How the President's Budget Deals With Temporary Policies

A common affliction of the federal government in recent years has been the many temporary extensions of certain spending or tax benefits. Because treating these provisions as if they will not be permanent artifically lowers their cost, they have become increasingly popular lately. This kick-the-can mantra is not a responsible way to govern, creating a great deal of uncertainty for those who benefit from these programs or tax cuts and, in most cases, requiring even bigger offsets to these costs in future years.  Especially over the last few years as lawmakers have been unable to forge a long-term budget agreement, they’ve continued to enact temporary patches and extensions to various policies that they know they will have to revisit again, most recently in the fiscal cliff deal. While the deal did, for better or worse, make permanent or let expire some provisions -- the 2001/2003/2010 tax cuts and Alternative Minimum Tax patch being examples of the former and the payroll tax cut an example of the latter -- it also left many provisions as temporary.

Encouragingly, the President’s FY 2014 budget makes some big strides towards ending this problem of temporary budgeting by either reflecting the permanent costs of these policies, ending them, or reforming them in a way that makes them permanent. To begin with, the President’s budget starts from a baseline that includes a permanent extension of the American Opportunity Tax Credit and the 2009 expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit, which are set to expire after 2017 and cost roughly $160 billion to extend through 2023. These extensions are paid for with certain revenue provisions outside of the "offer" portion of the budget.

His adjusted baseline also includes a permanent freeze of current Medicare physician payment rates to replace the scheduled 25 percent cut under the Sustainable Growth Rate (SGR) formula in 2014. OMB assumes a $250 billion cost to repeal the SGR, which is significantly more than CBO’s recently updated estimate of $140 billion. The savings he gains from various new revenue and spending cuts in his deficit reduction proposal partially offset these costs.

In addition to incorporating some of these expected costs into his baseline, the President’s budget also addresses various business tax extenders under his call for revenue-neutral corporate tax reform. We’ve discussed some of these tax extenders before, many of which have been consistently extended over the last few years. The President now proposes for some of these tax credits to be permanently extended, while allowing others to expire at year’s end, meaning fewer one-year extensions that hide the true cost of policies. Specifically, the President would permanently extend the Research and Experimentation (R&E) tax credit ($99 billion), increased expensing allowances for small businesses ($69 billion), and the renewable electricity production tax credit ($17 billion), among others. His corporate tax reform policies finance these permanent extensions with offsets such as modifying the international tax system, changing the tax treatment of the insurance industry, reducing oil and gas preferences, and repealing last-in first-out (LIFO) accounting rules. Meanwhile, the President would allow other tax extenders such as the 50 percent bonus depreciation to expire at the end of the year.

On the sequester, the President’s budget includes a full repeal, which costs almost $900 billion in direct costs and more than $1 trillion if counting extrapolated discretionary spending costs in 2022 and 2023. This would be paid for with part of his deficit reduction package.

Another temporary policy addressed is the issue of student loan interest rates, which are scheduled to double on certain loans in July from 3.4 percent to 6.8 percent. Last year, the President proposed a one-year extension of the rate, which ultimately was signed into law. This year, the President proposes to move toward a market-based approach that would permanently tie rates to 10-year Treasury notes, thereby keeping rates low in the short term and paying for them over the longer term by allowing them to rise as Treasury rates are projected to do. This reform helps to avoid two risks: the risk of student loan interest rates suddenly doubling this July and the risk that Congress will continue to extend the 3.4 percent rate year after year at a substantial cost.

While all of these policies move the President’s budget toward greater fiscal responsibility, it is not gimmick-free. For example, the President for the most part does not address the individual income tax extenders one way or another in his budget. Several of these, such as the deduction for state and local taxes are very popular and likely to be extended. The President’s budget also does not address the issue of expiring extended Unemployment Insurance (UI) benefits. At the end of this year, the maximum number of weeks individuals can collect UI benefits will fall from 73 weeks to 26. With unemployment levels projected to remain high, it is unlikely lawmakers would allow these extended UI benefits to expire entirely. Most grievously, the President uses “savings” from the drawdown of war spending to offset baseline transportation spending to make the Highway Trust Fund solvent. We’ve explained before that this war savings gimmick takes credit for a drawdown already scheduled to occur.

Overall, any budget deal that may be made in the weeks and months ahead should make permanent and pay for those policies which are likely to be extended or repealed anyways. This would not only helps to more accurately and responsibly plan for spending, but also would bring the current law and current policy baselines closer together, thus making budget projections more transparent. However, the uncertainty and lack of ability to plan for temporary extensions is preferable to simply making things permanent on a deficit-financed basis. That will make deficit projections much worse and take away pressure points to reform the related programs or tax provisions.

The President deserves credit for identifying permanent solutions to many of the temporary policies that plague Washington year after year and, for the most part, offsetting their costs. But more can be done in a final budget to put a stop to this practice.