The Bottom Line

December 12, 2013

So far, reactions to the budget agreement have been mixed. As we said in our report yesterday, Understanding the Bipartisan Budget Act, the deal replaces short-term savings in sequestration with smarter, permanent savings from mandatory savings and user fees, a positive development. But it largely pushes the big decisions down the road.

Today, the Washington Post weighed in on the deal, remarking that "a flawed deal is better than no deal." Perhaps the greatest achievement of the budget committee was showing that bipartisan compromise is possible.

Yet the deal has one overriding virtue: It exists. Republican and Democratic leaders have produced a bipartisan spending plan — and one that doesn’t increase the deficit through fiscal year 2015 at that. Now House and Senate appropriations committees can proceed to allocate funds within the overall caps set by the Murray-Ryan agreement: roughly $520 billion for defense and $490 billion for non-defense discretionary spending over the next two years. This eases the “sequester,” restores needed funds to defense and all but banishes the threat of a government shutdown like the GOP-engineered fiasco that so badly damaged this country’s reputation in October.

In short, the agreement’s importance is not fiscal but political: It amounts to a truce in the destructive budgetary wars that have plagued Washington since the advent of a Republican-majority House in 2011. During the interlude, U.S. businesses can invest in job-creating (and deficit-reducing) growth without worrying too much about disruptions from Washington. And lawmakers can address long-term questions such as tax and entitlement reform — assuming they want to.

The bill resolves some short-term concerns on sequestration, but does not make the kind of progress we were hoping for on the long-term problem. The Post notes that on this front, they still have a long way to go.

They should. Yes, President Obama and Congress have already achieved some long-term fiscal adjustment, to the tune of $2.7 trillion over 10 years, according to the Committee for a Responsible Federal Budget. Yet deficits are hardly the stuff of “a stale debate from two years ago or three years ago,” as President Obama suggested in a speech last week. What little deficit reduction the Murray-Ryan agreement claims to produce comes from a classic budgetary “magic asterisk”: $28 billion in promised restraint in mandatory spending (mostly Medicare) in 2022 and 2023.

The Washington Post notes that in order to reverse our upward fiscal course, we will have to turn to serious entitlement reform and closing tax loopholes. This deal did not do that in a meaningful way. But lawmakers can build off it and achieve a larger deal that would resolve sequestration in the remaining years if they choose and put debt on a sustainable downward path. There are few low hanging fruit in the budget left, now we only have the tough choices.

December 12, 2013

With the details on the agreement reached by Budget Committee chairs Paul Ryan (R-WI) and Patty Murray (D-WA) made fully available yesterday, CRFB has gone deeper into the Balanced Budget Act in a new paper and breaks down the sequester relief, the offsets, and finally the overall effect on the budget this decade and over the long term.

On the discretionary spending and sequester front, we show that the deal will ease the path of spending in the short term to ultimately reach sequester levels in 2016. Rather than spending being reduced by $20 billion come January, discretionary funding will rise by $25 billion. It will then raise very slightly to 2016 levels where it will continue on the current law path. In total, the sequester relief is $63 billion of budget authority, with the deficit impact totaling $62 billion.

The offsets come from a variety of sources, with many smaller policies and a few relatively big one. Some of the more notable offsets include increasing federal employee retirement contributions by 1.3 percentage points to a total of 4.4 percent of wages for employees hired after 2013, reducing the military pension cost-of-living adjustment for working-age retirees, and increasing aviation security fees. These offsets and other changes save $85 billion over ten years, more than the cost of the sequester relief. See the analysis for a full listing and discussion of the offsets.

In terms of debt, the agreement does very little since it includes only small net savings in the first decade, even though those savings grow over time. As you can see below, there is very little change in the CRFB Realistic Baseline assuming that the sequester stays in place. If, however, this deal allows the sequester to be kept in place permanently, it would produce some savings relative to the default Realistic baseline, which assumes the sequester is repealed.

Click here to read the full paper.

December 11, 2013
Weekly Update on Budget and Fiscal Policy Developments and a Look Ahead

We Have a Deal – Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) announced a budget deal late Tuesday after weeks of negotiation and a few days ahead of the December 13 deadline for their conference committee to report an agreement. The deal sets topline spending numbers for the next two years, $1.012 trillion for fiscal year 2014 and $1.014 trillion for fiscal year 2015. These levels are $45 billion above the sequester level for FY 2014 and $18 billion higher for FY 2015. The extra spending will be offset by spending cuts elsewhere and new non-tax revenue over ten years. Because the offsets exceed the spending increases, the deal will reduce the deficit slightly over the next decade and beyond. Ahead of the deal, we looked at what possibly could be included, some of which was in the deal. Shortly before the deal was announced, a bipartisan group of House members sent a letter to Ryan and Murray urging them “to find commonsense, bipartisan solutions to the serious fiscal challenges we face as a nation.” Ryan and Murray made it clear that this wasn’t the deal they each wanted and it does not address the long-term budget issues that must be contended with, but it represents a compromise that moves in the right direction.  

Doesn’t Deal with the Long Term – The agreement does little to address the long-term fiscal challenges facing the country, but it does provide some much-needed stability for the federal budget process and hopefully can set the stage for more substantive bipartisan deals. As Fiscal Commission co-chairs Erskine Bowles and Alan Simpson put it, “The agreement is but a small step forward in restoring some sanity and order to the budget process, and puts in place a slightly more rational fiscal policy by replacing a portion of the inane across the board cuts in discretionary spending from sequestration with smarter, permanent cuts in mandatory programs.” The Campaign to Fix the Debt echoed that sentiment saying, “it is preferable to another round of punts, gimmicks, and showdowns. Lawmakers should pass this legislation with the understanding that it is a step forward not a victory.” Read our summary of the deal and a brief explaining it here.    

Still a Good Deal of Work to Be Done – The budget deal still has to be approved by Congress. The House plans to vote on it on Thursday just before it adjourns for the rest of the year on Friday. The Senate is expected to take it up next week before it adjourns. Leaders in both chambers feel confident that the agreement will be approved by bipartisan majorities. Appropriators will then craft spending bills for the rest of this fiscal year based on the topline budget number. Appropriations legislation is expected to be considered the week of January 6 when lawmakers return from the holiday recess and just ahead of the January 15 expiration of the continuing resolution currently funding the government. Passing spending bills, as opposed to relying on the stopgap measures that have been used in recent years, will provide more guidance to federal agencies on how to proceed.

Will Unemployment Benefits Be Dealt In? – Legislation extending the period the unemployed can collect jobless benefits from 26 to 73 weeks expires on December 28. Some legislators are working to extend the expanded benefits for another year. An extension, which would cost $25 billion, was left out of the budget deal. We argue that any extension of unemployment benefits, just like any other extensions, should be paid for.  

