Off the Charts Blog | Center on Budget and Policy Priorities

Senator Pat Toomey (R-PA) this week outlined what he described as a compromise deficit-reduction proposal that includes significant revenues.  The reality is very nearly the opposite.

The Toomey proposal includes only modest revenues, and it then effectively takes revenues off the table for future rounds of deficit reduction.  Future rounds would be needed because the Toomey plan doesn’t reduce deficits nearly enough to keep the debt from rising faster than the economy in the coming decade.  Nearly all subsequent deficit reduction would therefore have to come from spending cuts (see graph).

• The plan falls well short of what’s needed to put the budget on a sustainable path. Analysts generally agree that we must reduce deficits by roughly $3 trillion over the next decade (about $2.6 trillion in policy changes plus $400 billion in interest savings) to stabilize the debt as a share of the economy.  Senator Toomey estimates that his plan would cut deficits by $1.45 trillion — about half the needed amount.
• The plan “uses up” the two biggest potential revenue sources for deficit reduction — the Bush tax cuts and tax expenditures — while raising revenues only a very modest amount. Policymakers would have to rely overwhelmingly on spending cuts to get the rest of the way to the $2.6 trillion policy-change target.

  Here’s why.  By lowering tax rates well below the Bush levels and locking in the new tax rates permanently, the Toomey plan would make it impossible to secure $800 billion in deficit reduction by letting the Bush tax cuts for households with incomes over $250,000 expire at the end of 2012.  The plan also would remove the leverage that the scheduled expiration of these tax cuts gives policymakers seeking a balanced deficit package that includes significant revenues.

  Moreover, by making very substantial changes in tax expenditures (and using most of the resulting savings to pay for the reduction in tax rates), the plan would make it almost impossible to come back in the next few years and secure further substantial savings in tax expenditures.  As a result, the avenues for securing a significant revenue contribution to deficit reduction would be closed off for the foreseeable future, despite the fact that a need for large additional deficit reduction would remain.

• Claims that the plan is balanced don’t hold up to scrutiny. Senator Toomey claims that his plan’s mix of spending cuts and tax increases is similar to that of the Bowles-Simpson plan.  That is far from the case.  If you examine Bowles-Simpson from the same starting point that Senator Toomey uses for his plan — namely, a baseline that assumes that all of the Bush tax cuts have been made permanent — then Bowles-Simpson raised well over $2 trillion in revenues over the next decade.  The Toomey plan raises $400 billion.  (Senator Toomey claims $500 billion, but that figure counts $100 billion in user fee increases and other savings of the sort that the federal budget — and Bowles-Simpson — properly classify as spending cuts.)

  Senator Toomey also ignores the fact that Congress has already enacted $1.6 trillion in spending cuts since Bowles-Simpson was issued, primarily through the caps on discretionary spending enacted last summer in the Budget Control Act and the additional cuts in appropriations enacted earlier in 2011.  If you add those spending cuts to the additional cuts that the Toomey plan would effectively require, the overall distribution of spending cuts and tax increases since Bowles-Simpson would become even more lopsided.

• The proposed dollar cap on itemized deductions is a potential step forward. One aspect of Senator Toomey’s plan — his proposal to place a dollar cap on itemized deductions — represents an advance over some other proposals to impose a limit on the overall benefits that tax expenditures can provide to a taxpayer.  It is more specific, could raise significant revenue, and could do so in a progressive manner.

  The Toomey tax-expenditure proposal raises some concerns, however.  Past bipartisan proposals to lower the top income-tax rates below 30 percent, such as the Tax Reform Act of 1986 (championed by Ronald Reagan) and the Bowles-Simpson plan, tied such a reduction in tax rates to the elimination of lower tax rates on capital gains income.  The Toomey plan, by contrast, keeps the top capital gains tax rate at 15 percent.  In addition, it would make permanent the estate-tax giveaway enacted on a temporary basis as part of the 2010 tax-cut deal, which slashes estate-tax obligations for the estates of the wealthiest 3 of every 1,000 Americans who die.

  The specifics of the Toomey tax-deduction proposal would also need to be analyzed carefully to ascertain their impacts on the ability of state governments to raise adequate revenues, as well as on charitable contributions.

  The principal shortcoming of this aspect of the plan, however, is that as noted above, Senator Toomey would use the overwhelming share of the revenue from his tax-expenditure proposal to pay for across-the-board tax rate cuts.  This ignores what should be the primary task at hand — reducing unsustainable budget deficits and contributing to a balanced package that achieves that goal.

