The Center's work on 'President’s Budget' Issues

How the Federal Budget Process Works — and What Happens When It Doesn’t

September 12, 2014 at 11:21 am

With Congress expected to approve a stopgap funding bill before October 1 to keep the government running for the next few months, this is an appropriate time to review how the federal budget process is supposed to work.  Our newly updated backgrounder does just that, describing the laws and procedures under which Congress decides how much money to spend each year, what to spend it on, and how to raise the money to pay for that spending.

More specifically, our backgrounder explains:

  • the President’s annual budget request, which is supposed to kick off the budget process;
  • the congressional budget resolution — how it is developed, what it contains, and what happens if there is no budget resolution;
  • how the terms of the budget resolution are enforced in the House and Senate;
  • budget “reconciliation,” an optional procedure used in some years to facilitate the passage of legislation amending tax or entitlement law; and
  • statutory deficit-control measures — spending caps, pay-as-you-go requirements, and sequestration.

It also explains the differences between discretionary and mandatory programs and between budget authority and outlays, as well as other concepts that aren’t widely known but are critical to understanding the budget process.

Noting that in recent years the budget process hasn’t always worked as envisioned, our backgrounder describes what happens if, for example, Congress fails to complete a budget resolution or to pass appropriations bills before the October 1 start of the fiscal year.

Obama Plan to Raise Rents on Rural Poor is the Wrong Way to Save Money

April 11, 2014 at 12:30 pm

About 42,000 extremely poor families — 15 percent of those assisted through the Agriculture Department’s (USDA) rural rental assistance program — could face rent increases of up to $600 a year under a proposal in President Obama’s 2015 budget.

Today, families with rural rental assistance must pay 30 percent of their income for rent and utilities.  The President’s proposal would require property owners to charge families a minimum of $50 a month — even if this exceeds 30 percent of their income.  Many of those who would be affected are especially vulnerable to hardship:  64 percent of households with USDA rental assistance have a head (or the head’s spouse) who is elderly or has a disability, and 135,000 children live in low-income families receiving such assistance.

USDA budget documents say that one goal of the proposal is to “encourage financial responsibility in tenants, increasing their opportunity for success on the path to homeownership.”  But there is no evidence that requiring destitute families to pay $50 a month helps them get back on their feet.  To the contrary, a growing body of research shows that extreme poverty — which the USDA proposal would exacerbate — does long-term damage to children’s neural development and education and employment prospects.

A second goal is to save money.  USDA estimates that the policy will reduce program costs by $5 million in 2015 and $20 million annually in later years.  But policymakers could surely find better ways to save $20 million a year than raising rents on some of the most vulnerable people in rural America.

USDA points out that some households with rental assistance through the Department of Housing and Urban Development (HUD) must pay $50 minimum rents.  But no major HUD program imposes a program-wide $50 minimum rent like USDA has proposed.  HUD’s supportive housing programs for the elderly and people with disabilities do not charge a minimum, while the Section 8 Project-Based Rental Assistance program has a $25 minimum rent and state and local agencies administering Housing Choice Vouchers and Public Housing can set the minimum below $50 or have no minimum at all.

USDA has also claimed that a proposed exemption for families who would face hardship from minimum rents — modeled on similar exemptions in HUD programs — would minimize any adverse consequences.  Tony Hernandez, the Administrator of USDA’s Rural Housing Service, told a House Appropriations subcommittee that households with incomes of $2,000 a year “probably would not have to pay because they would be exempted because of the hardship clause.”

But experience in the HUD programs indicates that very few would likely be exempted.  As we’ve noted, the HUD hardship policies have had little impact, partly because they require tenants — many of whom have physical or mental disabilities or very low education levels — to seek out exemptions.  A 2010 HUD study found that 82 percent of state and local housing agencies that chose to impose minimum rents exempted less than 1 percent of affected households.  (Moreover, the minimum rent proposed by USDA would fall almost exclusively on families with incomes close to or below $2,000, so if most of those families were exempted, the policy’s savings would largely disappear.)

Families facing hardship might have an even harder time obtaining exemptions in the USDA rental assistance program, where small rural property owners with limited administrative capacity would be responsible for implementing the hardship policy.  The best way to protect these families would be to reject the President’s proposal.

