The Bottom Line

November 7, 2014

Two of the biggest items among the tax extenders that Congress may consider before the end of the year are two provisions that allow accelerated write-offs of investments: section 179 expensing and bonus depreciation. Section 179 expensing provides an immediate write-off for small businesses for a certain amount of investment; both the amount and the level at which the favorable tax treatment phase out decreased significantly when the extenders expired at the end of last year. Bonus depreciation allows all businesses to write off half of certain investments immediately. Both provisions are among the costliest in the tax extenders package, costing a combined $315 billion over ten years if extended permanently.

These two policies, and in particular bonus depreciation, are generally justified as stimulative measures, and since they effect only the timing of write-offs, their temporary nature is central to their effectiveness in that regard. However, the Congressional Research Service's Gary Guenther in a recently updated report finds limited short-term economic benefit.

Though there appear to be no studies that address the economic effects of the enhanced Section 179 allowances enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The findings indicated that accelerated depreciation is a relatively ineffective tool for stimulating the economy during periods of weak or negative growth. [emphasis added]

Guenther sees many reasons why the effect of accelerated write-offs may be limited, including both their design and the economic context.

November 6, 2014

The White House this week requested an additional $6.18 billion in discretionary appropriations for the current fiscal year to cover the costs associated with mitigating the Ebola outbreak.

Of the additional funding, three-quarters is for the immediate response to tackle Ebola, while the remaining amount is part of a contingency fund to “ensure that there are resources available to meet unforeseen changes in the epidemic.” The emergency spending would go to various health agencies as well as international efforts to combat the spread of Ebola. The full breakdown of the request is as follows.

Administration Supplemental Spending Request by Category
Category FY 2015 Spending
Department of State and International Assistance Programs $2.1 billion
     US Agency for International Development (USAID) $1.98 billion
     Diplomatic Operations (Department of State) $36 million
     Contributions to International Organizations $85 million
     Bio-safety Training $5.6 million
Department of Defense (DARPA) $112 million
Department of Health and Human Services $2.43 billion
     Centers for Disease Control and Prevention $1.83 billion
     Public Health and Social Services Emergency Fund $333 million
     National Institutes of Health $238 million
     Food and Drug Administration $25 million
Contingency Fund $1.54 billion
Total, President's Request $6.18 billion

Source: OMB

November 5, 2014

With the 2014 midterm elections mostly in the books, the current Congress will return from weeks of campaigning to finish some remaining items before the end of the year and the swearing in of the new Congress. This year's lame duck session will likely to be less busy than some years, but there are still a few key things to get done before the 114th Congress begins.


Enact Appropriations

The current continuing resolution funding the government will expire on December 11, so policymakers will have to either extend it, enact appropriations bills, or cause a shutdown. This is the most important to-do list item for the lame duck Congress. Prior to the recess, appropriators indicated they wanted to get an omnibus appropriations bill done instead of a CR extending funding into the next Congress, and the chances of that look good -- thanks to the Murray-Ryan agreement setting defense and non-defense spending levels, House and Senate funding allocations are relatively close. Key questions that remain include whether lawmakers will provide supplemental funding for Ebola or ISIS and also what level of war spending they will provide (hopefully below the current level -- see "to-don't" list below).

For background on the appropriations process, see our Appropriations 101 document.

Pass Defense Authorization

Somewhat related to appropriations, lawmakers will also have to pass a defense authorization bill. For the budget world, this may be important to see if Congress will consider codifying a strict definition of war spending -- as the House budget resolution and an amendment to the House defense appropriations bill did -- or consider personnel savings policies that the Pentagon has long called for. Doing either of those things may help policymakers stay within the defense spending caps in the future and better ensure the integrity of those caps.

November 3, 2014
Despite gains, much work remains on entitlement programs

Over the long term, the country's debt is projected to grow to unsustainable levels. This outlook has not changed for the last two decades, according to a recent Washington Post op-ed authored by former Senators Bob Kerrey (D-NE) and John Danforth (R-MO), co-chairs of the 1994 Bipartisan Commission on Entitlement and Tax Reform. Entitlement trends contributing to dramatic growth in debt over the long term were considered unsustainable then, and they still are.

