The Center's work on 'Federal Budget' Issues

The Center informs the debate over federal budget priorities by analyzing the President’s budget and major congressional proposals throughout the annual budget process. We pay particular attention to the adequacy of funding for programs that assist low- and moderate-income families. We also analyze long-term budget challenges and measures to address them. In addition, we promote measures to improve fiscal responsibility.


The Risks of Dynamic Scoring

February 26, 2015 at 11:06 am

In a guest TaxVox blog post for the Tax Policy Center’s series on “dynamic scoring,” I discuss some of the risks of a new House rule requiring dynamic scoring for official cost estimates of tax reform and other major legislation.  Under dynamic scoring, those estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending.

Dynamic estimates vary widely depending on the models and assumptions used.  I conclude that to make sense of those scores, policymakers will need more information about the models and assumptions than the House rule requires:

The House rule allows the House to use any increase in revenue from highly uncertain estimates of macroeconomic growth to pay for other policies. Policymakers will also be tempted to use a favorable dynamic estimate as proof that a policy is good for the economy and therefore should be enacted.  But the uncertainty and gaps in the models may mean that such a simple conclusion isn’t appropriate. Lawmakers will need more information than the House rule requires to assess the reliability of the estimate and to understand a bill’s possible economic effects.

“Generational Accounting” Is Misleading and Uninformative

February 24, 2015 at 9:55 am

The topic of “generational accounting” will likely surface when economist Lawrence Kotlikoff, who helped develop the approach over 20 years ago, testifies at tomorrow’s Senate Budget Committee hearing.  Generational accounting purports to compare the effects of federal budget policies on people born in different years.  But it’s far more likely to obscure than illuminate the budget picture, as we have explained.

Generational accounting calculates “lifetime net tax rates” for each one-year cohort of the population through at least age 90 and a separate lifetime net tax rate for all future generations combined.  Those measures are supposed to reflect each generation’s tax burden, minus the benefits it receives through programs such as Social Security and Medicare, under existing budget policies.

But generational accounting rests on several highly unrealistic assumptions.  Its calculations of lifetime net tax rates assume that there would be no changes whatsoever in current law for taxes or benefit policies for anyone now alive.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  And it ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, CBPP, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that. Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.

Setting the Record Straight on Student Loan Costs

February 18, 2015 at 11:05 am

President Obama’s 2016 budget estimates that the outstanding portfolio of federal student loans will be $21.8 billion less profitable than previously thought over the loans’ lifetime.  This reestimate doesn’t mean that the program “had a $21.8 billion shortfall last year,” as a Politico story stated.  Nor does it justify adopting an alternative accounting method (so-called “fair-value accounting”) that would artificially inflate the program’s cost.  The reestimate is, indeed, completely unrelated to the accounting method.

Here, briefly, is what the reestimate does and doesn’t mean.

Lending programs appear in the budget with up-front estimates of the net costs or profits to the government over the loans’ lifetime.  In the case of student loans, the government makes a profit, even after accounting for defaults, which is why student loans are a good deal for both students and the government.  If the government later concludes that its earlier estimates of lifetime costs were too high or low, it reestimates all outstanding loans.  The reestimate is recorded in the year it’s made (in this case, 2015), not in the many past years in which the loans were issued.

The recent $22 billion upward reestimate is the net result of three factors:

  • The President’s decision to permit students who borrowed before 2008 to switch to the Pay-As-You-Earn (PAYE) repayment plan will raise future costs by an estimated $9 billion.  PAYE caps monthly loan payments at 10 percent of borrowers’ incomes and forgives the remaining debt after 20 years of payments.
  • More student borrowers than originally expected are switching to other repayment plans that tie payments to borrowers’ incomes, raising future costs by an estimated $15 billion.
  • Expected defaults are down (that is, more borrowers are expected to repay their loans than previously estimated), lowering future costs by an estimated $2 billion.

This isn’t a “shortfall.”  No cash is missing, nor are the 2015 inflows and outflows of student loans $22 billion lower than initially thought.  Rather, the $22 billion reestimate is a new, and slightly less sanguine, view of the net profits that the government will make over the next few decades on the student loans that are now outstanding.

The reestimate isn’t particularly large in percentage terms, either.  It’s about 2.9 percent of the outstanding portfolio of student loans, which is three-quarters of a trillion dollars.

Also, while Senator Deb Fischer (R-NE) cited the reestimate in introducing a bill requiring the use of “fair-value accounting” for student loans and other credit programs, “fair-value accounting” would make student loan accounting less accurate, not more, and it wouldn’t have avoided these reestimates.

Here’s why.  By law, the government estimates the costs or profits of its loans based on the difference between what the government will pay out in loans (including the cost to the Treasury of financing the loans) and the interest, principal, and associated fees that borrowers will repay over time, accounting for expected defaults.  “Fair-value” proponents say that the budget should reflect the higher financing and other costs that a private lender would incur if it, not the federal government, made the loans.  This approach would record loans as less profitable (or more expensive) to the government than they really are by including costs in the budget that the federal government never has to pay.  For these reasons, we strongly oppose “fair-value accounting,” as we’ve explained here, here, and here.