Permanent Doc Fix Even More of a Deal – Earlier this year, the Congressional Budget Office (CBO) significantly reduced its estimate of permanently replacing the Sustainable Growth Rate (SGR) -- known as the “doc fix” -- because of slowing growth in health care costs. That news spurred efforts to enact a permanent fix this year, as opposed to the annual patches preventing a steep reduction in payments to Medicare physicians. Now the estimate has been lowered even further, to $116.5 billion over ten years. While lawmakers are close to a deal on a permanent fix, agreement has still not been reached on offsetting the cost. With time running out to complete an agreement by the January 1 deadline for avoiding a 24 percent cut in physician payments, a three-month fix will be considered in the House to buy negotiators a little more time.  

Hopes for Farm Bill in 2013 Dealt a Blow – Another major bill that is close but won’t be finished this year is the farm bill. Again, the House may vote for a short extension to buy some time, in this case through the end of January. A farm bill agreement could include significant deficit savings.

 

Key Upcoming Dates (all times are ET)

 

December 12, 2013

  • Senate Finance Committee executive session to consider legislation to repeal the Sustainable Growth Rate (SGR) - "doc fix" - at 10 am.

 

December 13, 2013

  • Target adjournment date for the House.

 

December 20, 2013

  • Target adjournment date for the Senate.

 

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.

 

December 11, 2013

Update: See our full analysis of the deal here

On December 10th, Budget Committee chairmen Patty Murray and Paul Ryan announced an agreement to set discretionary funding levels for 2014 and 2015 and provide a package of reforms to offset the costs of appropriating funds above the levels set by sequestration.

The package would provide $45 billion of sequester relief in FY2014 and $18 billion in FY2015, split evenly between defense and non-defense. This $63 billion in sequester relief -- which is projected to increase outlays by $62 billion -- would be offset with $85 billion of cuts and user fees over ten years, including from:

  • Increasing airline security fees (Read our discussion of this policy here)
  • Increasing PBGC premiums (Read our discussion of this policy here)
  • Increasing federal civilian retirement contributions and reducing COLAs for military retirees (Read our discussion of this policy here)
  • Extend Medicare and other mandatory spending sequester cuts into 2022 and 2023
  • Reduce overpayments and other fraud
  • Add a "self plus one" option to the Federal Employees Health Benefits program
  • Reduce compensation to guarantee agencies for rehabilitated loans
  • Other spending cuts and user fees, including extending customs fees until 2023, ending the ability of the Strategic Petroleum Reserve to accept oil, reforming some mineral leases, among many others

As more details become available, we will continue to study and analyze the proposal. At face, the package appears to replace some of the abrupt mindless sequester cuts with more gradual and targeted reform while reducing deficits by $15 billion over the next decade and more in the following decade.

Savings and Costs in the Budget Conference Committee Agreement


*Mandatory sequester and customs fees only are extended through 2023. They would save a comparable amount annually in the second decade if they were extended further.
**While airline fees continue after 2023, they are used as "offsetting collections" which are not considered deficit reduction. If these collections were used to lower the spending caps in those years, the savings would be about $20 billion.
^Could add $2 billion to the deficit over ten years if the reduced accrual payments are used to increase spending in other areas.

The budget agreement would have only a very minor impact on debt levels relative to keeping the sequester in its entirety. Under the CRFB Realistic baseline with the sequester, debt would have reached 68.7 percent of GDP in 2023 and 78.9 percent in 2030. Under this plan, it would be around the same place in 2023 at 68.6 percent and at 78.7 percent in 2030. Importantly, assuming the sequester remains in place permanently, debt levels would be several points lower than a baseline which repealed the sequester.

Debt as a Percent of GDP, 2010-2030

In a statement reacting to the announcement of the deal, the Fix the Debt Campaign congratulated Congressman Ryan and Senator Murray for working on a bipartisan basis to address the sequester and put in place at least some permanent savings. However, much more work is still needed to address the long-term debt.

This deal demonstrates that Republicans and Democrats in Congress can work together on a proactive basis, rather than relying on 11th hour deals and governing by crisis. All indications are that we will need to fix the system before we can fix the debt, and it is a small start that this agreement takes a responsible and bipartisan approach to dealing with policy trade-offs and paying for necessary changes instead of adding to the deficit.

To be clear, this deal falls well short of what is needed to deal with the nation’s fiscal challenges. It will have only a marginal impact on the debt and it does not tackle the difficult choices we will have to make. It does not address the growth of entitlement spending, provide for tax reform, or help target government spending away from consumption towards more productive investments. It does not even put in place any further steps to help deal with these challenges in a timely manner...

...Still, it is preferable to another round of punts, gimmicks, and showdowns. Lawmakers should pass this legislation with the understanding that it is a step forward not avictory. There is more work to be done.

Be sure to check back at crfb.org over the next couple of days for further analysis.

December 11, 2013

With the end of the year fast-approaching and the looming prospect of a 24 percent cut to Medicare physician payments on January 1, the House of Representatives has introduced a bill to delay the Sustainable Growth Rate (SGR) mechanism through the end of March.

A 3-month delay will buy some time for the relevant committees to continue working on a much-needed permanent fix, while still maintaining a deadline for them to do so. The Senate Finance and House Ways & Means Committees appear to be near agreement on how to reform provider payments, but have yet to figure out how the added costs will be offset. The newest estimates from Friday put the cost of a 10-year payment freeze at $116.5 billion, and presumably the Finance/Ways & Means reform would cost a little bit more than that.

The 3-month delay bill would include the regular health extenders and temporarily patches the SGR by providing physicians a 0.5 percent payment update from 2013 through March 31, 2014. It would also delay the Affordable Care Act's reductions to Medicaid Disproportionate-Share Hospital allotments for two years to 2016, and extend them one year further through 2023 (currently they end in 2022). Altogether, CBO projects that the temporary delays will cost around $8.7 billion, and thus require that much in offsets.

The fact that the bill provides a 0.5 percent payment update instead of the usual flat freeze is likely due to a quirk in the SGR formula, which makes a short-term 0.5 percent payment increase slightly cheaper than a freeze over 10 years because the increase would then require larger cuts going forward once the patch expires. Unless lawmakers are planning to actually let the SGR hit soon – and they're not – the fact that a payment increase is cheaper is just an apparition and will actually make a permanent fix slightly more expensive (and if the short-term increase sets expectations going forward, future payment costs could increase significantly). According to CBO, while a one-year SGR fix with a 0.5 percent update costs $900 million less than a freeze ($18.7 billion over ten years compared to $19.6 billion), a permanent increase with 0.5 percent updates would cost nearly $20 billion more than a freeze ($136.1 billion for 0.5 percent updates versus $116.5 billion for a freeze). 

The bill would offset the added costs over 10 years by:

  • Extending the Medicaid DSH payment reductions through 2023 ($4.3 billion);
  • Introducing site-neutral payments for certain services performed in Long-term Care Hospitals ($2.6 billion); and
  • Shifting some of the savings from the sequester's Medicare cuts from Fiscal Year (FY) 2024 into FY 2023 ($2.1 billion).

Equalizing payments for the same service between different sites of service is positive step forward, and has great potential to be extended more broadly in line with multiple MedPAC recommendations. The extension of DSH payment reductions produces real savings compared to current law, but lawmakers should eventually make it permanent.

