How Would Governor Kasich's Plan Reduce Deficits?

Republican Presidential candidate Gov. John Kasich (R-OH) has released an "Action Plan" that plots a path to (on-)budget balance by 2025. Perhaps not surprisingly for a former House Budget Committee chairman, his plan is more akin to a Congressional budget resolution, laying out numbers and some specifics but not all of the policies necessary to get to those numbers. His plan includes reforming the tax code, downsizing some federal programs, retaining non-defense discretionary spending restraint, and provides general ideas for Medicare. Overall, it is an encouraging commitment to deficit reduction, and we look forward to seeing more details to achieve the savings he calls for.

Kasich's plan calls for the on-budget deficit – the deficit excluding Social Security and the Postal Service – to be eliminated by 2025, leaving about a $250 billion total budget deficit. His plan calls for $2.6 trillion of savings through 2025, mostly concentrated in health care and apparently revenue. These savings would put debt on a downward path to 67 percent of Gross Domestic Product (GDP) by 2025, about 10 percentage points lower than CBO's baseline.

Kasich's tax reform plan intends to raise $1 trillion of revenue through 2025, judging by its revenue totals, despite specifically mentioning cutting taxes and detailing many more changes that would cut taxes than ones that would raise taxes. It is not clear whether the plan relies on aggressive assumptions about economic growth to raise revenue or relies on reducing unspecified tax breaks.

On the individual side, the plan would:

• Reduce tax brackets from seven to three with a top rate of 28 percent
• Increase the Earned Income Tax Credit by 10 percent
• Reduce the capital gains rate to 15 percent
• Eliminate the estate tax

The plan does not specify which tax breaks he would eliminate or reduce other than saying that it would preserve the charitable deduction and maintain the mortgage interest deduction at its current limits. On the corporate side, it would:

• Reduce the corporate tax rate to 25 percent
• Allow businesses to write off the cost of all purchases immediately
• Double the R&E tax credit for small businesses
• Move to a territorial system for international taxation
• Allow multinational businesses to repatriate their foreign income at a reduced rate

Again, the plan does not specify how he would broaden the tax base to maintain or increase revenue. In order to reach the revenue numbers he intends, the plan would also need to include some provisions to raise revenue, not just tax cuts.

On health care, the plan would cap Medicaid, providing states with a specific per-person allocation for each category of beneficiary. He would give more flexibility in program design, including the use of cost-sharing for those who can afford it and greater use of private insurers to provide coverage. The plan does not specify the growth rate for these block grants, but they would save about $265 billion through 2025. There are no specific proposals for Medicare, but the plan calls for increased care coordination through Medicare Advantage and payment reforms to increase value and quality. The plan calls for reducing gross Medicare spending by about $525 billion through 2025.

He also proposes to downsize or consolidate other federal programs. He would direct most current federal transportation funding to the states, leaving the federal government to focus on transportation safety and research. He would also consolidate funding for education and job training into a few block grants to states and localities.

Some of this downsizing could be used to abide by the plan's constraints on discretionary spending, the category that is appropriated each year. It would freeze non-defense spending at its FY 2017 level, saving $370 billion through 2025. At the same time, he would increase defense spending in the short term but reduce its growth rate, increasing defense spending above baseline levels by $70 billion through 2025 but reducing it by about $15 billion in 2025 alone.

Finally, Kasich does not propose specific policies on Social Security but says that he would lead a bipartisan effort that would take the best policies from available solvency plans.

Gov. Kasich's plan is a good start, and his commitment to deficit reduction is a breath of fresh air in a campaign where tax cuts and spending promises have dominated the conversation. We look forward to seeing more details, particularly with tax reform, on how he intends to meet his goal.