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.


Projected Health Spending Has Fallen Since 2010, Even With Health Reform’s Coverage Expansions

January 28, 2015 at 11:20 am

The Congressional Budget Office (CBO) now projects that federal health spending — including the costs of health reform’s coverage expansions — will be about $600 billion less over 2011-2020 than CBO projected in January 2010 without health reform (see figure).

In other words, projected health spending over the decade has fallen by $600 billion since 2010, despite $1 trillion in additional spending for premium tax credits and expanded Medicaid to help cover 27 million more Americans.

The decline in projected spending, which continues a pattern of downward revisions to CBO’s projections in recent years, stems from several factors.  One is health reform’s cuts in payments to Medicare providers and health plans.  Another is the recession, which has reduced the demand for health care services by slowing income growth.

But CBO and other experts have also concluded that a substantial part of the health care cost slowdown reflects structural changes in the health care system.  Professional associations, hospitals, and doctors are taking steps to curb costly and ineffective procedures and treatments.

CBO’s new report says, “Although views differ on how much of the slowdown is attributable to the recession and its aftermath and how much to other factors, the slower growth has been sufficiently broad and persistent to persuade [CBO and the Joint Committee on Taxation] to significantly lower their projections of federal health care spending.”

Health reform itself has most likely contributed to the slowdown as well.  As Kaiser Family Foundation President Drew Altman has written, “Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. . . .  [It] is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.”

To be sure, federal health spending — even if cost growth remains moderate — will keep rising as more baby boomers become eligible for Medicare and Medicaid.  Making the U.S. health care system more efficient thus remains a major budget challenge.  But CBO’s latest projections show that we’ve already made substantial progress.

FAQs on Budget “Reconciliation”

January 22, 2015 at 2:59 pm

Republican leaders plan to use a legislative process called “reconciliation,” which allows for special and speedy congressional consideration of certain tax and spending bills, to advance their fiscal policy agenda in 2015.  In the Senate, members can’t filibuster reconciliation bills, and the scope of amendments they can offer to them is limited, giving this process real advantages for enacting controversial budget and tax measures.  Our new report addresses some frequently asked questions about reconciliation:

  • How Often Have Policymakers Used Reconciliation?
  • What Kinds of Changes Can a Reconciliation Bill Include?
  • How Does Congress Start the Reconciliation Process?
  • What Role Do Committees Play?
  • What Special Role Do the Budget Committees Play?
  • How Many Reconciliation Bills May Congress Consider Each Year?
  • Can the Full House or Senate Amend a Reconciliation Bill?
  • What Happens After Each Chamber Adopts a Reconciliation Bill?
  • What Procedural Advantages Does Reconciliation Have in the Senate?
  • What Procedural Advantages Does Reconciliation Have in the House?
  • Can Reconciliation Be Used to Increase Deficits?
  • What Is the Byrd Rule?
  • What Provisions are “Extraneous” Under the Byrd Rule?
  • How Is the Byrd Rule Enforced?

Click here for the report.

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IRS Funding Cuts Harm Customer Service and Raise Deficits

January 14, 2015 at 4:56 pm

Honest taxpayers will feel the pain of Congress’ cuts in the IRS budget, new reports from National Taxpayer Advocate Nina Olson and IRS Commissioner John Koskinen confirm.  As we’ve written, funding cuts in recent years have compromised taxpayer service and weakened enforcement of the nation’s tax laws.  Olson warns that this year’s cuts will worsen these problems, predicting that taxpayers will likely receive the worst service from the IRS in over a decade.

Congress has cut IRS funding sharply since 2010 (see chart), despite repeated warnings of the negative effects.  Funding is 19 percent below the 2010 level and at its lowest level since 1997, after adjusting for inflation.  Yet the number of tax returns filed has grown significantly, and the IRS has received major new responsibilities related to the Foreign Account Tax Compliance Act and the Affordable Care Act.

In her 2014 Annual Report to Congress, released today, Olson warns that funding cuts have led to a “devastating erosion of taxpayer service, harming taxpayers individually and collectively.”  The IRS will answer as few as 43 percent of taxpayers’ estimated 100 million calls this filing season, and callers will face an average wait time of at least 30 minutes.  In comparison, in 2004 the IRS answered 87 percent of calls with an average wait time of less than 3 minutes.  The IRS also won’t be able to respond to any taxpayer questions except “basic” ones this season, according to Olson.

Similarly, Commissioner Koskinen explained in a letter to IRS employees yesterday that this year’s funding cut will delay improvements in information technology for taxpayer services and force a reduction in enforcement funding of more than $160 million.  Cutting enforcement funding actually raises budget deficits by weakening tax collections.  Koskinen estimates this year’s cut in enforcement funding alone will cost the federal government at least $2 billion in revenue that it otherwise would have collected.

The IRS performs one of government’s most essential functions by collecting the revenue it needs to operate.  Congress should stop undermining it and give it the resources it needs.

New House Rule Could Ease Passage of Deficit-Increasing Tax Cuts

January 5, 2015 at 11:02 am

Our new paper analyzes a House Republican plan to amend House rules this week to require the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) to use “dynamic scoring” for official cost estimates of tax reform and other major legislation.   Under dynamic scoring, the official cost estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending.

Incoming Ways and Means Committee Chairman Paul Ryan has said this change is designed simply to generate more information on the impact of proposed policies.  In reality, however, the House would be asking CBO and JCT for less information, not more, and the new rule could facilitate congressional passage of tax cuts that are revenue-neutral only on paper.

