History Lessons from Past Deficit-Reduction Packages

November 16, 2011 at 12:42 pm

Compromise didn’t use to be a dirty word.  With revenue increases a major sticking point in the congressional “supercommittee’s” effort to cobble together a budget plan, we looked at past deficit-reduction packages and found that revenue increases were part of nearly every major package in the 1980s and 1990s, under Democratic and Republican administrations alike.

Revenue increases dominated the 1982 and 1984 packages, offsetting part of President Reagan’s large tax cuts of 1981, and were a major component of the 1987, 1990, and 1993 packages (see graph).

A key aim of fiscal sustainability is a stable or declining ratio of debt to Gross Domestic Product (GDP).  To achieve that, we need to get deficits in the medium term down to about 3 percent of GDP.   But under current policies, the deficit will be about 4 percent to 5 percent of GDP for the next decade even after the economy recovers and after we have phased down operations in Iraq and Afghanistan.

So we need to cut the deficit by 1 percent to 2 percent of GDP in the coming decade — an amount that rivals the biggest deficit-reduction efforts of the past.  The amount of deficit reduction for later decades will need to be even larger.  Meanwhile, the nation faces a graying population and continued demands on government in the areas of defense, homeland security, veterans’ care, infrastructure, and other needs.

Given the size of that challenge, and the need to phase in any entitlement changes gradually, the next round of deficit reduction must include substantial revenue increases.  In fact, simply letting the Bush tax cuts expire at the end of 2012 — or paying for those provisions that we choose to extend — would essentially stabilize the deficit for the next decade, buying us time to adopt gradual changes in entitlement programs and figure out the best ways to control health-care costs without jeopardizing coverage.

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CBO Ranks “Repatriation Holiday” Dead Last in Job Creation

November 16, 2011 at 11:18 am

Congressional Budget Office Director Douglas W. Elmendorf told the Senate Budget Committee yesterday that, of 13 policy options for creating jobs, increased unemployment benefits ranks first in terms of jobs created per dollars of federal cost.  That’s not surprising, given that jobless people are severely cash constrained and would quickly spend most of any incremental increase in cash and that, in turn, would lead to higher demand and job creation.

By sharp contrast, CBO ranks a repatriation holiday last for job creation of the 13 options analyzed.  CBO notes that U.S.-based multinational corporations are flush with cash and, even though a holiday would make shareholders richer (leading to some additional spending), “CBO expects that the effect on output would probably be positive but much smaller than the net cost to the government.”

Specifically, CBO estimates that over the 2012-13 period, a repatriation holiday would boost employment by at best the equivalent of one full-time-job for every $1 million in federal costs.

CBO Ranks “Repatriation Holiday” Dead Last in Job CreationIncreasing unemployment benefits could, by CBO’s estimates, be up to nineteen times more efficient than a repatriation tax holiday at boosting employment, in terms of federal cost per full time equivalent job created.  Another relatively efficient option for boosting job creation is reducing employees’ payroll taxes, which CBO estimates would be up to nine times more cost-efficient than a repatriation tax holiday.

Congress should carefully study the CBO report.  It’s the latest clear sign that lawmakers should ignore the multi-million dollar repatriation holiday lobbying campaign.  It is also a stark reminder of the urgency for Congress to act on additional unemployment benefits and the payroll tax holiday before year end.

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Helping States Level the Sales Tax Playing Field

November 15, 2011 at 5:08 pm

As I’ve pointed out, many states have taken steps in the past few years to chip away at the problem of uncollected sales taxes on Internet purchases, which cost states billions of dollars each year.  In an essay in today’s Wall Street Journal, I explain why and how Congress can solve this problem once and for all.

Sales taxes are always legally due on an item purchased from an Internet (or catalog) merchant if the same item would be taxable if bought in a local store.  But the Supreme Court has held that states can’t compel the seller to collect the tax from a customer unless it has a physical presence — store, warehouse, or sales force — in the customer’s state.

States have been pursuing a three-track strategy to address this issue.

