efficiency, representing hundreds of billions of dollars in scorable savings.
Daschle noted the slowdown in health care spending recently and the fact that the health care industry is changing the way it operates for the better. He said that lawmakers should build on the private sector's advancement and what has already been put in place in public programs to improve the health care system. And to those who say the parties won't agree on policies, Daschle concluded, "the opportunity has never appeared more fertile."
The budget conference committee will begin to meet in full shortly, when the conferees will begin to look for a compromise between the Senate and House budgets and hopefully, finally put the country on a sustainable fiscal path. Today, former Fiscal Commission co-chairs and CRFB board members Erskine Bowles and Alan Simpson write in The Hill that lawmakers should use the opportunity to lead and end the governing by crisis approach of the last few years:
It is time for leaders to break the cycle of bouncing from crisis to crisis by taking three common-sense steps: Stop the madness, start talking and solve the problem.
We suggest deliberations should start by identifying areas of agreement. There seems to be broad-based support for reforming farm subsidies, modifying the federal worker retirement system and charging user fees that better reflect the actual costs of certain government programs. Savings in these areas could be used to soften the blow of the mindless sequestration over the next year or two and allow appropriators to fund defense and non-defense discretionary programs at more reasonable levels.
Trading across-the-board, temporary and anti-growth cuts for more targeted and permanent savings would represent an important step, but negotiators must resist the temptation to declare victory with such a “small ball” approach.
There are no shortage of blueprints to emulate. Along with the many plans that have been proposed over the last few year, Bowles and Simpson point to their Bipartisan Path Forward proposal that was released earlier this year in March. While they clarify that it is not their ideal plan or the only plan out there, it might offer some guidance on how lawmakers should proceed. What policies should be included is still an open question, but a plan must address all parts of the budget. Conclude Simpson and Bowles:
Policymakers should seek to reach agreement on a framework that at a minimum stabilizes the debt as a share of GDP. Reaching such an agreement will require Democrats to accept some structural reforms of entitlements, and will require Republicans to use a portion of revenues that will result from simplifying the tax code for deficit reduction, instead of using all savings to reduce tax rates. But such an agreement is achievable.
It is going to take real political courage on both sides to come together to find common ground. The problem is real, the solutions are painful, and there is no easy way out. But there is room for a solution if both parties commit to stop the madness, start talking and solve the problem.
Click here to read the full piece.
"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.
A number of commentators have suggested recently that our budget problems could be solved if only we focused more on promoting economic growth. Economic growth, they argue, would generate more revenue and thus make painful tax increases and spending cuts unnecessary.
We've taken on this claim before, demonstrating that even a significant improvement in long-term growth would not be enough to prevent debt from growing faster than the economy. Over the medium term, the story is similar. Still, while faster growth cannot solve our medium-term debt problems, it certainly can help.
Rules of Thumb for Growth and Deficits
The actual impact of economic growth on budget deficits will depend on the source of the growth, but a broad rule of thumb suggests that every dollar increase in GDP will produce 20 to 25 cents more in revenue. For 2023, when GDP is projected to be nearly $27 trillion, a one percent increase in the size of the economy will yield about $60 billion in revenue.
Of course, the ten-year deficit impact will depend on how that 1 percent increase is achieved, both because there could be interim savings (or costs) and because of savings on net interest. For example, if the economy grew by 0.1 percentage point faster per year, that growth would produce about $315 billion of deficit reduction over ten years. On the other hand, if the economy grew 1 percentage point faster in 2014 and grew at the same rate after that, economic growth would produce $560 billion of savings. And if the economy started by growing 1 percentage point slower and then growing to 1 percent above projections by 2023, there would be barely any ten-year deficit reduction, though there would be in subsequent years.
|Savings/Costs (-) of Different Growth Scenarios Resulting in 1% Higher GDP by 2023 (billions)
|First Five Years
||Second Five Years||Ten Years|
|0.1% Annual Faster Growth
|Immediate 1% Increase
|1% Fall Followed by Faster Growth||-$120||$130||$10|
Source: CRFB calculations
Note: Numbers include interest savings/costs.
These ten-year estimates can serve as an important guide to understanding the effects of larger or smaller growth scenarios. Importantly, however, these estimates may be overly optimistic on the deficit impact, since they assume that there will be no feedback between economic growth and either health care spending or interest rates (both could be higher, leading to higher spending). They are also unlikely to be very predictive of long-run impact, over which higher growth is likely to result in higher spending -- like Social Security benefits, which grow with wages -- as well as revenue.
Economic Growth and The Debt
Faster economic growth can help improve debt projections in at least two ways. First, faster growth produces more revenue -- enough to result in $315 billion of deficit reduction for every 0.1 percentage point increase in the annual growth rate. But in addition, faster growth increases the economy's capacity to carry debt. Thought of another way: when we measure debt as a share of GDP, a higher GDP can help lower debt-to-GDP the same as lower nominal debt levels can lower the ratio.
