We commended the Senate last week for seeking a long-term solution to the highway funding shortfall and for funding its proposal with real offsets. That said, the bill's current form has a few problems. In particular, the bill actually worsens the structural mismatch between revenue and spending in the Highway Trust Fund (HTF) by increasing spending levels in the baseline without a corresponding increase in revenues and approving six years of funding but only paying for the first three, increasing the pressure for a future bailout of the fund. While the short-term patch passed by the House is more likely to become law in the near term, it is worth considering these issues in more detail because they are likely to arise again when negotiations on a long-term solution resume.
But before we jump into the problems with the Senate’s highway bill, it’s useful to revisit the unique budgetary treatment of the HTF.
The HTF’s unique budgetary treatment
As we wrote last year, highway spending is subject to a unique hybrid of discretionary and mandatory budgetary treatment which effectively allows it to sneak by budget rules. Currently, budget rules limit new discretionary spending through statutory caps on budget authority and limit new mandatory spending by applying pay-as-you-go (PAYGO) rules to mandatory outlays. However, highway spending evades both these limits since its contract authority counts as mandatory, meaning it is not subject to PAYGO, while its outlays count as discretionary.
The Senate is discussing a bill that would reauthorize highway programs for six years and provide $47.6 billion of funding to cover the Highway Trust Fund shortfall for the first three years. The money is a transfer of general revenue to the fund offset with real savings.
These are the provisions used to offset the $47.6 billion cost:
|Offsets in Senate Transportation Bill|
|Reduce the fixed dividend rate the Federal Reserve pays larger banks||$17.1 billion|
|Sell 101 million barrels of oil from the Strategic Petroleum Reserve||$9.0 billion|
|Index customs fees for inflation||$5.7 billion|
|Extend current budget treatment of TSA fees from 2023 to 2025||$3.5 billion|
|Use private debt collectors to collect overdue tax payments||$2.4 billion|
|Extend Fannie/Freddie guarantee fees||$1.9 billion|
|Require lenders to report more information on outstanding mortgages||$1.8 billion|
|Rescind TARP funds for the Hardest Hit Fund||$1.7 billion|
|Close an estate tax loophole about the reporting of property||$1.5 billion|
|Clarify the statute of limitations on reassessing certain tax returns||$1.2 billion|
|Devote civil penalties for motor safety violations to the Highway Trust Fund||$0.6 billion|
|Revoke or deny passports for those with seriously delinquent taxes||$0.4 billion|
|Stop paying interest when companies overpay for mineral leases||$0.3 billion|
|Adjust tax-filing deadlines for businesses||$0.3 billion|
|Allow employers to transfer excess defined-benefit plan assets to retiree medical accounts and group-term life insurance||$0.2 billion|
The Senate Finance Committee today approved a package of 50-plus tax breaks that expired last year known as "tax extenders." Unfortunately, they chose to extend almost all of them for two years by adding the costs of the tax cuts to the national debt.
The tax breaks are called the "tax extenders" because Congress typically only extends these expiring provisions a year or two at a time, but many of these provisions are quasi-permanent. (The research credit, for instance, has been extended at least 15 times since its creation in 1981.) The provisions expired at the end of last year, but Congress can extend them retroactively because most people do not pay their 2015 taxes until 2016.
The bill costs $95 billion over ten years to extend all 50-plus provisions for two years (retroactively for 2015 and forward for 2016). The Committee did not offer a way to pay for the cost, so the amount will be added to the deficit. In markup, the Committee did slightly expand more than a dozen of the provisions and the expansion was paid for, as opposed to extenders legislation in the House of Representatives which dramatically expanded some provisions by adding to the deficit.
The Senate Finance Committee has been working all year in five bipartisan working groups on tax reform, and today they have reports to show for it. Of particular interest is the international tax reform working group's report, since there has been some potential common ground emerging between the two parties, and this reform has been linked to a Highway Trust Fund solution. We will summarize the other four reports in a later post.
For background, the federal government taxes U.S. multinational corporations on their foreign income with a deferral system. This means that "active" foreign income is generally only taxed when it is repatriated to the U.S., while "passive" income – basically financial income that is highly fungible and mobile – is taxed immediately. The companies get foreign tax credits for the taxes they pay to foreign governments to prevent double-taxation.
The working group's framework discusses five issues in international tax reform:
On Tuesday, Sen. James Lankford (R-OK) wrote an op-ed in The Hill advocating for meaningful reform to the Social Security Disability Insurance (SSDI) program. The SSDI trust fund's pending insolvency is one of the Fiscal Speed Bumps that Congress will need to address before the end of the legislative session next year, and many see it as an opportunity to put in place changes that will extend the trust fund's solvency in perpetuity.