The third policy, "realigning the Medicare sequester for fiscal year 2023," however, is a pure timing shift and gimmick. The sequester relief deal extended the Medicare sequester through 2023, but part of its savings actually occur in FY 2024 (due to the technicalities of the sequester, the 2 percent Medicare cut that counts toward 2023 actually occurs from February 1, 2023 through January 31, 2024). This SGR bill would simply shift $2.1 billion of this cut that was set to occur in FY 2024, and thus outside the 10-year CBO scoring window, into FY 2023.  Instead of applying a 2 percent sequester for the full year, the bill would impose a cut in provider payments of 2.9 percent for the first six months of the year and a cut of 1.11 percent for the second six months of the year. This produces zero actual savings. Consequently, the legislation would increase the deficit by $1.8 billion ($2.1 billion minus the $0.3 net savings in the 10-year budget window). 

This gimmick also potentially reduces the amount of savings from further extensions of the Medicare sequester, as Congress may find it difficult to reinstate a sequester of 2 percent after having allowed it to decrease to 1.11 percent.

A short-term "doc fix" to buy time for a permanent replacement is positive step forward, but lawmakers should work to ensure temporary fixes do not make a permanent fix more difficult and avoid gimmicks in such a deal.

December 10, 2013

In recent weeks, we've used our blog to call for strict adherence to pay-as-you-go (PAYGO) principles for extending emergency unemployment benefits, offering sequester relief, extending the doc fix, and continuing the so-called tax extenders. Some have questioned whether abiding by PAYGO is truly necessary given the potential benefits and worthiness of many of these short-term policy extensions. With the economy still weak and many of these extensions assumed to occur anyway, the argument goes, policymakers should waive PAYGO rules to ease passage of the legislation.

In our view, this would be a huge mistake. In a world where current law budget projections have the debt on an unsustainable upward path, PAYGO is the right policy for the economy, the budget, and the government’s credibility. While putting debt on a downward path should be the ultimate focus, PAYGO at least helps policymakers to maintain fiscal discipline. PAYGO won’t solve our fiscal problems, but at least it can stop them from getting worse. 

The Economic Case for PAYGO

Some advocates have argued for waiving PAYGO in order to enact pro-growth policies. Although its true that some deficit-increasing policies can improve growth -- by providing short-term stimulus or encouraging long-term work and investment -- paying for these policies would strengthen that pro-growth impact. Higher debt levels slow economic growth over the long-run and lack of fiscal sustainability can even sometimes have a negative short-term impact.

Recently, we criticized a plan to repeal 60 percent of the sequester on a deficit financed basis, even though we believe that sequestration represents an "anti-growth" way to reduce the deficit. Though counterintuitive, this is entirely consistent. Repealing 60 percent of the sequester would increase the size of the economy by about $45 billion in 2014 at a budgetary cost of $700 billion through 2023. Thought of another way, deficit-financing this partial sequester repeal would mean increasing debt by 2.6 percent of GDP in order to increase the size of the economy by only 0.3 percent. Moreover, this temporary economic boost will fade and reverse. CBO rules of thumb suggest that by 2023, this partial-sequester repeal would reduce the size of the economy by about 0.3 percent, and that number would grow substantially over time.

Budgetary and Economic Effect of 60% Sequester Repeal
  2014 2023
Impact in Billions    
Deficit Impact +$35 billion +$85 billion
Debt Impact +$35 billion +$700 billion
GDP Impact +$45 billion  -$75 billion
     
Impact as Percent of GDP    
Deficit Impact +0.2 percent of GDP +0.3 percent of GDP
Debt Impact +0.2 percent of GDP +2.6 percent of GDP
GDP Impact +0.3 percent -0.3 percent

Source: CBO, CRFB calculations

The Fiscal Case for PAYGO

Abandoning PAYGO for the extension of current policies would substantially worsen the fiscal situation. Assuming war spending is drawn down and hurricane Sandy spending does not continue, current law would result in debt levels of about 68 percent of GDP by 2023 with debt rising by an average of less than half a percentage point of GDP per year in the early 2020s. If, on the other hand, policymakers violate PAYGO to waive the sequester, SGR, and extend the refundable tax credits (as in the "CRFB Realistic Baseline"), debt will rise to 73 percent of GDP by 2023, an average increase of about 0.8 percent annually in the 2020s.

Of course, because PAYGO does not require all offsets take place in the "same year," the fiscal implications of abiding by PAYGO are not the same as abiding by current law. For example, policymakers could temporarily extend expiring provisions one year at a time and pay for them over the following ten years. In this case, debt would be somewhat lower and grow somewhat more slowly than under the CRFB Realistic Baseline -- though the situation would be worse than if provisions were allowed to expire. We ran one illustrative example, which would extend doc fixes and other expiring provisions, and it would bring debt levels to roughly 71 percent of GDP by 2023, and the debt would be growing by roughly 0.5 percent of GDP annually in the early 2020s.1

On the flip side, using PAYGO rules to pay for these extensions all at once -- offsetting ten years of front-loaded policies with ten years of more gradual reforms -- could have the potential to actually improve the fiscal situation. We ran one illustrative example, which would replace these policies with a savings path similar to proposals from the President's budget.  Under this scenario, the debt would fall to below 68 percent of GDP by 2023, keeping it roughly flat later in the decade.2 

Source: CBO, CRFB calculations

The Fiscal Credibility from PAYGO

In addition to the economic and fiscal benefits of PAYGO, this rule helps with our fiscal credibility. This is especially true for repealing the sequester without offsets, which would show that lawmakers cannot even stick to the deficit reduction they have agreed upon.

As we pointed out in June, the rating agencies do not even see the sequester status quo as sufficient to quell concerns about debt. This perception is sensible. Our debt is currently twice its historic average as a share of the economy, the highest it has been since World War II, and projected to keep growing in the coming years and decade. In short, our debt problems are still far from solved.

Despite this, the markets are currently giving us the benefit of the doubt. Interest rates are low, and there is still a belief that the United States will do the right thing before it is too late. It's not clear that perception will last forever, particularly if we continue to violate our fiscal rules. And if the United States loses its fiscal credibility, the economic consequences could be severe.

* * * * *

Policymakers should enact a plan to put the debt on a clear downward path relative to the economy. In the meanwhile, they should at minimum prevent the fiscal situation from getting worse by adhering to strict PAYGO rules relative to current law. Adhering to PAYGO is the right economic policy, the right fiscal policy, and the right thing to do to maintain our country's fiscal credibility.


1 Illustrative scenario assumed that annual doc fixes, sequester relief, and expiring tax measures are extended for a year but paid for over the following ten years. The assumed savings are gradual.

2 Illustrative scenario assumed that annual doc fixes, sequester relief, and expiring tax measures are extended for ten years and fully offset over those ten years. The assumed savings take the 28 percent limitation on deductions, the chained CPI, and the health care savings from the President's budget and scale them up to the level of the costs of the extensions.

December 9, 2013

As budget talks continue, negotiators could turn to postal reform for budgetary savings.