Obama, Ryan Miles Apart on Non-Defense Discretionary Funding

April 8, 2014 at 3:35 pm

One especially stark difference between the recent budgets from President Obama and House Budget Committee Chairman Paul Ryan is in non-defense discretionary (NDD) funding, the budget category that includes key investments in the economy, such as education and basic research; support for low-income families, such as Head Start and housing assistance; and essential services that Americans expect, such as veterans’ medical care and food safety inspections.  Obama and Ryan are roughly $1 trillion apart on total NDD funding over the next decade.

First, some background.  Since the fall of 2010, when policymakers initiated deficit-reduction efforts, they have cut funding for NDD programs in three waves:  first, in the appropriations bills for fiscal year 2011, then again in 2012 through the Budget Control Act’s (BCA) funding caps (which extend through 2021), and then again when sequestration (which automatically lowers the BCA caps on defense and non-defense funding) took effect in 2013.

Last December, the Murray-Ryan budget agreement, which was enacted in the Bipartisan Budget Act, alleviated some of sequestration’s effects in 2014 and 2015.  Even so, NDD funding in 2014 under the agreement is roughly 15 percent below the 2010 level, adjusted for inflation, and will be about 17 percent below the 2010 level in 2015.

The President’s budget mitigates sequestration’s effects on NDD programs, adding about $200 billion over 2015-2024 above sequestration’s low levels.  The Ryan budget, by contrast, goes well beyond sequestration, cutting funding for NDD programs nearly $800 billion below the sequestration levels.  That’s a $1 trillion difference over the decade.

Congress has shown little appetite for re-opening the Murray-Ryan agreement for 2015.  The President’s call for more funding that year — offset by entitlement cuts and revenue increases — has gained little traction.  But a key issue is what happens starting in 2016.

As the chart shows, even with the President’s proposed level for 2016 — which would eliminate all of that year’s sequestration cuts for NDD programs — NDD funding would remain 12 percent below its inflation-adjusted 2010 level.  And over the decade, the President’s proposal wouldn’t erase all of the effects of sequestration.

Moreover, under the President’s proposal, NDD funding will still fall by 2017 to its lowest level on record as a share of gross domestic product (GDP) based on data available back to 1962.  That’s true because the BCA’s NDD caps are so tight, even without sequestration.

But the Ryan budget’s NDD cuts go much further.  Their depth is staggering — 25 percent below the inflation-adjusted 2010 level in 2016, and 36 percent below that level in 2024.  (The Ryan budget is 15 percent lower than the sequestration level in 2016, with the cut growing to 22 percent by 2024.)

Policymakers will have to confront the future of NDD programs next year when the Murray-Ryan deal’s modest relief from sequestration ends.   Chairman Ryan’s extremely harsh vision would represent a very large step backward.  Even the President’s proposal, while moving in the right direction, likely won’t be sufficient to meet the nation’s needs over the coming decade.

Ryan Roundup 2014: Everything You Need to Know About Chairman Ryan’s Latest Budget

April 8, 2014 at 9:52 am

We’ve compiled CBPP’s analyses and blog posts on House Budget Committee Chairman Paul Ryan’s budget.  We’ll update this roundup as we issue additional analyses.

  • Analysis: Ryan Block Grant Proposal Would Cut Medicaid by More Than One-Quarter by 2024 and More After That
    April 4, 2014
    “The Medicaid block grant proposal in the budget plan proposed by House Budget Committee Chairman Paul Ryan on April 1 would cut federal Medicaid (and the Children’s Health Insurance Program, or CHIP) funding by 26 percent by 2024, because the funding would no longer keep pace with health care costs or with expected Medicaid enrollment growth as the population ages….  These cuts would come on top of repealing the health reform law’s Medicaid expansion.”

    Blog Post: Ryan Budget Again Proposes a Medicaid Block Grant, Adding Millions to the Ranks of the Uninsured and Underinsured

  • Blog Post: Ryan Budget Mischaracterizes Housing Vouchers, Then Sets the Stage to Cut Them
    April 4, 2014
    “House Budget Committee Chairman Paul Ryan used a faulty number to argue that ‘Section 8’ Housing Choice Voucher program costs have risen excessively.  His budget documents also float a proposed expansion of the Moving to Work (MTW) demonstration that could lay the groundwork for deep, harmful cuts in the voucher program in years to come.  That program, which helps 2.1 million low-income families rent modest units of their choice in the private market, is just beginning to recover from the loss of 70,000 vouchers due to sequestration budget cuts last year.”