As our paper explains:

CBO and JCT already provide macroeconomic analyses of some proposed bills as a supplement to the official cost estimates they produce.  These analyses typically present a range of estimates of the legislation’s impact on the economy.

The new House rule, in contrast, asks for an official cost estimate that only reflects a single estimate of the bill’s supposed impact on the economy and the resulting revenue impact.  By incorporating additional revenue in the official cost estimate (as a result of an estimate of economic growth), this would enable lawmakers to write bills with deeper tax-rate cuts, or smaller offsetting curbs on tax breaks, than they otherwise could do.

The economic impact of even a well-designed tax reform plan is likely to be modest relative to the size of the U.S. economy.  But the estimates of revenue gains from the plan’s estimated dynamic effects could be large in the context of current fiscal debates.  Those estimates could also be highly dubious, depending on the models and assumptions used.

For example, JCT estimated that the tax reform plan that former Ways and Means Chairman Dave Camp produced last year could generate between $50 billion and $700 billion of additional revenue over the decade through faster economic growth (see chart), with the $700 billion estimate reflecting a series of very rosy assumptions — including the assumption that a future Congress will stabilize the debt as a share of gross domestic product (GDP) by approving large spending cuts that aren’t part of the Camp bill.  If highly optimistic economic and fiscal assumptions like these are included in official cost estimates but then fail to materialize, the result will be higher deficits and debt.  And as CBO, JCT, and other analysts have warned, tax cuts that ultimately expand deficits can slow economic growth, rather than increase it, because the higher deficits can create a drag on saving and investment.

Click here for the full paper.

IRS Funding Cuts Likely Mean More Tax-Credit Errors

December 11, 2014 at 11:00 am

Even as the Treasury Department’s Inspector General noted a significant overpayment rate in the refundable part of the Child Tax Credit (CTC) this week, lawmakers chose — in the pending 2015 government funding agreement — to weaken the IRS’s ability to reduce errors in this credit and other parts of the tax code by once again cutting IRS funding to enforce and ensure compliance with the tax rules.  And, while lawmakers such as Senator Orrin Hatch (R-UT), the Senate Finance Committee’s top Republican, assailed the IRS for failing to address the errors, the Treasury and IRS have recommended a series of measures to Congress to reduce errors in the tax credits and other parts of the tax code — and Congress has failed to act on them (except for one very small measure included in the 2015 funding agreement).

Errors in the CTC and the Earned Income Tax Credit (EITC) — another working-family tax credit — need to be reduced (as do errors related to small businesses and various other groups of tax filers).  But the debate around this issue often is misleading and ignores three significant points:

1. Most overpayments result from unintentional errors, not fraud. IRS studies indicate that the majority of EITC errors stem from the interaction between the credit’s complex rules and complicated family and child-rearing arrangements, not fraud.  The EITC has very strict rules over who can claim a child, for example, which often trip up separated or divorced couples or three-generation families.  The CTC eligibility rules are similar.

Moreover, overclaims in these tax credits account for a small share of the tax compliance gap.  Underreporting of business income alone accounted for $122 billion of the $450 billion tax gap in 2006, the latest year for which such data are available.

2. IRS funding cuts have weakened tax enforcement. The IRS’s budget has taken repeated hits in recent years and will shrink further under the fiscal year 2015 budget agreement, falling to its lowest inflation-adjusted level since 2000.  Funding for IRS enforcement has been hit particularly hard; its 2015 funding level under the agreement is 20 percent below the 2010 level, adjusted for inflation. Yet the number of tax returns filed has grown significantly over the same period, and the IRS received substantial new responsibilities related to the Foreign Account Tax Compliance Act and the Affordable Care Act.

Because of these cuts, the IRS lacks the resources to pursue a substantial share of the questionable EITC and CTC claims that it identifies or to improve enforcement of other parts of the tax code.  For example, the IRS can use data matching and other techniques to identify questionable claims on tax returns related to the tax credits, but it cannot pursue many of those claims further because it lacks the staff resources to do so.  Due to budget cuts, the number of IRS staff devoted to enforcement has dropped by 15 percent since 2010.

3. Congress has failed to act on proposals designed to lower error rates. The year-end funding bill requires people who prepare their own returns to answer due diligence questions when claiming refundable tax credits, a useful but small measure.  But Congress has ignored an array of other, more significant proposals from the Treasury and the IRS (most of which are in the President’s fiscal year 2015 budget) to reduce errors in these credits.  These include:

  • Giving the IRS the statutory authority to require paid tax preparers to demonstrate basic competence in the rules governing these credits and other basic tax matters. The Treasury has found very high EITC error rates among returns filed by certain types of paid preparers (e.g., those who aren’t lawyers, CPAs, enrolled agents, or affiliated with a national tax preparation firm).  These preparers do not need to get any training whatsoever or demonstrate basic competence in the tax rules, a factor that contributes to tax-credit errors.
  • Requiring employers and other third parties to send the IRS information such as W-2’s and 1099’s earlier in the year to help it detect erroneous or fraudulent claims before it pays them.
  • Requiring paid return preparers to follow due diligence requirements in determining eligibility for the CTC, as they already must do for the EITC.

Senator Hatch said this week that “[t]he IRS’s inability to properly administer these refundable tax credits fails American taxpayers.”  In reality, it’s Congress that has failed American taxpayers by not giving the IRS what it needs to enforce the tax code.