Importantly, even if the government had been using phantom “fair-value” costs in its initial estimates of student loans, it still would have needed to make the same upward revision in 2015 due to the three factors described above.  “Fair-value accounting” would not have affected that reality in any way.

A Double Standard on Tax Compliance

February 13, 2015 at 1:23 pm

House Ways and Means Committee Chairman Paul Ryan suggested recently that Congress should expand the Earned Income Tax Credit (EITC) for childless adults and non-custodial parents and fully offset the cost by reducing EITC overpayments.  But he and other House Republicans voted today to permanently extend an expensive small-business tax break without offsetting the cost, such as by requiring any improved compliance in that part of the tax code — where the rates of error and loss to the Treasury far outstrip those for the EITC.  The IRS estimates that a stunning 56 percent of business income that individual returns should have reported went unreported in 2006, the latest year for which these data are available.

These developments highlight an egregious double standard in how lawmakers view tax compliance, depending on whether low-income working families or small businesses are at issue.

During a Ways and Means Committee hearing, Ryan praised the EITC’s proven effectiveness in promoting work and reducing poverty and alluded to his proposal to expand the tiny EITC for childless workers — the lone group that the federal tax code actually taxes into (or deeper into) poverty and a group that needs the EITC’s pro-work income boost and incentives.  Ryan’s proposal to expand the childless workers’ EITC is nearly identical to one from the President, which would seem to make it ripe for bipartisan legislative action.

But Chairman Ryan seemed to suggest the need to generate offsetting savings within the EITC to pay, on a dollar-for-dollar basis, for the EITC change.  To be sure, Congress can and should take important steps to reduce EITC errors, including:  1) providing the IRS more adequate funding for enforcement; 2) giving the IRS the authority to regulate paid tax preparers to ensure they meet basic competency standards (a majority of EITC errors occur on commercially prepared returns); and 3) enacting a battery of measures the Treasury has proposed to reduce EITC errors.  Yet Congress has cut IRS enforcement funding heavily since 2010.  It also has failed to approve the Administration’s request to empower the IRS to take steps to significantly reduce errors by commercial tax preparers.

Further, the Joint Tax Committee is understandably cautious about “scoring” various measures to reduce errors on tax returns, whether they concern the EITC or other parts of the tax code.  The combined scored savings from all known legislative proposals to lower EITC errors fall well short of the costs of expanding the EITC for childless workers.  This raises a concern that lawmakers could propose measures to cut the EITC for honest low-income working families and misleadingly promote them as cutting “fraud, waste and abuse” when that’s not what they would do.  Sadly, some members of Congress have done just that in the past.

The small-business legislation that the House approved today would make permanent a generous tax break (known as “Section 179” expensing) for certain small-business investments.  Business income on individual tax returns is, by far, the largest source of tax non-compliance with, as noted above, an estimated 56 percent of this income unreported in 2006.  This resulted in an estimated tax gap of $122 billion, more than four times the gap due to all individual income tax credits (including the EITC).

A dollar is a dollar, whether it’s spent subsidizing small businesses or supplementing the wages of a low-wage worker striving to get a toehold in the economy.  Policymakers should work to improve compliance throughout the tax code.  And they should stop applying double standards to the effort.

Support for Home Visiting Programs Slated to Expire

February 13, 2015 at 10:44 am

A federal-state partnership that supports home visiting programs in every state will expire March 31 unless Congress extends it, jeopardizing programs with a proven record of strengthening high-risk families and saving money over the long term.

The Maternal, Infant, and Early Childhood Home Visiting (MIECHV) program funds programs through which trained professionals — often nurses, social workers, or specialists in early childhood development— help parents acquire the skills to promote their children’s development.

More specifically, MIECHV works to improve maternal and newborn health, prevent child injuries and abuse, help children succeed in school, reduce crime and domestic violence, and make families more economically self-sufficient.  Research shows that it helps keep children out of the social welfare, mental health, and juvenile corrections systems, with considerable cost savings for states.

A new report and 22 state and tribal profiles from the Center for American Progress and Center for Law and Social Policy explain how states and tribes use MIECHV funds to improve and expand home visiting programs to serve more vulnerable families.

For example, MIECHV funds help these programs create or expand data collection systems that enable them to evaluate and report on outcomes for children and families.  (Most MIECHV funds go to rigorously evaluated programs for which there’s well-documented evidence of success.)  MIECHV funds also support training, technical assistance, and professional development for home visiting workers.

Many families have benefited from MIECHV-funded services.  Continued federal support would help states build on that success by reaching more vulnerable families.  Congress should reauthorize the program at current funding levels.