The United States Postal Service is currently in bankruptcy, and losing about $6 billion per year.

In the last Congress, both the House and Senate proposed legislation to improve the finances of the U.S. Postal Service (USPS). Both bills allowed the Postal Service to eliminate Saturday delivery (though the House's version was more aggressive and started earlier), and both relieved the Postal Service of certain contribution obligations (the House version for pensions, and the Senate version for both pensions and retiree health care). In addition, the bills proposed various smaller options to save the USPS money, including allowing it to set rates for many products to cover their cost, encouraging workers to retire, and requiring Alaska to make payments to the Postal Service for bypass mail (rural delivery that does not go through a USPS facility).

In the past, President Obama has also proposed some reforms, including allowing stamp prices to increase faster than inflation and reducing the share of health and life insurance premiums that the federal government pays.

Many of the available savings options are presented below. Importantly, they are measured on a "unified budget" basis. The post office is "off-budget," and many policies which improve its financial status would actually worsen the "on-budget" deficit.

Ten-Year Savings/Costs (-) in Postal Reform Bills (billions)
  Savings/Costs
Allow the Post Office to End Saturday Delivery $20 billion
Increase Postal Employee Health and Life Insurance Premiums $10 billion
Increase the Price of First-Class Stamps by One Cent (above inflation cap) $5-10 billion
Provide the Post Office with Relief for Retirement Contributions -$5 billion
Provide the Post Office with Relief for Health Care Fund Contributions -$10 billion
Increased Credits to Encourage People to Retire  <$1 billion
Require Payment from Alaska for Bypass Mail (Expedited Rural Delivery) $1 billion
Increase Non-Profit Advertising Rate to 80% of Commercial Rate; Allow Increase in Rates to Cover Costs of Certain Types of Mail <$1 billion

Source: CBO

To be sure, postal reform is not easy, and it may be more difficult to do piece-wise -- when savings would not be accompanied with relief -- than all at once.  But policymakers must act to strengthen the financial integrity of the post office and should do so sooner rather than later.

December 9, 2013

A good piece in the Washington Post over the weekend takes a look at why Medicare physicians continue to use an expensive drug to help prevent blindness when what appears to be an equally-effective drug is available for a fraction of the price.

According to the article, Lucentis costs Medicare about $2,000 per injection. Avastin costs only around $50.

The authors outline a long list of reasons why Medicare physicians continue to use Lucentis so frequently, including the need to use Avastin "off-label," that Avastin is packaged in doses generally too large for ophthalmology, and that Medicare doesn't negotiate directly with the manufacturer on prices. While all of these reasons likely play a role, a key reason is that Medicare actually pays doctors more to use Lucentis.  In this particular case, doctors get paid about $117 more by Medicare to administer Lucentis as opposed to Avastin. In other words, Medicare builds incentives that ultimately end up costing the program and the beneficiary more money (this is far from the only example of a perverse incentive caused by Medicare's payment structure).

Medicare actually pays doctors a higher amount for the administration of certain drugs, like Lucentis and many for cancer, the more expensive the drug is. For physician-administered drugs covered by Medicare, doctors are paid the average sales price (ASP) of the drug plus 6 percent of its cost (ASP+6%). This reimbursement is intended to cover the physician's cost to purchase the medication plus handling costs, but it has the effect of incentivizing doctors to use the most expensive drug available, even though the actual cost of handling is not necessarily related to the cost of the drug. In this specific example, a physician would receive roughly $117 (6% of cost difference of the drugs) more to administer Lucentis than Avastin.

MedPAC has highlighted this problem, and both the Bipartisan Policy Center and National Coalition on Health Care, among others, have recommended the simple fix of changing the reimbursement to equal the average sales price of the medication plus a flat payment so that the physician does not receive a higher reimbursement as a result of choosing a more expensive drug. Other reforms such as reference pricing or giving CMS greater ability to deny coverage for certain drugs if a less expensive, therapeutically-equivalent drug is available have also been suggested to reduce the unnecessary costs from using more expensive drugs. At a minimum, though, policymakers should eliminate the incentive created under current policy for doctors to choose the more expensive, yet no more effective, drug.

The exact savings of such policies are not known, but if doctors choosing Lucentis over Avastin costs Medicare $1 billion annually by itself (as the article finds), there may be significant savings available without impacting patient care. Even if not done on its own, maybe lawmakers will look to such policies as part of an offset package to finally fix the Sustainable Growth Rate mechanism.

December 9, 2013

As the budget conference committee continues its work on finding a bipartisan solution to replacing a portion of the sequester with better targeted reforms, negotiators appear to be turning to user fees and related receipts as an alternative to tax revenue.

Like taxes, user fees help raise money for the government. But while taxes tend to be relatively broad and can fund a wide array of government activities, user fees represent charges for a specific transaction to help fund a service offered as a result of that transaction. For example, the federal government charges user fees for park admission to help fund the public park system, passport fees to offset the production costs, and airline fees to help offset the costs of airport security. User fees are based on the premise that firms and individuals should directly pay for the costs and services they directly benefit from, rather than the burden being imposed on the general public.

From a budgetary perspective, user fees can be classified as offsetting collections, offsetting receipts or revenue. Offsetting collections go directly into appropriated accounts, thus easing the funding burden of discretionary appropriations. Offsetting receipts, meanwhile, count as "negative mandatory spending" and these receipts, like revenue, could be used to reduce the deficit or offset the cost of sequester relief.

According to recent reports, a number of user fees have been under discussion in the budget negotiations. Press reports have mentioned possible increases in airline security fees, increases in Fannie and Freddie guarantee fees, and sales from spectrum auctions or new spectrum user fees. Below, CRFB Has compiled several different user fees and their potential savings over the next ten years.


Policy Options
Ten-Year Savings
Gradually increase aviation security fees to $7.50 per one-way trip $25 billion
Increase aviation security fees to $5 per one-way trip $10-$15 billion
Establish a $100 per flight surcharge for airtraffic control services $10 billion
Establish new fees for Food Safety and Inspection Service $10 billion
Extend current Fannie/Freddie guarantee fees $5-$10 billion
Extend current customs user fees $5-$10 billion
Allow FCC to establish fees on unauctioned spectrum licenses $5 billion
Establish an annual fee on commercial users of inland waterways $4 billion
Charge beneficiaries of trade promotion activities of the International Trade Administration $3 billion
Reauthorize special fee on nuclear facilities $2 billion
Increase fees on of hardrock minerals to restore abandoned mines $2 billion
Establish fees to offset the costs of federal rail safety activities $2 billion
Establish CFTC user fees to offset non-enforcement activities $2 billion
Impose a fee on all oil and gas leases $1 billion
Increase permit fees from the Army Corps of Engineers $1 billion

Source: CBO, OMB, rough CRFB calculations. Numbers above $5 billion rounded to the nearest $5 billion.

 

December 9, 2013
Avoid Budget Gimmicks

While we continue to hope for a substantial budget deal that would address our long-term fiscal problems, it looks like a smaller deal is more likely. Replacing part of the sequestration with permanent long-term savings would represent progress, though more work will remain.