Kerrey and Danforth note that there has been some good news, notably the slowdown in health care spending and (temporarily) low interest rates reducing the amount the government pays in interest. However, the core drivers of our long-term problems – population aging and rising health-care costs – remain. The problems have become harder to address:

Meanwhile, the passage of time, the failure to take more ambitious actions and the enactment of new obligations have combined to limit our choices and placed the government in a more difficult position to address the challenges than it was in 20 years ago.

The debt burden has grown sharply. Debt held by the public has gone from 48 percent of gross domestic product in 1994 to 74 percent in 2014. This limits our fiscal flexibility and constrains the policy choices of future generations.

Demographics are working against us. The baby boom generation, which was coming into its peak earning years when we were on the commission, has begun to retire, slowing potential economic growth, lowering potential revenue and increasing spending on retirement and health-care benefits.

Because of the delay in addressing entitlements, it will be more difficult to turn the titanic trends in these budget programs. Social Security has run cash deficits since 2010, and every year of delay increases the shortfall which must eventually be addressed. The senators note that health care programs have expanded, income tax rates have been cut, and the amount lost annually to "tax expenditures" has increased. At the same time, discretionary spending will be at its lowest level in 50 years (as a percentage of the economy), making it increasingly difficult to find savings in that area.

October 31, 2014

Happy Halloween! For the spookiest day of the year (though some might argue that's April 15th), CRFB is thinking about scary costumes and wondering what budget polices they represent.

Frankenstein—What could be more fitting than comparing our nation’s tax code to a monster cobbled together by a mad scientist?  Comprehensive tax reform should be an essential part of the next Congress' agenda.  Its spark of life is just what this country and the economy needs.

Zombies—The undead rising from the grave is just like one of the more pressing issues in the upcoming lame duck Congress. More than 50 tax cuts known as "tax extenders" lapsed at the end of 2013, yet Congress is considering retroactively bringing them back from the dead for 2014. If a two-year extension (2014 and 2015) passes Congress after the election, the impact is a trick, not a treat, of about $85 billion added to the national debt over ten years.  But of course there could be an even scarier deal

Vampires—Interest on our national debt will suck the life out of our budget, leaving little room for important spending. Right now, interest rates are low and we pay relatively little. But Dracula is hovering above us: Interest payments are projected to nearly quadruple in nominal dollars by the end of the decade (increasing as a share of the economy from 1.3 percent in 2014 to 3.0 percent in 2024). At the same time, discretionary outlays will shrink from 6.8 percent to 5.2 percent of GDP in 2024.  The essential roles of government are being bled dry by interest on our national debt.

October 30, 2014

A recent Health Affairs piece from CRFB's Loren Adler and Adam Rosenberg showed that the prescription drug benefit, Part D, has been responsible for a majority of the Congressional Budget Office's downward revisions to actual and projected Medicare spending since 2011 (although Part A, the hospital insurance component, also played a significant role).

But judging the slowdown by how much CBO projections have changed is only one way to look at the issue. Another way would be to compare the actual slowdown in annual growth rates of each Part of Medicare over the past few years. Not surprisingly, a similar story arises from this approach -- the slowdown has been most prominent in Part D, followed closely by Part A. 

From 2010-2014, Medicare per beneficiary spending actually shrank at an average annual rate of 0.3 percent (although total spending still increased as more and more baby boomers reached retirement). As illustrated below, both Parts A and D experienced negative per beneficiary growth over this window, while Part B grew only slightly slower than GDP per capita.

October 30, 2014

As soon as the election is over, the lame duck Congress will be pressed to deal with several pieces of must-pass legislation before the end of the year, including their last chance to retroactively extend a set of tax breaks that have been expired since last year. These tax extenders are routinely extended for a year or two at a time without offsets so they add to the national debt, causing it to grow even more than already projected under current law.