As a result, even small improvements in growth can help slow debt accumulation. If growth were 0.1 percentage point higher annually, for example, debt levels would reach 71 percent of GDP by 2023, compared to 73 percent under the CRFB Realistic Baseline. Even just a faster economic recovery that brings GDP back to its potential sooner would bring debt levels to 72 percent of GDP by 2023.
Still, it would take a pretty significant improvement in growth to put the debt on a clear downward path as we have called for in the past. In fact, by our estimates, doing so would require the economy to grow nearly 0.5 percentage points faster each year. This would mean annual productivity growth nearly 40 percent faster than what is projected and inconsistent with what most analysts think could be generated through government policy changes alone. Even under this scenario, CBO expects that debt would bottom out in the mid-2020s and begin to rise again thereafter.
Source: CBO, CRFB calculations
Growth Isn't the Solution, But It Can Help
At the end of the day, no reasonably achievable increase in economic growth can solve all of our fiscal woes. Even if we could permanantly increase productivity growth from the 1.3 percent projected by CBO to 1.8 percent annually -- a scenario which seems highly unlikely -- debt would still begin to grow as share of GDP by the middle of next decade.
Yet while growth cannot be the whole solution, it certainly can help. That's why policymakers should focus not only on the size of whatever deficit reduction they do, but also the composition. Replacing the anti-growth sequestration with more targeted and gradual cuts can improve growth by increasing demand and reducing the squeeze on public investments. Reforming the tax code can promote growth by encourage work and investment and reducing various distortions. Raising retirement ages can improve growth by encouraging more savings and longer working lives. And deficit reduction itself can encourage growth by reducing the "crowd out" of private investment.
Ultimately, a comprehensive plan to replace the sequester and reduce long-term debt could go a long way to improving economic growth in both the short and long term. And that improved growth can further help us to put our fiscal house in order.
It is difficult to believe that nearly two weeks ago, our country was on the brink of default, the shutdown dragged on, and lawmakers seemed unable to come to any sort of compromise. After narrowly avoiding fiscal disaster, many may be ready to put the budget on the back shelf. But on Friday, Bill Frenzel penned an editorial in Forbes that claims the budget should remain a focus and what we should expect going forward from the budget conference.
Fiscal crises have been manufactured by Congress, Frenzel argues, and in focusing on brinksmanship, they are reducing their ability to implement needed reforms to address our long-term debt. He writes:
We have been watching this long-running soap opera since well before Republicans regained their majority in the House in 2010. The Bowles-Simpson Deficit Commission began its work in April that year. On their clearer-thinking days, both parties agree that the goal is supposed to be a reduction in the US debt ratio, something along the lines of Bowles-Simpson. Unfortunately, there are few clear-thinking days.
At every stage of this running battle, the solutions have been temporary. Crises have been averted, but only for a few months. No solutions have been achieved. Increasing debt continues to loom. Each catastrophe temporarily avoided has set up another a few months ahead.
Frenzel has low expectations for a conference committee, but still believes that a substantive agreement could be reached, if lawmakers commit to creating real policy instead of pushing off crises as they are used to doing:
After giving our economy, and our world reputation, a kick in the pants, the parties have delivered another temporary postponement. Time is too short now for the grand compromise. But the policy makers could salvage something in this otherwise dismal year.
They could modify the sequester cuts, but off-set changes with cuts elsewhere. They could also establish a budget path forward to a targeted debt ratio of 60% in 10 years, using growth-oriented tax reform and reductions in the long-term programs that are driving the deficit /debt.
At this point, the best that can be expected is a future target, a plan without details, and without enforcement. But that’s far better than we have achieved in the past five years. Congress is not very good at keeping its promises, but a 10-year target would be worth trying.
Click here to read the full article.
"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.
Yesterday, CRFB board member and former Senate Budget Committee argued in the Washington Post that ultimately, additional revenue through comprehensive tax reform will be needed along with entitlement reforms to put the budget on a sustainable path. Responding to a Washington Post editorial, Conrad stated that no part of the budget can be excluded in these upcoming fiscal negotiations:
The Post’s Oct. 20 editorial on the budget challenge [“A fiscal quid pro quo”] made important points but was way off-base on the issue of revenue. It suggested that a fair trade would be reductions to the “sequester” budget cuts in exchange for reforms to Medicare and Social Security and said that Democrats should not insist on additional revenue because that’s a non-starter with many Republicans. Democrats would make a serious mistake by following that advice.