Related Posts:

• Greenstein on the “Fiscal Cliff”
• Three Key Messages on Sound Policy and the “Fiscal Cliff”
• Series: Thinking About Tax Policy

Federal spending on low-income programs has gone up considerably in recent years, a development discussed at a recent House Budget Committee hearing.  A new CBPP analysis examines why and explains that low-income programs outside of health care are not a factor in our serious long-term budget problems.  Here’s the opening:

Several conservative analysts and some journalists lately have cited figures showing substantial growth in recent years in the cost of federal programs for low-income Americans.  These figures can create the mistaken impression that growth in low-income programs is a major contributor to the nation’s long-term fiscal problems.

In reality, virtually all of the recent growth in spending for means-tested programs is due to two factors:  the economic downturn and rising costs throughout the U.S. health care system, which affect costs for private-sector care as much as for Medicaid and other government health care programs.  Moreover, Congressional Budget Office (CBO) projections show that federal spending on means-tested programs other than health-care programs will fall substantially as a percent of gross domestic product (GDP) as the economy recovers — and fall below its average level as a percent of GDP over the prior 40 years, from 1972 to 2011.  Since these programs are not rising as a percent of GDP, they do not contribute to our long-term fiscal problem.

Specifically, federal spending for mandatory (or entitlement) programs outside health care (including refundable tax credits like the Earned Income Tax Credit) averaged 1.3 percent of GDP over the past 40 years.  This spending reached 2.0 percent of GDP in fiscal year 2011, a substantial increase.  But CBO projects that it will return to the prior 40-year average of 1.3 percent by 2020 and then remain there (see chart).

Federal spending for low-income discretionary programs is virtually certain to fall as a percent of GDP in the coming decade as well.  Under the Budget Control Act’s funding caps, non-defense discretionary spending will fall over the decade to its lowest level as a percent of GDP since 1962 (and probably earlier).

As a result, total spending for low-income programs outside health care — both mandatory and discretionary programs — is expected to fall over the coming decade to a level below its prior 40-year average.

Click here for the full report.

Senator Pat Toomey (R-PA) pounced on CNN’s Soledad O’Brien this week when she raised findings from an analysis that CBPP issued last fall of the tax plan that the Senator proposed to the congressional “Supercommittee.”  Senator Toomey asserted that a finding that O’Brien cited — that his tax plan would raise taxes on people making less than $200,000 — was “factually wrong and ridiculous.”

Really?  Let’s take a look:

In presenting his plan to the Supercommittee, Senator Toomey indicated it would:

• Cut tax rates below the levels of President Bush’s tax cuts, setting the top rate for high-income households at just 28 percent;
• Limit “tax expenditures” (credits, deductions, and other tax preferences) using a model developed by leading economist Martin Feldstein;
• Leave the current preferential tax rate for capital gains in place; and
• Produce $290 billion in increased revenues for deficit reduction.

It is impossible to do all of these things without raising taxes on people below $200,000.  Consider:

• The Urban Institute-Brookings Institution Tax Policy Center (TPC) has estimated that the reductions in tax rates that Senator Toomey proposed would cost $268 billion in 2015 alone, with $137 billion of it going to people over $200,000. (These estimates assume a corresponding reduction in the tax rate under the alternative minimum tax, or AMT.  If policymakers do not enact that corresponding reduction, the number of taxpayers subject to the AMT would double to more than 13 million — a result that Senator Toomey surely does not intend.)
• TPC also has estimated that a Feldstein-like tax-expenditure limit on people making over $250,000 would raise only $48 billion in 2015, meaning that higher-income households would receive a large net tax cut — they would gain much more from the tax-rate reductions than they would lose from the tax-expenditure limit.  (TPC did not provide this estimate for people over $200,000, but the TPC figures make clear that those over $200,000 would receive a substantial net tax reduction.)

The math is irrefutable.  Senator Toomey told O’Brien that, while reducing their deductions and credits, he also would cut tax rates for people below $200,000 so that they would face no net tax increase.  But that can’t be.  If the tax plan is supposed to produce a net increase in revenues, and if it loses revenue from people making over $200,000, then it simply must raise revenue from people making less than $200,000.

Nor would that outcome be terribly surprising.  With regard to tax expenditures, the Toomey plan shields the most lucrative tax expenditure for high-income people — the preferential tax rate on capital gains — while limiting key tax expenditures that lower- and middle-income people use, such as the child tax credit and employer-provided health insurance.  Indeed, Feldstein’s own estimates show that nearly three-fifths (71 percent) of the revenue that his proposal to limit tax expenditures — the model for the Toomey plan — would produce would come from people with incomes under $200,000.

Moreover, the Joint Committee for Taxation (JCT), Congress’ official, impartial “scorekeeper” on tax legislation, examined a plan similar to Senator Toomey’s — one that would cut tax rates to about one-seventh below the Bush tax rates, setting the top rate at 30 percent (Senator Toomey’s top rate is 28 percent), fully offset the costs of cutting tax rates by reducing tax expenditures (the Toomey plan would go further and limit tax expenditures enough to produce $290 billion in net revenue increases for deficit reduction), and retain the current preferential tax rates for capital gains and dividends (as the Toomey plan would do).  JCT found people making more than $200,000 would receive large tax cuts while those making less than $200,000 would, on average, face tax increases.