However, as CRFB President Maya MacGuineas wrote in zpolitics over the weekend, if lawmakers are looking toward a smaller deal, it becomes that much more that the avoid budget gimmicks and worsening the fiscal situation. Writes MacGuineas:

What is a budget gimmick?  Simply put, it’s an accounting trick that allows lawmakers to artificially create or inflate budgetary savings.  Imagine if you make some tough choices one month and are able to put away $100. When planning your budget for the next month, you decide to use those savings to pay your $100 heating bill and buy a $100 cell phone.  It doesn’t take an economist to realize that budget isn’t going to work.

The example may seem extreme, but MacGuineas notes that Congress does the same thing on a larger scale. By taking advantage of the scoring conventions of the Congressional Budget Office, lawmakers are able to mask the deficit impact of their policies with phony savings:

For instance, the Congressional Budget Office only scores legislation based on its budget impact over 10 years, so Congress will often make sure that provisions that will increase the deficit don’t take effect until the second decade after a bill is passed.  Projected war and emergency spending, including Superstorm Sandy relief, grows with inflation.  If lawmakers rein that spending in by applying budgetary caps, they can claim bogus savings for unspent money. Lawmakers have also considered willfully disregarding the inevitable, like counting savings from expiring provisions — the Child Tax Credit or Pell Grants — that will almost certainly be renewed. Talk about counting your chickens before they hatch.

With our fiscal outlook the way it is, we cannot afford to move backwards on the budget. No matter what a final deal includes, policymakers at the very least need to make sure it's gimmick-free:

Our elected officials are smart enough to know that this issue is too important for tricks. The conference committee has an opportunity to stop the games and get serious about the debt before it is too late. We are counting on them to do just that.

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.

December 6, 2013

The budget conference committee is rumored to be close to a deal that includes changes to federal retirement programs, increasing the share that federal workers pay toward their own retirement funds.

Currently, most civilian federal workers are required to contribute 0.8 percent of their salary toward the Federal Employee Retirement System (FERS), while federal agencies contribute an additional 11.9 percent. That 12.7 percent is deposited into a trust fund used to pay a defined-benefit pension to federal workers after they retire. As a result of 2012 legislation, federal workers hired after 2012 pay an increased amount of 3.1 percent. 

Policymakers have two types of options to consider with regards to federal retirement benefits – either they could increase pension contributions or they could reduce pension benefits.

With regards to contributions, policymakers will need to decide if they want to apply increases to only new workers (who currently pay 3.1 percent), only existing workers (who currently pay 0.8 percent), or both. The President’s budget would generate $20 billion by increasing contributions for most current workers from 0.8 to 2.0 percent. To generate the same amount of savings from new workers, their 3.1 percent contribution would have to more than double. 

As we've explained before, policymakers need to be careful not to double count savings from increases. The money can be used to reduce the deficit, offset sequester relief, or provide headroom under the sequester – but not all three.

Instead of increasing contributions, policymakers could change the benefit formula. For example, benefits could be calculated based on a workers’ highest 5 years of pay, instead of their highest 3. Or COLAs could be disallowed prior to age 62, with a one-time catch-up that year.

These changes could apply to only the civilian system, but would save far more if applied to military benefits as well, which Defense Secretary Hagel recently explained are consuming an increasing share of the defense budget. Savings from military retirement benefits might also be a logical offset for the defense sequester, though again policymakers must be careful to avoid double-counting.

Options for Increasing Federal Retirement Contributions
Policy Ten-Year Savings
Increase contributions by current employees from 0.8% to 2.0%, as proposed by the President ~$20 billion
Increase contributions by current employees from 0.8% to 3.1% ~$40 billion
Increase contributions by new employees pay from 3.1% to 6.35% (half of the total cost) ~$20 billion
Gradually increase contributions for current and new workers to 6.35% (half of the total cost) ~$70 billion
Calculate retirement benefits based on highest 5 years, instead of 3 years, of earnings, for civilians only $4 billion
Calculate retirement benefits based on highest 5 years, instead of 3 years, of earnings, civilian and military $6 billion
Freeze COLAs for federal civilian and military retirees until age 62, then provide one-time catch up ~$20 billion
Reduce military retirement benefits from 2.5 percent of wages per year to 2 percent for new retirees ~$5 billion
Eliminate the special Social Security payment for federal retirees that retire before age 62 ~$3 billion

*Estimates based on CBO data and CRFB staff calculations.

More information about federal worker retirement reform is available in the Moment of Truth Project’s report “Shared Sacrifice: Reforming Federal Retirement Programs.” It concludes:

Federal retirement programs help to protect the economic security of those who serve in our military and work for the government, and they should continue to do so in the future. However, these programs must be sustainable, be made more equitable across the government, and savings from these programs should be included in any comprehensive deficit reduction package...

 
December 6, 2013

Earlier this year, we discussed how the prospects for a permanent fix to the Sustainable Growth Rate formula had improved given CBO's dramatic reduction in its estimate of the cost of a fix. Now the deal has gotten even better as CBO has further reduced its estimate by $21 billion, showing that a permanent doc fix would cost only $116.5 billion over ten years. Similarly, the projected cost of the Energy & Commerce Committee's proposal declined by $22 billion to $153.2 billion over 10 years.

December 6, 2013

With Budget chairs Ryan and Murray apparently close to a deal, they may turn to PBGC premiums as a way to raise money without increasing taxes.

For background, the Pension Benefit Guarantee Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 to insures defined benefit plans which have insufficient assets to pay promised benefits. It is self-funded through premiums which are composed of a flat-rate premium of $42 in 2013 and a variable-rate premium of $9 for each $1,000 the plan is underfunded. Those premiums will increase to $70 and $25, respectively, by 2023.

In 2003 and 2004 and between 2009 and 2012, these premiums were insufficient to cover PBGC’s costs, creating a $17 billion net liability from 2002-2012. A premium increase from last year’s highway bill saved $11 billion, which is projected to produce temporary surpluses through 2019. However, the program still has a $34 billion unfunded liability.

There are a few different options for increasing PBGC premiums. A CBO Budget Option would increase the flat-rate fee by 15 percent and increase the variable-rate fee by one-third, saving $5 billion over ten years.

The President's budget would simply give the PBGC the authority to raise premiums as necessary to ensure solvency and direct PBGC to take into account the risk that a plan poses to future retirees and the PBGC. This proposal would both encourage companies to fully fund pensions and improve financial soundness of the PBGC. CBO estimates that the President's proposal would save $13.6 billion. A similar policy was included in the original Simpson-Bowles report.

The Senate budget resolution appears to assume reforms along the lines of the President's proposal, with the report accompanyng the resolution calling for "establishing risk-based premiums for under-funded companies' pension plans." While the House budget resolution explicitly states that it does not assume the President's proposal, it suggests savings of $950 million.

Policymakers could also increase the flat-rate fee, variable-rate fee, or both by whatever amount they deem acceptable.

