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RealClearPolicy | May 21, 2015
Congress faces yet another deadline, and yet again is set to stall. This time, there literally could be a bumpy road ahead.
The current legislation authorizing highway and mass-transit spending is scheduled to expire at the end of the month. Not long after that, the Highway Trust Fund (HTF) will run out of reserves, which will cause road-improvement projects across the country to grind to a halt. Legislative action is required to avoid delaying critical infrastructure projects and the jobs they produce.
A two-month extension of highway funding has already been passed by the House and is likely to be enacted soon. Lawmakers should use the extra time to end the cycle of temporary fixes and produce a long-term solution that is free of gimmicks and is fiscally responsible.
Another short-term extension is in keeping with Washington's recent track record in dealing with similar circumstances. Time after time, deadlines have been nearly missed or even outright disregarded when it comes to important budget and fiscal matters. Lawmakers have often kicked the can down the road with short-term patches, only to be forced to address the same issue again and again. Steering haphazardly over these "fiscal speed bumps" has imperiled the nation's finances and caused voters to question the ability of Congress to function.
In the relatively few instances when an issue was actually resolved, it was done in a way that worsened the already unsustainable long-term national debt outlook. This was the case with the recent "doc fix" that permanently replaced the Sustainable Growth Rate (SGR) formula for Medicare payments to physicians. By our calculations, the "fix" will add over $500 billion to the long-term debt.
Now, Congress faces a highway-funding shortfall of about $175 billion over the next decade. That's the equivalent of a 14-cent-per-gallon gas-tax increase, or more than a 35 percent cut in future spending.
After multiple temporary patches, lawmakers want to kick the can yet again, this time in the hopes that tax reform can be enacted later this year and can provide revenue for the Highway Trust Fund.
With our infrastructure spending underfunded and our tax code badly in need of reform, marrying tax and highway policy offers a rare two-for. But passing tax reform is also very hard — which is why it hasn't happened in almost 30 years — and counting on its passage to fund current highway projects puts those and future projects at risk.
Legislators must come up with a plan that charts a course for stable highway funding while avoiding potholes and wrong turns without driving up the debt.
My colleagues at the Committee for a Responsible Federal Budget and I have written a new paper, "The Road to Sustainable Highway Spending," that lays out such a plan — one that would encourage the passage of tax reform to fund highway spending, but not count on it to keep the program solvent.
The proposal has three components:
- Get the trust fund up to speed by paying off $25 billion of "legacy costs" from past highway commitments by reducing unnecessary farm subsidies and extending certain spending cuts from the Ryan-Murray budget deal.
- Bridge the financing gap by ensuring that revenue and spending remain closely in line through a default policy that schedules a 9-cent gas-tax increase one year in the future and limits annual highway spending to revenue collection and interest income.
- Create a fast lane to tax and transportation reform that uses a special process to give Congress the opportunity to utilize tax reform to find alternative revenue to replace some or all of the scheduled gas-tax increase, pay for higher infrastructure spending, or both.
The plan described above gives Congress both the power and the responsibility to decide how we should finance our infrastructure spending and how large the federal investment should be. But it ensures that every dollar of highway spending is fully paid for, and puts an end to the process of temporary gimmick-ridden patches that pave over the real problem.
We face a rocky road for highway funding because policymakers refuse to work together and make the decisions necessary to move forward. There are lots of options available; Congress must build on those ideas. In "The Road to Sustainable Highway Spending," we illustrate one potential route.
We can't afford any more "my way or the highway" attitude from lawmakers. We need collaboration and leadership. It's time to get to work.
Marc Goldwein is the Senior Vice President and Senior Policy Director of the Committee for a Responsible Federal Budget.
The current legislation authorizing highway and mass transit spending is scheduled to expire at the end of May, and only a few months later the Highway Trust Fund will run out of reserves. Extending the life of the trust fund through the end of the year will require $11 billion, and extending it for a decade will require nearly $175 billion.