An article from Bloomberg suggests that some lawmakers may be considering breaking tradition -- but not in a good way. Instead of extending the provisions for just one or two years (adding a smaller amount to the debt), they will select a few of the bigger provisions to extend permanently.

For example, one potential deal between the two parties could permanently extend and expand the research & experimentation tax credit (as provided for in H.R. 4438); permanently increase the amounts that small businesses can write off immediately; and continue the expansions to refundable tax credits like the Child Tax Credit and American Opportunity Tax Credit that were originally passed in the 2009 stimulus (ARRA) and that currently expire in 2017.  Along with these new provisions this potential deal would also provide for a two-year (2014 and 2015) extension of all the other provisions. This is bipartisanship in the worst sense: both parties adding provisions they want to the national credit card.

October 30, 2014

The National Academy of Social Insurance (NASI) released a survey last week (see video of CRFB President Maya MacGuineas at the release event) showing that a majority of Americans are willing to raise taxes – including their own – to preserve Social Security. Given the program's funding gap, it is an encouraging sign that Americans are willing to pay higher taxes to improve Social Security's solvency. Trade-off analysis, which NASI used, is an excellent way to get Americans to consider complex issues with pros and cons to all sides. Unfortunately, the design of the survey prevents the answers from being as useful as they could have been.

NASI's survey set out to determine how Americans would prefer to improve Social Security. Most respondents favored raising taxes (both the payroll tax rate and the taxable maximum) and increasing benefits. Respondents opposed raising the retirement age or means-testing benefits. This result differs from other similar surveys that found support for balanced packages of tax increases and decreased benefits for high earners.

Although it is impossible to know for sure, this survey's divergent results may have been driven by its framing of certain choices.

October 29, 2014

The last few months have seen a number of new ideas to save money in Part D of Medicare by encouraging more efficient use of drugs by prescription drug plans and beneficiaries. But Part D has also grown significantly slower than expected since its inception.

On this blog and in Health Affairs, we've highlighted the disproportionate role that Part D has played in the federal health care spending slowdown. One quarter of the $900 billion downward revision in the Congressional Budget Office's (CBO's) health care spending projections through 2021 came from Part D. And Part D's downward revision was by far the largest as a percent of program spending (nearly one quarter) among the major health care programs. Looking back further, actual 2013 Part D spending ended up almost 50 percent lower than CBO's original projection when the law passed ($50 billion vs. $99 billion), and total spending over the 2004-2013 period ended up being 36 percent lower ($353 billion vs. $550 billion).

In their Health Affairs post analyzing the Medicare slowdown, CRFB analysts Loren Adler and Adam Rosenberg cited a CBO report breaking down the sources of the slowdown in Part D. In this post, we examine more closely that report, which not only goes into the reason for slower growth in Part D but also how Part D's design compares to Medicaid in controlling costs.

In analyzing the source of the slowdown, CBO's conclusion is clear:

Taken together, the faster-than-expected slowdown in national drug spending per person and the smaller-than-expected enrollment in Part D account for nearly all of the difference between CBO’s initial projection and actual Part D spending. CBO’s original projection reflected the agency’s judgment that elements of the program’s design that were intended to foster price competition between private plans would help to limit the costs of Part D, yielding lower costs per enrollee than would be expected for a similar population under a typical employment-based drug plan offered at that time.

October 28, 2014

House Majority Leader Kevin McCarthy (R-CA) tells Politico that his priorities for the next Congress include the budget process, and in particular, evaluating the budgetary impacts of legislation over the long term and biennial budgeting. We generally share McCarthy's support for biennial budgeting though our enthusiasm depends on what emerges from the legislative process –  and it is by no means a silver bullet.