  • Analysis: Ryan Budget Would Slash SNAP by $137 Billion Over Ten Years: Low-Income Households in All States Would Feel Sharp Effects
    April 4, 2014
    “House Budget Committee Chairman Paul Ryan’s budget plan includes cuts in the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp Program) of $137 billion — 18 percent — over the next ten years (2015-2024),  which would necessitate ending food assistance for millions of low-income families, cutting benefits for millions of such households, or some combination of the two.  Chairman Ryan proposed similarly deep SNAP cuts in each of his last three budgets.”

    Blog Post: Ryan’s SNAP Cuts Would Hit Millions of Low-Income Americans

  • Analysis: Medicare in Ryan’s 2015 Budget
    April 8, 2014
    “The Medicare proposals in the 2015 budget resolution from House Budget Committee Chairman Paul Ryan (R-WI) are much the same as those in Ryan’s previous budgets. Once again, Chairman Ryan proposes to replace Medicare’s guarantee of health coverage with a premium-support voucher and raise the age of eligibility for Medicare from 65 to 67. Together, these changes would shift costs to Medicare beneficiaries and (with the simultaneous repeal of health reform) leave many 65- and 66-year-olds without health coverage.”Blog Post: Ryan’s Medicare Proposals: the Latest
  • Analysis: Ryan Plan Gets 69 Percent of Its Budget Cuts From Programs for People With Low or Moderate Incomes
    April 8, 2014
    “House Budget Committee Chairman Paul Ryan’s new budget cuts $3.3 trillion over ten years (2015-2024) from programs that serve people of limited means. That’s 69 percent of its $4.8 trillion in total non-defense budget cuts. Not much has changed on this front from Chairman Ryan’s budget plan of a year ago, or the year before that. Then, too, Chairman Ryan proposed very deep cuts, the bulk of which were in programs that serve low- and moderate-income Americans.The deficit reduction plan that Fiscal Commission co-chairs Erskine Bowles and Alan Simpson issued in late 2010 established as a basic principle that deficit reduction should not increase poverty or widen inequality. The Ryan plan charts a radically different course, imposing its most severe cuts on people on the lower rungs of the income ladder.”

    Blog Post: Ryan Budget Gets 69 Percent of Its Cuts From Low-Income Programs [Updated]

  • Blog Post: Obama, Ryan Miles Apart on Non-Defense Discretionary Funding
    April 8, 2014
    “One especially stark difference between the recent budgets from President Obama and House Budget Committee Chairman Paul Ryan is in non-defense discretionary (NDD) funding, the budget category that includes key investments in the economy, such as education and basic research; support for low-income families, such as Head Start and housing assistance; and essential services that Americans expect, such as veterans’ medical care and food safety inspections.  Obama and Ryan are roughly $1 trillion apart on total NDD funding over the next decade.”
  • Blog Post: Ryan Budget a Path to Adversity for Millions — and Maybe for the Economy Too
    April 9, 2014
    In his latest US News & World Report post, CBPP Chief Economist Chad Stone reprises analysis showing that House Budget Committee Chairman Paul Ryan’s “Path to Prosperity” budget is, in fact, as CBPP President Robert Greenstein described it, a path to adversity for tens of millions of Americans.  He then discusses why it also could be a path to adversity for the economy as a whole.
  • Blog Post: Chairman Ryan’s Response to the Center’s Analysis Doesn’t Hold Water
    April 10, 2014
    “House Budget Committee Chairman Paul Ryan took exception to our finding that 69 percent of the non-defense spending cuts in his new budget come from programs for people with low and moderate incomes.  But he makes no attempt to refute our calculations, and his response both defies logic and conflicts with his own budget and even his own words.”
  • Blog Post: Chairman Ryan’s Obfuscation: Part 2
    April 10, 2014
    “In his attempt to deflect our finding that 69 percent of his budget cuts come from programs targeted on Americans of limited means, Ryan says that Medicaid would receive over $3 trillion during the coming decade under his budget and that its costs would grow in all years after 2016.  [This blog post explains] what his too-clever-by-half response conceals.”
  • Statement: Robert Greenstein, President, On the House Passage of Chairman Ryan’s Budget Plan
    April 11, 2014
    “House Budget Committee Chairman Paul Ryan’s “Path to Prosperity” budget, which the House has now passed, is anything but that for most families and individuals.  Affluent Americans would do quite well, but for tens of millions of others, the Ryan plan — which gets 69 percent of its cuts from programs that serve people of limited means — is a path to more adversity.”