For over 50 years, federal highway spending had been financed with dedicated revenue, mainly from the gas tax. Since 2008, however, dedicated revenues have fallen short of spending, and policymakers have covered the difference with about $65 billion of general revenue transfers – often without truly paying for the cost. Those transfers are projected to run out before the end of the year, disrupting infrastructure spending across the county.
To maintain important infrastructure investments and avoid adding an additional $175 billion to the debt, Congress must identify responsible solutions to close the shortfall in the Highway Trust Fund. Fortunately, Congress has many options at its disposal to do so (see Appendix for more).
One solution that has recently gained popularity would rely on revenue generated from business tax reform to close some of the $175 billion gap. While this would be a sensible solution, tax reform will not pass before the current highway bill expires, and there is a risk it will not pass at all this year.
CRFB’s plan, The Road to Sustainable Highway Spending, would encourage the passage of tax reform while also ensuring the Highway Trust Fund remains adequately funded regardless of tax reform’s fate. The plan would:
- Get the Trust Fund Up to Speed ($25 billion) by paying the “legacy costs” of pre-2015 obligations with savings elsewhere in the budget.
- Bridge the Financing Gap ($150 billion) with a default policy to raise the gas tax by 9 cents after a year and limit annual spending to income.
- Create a Fast Lane to Tax Reform to help Congress identify alternative financing before the gas tax increase and spending limits take effect.
The Road to Sustainable Highway Spending would ensure the Highway Trust Fund remains solvent while giving policymakers flexibility to decide the level of highway spending and how it would be paid for. Our plan represents just one of many possible solutions. Importantly, any solution must responsibly address the gap between spending and revenue without resorting to gimmicks or deficit-financed transfers.
This year, Congress made it a priority to pass a concurrent budget resolution. Both the House of Representatives and Senate passed their own budget plans at the end of March, and now they must work through the differences in the two budgets through a budget conference committee. This week, both chambers began the process and appointed conferees to serve on the committee. Below, we explain how this budget conference will work, and what it intends to accomplish.
What is a budget conference?
A budget conference is a process by which the House and Senate iron out the differences in the budget resolutions they each passed separately to arrive at a unified “concurrent budget resolution” that each chamber will then adopt. The leaders of each party and budget committee in both houses choose members to participate in the conference committee.
Over what time period will the conference negotiate?
According to the Budget Act of 1974, which created the current budget process, a budget conference is supposed to be completed and the resolution passed by both chambers by April 15th. Obviously, Congress has not met this deadline – and indeed it is routinely missed. However, Senate Budget Committee Chairman Mike Enzi (R-WY) and House Budget Committee Chairman Tom Price (R-GA) have already been negotiating ahead of a formal conference, and formal negotiations will begin shortly now that conferees have been named. A formal meeting of the conference committee will occur on April 20th, after which a timeline for completion may become clearer.
Who is in the budget conference?
The budget conference committee will consist of 30 lawmakers – 22 from the Senate and 8 from the House of Representatives. Of the Senate members, 12 are Republicans and 10 are Democrats (including two independents caucusing with Democrats). Of the House members, 5 are Republicans and 3 are Democrats. The conference committee is chaired by Representative Tom Price (R-GA) and Senator Mike Enzi (R-WY), and includes Representatives Diane Black (R-TN), Mario Diaz-Balart (R-FL), John Moolenaar (R-MI), Gwen Moore (D-WI), Todd Rokita (R-IN), Chris Van Hollen (D-MD), and John Yarmuth (D-KY) and Senators Kelly Ayotte (R-NH), Tammy Baldwin (D-WI), Bob Corker (R-TN), Mike Crapo (R-ID), Tim Kaine (D-VA), Angus King (I-ME), Lindsey Graham (R-SC), Chuck Grassley (R-IA), Ron Johnson (R-WI), Jeff Merkley (D-OR), David Perdue (R-GA), Rob Portman (R-OH), Bernie Sanders (I-VT), Jeff Sessions (R-AL), Debbie Stabenow (D-MI), Pat Toomey (R-PA), Mark Warner (D-VA), Sheldon Whitehouse (D-RI), Roger Wicker (R-MS), and Ron Wyden (D-OR).