On long-term budgeting, Politico's Jake Sherman writes:

Also in McCarthy’s crosshairs: the congressional budget process. He thinks writing a budget each year is antiquated, and said Congress should consider budgeting once every two years. Also, he wants to reform the Congressional Budget Office so it studies the impact of legislation over, say, 20 years, instead of 10. He said Congress often times gets “stuck in our subcommittees” and he wants to “start looking at what we’re doing in the next 50 years.” McCarthy says Washington is frozen because the “structure holds us back.”

“The ideas are great,” McCarthy said, “but what stops the ideas from becoming law? Some of the archaic things we do.” McCarthy added, with a hefty dose of incredulity, “The budget act is the Budget Act of 1974. Does the world look like it did in ‘74?”

We are encouraged to hear McCarthy discuss the importance of long-term budgeting. Our recent paper "The Budget Act at 40: Time for a Tune Up?" shared McCarthy's concerns about a lack of focus on the long term as one of the key problems in the current budget process:

October 28, 2014
Urgency of Federal Deficit Remains

Erskine Bowles is a former co-chair of the Simpson-Bowles Fiscal Commission and member of the Committee for a Responsible Federal Budget. He wrote an op-ed that appeared in USA Today.

The good news that the budget deficit declined to $486 billion in fiscal year 2014 has prompted a declaration in some circles that the deficit is no longer a concern, and we should now turn our focus to making investments in economic growth. This either/or analysis is shortsighted and the source of many of our nation's current problems created by both parties. America is and will continue to be constrained from pursuing dynamic economic growth opportunities and from making smart investments in the future until we put our budget on a fiscally sustainable course.

I wish I could believe the recent decline in the deficit is sustainable. The temporary factors related to the recession — which caused the deficit to increase dramatically — are now receding, but the structural problems with our budget remain.

October 24, 2014

Social Security's finances are far from secure, and every year that Congress waits before addressing the problem makes it harder to fix. This week, the Social Security actuaries updated their estimates of options to restore solvency based on the assumptions in the 2014 Social Security Trustees report. Most of the options save a similar amount as last year but close a smaller percentage of the larger shortfall.

The most recent Trustees report showed a slightly bigger shortfall than last year, mostly because of slower short-term economic growth and the addition of one more high-deficit year at the end of the 75-year estimation window. Even though most policies would save about the same amount, the shortfall has grown by 6 percent, so each option closes a slightly smaller percentage of the shortfall.

October 23, 2014

In response to Howard Gleckman's piece on the FY 2014 deficit where he noted that the budget had returned to "normal," Donald Marron wrote that the most common concept of normal is not all that useful. The 2014 budget ended up being close to the 40-year historical averages for spending, revenue, and deficits. That average is often considered a benchmark for fiscal metrics, and it is frequently used by the CBO and others.

Still, Marron notes that this average may not be helpful in assessing the appropriateness of the size of deficits because of what those deficits have lead to and how bad years can skew the numbers.

But what has been the result of that “normal” policy? From 1975 to today, the federal debt swelled from less than 25 percent of GDP to more than 70 percent. I don’t think many people would view that as normal. Or maybe it is normal, but not in a good way.

Just before the Great Recession, the federal debt was only 35 percent of GDP. Over the previous four decades (1968 through 2007), the deficit had averaged 2.3 percent of GDP, almost a percentage point lower than today’s 40-year average.

But what would be a better benchmark? Brad DeLong suggests having deficits to keep debt-to-GDP constant, but that has a few problems. In the current context, it would leave debt at a historically high level and leave no room for error. Below, we will look at a few other benchmarks.

October 22, 2014

Although the Veterans Affairs (VA) and the Patent Office are infamous among federal agencies for the long wait times and lines, their backlogs pale in comparison to another office that manages court hearings for the Social Security Disability Insurance (SSDI) program. According to an article by David A. Fahrenthold from the Washington Post, with 990,399 people waiting to get a decision on their disability claims, “That is Washington’s backlog of backlogs — a queue of waiting Americans larger than the populations of six different states.” In contrast, the VA has 526,000 cases pending and the Patent Office has 606,000 applications waiting.