PBGC Premium Options
Source Policy 2014-2023 Savings
President's Budget Allow PBGC to increase premiums as necessary and take into account risk pension plans pose to PBGC $14 billion
CBO Budget Option Increase fixed-rate premium by 15% $2 billion
Increase variable-rate premium by one-third $3 billion
Increase fixed-rate premium by 15% and variable-rate premium by one-third $5 billion
House Budget Does not specify $1 billion
Senate Budget Establish risk-based premiums to take into account risk pension plans pose to PBGC Unknown

Source: CBO, HBC

As we’ve explained before, replacing temporary sequester cuts with permanent deficit reduction would represent a small step forward in improving the budget situation.

December 5, 2013
Among the proposals that the budget committee is rumored to be considering to replace a small part of the sequester is an extension of a reduction in Medicaid payments to hospitals that serve a high number of low-income patients to help offset uncompensated care costs. First passed as part of the Affordable Care Act (ACA) through fiscal year 2020 (which not coincidentally goes just through the end of the 10-year budget window used by the Congressional Budget Office used to judge the deficit impact of the bill), these reductions have been extended several times, most recently in the fiscal cliff deal, and are now scheduled to expire after 2022. If the conference committee includes this policy, it should extend the reductions permanently instead of repeatedly using short-term extensions to the end of the current CBO budget window to pay for new short-term spending.
 
Called Disproportionate Share Hospital (DSH) payments, both Medicare and Medicaid make additional payments to hospitals that treat a disproportionate share of low-income patients. Along with other government programs, these payments are intended to help compensate those hospitals for having more uninsured patients who may not pay their medical bills and more patients on Medicaid, which generally pays lower rates than Medicare and private insurance. Without public assistance, hospitals would get stuck with the bill for this uncompensated care, which reached $57.4 billion in 2008, according to the Urban Institute. In 2012, Medicare paid $12 billion through DSH payments and Medicaid paid $11 billion.
 
Due to the coverage expansions in the Affordable Care Act, however, projections show that the amount of uncompensated care will drop dramatically. For instance, the RAND Corporation estimated that uncompensated care nationally would decrease by $32 billion in 2016 alone due to the effects of the health care law. Therefore, with fewer payments needed to compensate hospitals, the ACA reduced Medicare DSH payments by $22 billion over 10 years and Medicaid DSH payments by $14 billion.
 
But while the Medicare payment reductions were made permanent, the Medicaid payment reductions were left to expire after 2020. Policymakers have since extended these reductions whenever they want to claim an extra $4 billion in savings to offset new spending, yet it is unlikely that the payments would ever be allowed to increase to their pre-ACA levels.
 
Moreover, each 1-year extension has been used to pay for an immediate 1-year "doc fix." While there is a benefit right now to reducing near-term fiscal drag through offsets over 10 years, continuing the practice of offsetting immediate spending with savings literally in the last year of CBO's 10-year window feels close to a gimmick and actually increases our debt by over $1 billion each time due to increased interest costs.
 
If the budget conference committee is going to include a reduction in DSH payments, the fiscally responsible thing would be for policymakers to permanently extend the reductions. While this policy would only save $4 billion this decade, a permanent extension would produce another roughly $60 billion in deficit reduction over the 2nd decade.
 
Revenue Impact from Reducing DSH Payments
Policy First Decade
2014-2023

Second Decade
2024-2033

Extend reductions in DSH payments for one year $4 billion $0 billion
Permanently extend reductions in DSH payments $4 billion  ~ $60 billion*

*Estimates for the second decade are CRFB staff calculations, and should be seen as an order of magnitude, rather than a precise estimate.

 
December 5, 2013
Friday the 13th Approaches

It's just a little over a week before the budget conference committee is supposed to present its recommendations to Congress. Former U.S. Comptroller and CRFB board member David Walker writes in The Hill that the deadline is also an opportunity we cannot afford to waste:

Friday the 13th has additional significance this year. In addition to being an annual day of caution for superstitious people, it is a deadline date and day of opportunity for the recently appointed joint Senate and House Budget Conference Committee to report its recommendations for the fiscal 2014 budget. Hopefully this committee will not be a super failure like the joint "Super Committee" that was formed after the debt ceiling deal in August of 2011.

We had great hopes for the budget conference committee, but recent reports on the negotiations have been discouraging. A partial replacement has become the focus rather than a comprehensive deal that could make progress on the long-term debt problem. Write Walker:

It's clear that the Committee has been working to tap down expectations of what it is likely to achieve. The Committee is focusing its efforts on trying to achieve a deal to replace all or part of the sequester for a two-year period with alternative direct or indirect spending reductions. To do so they should focus on mandatory spending proposals in President Obama's budget submission and unallocated funds from prior budgets. While achieving agreement on discretionary spending levels for two years would be good, it's not enough and the Committee should aim higher.

While achieving agreement on a fiscal "grand bargain" is beyond reach, it would be desirable for the Committee to agree on a fiscal goal that the Congress and president would seek to achieve over time. One possible goal would be to set a target of getting public debt/GDP down to 60 percent of GDP by 2030 with a fiscal trajectory that will keep debt/GDP no higher than that level over time. This would be a meaningful accomplishment and would ultimately force the Congress and the president address the four key actions needed to effectively address our longer-term structural deficits. Namely, the need for social insurance reform, additional health care reform, comprehensive tax reform, and a more intelligent way to address discretionary spending allocations.

We've shown that the long-term debt problem is very real and concerning, and the longer we wait, the tougher the choices will become. Lawmakers have missed many opportunities over the past few years, and eventually we will be forced to solve this problem. It makes no sense to wait any longer:

The American people are tired of the hyper-partisanship and ideological gridlock in Washington. They want their elected officials to start solving problems and generating some results. Hopefully this Friday the 13th won't involve another fiscal failure and lost opportunity. America and Americans deserve more from their elected officials.

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.

December 4, 2013

Recently, several Members of Congress and outside groups have called for continuing extended unemployment benefits to allow the unemployed to collect for up to 73 weeks instead of 26. When Congress considers this extension, as with tax extenders and the sequester, they should keep PAYGO principles in mind.

CBO recently estimated the cost of a one-year extension at $25 billion and separately found that this extension would increase GDP by 0.2 percent and employment by 200,000 at the end of 2014. These gains are far from insignificant, but if a policy is important enough to extend, it’s also worth paying for.

The pay-as-you-go (PAYGO) principle ensures that policymakers face the real trade-offs of budgeting, and when abided by, it prevents policymakers from making an already unsustainable fiscal picture even worse.

Moreover, offsetting an extension of unemployment benefits would be a win-win economically. As CBO explains:

"[extending unemployment benefits] would lead to greater federal debt, which would eventually reduce the nation’s output and income slightly below what would occur under current law (unless other policy changes were made that offset the increase in federal debt from the policies analyzed here)."

Offsetting the cost of unemployment benefits with other savings will prevent them from adding to the debt and reducing economic growth, and assuming the offsets are permanent, they will eventually help to slightly accelerate the growth of the economy over the long term.