The Social Security Disability Insurance Trust Fund is sustained by payroll taxes on each check. When the trust fund goes insolvent next year, 14 million disabled Americans will face a drastic cut to benefits of almost 20 percent or the fund will have to be replenished with higher taxes.
Some have suggested to fix the insolvency that Congress should only shift funds from Social Security or the Old-Age and Survivors Insurance Trust Fund, which would reduce those programs’ solvency as well. Clearly, shifting funds does not address the root of the problem.
It is time for a major overhaul of the disability system and a renewed focus on the disabled. Before the SSDI program goes insolvent in 2016, there are things that Congress and the Social Security Administration can do to protect the program for those who rely on it and the taxpayers who fund it.
The Tax Policy Center (TPC) recently released a primer on carbon taxes. The report outlines how the construction of a carbon tax matters for its efficacy in reducing emissions, overall impact on economic well-being, and distributional impact. Particular focus is given to analyzing the potential winners and losers under a carbon pricing regime and how the revenue generated by the tax can be used to alter these effects. Conveniently, the report comes on the heels of a new carbon tax bill (described below) and new research released by CBO, which forecasts hurricane damage to rise five-fold by 2075 as a result of climate change.
Ways and Means Ranking Member Sander Levin (D-MI) and Senator Tammy Baldwin (D-WI) have introduced a bill to close a well-known tax loophole that allows investment and private equity fund managers to pay a lower rate on their taxes. The Carried Interest Fairness Act would close a loophole allowing fund managers to classify their income as long-term capital gains, which is taxed at a top rate of 20 percent, instead of wage income, which is taxed at a top rate of 39.6 percent. (Neither number includes Medicare taxes on investments and wages.)
Investment managers often have a partnership share in their investment fund, which is structured as a "passthrough" entity. When the fund does well and its assets increase, each partner's share of the gain is taxed as capital gains. Fund managers receive some of their compensation in the form of capital gains, even though they are being compensated for their work, not investing their own money.
Last week, the Senate Budget Committee passed a bill to limit the use of the Crime Victims Fund (CVF) as a back-door method to increase appropriations. The bill, S. 1495, is sponsored by Senator Pat Toomey (R-PA). It creates a point of order against appropriations bills containing a Change in Mandatory Program (CHIMP) that would cause the amount available to be spent from the CVF to be less than the 3-year average of incoming funds.
A similar measure was proposed in this month's markup of the Senate's Commerce, Justice, and Science appropriations bill by Senator James Lankford (R-OK). He proposed an amendment that would have prevented further use of these specific CHIMP funds in the bill after FY 2016, but it was defeated in committee.
As we explained in our blog, CHIMPs are provisions in appropriation bills making changes (usually reductions) in mandatory spending programs. The savings are then available to be used to offset increases in discretionary spending above the spending cap. This can be perfectly acceptable when the savings created are real, but lawmakers often use fake savings to fund real increases in spending.
The Crime Victims Fund is a frequently used source of CHIMPs: according to CBO over half of the $19 billion in CHIMPs from FY 2015 came from the CVF.
To combat gimmickry, the Senate budget included a phasedown and eventual elimination of CHIMPs that saved no actual money. And during markup of the Senate budget, the Budget Committee adopted an amendment by Senator Mike Crapo (R-ID) that would have created a point of order against CHIMPs originating from the CVF. Senator Toomey’s bill forces CVF payouts to equal recent incoming funds, which essentially creates a cap of $10.5 billion in CHIMPs from the CVF, preventing the size of the CVF CHIMPs from growing.
The Senate is undergoing vote-a-rama, an annual event where the Senate considers hundreds of amendments before voting on the budget resolution. Of the dozens which are normally voted on, most are typically policy statements or messaging documents, rather than changes to the underlying numbers in the budget.
One of the few amendments that would actually lead to savings will be offered by Senator Mark Warner (D-VA). The amendment would restore $1.6 billion in funding on “program integrity” activities to reduce overpayments and fight fraud and abuse in Medicare, Medicaid, and disability programs. Program integrity funding is currently not included in either the House or Senate budgets, despite the fact that the Budget Control Act allows funding of up to $1.6 billion for these activities in FY 2016.
While considering the FY 2016 budget, the Senate Budget Committee voted on about 50 amendments before passing the budget resolution on a party line 12-10 vote. (We described the underlying budget here). Some of these amendments were steps toward fiscal responsibility, some were steps backwards, and some were more mixed. Below, we describe the good, the bad, and the other notable amendments, even though not all of them passed.