The only way that Senator Toomey’s plan could avoid raising taxes on people with incomes below $200,000 would be if he designed it in such a way that it lost significant revenue overall and, thus, added significantly to the deficit.  Given its tax cuts for people at high income levels, it must either raise taxes on middle-income families or increase the deficit.  It cannot achieve the conflicting goals that Senator Toomey claims for it.

That would become evident if Senator Toomey turned his proposal, which is still not available on paper, into a specific plan and sent it to JCT for analysis.

Mitt Romney said last week that if the safety net “needs a repair, I’ll fix it.”  It does need some repair, as our recent blog series explained.  That is, the safety net works but still has some serious gaps.

The positive news is that the safety net, bolstered by temporary expansions enacted during the recession, has helped hold the line against poverty and hardship in the past few years.  Without safety-net programs, the poverty rate would have been 28.6 percent in 2010, nearly twice its actual 15.5 percent rate (using a measure of poverty that includes the impact of tax credits and safety-net programs like food stamps that provide non-cash benefits).

Moreover, under broader measures of poverty, the poverty rate rose only modestly between 2007 and 2010 despite the tremendous increase in unemployment.  This outcome reflects the strength of the safety net, as bolstered by temporary measures enacted in the Recovery Act that Census data show kept 7 million Americans out of poverty in 2010.

But the safety net also has significant holes.  For example:

• Medicaid coverage for poor parents has large gaps. Most low-income children are eligible for either Medicaid or the Children’s Health Insurance Program.  But for adults, the story is very different.

  In the typical (or median) state, working parents are not eligible for Medicaid if their incomes exceed just 63 percent of the poverty line ($12,027 for a family of three), as a new Kaiser Foundation report shows.  Non-working parents, such as those who have been laid off, are ineligible for Medicaid if their incomes exceed 37 percent of the poverty line (or $7,063 for a family of three).  And, in most states, non-disabled adults under age 65 who are not raising minor children are not eligible for Medicaid at all.

  As a result, very large numbers of poor individuals — including many of the working poor — are uninsured.

  The Affordable Care Act will fill this coverage hole by expanding Medicaid to cover non-elderly adults with incomes up to 133 percent of the poverty line.  A number of presidential candidates and other political figures, including Governor Romney, have pledged to repeal the law, however, which would leave this hole in place unless a repeal measure is accompanied with strong alternative ways to expand coverage for these low-income individuals.

• Temporary Assistance for Needy Families (TANF) has weakened at the very time that the need for it has increased. Congress created TANF in the 1996 welfare reform law both to help parents find and maintain employment and to provide a safety net for families when they cannot work.  Unfortunately, flaws in TANF’s design have significantly limited its success on both fronts.

  TANF policies that emphasize employment — combined with other policy changes, such as expansions of the Earned Income Tax Credit — moved more people into the labor market, particularly during the booming economy of the late 1990s.  But the current downturn has exposed serious shortcomings in TANF.

  TANF benefits have eroded over time and now are below 50 percent of the poverty line in all states — and below 30 percent of the poverty line in most states.  In addition, the share of needy families who receive any benefits has fallen sharply.  In 1996, TANF cash assistance reached 68 families with children for every 100 such families in poverty; in 2009, it helped just 27 families for every 100 in poverty.

  Largely because of these trends, Census data show that the safety net now does much less than it used to to lift children out of deep poverty — that is, to lift them above half of the poverty line.

  A big reason for TANF’s sharp decline is that it is a block grant, so federal funding stays flat even when need rises during recessions.   This is noteworthy because both the Ryan budget that the House adopted last year and proposals put forth by various presidential candidates (including Romney, Newt Gingrich, and Rick Santorum) would use TANF as a model for sweeping changes to programs such as Medicaid and SNAP and convert both programs to block grants.

• Supplemental Security Income (SSI) provides vital cash assistance to the nation’s poorest elderly and disabled people but leaves many of them well below the poverty line. SSI provides monthly cash assistance to people who are disabled, blind, or elderly and have little or no income and few assets, but its benefit levels are very low.  SSI benefits bring a single elderly or disabled individual to $8,376 a year — 75 percent of the poverty line.  (It brings couples to 83 percent of the poverty line.)  As a result, many SSI recipients have difficulty meeting basic needs.

• Federal rental assistance enables millions of low-income households to rent modest housing at an affordable cost, but the need far outstrips available funding. Only one in four low-income households that qualify for housing assistance receives it, due to limited funding.  The number of families receiving federally funded rental assistance has remained static in recent years in the face of growing need.