PAYGO rules are there to enforce fiscal responsibility, not to be waived whenever they become inconvenient. Policymakers should abide by PAYGO strictly, at least so long as the debt is on an unsustainable long-term path.

December 4, 2013
Weekly Update on Budget and Fiscal Policy Developments and a Look Ahead

Deals to be Had – We survived Black Friday, Cyber Monday and Giving Tuesday. While the door buster bargains may be gone, there are still deals for the taking in Washington. Namely, lawmakers have striking deals on a budget and farm bill on their wish lists. With a Congress that is on pace to go down as the least productive in history, legislators have to be in the mood for bargains. Although progress has been very slow, there are signs of progress. The House is back from Thanksgiving break this week while the Senate is still home. The House would like to wrap things up and adjourn by December 13, the deadline for the budget conference committee to report a deal, and several deadlines loom at the end of the year. Prepare for the next big holiday rush.

Budget Blowout – The lead negotiators in the budget conference committee, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA), appear to be close to an agreement that would establish a budget framework for the rest of this fiscal year and possibly next year and mitigate some of the automatic sequester cuts. The prospective deal would likely set a spending level for this fiscal year somewhere in between the $967 billion approved by the House and the $1.058 trillion passed by the Senate. Some of the sequester cuts over the next two years could be replaced by cuts elsewhere in the budget and with additional revenues by increasing fees such as those for airline security. While the committee has until December 13 to report a deal, appropriators are pushing for quicker action so they have time to produce a spending plan based on the topline numbers ahead of January 15, when the current stopgap measure funding the government expires. Appropriators wanted a deal by Monday so that they can get to work. If the committee fails to reach a deal, a bipartisan group of senators is prepared to pick up the slack and work on an agreement and House leaders say they will move another stopgap continuing resolution at the $967 billion level in that case.   

Cultivating a New Farm Bill – As many of us continue to recover from excessive consumption of turkey and other foods, lawmakers are working on renewing a major farm bill. Food stamps and crop subsidies continue to be the key sticking points. As negotiators continue their talks ahead of a January 1 deadline, some are broaching the possibility that the matter could be rolled up into a budget deal. 

Dealing with Medicare Physician Pay – Another January 1 deadline involves the so-called “doc fix” regarding the formula for the paying Medicare physicians. Policymakers are motivated to agree on a permanent solution to the perennial problem of avoiding a steep reduction in payments to Medicare physicians because the cost of a SGR fix has dropped dramatically. As part of this effort, the key congressional negotiators recently reached agreement on how Medicare reimburses physicians for certain services and procedures. Payments for some services would be decreased and redistributed to other services that are currently viewed as undervalued.

Extending the Tax Extenders Debate – Numerous tax provisions face yet another January 1 deadline. The so-called “tax extenders” consist of 55 tax measures, including a corporate research and development tax credit, which have been routinely extended each year. Extending them for another year would cost about $54 billion. According to CQ (subscription required) the provisions will likely not be renewed by the end of the year, but some could be extended retroactively, perhaps as part of a comprehensive tax reform package.

Getting Less Than They Bargained for – Even if the budget conference committee reaches a deal, it will be a very small one that will likely not improve the long-term fiscal outlook. As we have been pointing out, “The Longer We Wait, the Tougher the Choices Become.” The longer we wait to implement the savings necessary to put the national debt on a sustained, downward path as a share of the economy, the more severe the deficit reduction will be. We also provided some thoughts on how to assess policies effectively through disregarding temporary effects and timing shifts, particularly making sure that permanent tax rate cuts aren’t paid for with temporary revenue raisers. Timing shifts are one of the gimmicks we warn about in a new paper, along with war drawdown “savings,” ignoring policies that are routinely “patched,” double-counting, excessive back loading, shifting sequester cuts, and trust fund revenue transfers. Relatedly, we warn against the idea of applying savings from the fiscal cliff deal to repeal 60 percent of the sequester.  

 

Key Upcoming Dates (all times are ET)

 

December 12, 2013

  • Senate Finance Committee executive session to consider legislation to repeal the Sustainable Growth Rate (SGR) - "doc fix" - at 10 am.

 

December 13, 2013

  • Date by which the budget conference committee must report to Congress.
  • Target adjournment date for the House.

 

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.

 

December 4, 2013

In his recent testimony, CBO directory Doug Elmendorf argued that it would be beneficial for policymakers to make large improvements to our budgetary picture, but that small steps forward would be better than nothing, and "no steps at all would be better than stepping backward." Budget gimmicks fall squarely into that stepping backwards category by potentially offsetting real costs with phony savings.

Today, CRFB released a paper "Beware of Budget Gimmicks" which warns against using these various tricks. The types of gimmicks the paper warns against are:

  • Phony Drawdown Savings: This gimmick involves claiming savings for the drawdown of costs related to the war in Afghanistan, which is already in place, and the discontinuation of one-time Superstorm Sandy aid, which was never meant to continue. We discussed the war gimmick previously in detail.
  • Timing Shifts or One-Time Savings: There are many policies which provide one-time savings, shift costs just outside or shift savings just inside the ten-year window, or save money upfront but cost money in later years. Using these policies to achieve ten-year savings provides a very incomplete and misleading picture of their effect on the budget.
  • Ignoring Policies Currently in Place That Are Likely to be Extended: Policies like the "doc fix" are temporary but very likely to be continued into the future. A major gimmick would be to artificially improve budget numbers by ignoring the costs of these current policies.
  • Double-Counting Savings: For technical reasons, some savings -- particularly increasing federal employee retirement contributions -- could be used both to offset the cost of repealing part of the sequester and create room under the discretionary caps for more spending. Doing both of those would result in a double-counting of savings and could lead to higher debt. Read more about this gimmick here.
  • Excessively Back-Loading Savings: Policymakers may choose to enact policies late in the ten-year window that they have little intention in following through on. While starting some policies at a later date might be ideal to give people time to prepare for the changes, having a sudden "cliff-like" spending cut or tax increase take effect would not be credible.
  • Shifting the Sequester Cuts: One gimmick to provide sequester relief in the short term would involve shifting those cuts to later years. While "smoothing" the sequester so there is a constant nominal dollar increase in the caps could be credible, spending up to pre-sequester levels by cutting well below sequester levels in later years without a reasonable path to get there would be a gimmick.
  • Trust Fund Revenue Transfers: Because of the budgetary accounting mechanisms, transferring general revenue to trust funds that are due to be exhausted, such as the Highway Trust Fund and the Disability Insurance trust fund, are not recorded as costs even though they allow lawmakers to spend more than they would if the trust funds were exhausted. If policymakers wish to improve the financial situation of a trust fund, they should identify policy changes to do so, not rely on general revenue.

Relying on any of these budget gimmicks would be a step backward after lawmakers have taken some steps in the right direction. It would also undermine fiscal credibility by showing that lawmakers are not serious about our debt challenge and will look for easy ways out instead of making hard choices. They should instead use legitimate, targeted savings if they wish to provide sequester relief or offset other costs rather than further adding to the debt through smoke and mirrors.