Greenstein: We Need a Stronger EITC and Minimum Wage

March 5, 2014 at 12:19 pm

On last night’s PBS “NewsHour,” CBPP President Robert Greenstein discussed the President’s new budget and issues that both sides of the aisle might agree on.  In this exchange with host Judy Woodruff and James Capretta from the Ethics and Public Policy Center, Greenstein explained why we should strengthen both the Earned Income Tax Credit (which the President proposes expanding for childless workers) and the minimum wage:

JUDY WOODRUFF: [W]hat do you see in here, Jim Capretta, where you see the two parties could work together?

JAMES CAPRETTA: Well, there’s one possibility. I don’t know how much of a chance, but around the Earned Income Tax Credit, there’s more bipartisan support for that kind of an approach to wage supplements than it is for just redistributing through taxing and spending.

[The] Earned Income Tax Credit is a program that Bob knows well that provides additional support directly through the federal tax system to people that are actually working, have a job, and it boosts their income directly to the proportion of earned wages. It’s the kind of thing that could be built on.

It’s better than doing, frankly, a minimum wage increase, certainly of the size the president has pushed….

ROBERT GREENSTEIN: I think we need to do both the minimum wage increase and the Earned Income Credit.

You can’t do the whole thing through the Earned Income Credit. It puts too much strain on government finances. You can’t do the whole thing through the minimum wage. That puts too much strain on employers.

But I think Jim is right that there is a potential here, for even another reason. The president is proposing to increase the Earned Income Credit for workers not living with minor children. We already have a sizable Earned Income Credit for families with kids.

When you look at these young workers or middle-aged workers who are single individuals, if they’re paid low wages, they’re the one group whom the federal government today literally taxes into poverty or deeper into poverty. That should be something that both parties can say, that’s not a good idea. And both parties want to encourage these people to work more, and the Earned Income Credit does that.

We’ve documented the importance of extending the EITC to childless workers and why we need a stronger minimum wage.

Watch the interview below:

Greenstein on President Obama’s New Budget

March 4, 2014 at 1:47 pm

CBPP President Robert Greenstein has issued a statement on the President’s fiscal year 2015 budget:

President Obama’s new budget is a solid blueprint that would reduce deficits, alleviate poverty, and boost investment in areas needed for future economic growth, such as infrastructure, education, and research.

On the deficit front, the budget confounds the recent predictions of some pundits by including, rather than eschewing, deficit reduction.  While offsetting the costs of its new investment initiatives by cutting spending and scaling back tax breaks, the budget goes further by reducing deficits enough to put federal debt as a share of gross domestic product (GDP) on a declining path.  With about $1.7 trillion in deficit reduction over the next ten years (excluding the savings from winding down operations in Afghanistan), the budget would reduce the debt-to-GDP ratio to 69 percent in 2024.

As previously announced, the budget doesn’t include the proposal in the President’s budget last year to switch to the “chained Consumer Price Index” in calculating annual cost-of-living adjustments in Social Security and other programs.  It does, however, retain the $400 billion in Medicare savings in last year’s budget, including about $60 billion in Medicare beneficiary reductions (through increases in premiums for affluent beneficiaries, increases in some co-payments, and changes affecting Medigap coverage).

On the poverty-fighting front, the budget features an important proposal to boost the Earned Income Tax Credit (EITC) for low-income workers who are not living with minor children — a measure many analysts across the political spectrum believe holds considerable promise for reducing poverty and also increasing labor-force participation, including among young minority men.  Single low-wage men and women are the one group of Americans whom the federal tax code literally taxes into — or deeper into — poverty.  The Obama proposal, which builds on a long bipartisan tradition of support for the EITC, would substantially address that problem.