These shortcomings deserve policymakers’ attention.  We need a strong safety net both because not everyone can work (due to age, illness, and other factors) and because there often are not enough jobs for all who want them — such as now, when there are four job-seekers for every available job.

A well-functioning safety net also helps the economy by making recessions less severe than they otherwise would be.  It expands to cover more people when unemployment climbs and poverty increases, thereby cushioning the loss of purchasing power and keeping the economy from weakening further and preventing still more job loss.

Note: The Center on Budget and Policy Priorities is a non-partisan organization and takes no position on political candidates.

Related Posts:

As you may have heard, Mitt Romney said this morning, “I’m not concerned about the very poor. We have a safety net there. If it needs a repair, I’ll fix it.” We’re glad the governor is expressing support for a safety net and for fixing it if it needs repair.  Yet his own budget proposals would tear gaping holes in the safety net and damage it severely.  Consider the following:

• The Romney budget proposals would make massive cuts in safety-net programs.  For starters, he has embraced the budget that House Budget Committee chairman Paul Ryan proposed last year, which would make the deepest cuts in assistance for low-income Americans in modern U.S. history.  The Ryan budget would convert Medicaid to a block grant and cut its funding by 49 percent by 2030 below currently scheduled levels, a proposal that Governor Romney has specifically defended.  It would also convert SNAP (formerly known as the Food Stamp Program) to a block grant and cut its funding by $127 billion (or almost 20 percent) over the next decade.  These cuts, combined with deep cuts in Pell Grants, low-income housing assistance, and other programs for low-income people, would total a stunning $2.9 trillion over the next decade.  The Ryan budget would get nearly two-thirds of its savings over the next ten years by cutting programs targeted on people with low or modest incomes, even though those programs account for only about one-fifth of the budget, making it the most regressive budget plan that a chamber of Congress has ever passed.
  
  And the Romney proposals go farther than Rep. Ryan’s — they would lead to even deeper cuts in basic safety-net programs for the poor than the Ryan budget would.  That’s because Governor Romney has proposed to:  1) shrink federal spending to 20 percent of GDP for 2016 and all subsequent years, which is a bit below what federal spending would fall to over the next two decades under Chairman Ryan’s budget; 2) increase defense spending to 4 percent of GDP, a higher level of spending than it would reach under the Ryan budget; 3) permanently extend President Bush’s tax cuts; 4) enact new tax cuts on top of them, which the Urban Institute-Brookings Institution Tax Policy Center estimates would lose an additional $180 billion a year by 2015; and 5) require that the federal budget be balanced.

  Governor Romney hasn’t outlined cuts in specific programs.  But if policymakers exempted Social Security, as he has suggested, they would have to cut all other nondefense programs — including safety-net programs for the poor — by an average of 24 percent in 2016 and 35 percent in 2021 just to reach Governor Romney’s first four goals.  Furthermore, to balance the budget at the same time — which Governor Romney has said should be a constitutional requirement — policymakers would have to finance his tax cuts with even deeper budget cuts.  To meet all of Governor Romney’s budget goals — including balancing the budget — would require cutting all nondefense programs other than Social Security by an average of 54 percent by 2021.  And since policymakers surely wouldn’t cut Medicare in half by 2021, safety-net programs for the poor likely would be cut even more severely.  The ensuing increase in poverty and destitution would almost certainly surpass anything in our country’s recent history.

• Even a cut of 24 percent — the smallest of the figures I’ve just mentioned — would have a devastating impact on safety-net programs. For example, the cuts in SNAP would throw almost 11 million low-income people off the program, cut benefits deeply — by over $1,500 a year for a family of four — or some combination of the two.  Cuts of 24 percent in compensation payments for disabled veterans, which average less than $13,000 a year, would shrink those payments — as well as pensions for low-income veterans, which average about $11,000 a year — by nearly a fourth.  Supplemental Security Income (SSI) benefits for the poorest elderly and disabled individuals in the country, which today lift impoverished elderly and disabled people living alone to only three-quarters of the poverty line, would be slashed — with these people pushed below 60 percent of the poverty line.

• And while cutting low-income programs, Governor Romney would actually raise taxes on low-income families. According to the Tax Policy Center, the Romney tax plan would provide big tax cuts at the top of the income scale that average $140,000 a year (on top of the Bush tax cuts) for people who make over $1 million a year.  Yet it would increase average tax burdens for low- and moderate-income families.  The plan would do so by letting certain tax measures that benefit low-income families expire at the end of 2012 — including measures that reduce marriage tax penalties on working-poor families and help low-income students afford college — even as it made permanent all of the expiring tax cuts for wealthy individuals and abolished the estate tax.