Today, the Congressional Budget Office (CBO) released its re-estimate of the President’s FY 2016 budget, using its own economic and technical assumptions. While CBO generally shows lower debt in the near term than the Office of Management and Budget (OMB) did, it also shows debt on a slight upward path as a share of GDP after 2020. Thus, it is less likely that the budget would stabilize debt over the long term, as OMB’s projections showed.
According to CBO, debt held by the public in the President’s budget would reach 73.1 percent of GDP by 2025, 1 percentage point lower than in 2014 (and about what OMB estimated), but 1 percentage point higher than in 2020. In dollars, debt would rise from about $13.1 trillion today to $20.1 trillion by 2025.
CBO projects debt under the President’s budget would be $1.1 trillion lower than in CBO’s current law baseline in 2025. Those savings can be mostly attributed to two factors: increased revenue and reductions in war spending that are largely already expected to occur.
CBO projects annual deficits would fall from $486 billion (2.7 percent of GDP) in 2015 to $380 billion (2.0 percent of GDP) in 2016 before rising in every subsequent year to over $800 billion (2.9 percent of GDP) by 2025. Both spending and revenue will be growing as a share of GDP over this period, but spending will increase slightly faster, from 20.5 percent in 2015 to 22.1 percent in 2025, while revenue will rise from 17.8 percent to 19.2 percent. These increases are the result of both current law trends and policy changes proposed in the President’s budget.
CBO estimates deficits through 2025 will be $206 billion higher under the President’s budget than OMB estimates, with more than the entire difference ($345 billion) coming from differences in economic projections. In the other direction, $139 billion of technical differences reduced deficits relative to what OMB estimated. In addition, using CBO’s GDP instead of OMB’s results in the 2025 debt-to-GDP ratio being one percentage point higher.
Ultimately, CBO shows that while the President’s budget responsibly offsets its new spending, it does not go far enough in reducing the debt to ensure fiscal sustainability over the long term.
Read the full paper below, or download a printer-friendly version here.
Today, the President released his FY 2016 budget, laying out his priorities and proposals for the coming year. The budget includes policies and initiatives to reform immigration, taxes, and Medicare, while promoting early and higher education, reducing low-income and middle-class taxes, repealing a portion of future sequester cuts, and implementing other tax and spending changes.
Our main findings from the budget are:
- The President’s budget includes sufficient revenue and spending cuts to pay for his new initiatives and reduce deficits by about $930 billion relative to current law over the next decade. Relative to the President’s baseline, the budget includes $2.2 trillion of deficit reduction.
- Based on its own projections, debt under the President’s budget would remain relatively stable as a share of GDP, reaching 73 percent of GDP in 2025 compared to 74 percent today. In dollar terms, debt will rise from about $13 trillion today to over $20 trillion by 2025.
- Deficits under the President’s budget would remain steady over the course of the decade at about 2.5 percent of GDP each year.
- Between 2015 and 2025, spending will grow from 20.9 percent of GDP to 22.2 percent and revenue from 17.7 percent of GDP to 19.7 percent. Historically, they have averaged 20.1 and 17.4 percent, respectively.
Interest costs alone, in the budget, will grow from under $230 billion (1.3 percent of GDP) today to nearly $800 billion (2.8 percent of GDP) in 2025.
The President’s budget should be commended for responsibly identifying tax and spending offsets sufficient to pay for new spending and tax cuts, and setting aside additional savings for deficit reduction beyond that.
However, the budget does far too little to reduce current debt levels nor slow the growth of entitlement spending over the long-run. Under the President’s budget, debt remains roughly twice as high as in 2007 and higher than any time in history other than around World War II. Meanwhile, Social Security and Medicare remain on paths toward insolvency and both programs – along with interest spending – will continue to grow rapidly.
Ultimately, significant entitlement reforms will be necessary to put the debt on a sustainable path. And the longer we wait to enact these reforms, the larger and more abrupt they will need to be.
Update (2/4): Figure 3 has been updated to incorporate official Treasury Department estimates on the extension of the refundable tax credit expansions.