The Social Security’s old age program uses a very clear, measurable standard to award benefits: the Full Retirement Age. Determining eligibility is easy, since it is purely based on your age.

Conversely, determining if a worker is eligible for SSDI benefits is not as simple. To qualify for benefits, insured workers have to suffer from one or a combination of physical impairments that render them unable to perform any job available in the economy. This requires medical evidence, a complex set of guidelines, and government employees who make determinations whether a person is disabled.

October 22, 2014

The Center for American Progress' Katherine Blakeley and Lawrence Korb recently issued a report recommending how lawmakers should wind down war spending, known as Overseas Contingency Operations (OCO), as U.S. involvement in Afghanistan wanes. OCO has become a headache for budget enforcement because, unlike base defense spending, it is not capped and so it has been used to avoid the discretionary spending caps.

Making matters worse, the continuing resolution funding the government for the first two-and-a-half months of FY 2015 continued OCO spending at last year's levels, $26 billion above the Administration's request (at an annualized rate). Congress should address this issue during the lame duck session by making prudent use of the OCO designation in any government funding bill to limit spending to war needs and codify criteria for use of the OCO designation in the defense authorization bill.

Blakeley and Korb make five main recommendations:

    • Keep OCO funds tied to the costs of war
    • Stop using OCO funds as a ‘safety valve’ for the base defense budget
    • Do not make OCO a permanent emergency fund
    • Exercise authorizing and oversight authority for military action
    • Have the tough conversations about defense resources and trade-offs
October 22, 2014

Year after year, Senator Tom Coburn (R-OK) refuses to simply give lip service to "wasteful government spending" and has instead called out controversial government spending by name. Today, his office published the fifth annual edition of his Wastebook, detailing 100 examples of what he describes as "stupid spending," totaling almost $25 billion. The Wastebook looks at little-used government programs, unusual research projects funded by government grants, and tax breaks given to companies to compile these examples.

As Senator Coburn explained,

This report, the fifth annual Wastebook, gives a snapshot of just a fraction of the countless frivolous projects the government funded in the past twelve months with borrowed money and your tax dollars. Every year taxpayers, regardless of their personal political leanings, raise their eyebrows and shake their heads in disbelief at how billions of dollars that could be been better spent—or not spent at all—were squandered. Then they ask, “but what are you doing about it?”

Some of the spending examples highlighted in his report are:

  • Paid vacations for bureaucrats gone wild—$19 million: Many situations that would cause private-sector employers to fire their employees instead results in federal employees going on “administrative leave.”  Most of these situations can be described as personnel matters such as criminal investigations, misconduct and security concerns.  GAO estimates that the paid leave costs the government about $19 million.
  • Pentagon to spend $1 billion to destroy $16 billion in unneeded ammunition—$1 billion: The Pentagon is spending a billion dollars to destroy $16 billion in excessive purchases of military-grade ammunition. The amount of surplus ammunition is now so large that the cost of destroying it will equal the full years’ salary for over 54,000 Army privates.  How the military came to purchase so much ammunition it didn’t need was uncovered in a 2014 Government Accountability Office (GAO) investigation.
  • FAA upgrades low traffic airport serving high-end ski resort—$18 million: The Federal Aviation Administration awarded $18 million dollars for a construction project at an airport that serves a ski and golf resort in Idaho.  There are on average four daily commercial flights leaving the airport. Construction was to include “comfortable chairs and a fireplace.”
  • DOD sends 16 planes to the scrap heap for $32,000$468 million: After spending over $468 million on a fleet of 20 planes that were supposed to be the backbone of the Afghan Air Force’s air transport mission, the Defense Department scrapped 16 of those planes as opposed to selling or dispatching them for their purpose.
  • Watching grass grow$10,000: The Interior Department's U.S. Fish and Wildlife Service is spending $10,000 to watch how fast grass grows in Florida after its been pulled out plug by plug and “painstakingly document how fast it returns."
  • Spouses stab voodoo dolls more often when “hangry”$331,000: A National Science Foundation grant provided money to research the phenomenon of being “hangry,” in which a subject is angered because of a lack of food.  Spouses with lower levels of blood sugar were more likely to harm the voodoo doll representing their significant other.
October 21, 2014