As Conrad explains, the country needs more revenue given our fiscal path, along with entitlement and tax reform. But it's worth noting that new revenues have often been included in comprehensive tax reform. Not only could tax reform help get our fiscal house in order, but it could also help economic growth. Writes Conrad:
Tax reform should be part of any budget deal. Tax reform is necessary to unlock the full potential of our economy. The current tax system is not fair and damages U.S. competitiveness. A five-story building in the Cayman Islands claims to be home to more than 18,000 companies. Is it the most efficient building in the world? No! That and other tax scams cost our country more than $100 billion each year, the Senate Permanent Subcommittee on Investigations has found.
If we don’t fix the revenue side of the equation at the same time as we repair Social Security and Medicare, it will never happen. To suggest, as The Post does, that Democrats should trade adjustments to the sequester for reforms to these programs assumes that the sequester affects only Democratic priorities. More than half of the $1.2 trillion in sequester cuts are to defense, long a Republican priority.
We've known for a while now that solving our debt problem would require tough choices and sacrifices from both parties. Lawmakers have taken advantage of most of the easy policies, so even more modest plans will need to look at all parts of the budget. Concludes Conrad:
A mini-“grand bargain” would require all of these elements: changes to Social Security and Medicare to ensure their solvency for future generations; a modest increase in revenue so all parts of society participate in getting our country back on track; and changes to the sequester cuts that force nearly all of the deficit savings on less than 30 percent of the budget.
We can do this, but everyone must be prepared to give a little so that our nation can gain a lot.
Click here to read the full op-ed.
Yesterday, the Congressional Budget Office (CBO) dramatically lowered its estimate of savings if policymakers chose to increase the Medicare eligibility age from 65 today to match Social Security's full retirement age of 67. Last year, CBO estimated that increasing the age would generate $113 billion in savings over 10 years. They've reduced that estimate by nearly 85 percent (their estimate of the savings to Medicare dropped by roughly 60 percent and their estimate of new spending remained similar), and now say that raising the age will result in only $19 billion in savings.
The reason for the dramatic change stems from CBO taking a closer look at the group of people who would be affected by the change — 65- and 66-year olds who would have to wait until they turned 67 to claim Medicare, instead of starting the program at 65. To estimate the cost savings to Medicare for the 65- and 66-year olds whose enrollment would be delayed under this proposal, CBO previously looked at all 65- and 66-year olds in Medicare, including those who are in the program because they are disabled or suffer from end-stage renal disease (ESRD) and would not be affected by this proposal. Beneficiaries with disabilities or ESRD, however, require extensive care, are less likely to have access to employer-provided health insurance, and are far more expensive to cover than the average 65- or 66-year old.
In updating their analysis, CBO honed in on only the beneficiares who would be affected by the change -- the 65-year olds enrolling for the first time. This group is much healthier, and usually still has health coverage from their employer. In these cases, a person's employer-provided insurance still pays most of the costs, and Medicare is usually only a secondary payer. Providing Medicare to these folks is not nearly as expensive as for enrollees with disabilities or ESRD, and therefore raising the Medicare age so they are not covered does not save nearly as much as previously thought.
Raising the eligibility age for Medicare would also increase spending on Medicaid and exchange subsidies, but "CBO's estimate of the extent to which this option would increase federal spending for Medicaid and exchange subsides has not changed significantly."
|Breakdown of Estimate for Raising Medicare Age (billions)|
Note: Negative numbers denote deficit reduction
CBO's revision shows the value of closely examining and re-examining policy changes, and highlights the uncertainty of all budget estimates. This also reinforces the need to be conservative in budget assumptions and to work to put the debt on a clear and robust downward path.
With a deal on the appropriations bill last week, the government has been reopened and a default has been avoided. But the reality is that lawmakers do not have too long before the next budget deadlines draw near.
The budget conference committee has set an informal deadline on December 13 to report its recommendations to Congress. While there is no penalty for missing this deadline, symbolically it serves as our next "fiscal speed bump." On January 1, Medicare provider payments will be cut by 24 percent unless a "doc fix" is enacted, the farm bill will expire and prices will revert back to 1949 law, the unemployment benefit expansion will expire, and some "tax extenders" will sunset. While not quite the fiscal cliff we saw last year, Congress clearly has work to do.
We could also find ourselves back in a government funding and debt ceiling debate in early 2014. The continuing resolution will expire on January 15, at the same time a so-called "second sequester" will go into effect on non-exempt other mandatory spending and Medicare spending. While the debt ceiling is reinstated on February 8th, extraordinary measures should be able to prevent a default until late Febraury or early March, although the exact date is uncertain.
Of course, all of these are manageable if lawmakers can start budgeting and stop the crisis-to-crisis cycle we've seen over these past few years. This is why the budget conference beginning next week is so important. Hopefully, lawmakers can use this opportunity to come together and deal with these deadlines in a fiscally-responsible way.