December 4, 2013

Last month, Senate Finance Committee Chairman Max Baucus (D-MT) released three tax reform discussion drafts. One of the most commendable elements in these discussion drafts is Baucus’ focus on the long-term impact of reform – ensuring it will not add to the deficit in future decades.

In a recent paper, we wrote about the importance of measuring long-term fiscal impact and the many ways it could be measured. While precise estimates of a policy become increasingly uncertain beyond the ten-year budget window, several measurement tools can provide policymakers with an indication of the fiscal impact of a policy beyond the ten year window.Senator Baucus adopted one of these measures, “steady-state analysis,” as the standard for tax reform to ensure that his corporate tax reform package is revenue-neutral even after temporary effects fade. As we explained in our paper:

A steady-state analysis shows the budgetary effect of a policy, disregarding aspects that result in temporary effects or timing shifts. This type of analysis is particularly useful for policies with both permanent and temporary effects. In those cases, the steady-state analysis would measure the effect of the former while ignoring the latter. The measurement can be expressed in dollar terms or as a percent of GDP. An advantage to this approach is that it controls for the “noise” associated with timing shifts. On the other hand, it ignores the fact that these shifts can create noticeable increases or decreases in  borrowing levels upfront that – though temporary – can continue to have effects in later years in the form of higher or lower debt levels and, thus, interest payments.

By focusing on the steady state, Senator Baucus can avoid the fiscal folly of paying for permanent corporate tax rate cuts with provisions which increase revenues temporarily. In particular, four sets of provisions proposed by Senator Baucus have significant temporary effects. All of these provisions generate at least a portion of their revenue from a timing shift or temporary increase in revenues that diminishes or disappears over time:

  • Repealing last-in-first-out (LIFO) accounting rules (see our tax break-down on LIFO here and our write up of Baucus’s proposal here);
  • Repealing accelerated depreciation in favor of a simpler schedule (see our tax break-down on accelerated depreciation here and our write up of Baucus’s proposal here);
  • Repealing “full expensing” for research and experimentation, intangible drilling, and advertising (see our discussion of intangible drilling here, information on the advertising deduction here,  and write up of Baucus’s proposal here); and
  • Imposing a one-time transition tax on corporate profits being held overseas, (see our write up of Baucus’s proposal here)

Most of these measures would continue to raise revenue over the long-run, but the revenue will fall as a percentage of GDP after the first decade. For example, repealing LIFO rules is likely to raise less than one quarter as much in the second decade as it does in the first. And studies suggest that revenue from repealing accelerated depreciation will modestly decline early in the second decade, and eventually begin to grow in nominal dollars, but still decline as a share of the economy. A steady-state analysis clears away these temporary revenue effects and measures whether the long-term revenue will increase or decrease.

It is also important to remember that some types of policies operate in the opposite direction. New “expensing” provisions (Baucus proposes a few for small businesses) cost more in the short-run than in the long-run, as does most transition relief. Policies that broaden the tax base that are phased in or grandfather existing property (for example, changing the deductibility of interest for new loans only), will raise more in the long-run than in the first decade. Temporary revenue gains could be used entirely to offset temporary revenue losses and still meet the goal of steady-state neutrality.

Steady-state analysis is not the only method to ensure that temporary revenue is not used to pay for permanent rate cuts that ultimately add to the deficit. Policymakers have a number of options for looking beyond the standard 10-year scoring window. As an example, they could look at the second decade impact – when most (though not all) of the timing shifts will have faded. Or they could use present-value analysis to determine revenue-neutrality over a long period of time – say 50 years.

Of all these approaches, steady-state analysis is the strictest way to approach reform that temporarily raises money – erring the most on the side of fiscal responsibility. All temporary revenue and the interest it produces represent permanent gains for the government that is never returned in the form of lower corporate rates.

This is not to say that the “steady state” measure is the absolute right one. Like every other measure, it has many flaws. This is also not to say that corporate tax reform has to meet this target if part of a broader plan – what matters most is the package as a whole, not each individual part. However, this measure does help ensure fiscal responsibility over the long-term.

The importance of a long-term focus should not be understated.  As we’ve explained, our long-term debt problems are very far from solved. Whether talking about tax reform, sequester replacement, or entitlement reform, policymakers should focus their efforts beyond the next 5-10 years in order to put us on a sustainable fiscal path.

December 3, 2013

A recent CNN Money article suggests that budget conferees are likely to propose an increase in aviation security fees. When added to an increase in federal retirement contributions and other changes being floated, these higher fees could help pay for a reduction in the 2014 and 2015 sequester.

For background, the federal government has played an increased role in airport security since the 9/11 terrorist attacks. To help fund TSA security costs, the federal government charges a ticket fee of $2.50 per non-stop flight and $5 per indirect flight. In 2012, the fee raised $2 billion, covering only 40 percent of the $5 billion aviation security budget.

Given this shortfall, a number of proposals including the Simpson-Bowles Bipartisan Path Forward and the President’s Budget have proposed increasing aviation fees.

One option would be to charge a flat $5 fee, regardless of the number of stops. This proposal would raise $11 billion over ten years if it started in 2015, or $13 billion if it began in 2014. If in place today, this increase would allow TSA fees to cover 60 percent of costs. Most of these proposals would not increase the total amount of money going toward aviation security but increase the share paid by air passengers rather than taxpayers. The House budget resolution uses this option, although it is not clear when the policy takes effect.

Of course, policymakers could go further. A $6 flat fee would raise close to $20 billion over ten years and cover about 70 percent of costs. The President's budget and the Senate budget resolution would go further still, gradually increasing the flat fee from $5 to $7.50 by 2019 and allowing the Homeland Security Secretary to increase it further as necessary. This would save $26 billion over ten years, with $8 billion dedicated go toward a higher aviation security budget for net savings of $18 billion. This approach would allow TSA fees to cover about 85 percent of the costs.

There are other options as well, such as indexing a $5 flat fee to inflation (it would reach about $6.10 by 2023) or requiring the fee cover a certain percentage of the aviation security budget. Policymakers could also keep the current fee structure while raising the rates.

The below table includes a number of potential options:

 Savings from Aviation Security Fee Increases
Policy Options
Ten-Year Savings
Increase to $5 flat fee in 2014 $13 billion
Increase to $6 flat fee in 2014 $20 billion
Increase to $7.50 flat fee in 2014 $31 billion
Increase to $5 flat fee in 2014, then gradually increase to $7.50 by 2019 $26 billion
Increase to $7.50 flat fee by 2019 and increase aviation security budget by $8 billion $18 billion
Increase to $5 flat fee in 2014 and index for inflation $17 billion
Increase to $7.50 flat fee in 2014 and index for inflation $36 billion
Require fee to be adjusted to cover 75% of aviation security budget ~$23 billion
Increase current direct and indirect flight fees by 50% (to $3.75 and $7.50) ~$15 billion

Source: CBO, OMB, rough CRFB calculations

Raising the aviation security fee would not be a significant entitlement reform, but replacing temporary sequester cuts with permanent mandatory savings would be a small step forward for the budget.

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