No one should declare this budget “dead on arrival,” for two reasons.  First, under the Murray-Ryan agreement of last year, both parties have agreed on the total amount available for appropriated programs this year, and the Obama budget includes program-by-program requests that hit that total.  Consequently, the budget’s appropriations requests will likely play an important role as the Appropriations Committees craft the annual funding bills this year.

Second, with no big budget showdowns or deadlines looming this year, 2014 likely won’t be a year of significant budgetary action beyond the appropriations bills.  But 2015 may well be.  Policymakers likely will seek to negotiate another budget deal to ease the scheduled sequestration budget cuts for 2016 and beyond and also may consider tax reform and other measures.  Both the new Obama budget and the budget proposal that House Budget Committee Chair Paul Ryan will unveil in a few weeks will offer dueling frameworks for a year-long debate on where fiscal and program policy should go, in advance of larger decisions next year.

The vision reflected in the Obama budget will provide a much sounder course than the one we’ll likely see in the Ryan budget.  That’s because the Obama budget curbs lower-priority spending and unproductive special-interest tax breaks in order to make investments that the nation needs for future prosperity, reduce poverty and better reward low-paid work, and give many young children a better chance of success, while reducing mid-term and long-term deficits at the same time.

Don’t Forget What Happened When Obama First Proposed Chained CPI

February 24, 2014 at 3:17 pm

Most media coverage of the President’s decision not to include the “chained CPI” for cost-of-living adjustments in Social Security and other retirement programs in his 2015 budget has left out a key point to understanding the announcement.

When the President was preparing his 2014 budget early last year, Republican leaders strongly urged him to include the chained CPI, and he did.  But House Budget Committee Chairman Paul Ryan then failed to put the proposal in his budget, which included no Social Security savings (and fewer Medicare savings over ten years than the Obama budget).

More importantly, Representative Greg Walden, chair of the National Republican Congressional Committee, called the President’s chained CPI proposal “a shocking attack on seniors,” attacked the President for “trying to balance the budget on the backs of seniors,” and signaled that Republican challengers in 2014 would attack Democratic incumbents over it.  He and other Republicans also noted that their budget — the Ryan budget — did not include the proposal.

To be sure, House Speaker John Boehner distanced himself from Walden’s remarks.  But the message was clear: after urging the President to include the chained CPI in his budget, Republicans left it out of theirs, and various Republican challengers were likely to use it to portray Democrats as seeking to cut Social Security (and themselves as the defenders of Social Security beneficiaries).

Coming on top of the Ryan budget, the Walden statement had a toxic impact on congressional Democrats.  That combination may have been one of the most important political developments that ultimately brought us to the Administration’s announcement.

President’s Budget to Propose Building on Murray-Ryan Agreement

February 20, 2014 at 5:25 pm

The White House announced today that it will recommend $56 billion in additional discretionary funding for 2015 above the level contained in the budget deal that Senate Budget Committee Chair Patty Murray and House Budget Committee Chair Paul Ryan negotiated in December.  The additional funding, which would be evenly split between defense and non-defense, would be fully offset by cuts in mandatory programs and revenue increases.

The Administration’s proposal does not undermine the Murray-Ryan deal, but builds on it.  The Administration’s detailed budget proposal will include line-by-line and program-by-program funding levels that fully adhere to the budget agreement’s 2015 funding caps, which are now the law.  Thus, Congress will have a detailed Administration proposal for how to allocate discretionary resources consistent with the budget agreement.

But the President is also outlining his vision of how to improve upon the budget deal, through a proposal that would invest more in areas important to long-term economic growth — like infrastructure, research, and education — and pay for those investments through entitlement and tax reforms.  He would do so in a way that is consistent with the approach used in the Murray-Ryan agreement, which provided some sequestration relief, offset by a combination of other spending cuts and increased revenues in the form of higher user fees.

The bulk of the sequestration relief in the recent budget agreement comes in 2014.  Its sequestration relief for 2015 is very modest, doing little to mitigate sequestration’s bite.  Under the deal, discretionary funding (adjusted for inflation) will fall in 2015, with funding for non-defense discretionary programs shrinking to 16.6 percent — or one-sixth — below the 2010 level in inflation-adjusted dollars (see graph).

The Administration’s new proposal would provide additional funding for discretionary programs in 2015, while adhering to the framework of the Murray-Ryan deal in key respects.  First, it would split sequestration relief evenly between defense and non-defense, reflecting the fact that sequestration applies equally to defense and non-defense programs.