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

Adler Figure 1

October 21, 2014
Yes, the Deficit Is Smaller. But That Wasn’t the Main Problem.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

Some influential people would have you believe that with the deficit shrinking our fiscal problems are behind us. Nobel Prize winner Paul Krugman recently wondered why the fiscally responsible crowd wasn’t celebrating the news that the deficit was down to $483 billion. The White House has been touting the recent two-thirds decline as a major accomplishment.

The irony should not be lost on anyone: Both Mr. Krugman and the White House have long argued–correctly–that short-term deficits were not the problem and that reducing them too much too fast would harm the economy.

While the massive deficits of recent years were startling, they were never the country’s key fiscal problem.

Deficits, which grew more than 750% from 2007 to 2009, were a symptom of the near-calamitous economic crisis in which revenues plunged and automatic spending kicked in. Much of the growth in the federal deficit was a sign of just how bad the economy was. But deficits were also a partial cure for our economic woes in that the automatic stabilizers and the additional spending in the 2009 stimulus (for all its flaws) stopped the economic tailspin from becoming far worse.

October 21, 2014

Fraud -- along with the closely related waste and abuse -- is too often cited as a big factor affecting our high deficits, even though  this is not the case. Nonetheless, rooting it out can be a non-controversial path to marginally reduce spending and to help assure Americans that their taxes are not being wasted. A new CBO report discusses anti-fraud efforts in federal health care programs and how they are accounted for in the agency's scoring of costs and savings in legislation.

There are a number of agencies and mechanisms tasked with reducing fraud in health care programs. The Center for Medicare and Medicaid Services (CMS), of course, is the main one. But there is also the Health and Human Services Inspector General, the Department of Justice, and the Health Care Fraud and Abuse Control (HCFAC) program, a dedicated fund for pursuing fraud that has both a mandatory and a discretionary appropriation.

Despite this anti-fraud efforts, significant improper payments (a broader category than fraud) of $65 billion in health care still exist, at least some of which is fraud. CBO discusses a number of different strategies to reduce it, including increasing anti-fraud funding, allowing new authority for agencies to pursue fraud, shifting funds to activities expected to provide higher returns, and increasing penalties.

In terms of the first strategy, based on previous efforts, CBO assumes that an additional dollar of HCFAC spending yields $1.50 of savings (see the table below for an example). The Budget Control Act allowed for adjustments to the discretionary spending caps for HCFAC totaling $3 billion in additional funding, providing estimated savings of $3.7 billion. (The ratio is less than 1.5 to 1 in this case since it takes time for the savings to materialize). Notably, however, these net savings cannot be used for budget enforcement like pay-as-you-go rules because of their uncertain nature.

October 20, 2014
Barrow is 'brave'

Alan Simpson and Erskine Bowles are the former chairs of the Simpson-Bowles Fiscal Commission and members of the Committee for a Responsible Federal Budget. They co-wrote an op-ed in the Statesboro Herald.

Our nation needs to get its fiscal house in order, and to do so citizens must fully demand leaders who are willing to put partisan differences aside and come together to present the American people with honest solutions and consensus proposals that put the national interest ahead of special interests. That is why we were so disheartened to learn that John Barrow is being criticized for his support of a budget based on the plan recommended in 2010 by a bipartisan majority of the National Commission on Fiscal Responsibility and Reform which we co-chaired (Simpson-Bowles Commission).

The Simpson-Bowles plan is a comprehensive, tough-minded and pragmatic approach to attacking our national debt and ensuring that Social Security is fiscally sound for future generations.

Because it seeks to tackle the hard problems, it came under savage attack from partisan interests from both ends of the spectrum.

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