Update on House Budget Process Bills

January 25, 2012 at 4:12 pm

We’ve updated our analyses of several bills that would make harmful changes in the congressional budget process in order to reflect their passage by House committees.  The full House is expected to vote on these and other budget process bills beginning next week.

On “Territorial” Taxation Issue, Don’t Ignore U.S. Workers’ Interests

January 24, 2012 at 4:41 pm

“We don’t have an obligation to solve America’s problems,” an Apple executive told the New York Times in connection with Apple’s decision to make the iPhone in China.  “Our only obligation is making the best product possible.”

To be sure, Apple is a business and, as such, it seeks to maximize profits for its shareholders — not improve the living standards of average Americans.  Unfortunately, policymakers tend to forget that basic reality when they are debating policy, especially tax policy.

Take the major effort by a number of corporations to convince Congress to adopt a “territorial” tax system, which would set U.S. taxes on corporate foreign profits at zero. Proponents claim it would make the United States more “competitive” with other countries, implying that we’re all in this together.  But although a territorial tax system might be good for corporate shareholders, it might not be good for America’s workers. The Congressional Research Service’s Jane Gravelle told Congress last year that it:

would make foreign investment more attractive.  That would cause investment to flow abroad, and that would reduce the capital which workers in the United States have, so it should reduce wages.  A capital flow reduces wages in the United States [and] increases the wages abroad.

Congress needs to remember the Apple executive’s statement when considering the territorial proposal.  The interests of U.S. multinationals merit consideration, but so, too, do the interests of average Americans.

Taking a Pass on “Pass-Through” Income Would Cost Kansas

January 24, 2012 at 4:30 pm

Owners of large corporations, well-heeled law firms, and big investment funds would pay no taxes on millions of dollars in income under Kansas Governor Sam Brownback’s plan to abolish the income tax on business earnings that are “passed through” to owners, rather than taxed at the corporate level.

Small Businesses That Employ Other People Generate Less Than One-Third of Pass Through IncomeThe plan would make Kansas the first state in the nation to exempt pass-through income from an otherwise broad-based income tax.  Owners of a business entity normally pay personal income taxes on pass-through income.

Proponents say the plan would be a boon to small businesses and encourage job creation.  But when my colleague Michael Mazerov and I took a closer look, we found that much of the benefit would flow to large corporations and to investment funds and other entities that have few or no employees and are unlikely to create more jobs.

Small, job-creating businesses would get much less.  Small businesses that spend at least $10,000 on labor — the small-business employers that the governor claims to be targeting — generate only 28 percent of all pass-through income, according to a recent U.S. Treasury Department study (see graph).

Moreover, the state budget would take a big hit.  The plan likely would cost Kansas $266 million a year or more in lost revenue, when schools and other vital services that bolster the state’s economy and create a better foundation for future economic growth are still reeling from deep cuts.

The plan also would make the tax code less fair.  For example, a wage earner would pay more in taxes than a pass-through business owner, even if they have the same earnings.

And exempting pass-through income could create new incentives for tax avoidance, such as prompting some taxable corporations to reorganize as pass-through entities purely to take advantage of the tax break.

With unemployment still high and balancing the Kansas budget still a challenge, this is the wrong road for Kansas to take, or for other states to follow.

Reischauer “Strongly Opposes” House Bill to Inflate Cost of Federal Credit Programs

January 24, 2012 at 1:48 pm

We’ve issued an analysis explaining the serious problems with a bill before the House to change the federal accounting of direct loans and loan guarantees, which would artificially inflate the cost of federal credit programs.  Meanwhile, Robert Reischauer, former director of the Congressional Budget Office and outgoing president of the Urban Institute — and a CBPP board member — sent the following letter to Rep. Chris Van Hollen (D-MD) explaining his opposition to the bill.

The Honorable Chris Van Hollen                                           January 23, 2012

1707 Longworth H.O.B.

Washington, D.C. 20515

Dear Representative Van Hollen,

I am writing in response to your request for my views on the desirability of adopting “fair value accounting” of federal direct loan and loan guarantee costs in the budget as proposed in H.R. 3581.  I strongly oppose such a change.

The accounting convention used since enactment of the Credit Reform Act of 1990 already reflects the risk that borrowers will default on their loans or loan guarantees.  Under Credit Reform, costs already are based on the expected actual cash flows from the direct loans and guarantees (with an adjustment to account for the timing of the cash flows).  H.R. 3581 proposes to place an additional budgetary cost on top of the actual cash flows.  This additional cost is supposed to reflect a cost to society that stems from the fact that, even if the cash flows turn out to be exactly as estimated, the possibility that the credit programs would cost more (or less) than estimated imposes a cost on a risk-averse public.  Under the proposal, this extra cost would be the difference between the currently estimated cost of direct loans and loan guarantees to the federal government and the cost of those loans and loan guarantees if the private market were providing them.

A society’s aversion to risk may be an appropriate factor for policymakers to take into account in a cost-benefit assessment of any spending or tax proposal but adding a cost to the budget does not make sense. Nor is it clear that the cost of societal risk aversion should be based on individual or institutional risk which is what the private market reflects. Inclusion of a risk aversion cost for credit programs would be inconsistent with the treatment of other programs in the budget (many of which have costs that are at least as uncertain as the costs of credit programs–for instance, many agriculture programs and Medicare)–and would add a cost element from a traditional cost-benefit analysis without adding anything based on the corresponding benefit side of such an analysis. It would also make budget accounting less straightforward and transparent.

H.R. 3581 represents a misguided attempt to mold budget accounting to facilitate a cost-benefit analysis, with the result that neither the budget nor the cost-benefit analysis would serve their intended purposes well.

I would be glad to discuss these issues in more detail if you would like.

With best wishes.

Robert D. Reischauer

Proposed Changes in Congressional Budget Process Wouldn’t Help Fiscal Discipline

January 24, 2012 at 1:27 pm

House committees this week will consider a series of changes to the congressional budget process that proponents — including Budget Committee Chairman Paul Ryan (R-WI)— say will promote fiscal responsibility; the full House is expected to vote on these bills beginning next week.  We have produced analyses of four of the bills thus far, explaining why they would mark a step backward for the budget process:

  • The Legally Binding Budget Act (H.R. 3575) would bar Congress from considering annual appropriations bills — or any other legislation that would affect the budget — until Congress has passed, and the President has signed, a joint budget resolution for the fiscal year.  This change would likely delay the consideration of appropriations bills and could lead to efforts to combine major legislation into a single massive annual budget bill and bypass most congressional committees.
  • The Biennial Budgeting and Enhanced Oversight Act (H.R. 3577) would move the federal budget from an annual to a biennial cycle and make other changes in the budget process.   While proponents claim that biennial budgeting will lead to more thoughtful and deliberative budgeting, its disadvantages are likely to outweigh its advantages.
  • The Baseline Reform Act (H.R. 3578) would require the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) to assume, in constructing budget “baselines” that project funding levels for future years, that future annual appropriations will remain frozen indefinitely, with no adjustment for inflation.  This change could weaken fiscal discipline and would establish an unrealistic and misleading benchmark against which to measure changes in funding.
  • The Budget and Accounting Transparency Act (H.R. 3581) would require CBO and OMB to add an extra amount to the budgetary cost that they show for federal loan and guarantee programs, based on the additional amount that private lenders would charge if they, rather than the federal government, issued the loans and loan guarantees.   This proposal is not based on any claim that current estimates of the federal outlays and receipts associated with credit programs understate the actual federal costs of those programs.  Quite the contrary, the legislation would artificially inflate the programs’ estimated budgetary cost and overstate federal deficits.