Second, like the Murray-Ryan deal, it offsets the cost of the funding boost with savings over ten years, shifting the deficit reduction to later years when the economy is expected to be stronger — and when budget cuts should have far less, if any, impact in slowing growth and costing jobs.  By replacing appropriations reductions scheduled for 2015 with what would presumably be permanent changes in entitlement programs and the tax code, the proposal would likely increase the long-term deficit reduction.  It therefore reflects the judgment, shared by most economists and fiscal policy analysts, that the economy would benefit from less deficit reduction in the near term and more in long run.

The proposal does differ from the Murray-Ryan framework in one noteworthy respect.  That agreement included no changes to the tax code; it relied solely on user fees for its revenues.  The Administration’s new proposal, by contrast, would raise some tax revenue by reforming some tax expenditures and closing loopholes.  This overcomes a limitation of the Murray-Ryan deal that heavily constrained the sequestration relief it could provide.

The Administration proposal highlights that the funding levels under current law will deprive the nation of worthy investments in such areas as infrastructure, research, and education, and it urges Congress and the nation to evaluate whether the benefits of higher spending in those areas outweigh the costs of cutting certain programs and raising certain revenues.

Chained CPI Makes Sense Only Under Certain Conditions

February 20, 2014 at 3:04 pm

We’ve long said that the chained Consumer Price Index (CPI) for cost-of-living adjustments in Social Security and other retirement programs could be a reasonable part of a comprehensive deficit-reduction package — but only under certain conditions.  In the absence of those conditions, the President’s decision not to include the chained CPI in his fiscal year 2015 budget is a sound one.

Many economists believe the official CPI overstates inflation and view the chained CPI as a more accurate measure of overall inflation (although not of inflation faced by the elderly).  On average, the chained CPI grows about 0.25 to 0.3 percentage points more slowly than the official CPI.

Using the chained CPI to index Social Security and other programs would mean that benefits would be a bit lower than under current law.  The proposal in the President’s fiscal year 2014 budget would have reduced benefits for future Social Security beneficiaries by an average of 1 to 2 percent over the course of their retirement.

Since Social Security benefits are modest, and since most beneficiaries have little other income, no one should propose a cut in benefits casually.  We’ve said time and again that the chained CPI is worth considering only if two crucial conditions are met:

  • First, measures to protect the very old and low-income people must be an essential part of the chained CPI; the Administration included these features in last year’s proposal.
  • Second, even with such protections, the chained CPI must be part of a larger budget package that shrinks long-term deficits significantly and does so in a fair and balanced manner by including measures that raise significant revenue in a progressive manner.

This second condition remains well out of reach.  That’s why CBPP President Robert Greenstein stated when the President’s budget was released last year, “Politically speaking, I had thought the White House should not put these concessions [including the chained CPI] in the budget, as distinguished from offering them in negotiations if and when Republicans agreed to dedicate substantial savings from curbing tax credits, deductions, and other preferences (known as ‘tax expenditures’) to deficit reduction.”

Greenstein also predicted, “I am concerned that Republican leaders will adopt the cynical approach of labeling the chained CPI an ‘Obama proposal’ they are willing to accept but only as part of a package that raises little or no revenue and, thus, does not force them to make any sizeable compromises of their own.”  Such an approach would fail to share sacrifices in an equitable manner.

Since that’s exactly what has happened, removing the chained CPI proposal from the budget — while remaining willing to consider it in the context of broader budget negotiations — is an appropriate response.

Deficit-Neutral Tax Reform Would Be a Mistake

July 12, 2013 at 9:33 am

Given the nation’s long-term fiscal pressures, revenue increases need to make a significant contribution to deficit reduction, alongside cuts in spending for mandatory programs.  Deficit-neutral tax reform would, as a result, be highly problematic, as we explain in a new paper.  Here’s an excerpt:

Tax reform generally refers to a process through which policymakers would scale back the vast collection of tax deductions, credits, and other preferences, known collectively as “tax expenditures.” … If tax reform were revenue neutral, it would use up the politically achievable savings from tax expenditures to lower rates without producing any deficit reduction, and it would effectively take revenue off the table for deficit reduction for years to come.  It likely would take major mandatory programs off the table as well, because many policymakers would justifiably resist changes in those programs — which could significantly affect millions of people with relatively modest incomes — if they were not accompanied by revenue increases from reforming inefficient tax expenditures that disproportionately benefit the most affluent households.