  • They have tried to encourage consumers to pay the sales taxes they owe, such as by putting a payment line on the state income tax form.
  • They have enacted and tried to enforce laws that make clear that if a company has a sales representative or subsidiary in a state, this constitutes a physical presence in that state, obligating the company to charge sales tax.
  • They have worked together, by agreeing to the Streamlined Sales and Use Tax Agreement, (SSUTA), to harmonize and simplify their sales tax rules in hopes that Congress would enact a law allowing them to require at least large and mid-sized Internet and catalog retailers to charge sales tax, regardless of physical presence.  (The Supreme Court made clear that Congress could do this.)

These state initiatives are finally spurring action by Congress.  Three bills now before Congress would empower states to collect the taxes due on Internet sales.  Most recently, on November 9 Senator Mike Enzi (R-WY) and four other Republican and five Democratic co-sponsors introduced the Marketplace Fairness Act.

Read more…

BBA Roundup

November 15, 2011 at 4:04 pm

We’ve issued two new papers on proposals for a constitutional balanced budget amendment.

  1. Program Cuts Under a Balanced Budget Amendment: How Severe Might They Be?
  2. Here’s the opening:

    The constitutional balanced budget amendment that the House is expected to consider this week could force Congress to cut all programs by an average of 17.3 percent by 2018.  If revenues are not raised (the House-passed budget resolution assumes no increase above current-policy levels) and all programs are cut by the same percentage, Social Security would be cut $184 billion in 2018 alone and almost $1.2 trillion through 2021; Medicare would be cut $117 billion in 2018 and about $750 billion through 2021; and Medicaid and the Children’s Health Insurance Program (CHIP) would be cut $80 billion in 2018 and about $500 billion through 2021.

    If policymakers limit cuts to some programs, other programs would have to be cut more deeply.  For instance, if Social Security is exempted from cuts needed to meet the balanced budget mandate, other programs would have to be cut by nearly one-fourth, on average.

  3. Balanced Budget Amendment Highly Ill-Advised for Addressing Long-Term Fiscal Problems
  4. It begins:

    The balanced budget amendment to the U.S. Constitution that the House will consider this week would be a highly ill-advised way to address the nation’s long-term fiscal problems.  It would threaten significant economic harm while raising a host of problems for the operation of Social Security and other vital federal functions.

    The economic problems are the most serious.  By requiring a balanced budget every year, no matter the state of the economy, the amendment would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses.  That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.


Many States Still Taxing the Incomes of Working-Poor Families

November 15, 2011 at 2:36 pm

The successful bipartisan effort over the past two decades to reduce the state income taxes of working-poor families came to a standstill in 2010, our latest survey finds.

Since 1990, the number of states levying income taxes on poor, two-parent families of four has dropped by well over a third.  But no new states exempted working-poor families from income taxes in 2010, and in most of the states where such families still pay income taxes, they saw their income taxes increase.

States’ lack of progress in 2010 means that last year:

  • Fifteen of the 42 states with an income tax levied the tax on working, two-parent families of four with incomes at or below the poverty line, which is about $22,300 for a family of that size (see table).
  • In a number of states, these working-poor families faced income tax bills of several hundred dollars — $498 in Alabama, $292 in Hawaii, $238 in Georgia, and $234 in Oregon.  That’s a lot of money for a family struggling to make ends meet.
  • Several states continued to tax families living in severe poverty.  Alabama, Georgia, Illinois, Montana, and Ohio taxed the income of two-parent families of four earning less than three-quarters of the poverty line, or about $16,700.
  • In nine states, a family of three where the employed person works full-time at the minimum wage owed income tax in 2010:  Alabama, Georgia, Hawaii, Illinois, Mississippi, Missouri, Montana, Ohio, and Oregon.

Since the recession hit, the severe drop in revenues has limited states’ ability to reduce the taxes of poor families.  Nonetheless, doing so should remain a priority.

It can help to make work pay for these families, offsetting work-related costs like transportation and child care expenses.  And research suggests that increasing the after-tax incomes of poor families can boost their children’s chances of success in the classroom and ultimately in the workforce.

Unfortunately, a few states enacted measures over the last two years that raise taxes on low-income families.  As we’ll explain tomorrow, these measures hurt not only low-income families, but also the broader economy.