Aggravating these risks, some prominent proponents of deficit-neutral tax reform have set, as a key tax-reform goal, a sharp cut in the top income tax rates.  The House-passed budget resolution of this spring, for example, calls for setting a goal of cutting the top individual and corporate rates to 25 percent and offsetting that cost through unspecified tax-expenditure savings.  The House rate-cut goals would dig a $5.7 trillion revenue hole over the next ten years, the Urban Institute-Brookings Institution Tax Policy Center (TPC) has estimated, with the tax benefits heavily skewed to people at the top.  The task of finding anything close to that amount in tax expenditure savings would be politically herculean, given the popularity of such major and expensive tax expenditures as the mortgage interest deduction, the charitable deduction, and many others.

Consequently, policymakers would have strong incentive to use budget gimmicks and optimistic revenue forecasts (including the dubious tactic of “dynamic scoring”) to reach the stated goal of deficit-neutral tax reform.  Thus, a purportedly revenue-neutral tax reform bill might be revenue neutral only cosmetically (or might be revenue-neutral only over the first ten years and lose revenue after that due to the use of “timing-shift” gimmicks).  If so, tax reform could wind up raising less revenue than current law over the long term, making long-term deficits worse.

Revenue-neutral tax reform also could lengthen the amount of time that policymakers leave the “sequestration” budget cuts in effect by making it harder to craft a balanced, long-term budget agreement to replace them.  Sequestration, with its equal defense and nondefense cuts, was designed to bring bipartisan negotiators to the table in search of a broader agreement that would include both mandatory spending cuts and revenue increases.  Revenue-neutral tax reform could doom that prospect as well.

Click here for the full paper.

How Much More Deficit Reduction Do We Need Over the Coming Decade?

July 10, 2013 at 11:26 am

In February, CBPP estimated that $1.5 trillion in deficit savings would stabilize the debt (so it stops rising as a percent of the economy) over the latter part of the decade.  But, the new, more optimistic budget projections the Congressional Budget Office (CBO) released in May lowered deficits over that period by hundreds of billions of dollars.  As a result, we now project that policymakers could stabilize the debt over the coming decade with about $900 billion in further deficit savings.

Our new analysis also notes that, while stabilizing the debt is the minimum goal, the improved fiscal outlook may make a more ambitious goal more attainable — one that includes temporary measures to strengthen job creation now while also taking sufficient steps to place the debt ratio on a downward path in the latter years of the decade.

As our analysis explains:

[C]urrent budget projections are considerably less daunting than they were a few years ago, as a result of CBO’s less pessimistic economic and technical assumptions and the spending and tax legislation that the President and Congress have enacted over the past 2½ years.

In this analysis, we also find that, in addition to the amount of deficit reduction to achieve over the coming decade, the timing of that deficit reduction is important.  In particular, the amount of deficit reduction occurring during the latter part of the decade — and thus the resulting trajectory of the debt-to-GDP ratio at the end of the decade — is a key factor for assessing how various deficit-reduction policies will affect the outlook over the longer term, when the nation’s fiscal challenges will be greater.

If policymakers do not change current policies, the debt ratio will fall to 72 percent of GDP by 2018.  After 2018, the debt ratio will start rising again because of the ongoing retirement of the baby-boom generation and the long-term pressure of health care cost growth (even after accounting for the recent slowdown).  The debt ratio would exceed 75 percent of GDP by 2023 and continue rising gradually after that.

We estimate that $900 billion in deficit reduction that starts in 2019 could halt the rise of debt through the end of the decade, stabilizing the debt ratio at 72 percent of GDP.  Stabilizing the debt ratio is the minimum appropriate fiscal policy during normal economic times because an ever-rising debt ratio is ultimately unsustainable. When times are good, the debt ratio should decline, to reduce the share of the budget devoted to interest on the debt and to allow for necessary debt increases during recessions, wars, and other crises.

Our analysis examines five scenarios of possible deficit-reduction amounts and paths that policymakers could follow.  Based on those scenarios, we reach two sets of conclusions:

  • Our estimate that $900 billion in deficit reduction could stabilize the debt ratio in the decade’s final years assumes sequestration does not continue beyond 2013.  If, instead, policymakers maintain it, it will generate another $1.1 trillion in savings, producing a debt ratio of 71 percent in 2023.  Yet, the debt ratio will still start rising at the end of the decade, partly because sequestration savings fade over time.

    As a result, it would be far better — for budget policy, for the economy, and for the long-term debt trajectory — to replace sequestration with a balanced package of savings that phases in more slowly initially and more rapidly in the latter years of the decade.  The debt trajectory during the latter part of the decade will generally be more important for the nation’s long-term fiscal health than the amount of deficit reduction over the next ten years.

  • For any given amount of net 10-year deficit reduction, policymakers would be well-advised to include an up-front jobs package to help address the current high rates of unemployment and under-employment.  By offsetting the cost of the jobs package over the decade, policymakers also could ensure that the gross 10-year deficit reduction would be greater and the debt ratio would have a better long-term trajectory.

For instance, while a $1.5 trillion ten-year deficit-reduction package would shrink the debt to 69 percent of GDP by 2023, the debt ratio would fall more rapidly in 2023 and produce better results in later decades if the package included $250 billion in temporary, up-front job-creation measures, offset by $250 billion in permanent revenue increases and program savings that continued to reduce the deficit beyond the next ten years.

With the debt ratio falling over the next few years under current policies, additional deficit reduction that is more back-loaded — and thereby targeted to reduce the deficit more in the final years of the decade, when the economy is expected to be stronger and when the debt ratio is projected to start rising again under current policies — would have a greater positive impact on the nation’s long-term fiscal outlook.

Click here for the full report.

A Tale of Two Bills

June 27, 2013 at 4:34 pm

Families that need housing assistance have been hit hard in recent years, as sequestration has deepened cuts to low-income housing and community development programs that the President and Congress made in 2011 and 2012.  Recognizing the harm caused by mindless sequestration cuts, both chambers of Congress approved their own 2014 budget plans earlier this year to replace it.  But, the funding bills that the House and Senate appropriations committees approved today for the Department of Housing and Urban Development (HUD) show that their overall budget plans are miles apart — and families that need assistance have a lot at stake in how this gap is bridged.

Recent cuts have fallen on rental assistance and community development programs (see chart).  In 2013, for example, total funding for HUD’s three major rental assistance programs — the Housing Choice Voucher, Public Housing, and Section 8 Project-Based Rental Assistance programs — is $3.6 billion, or nearly 10 percent, below the 2010 level, adjusted for inflation.  Meanwhile, states and localities have lost $1.2 billion (28 percent) in annual Community Development Block Grant (CDGB) funding and $1.0 billion (51 percent) in annual HOME funds.

Because of these cuts, tens of thousands of low-income families won’t get the housing assistance they need to avoid homelessness and other hardships.  While policymakers have recognized sequestration’s harm, however, the House and Senate proposals couldn’t be more different.

The House budget plan replaces sequestration with even deeper cuts in non-defense discretionary programs — including low-income housing and community development programs — while increasing funding for defense.  In line with this plan, the House HUD funding bill would lock in cuts in housing voucher assistance for more than 100,000 low-income families — nearly all of which include seniors, people with disabilities, or children — and cut funding for public housing, CDBG, and HOME to historically low levels, as we recently explained.

In contrast, the Senate HUD funding bill rolls back sequestration cuts and restores badly needed assistance to low-income families and communities (although funding in some areas would remain well below the 2010 level).  It can protect these critical safety net programs for low-income families because it is part of the Senate’s more balanced, yet fiscally responsible approach to addressing budget challenges.

The Senate bill would, for example:

  • Restore funding for most of the up to 140,000 Housing Choice vouchers that will be lost under sequestration.  (The President’s budget request for voucher renewals, which provides $400 million more for voucher renewals than the Senate bill, would restore all of the voucher assistance cut by sequestration.)
  • Roll back the deep cuts in homeless assistance, restoring Emergency Solutions Grant funding, for example, to help local communities prevent homelessness and provide housing assistance to homeless individuals and families.
  • Provide more adequate funding to operate and repair public housing, while also reversing the sequestration cuts in CDBG, HOME, and other HUD programs.