Off the Charts Blog | Center on Budget and Policy Priorities

The day President Obama signed an extension of assistance to states to preserve jobs in education and health care — August 10 — Mississippi Governor Haley Barbour said that accepting the money would make his state worse off, since Mississippi would have to take up to $75 million in state funds away from law enforcement, mental health, and other needs to qualify for the federal funds.

The Wall Street Journal used Barbour’s view to buttress an editorial arguing that the President and Congress “are determined to keep pushing strung-out state governments to take one more fix.”

But yesterday, Governor Barbour issued a statement saying that Mississippi will, in fact, take the money, having realized that the state wouldn’t have to shift state funds to qualify after all.

It’s telling that one of the new law’s harshest critics, who at first accused the federal government of “hijacking state budgets,” has reconsidered his position on accepting the funds in light of the facts.

The funding is an extension of aid Congress originally provided in last year’s Recovery Act.  It will protect a fragile economy by helping avert more layoffs of teachers, health care workers, and others that would send a new wave of job losses throughout the economy and damage prospects for recovery.  As the nonpartisan Mississippi Economic Policy Center noted, “the legislation represents an important boost for the state’s economy and its people in these difficult times.”

The Recovery Act has helped prevent a terrible economic situation from being even worse.  This month’s extension recognized that the state aid was going to run out before states — which have been hit by a record drop in revenues plus an increased need for services — got back on their feet.  Because of these Recovery Act measures, more people are working; that’s the most important fact of all.

“[T]he nation’s budget outlook over the coming decade has not changed materially in the five months since [the Congressional Budget Office] released its previous projections,”  according to CBO’s update of the federal budget released today.  The estimated deficit for the fiscal year that will end on September 30 is $1.342 trillion — just 2 percent ($27 billion) smaller than CBO’s March estimate.

Although CBO’s new “baseline” projection shows slightly higher deficits over the 2011-2020 period, this merely reflects the arcane rules that govern the baseline rather than a real change in the outlook.  In July Congress appropriated an additional $46 billion for fiscal year 2010 — primarily for the wars in Iraq and Afghanistan, but also for responding to the Gulf oil spill, relief for the earthquake in Haiti, and other purposes.  This action was widely anticipated; in its budget submission in February, the Administration requested $47 billion in supplemental funding.  Even though the supplemental appropriation for 2010 does not alter the likely level of spending in the future, CBO is required to assume in its baseline that the additional spending will continue each year.

The budget baseline is also unrealistic in other ways.  The baseline rules require CBO to assume that current laws will remain unchanged, even though current laws differ from current policies in many respects.  For example, CBO generally must assume in its baseline that temporary tax cuts will expire on schedule, even if Congress is very likely to extend them.  For this reason, we and many other budget-watchers regularly adjust the CBO baseline to allow for continuation of the 2001 and 2003 tax cuts, deferral of scheduled reductions in Medicare’s physician payment rates, and troop reductions in Iraq and Afghanistan, among other things.

CBO estimates that the recently enacted health reform legislation (the Affordable Care Act) will reduce the deficit by $179 billion over the 2011-2020 period.  In March, CBO estimated that the law will reduce the deficit by $143 billion over the 2010-2019 period.  The new estimate is the same as the old one except that it covers a different ten-year period.  It excludes an estimated $6 billion increase in the deficit for 2010 and adds an estimated $30 billion reduction in the deficit for 2020.

Rep. Paul Ryan and his budget plan are getting a lot of respectful attention in the press.  (See here and here.) New York Times columnist Matt Bai suggests Ryan’s plan might represent “the starting point in what could be a serious negotiation about entitlements and spending.”  But a careful look at the plan shows it to be a radical blueprint to shift massive resources from the broad majority of Americans to the very wealthy, while leaving the budget on an unsustainable course for decades.

Tax cuts for the wealthy; tax increases for the middle class. The Ryan plan would give the most affluent households a new round of large tax cuts by reducing the top income tax rates; eliminating income taxes on capital gains, dividends, and interest; and abolishing the corporate income tax, the estate tax, and the alternative minimum tax.  To offset some of the cost, the plan would place a new consumption tax on most goods and services, which would increase taxes on most low- and middle-income families.

The tax cuts for those at the very top would be historic.  The richest 1 percent of Americans would see their taxes cut in half, and households with incomes above $1 million would receive a $502,000 tax cut each year, on average, according to the Urban Institute-Brookings Institution Tax Policy Center.

In contrast, about three-quarters of Americans — those with incomes between $20,000 and $200,000 — would face tax increases.  Households with incomes between $50,000 and $75,000 would pay an extra $900, on average.

Debt would grow for decades despite massive program cuts. The Ryan plan would partially privatize Social Security and replace Medicare and most of Medicaid with vouchers whose value would erode over time, leaving low-income families, seniors, and people with disabilities less and less able to buy adequate health coverage on their own.  Yet despite these huge cuts, the plan fails to achieve its advertised goal of fiscal responsibility because of its enormous tax cuts for the rich.  Federal debt under the plan would rise over the next several decades to unsustainable levels far in excess of the size of the nation’s economy.

In March, after the Tax Policy Center and the Center on Budget and Policy Priorities demonstrated that revenues under the Ryan plan were inadequate to rein in rising debt, Rep. Ryan wrote, “If needed, adjustments can be easily made to the specified [tax] rates to hit the revenue targets and maximize economic growth.”  More than five months later, we’re still waiting for Rep. Ryan to explain how he proposes to make his numbers add up.

No state has been hurt more by the recession than Michigan, where unemployment tops 13 percent and home values have plummeted in many areas.  So a few days ago, when many communities across the state voted on ballot questions to raise money for local services, the result could only be a disaster for supporters of higher taxes, right?

Wrong.

Voters approved 86 percent of the 623 ballot proposals calling for higher taxes or fees, according to an analysis by the Center for Michigan, a respected non-partisan policy institute.

They supported 96 percent of requests to renew expiring taxes or reverse previous tax cuts, according to the report.  Even proposals for new tax increases passed at a 69 percent rate.

What’s going on? Well, once again the voters showed that they get it.  While “tax revolts” often get the headlines, voters know that the services they depend on — like roads, schools, libraries, and fire protection — cost money.  And they’re prepared to pay to maintain those services as part of a balanced approach to addressing the worst recession of our times.

In contrast, closing budget shortfalls entirely by cutting services hurts people in need, threatens the economic recovery by reducing overall demand, and fails to make needed investments in the future.

Today we sat down with Paul Van de Water, senior fellow, to discuss how Social Security helps to reduce poverty.

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Paul, you recently authored a paper that found that Social Security lifts almost 20 million Americans out of poverty. Who are these Americans that are helped?

Here’s the breakdown: Social Security lifts more than 1 million children, more than 5 million adults, and 13 million elderly Americans out of poverty.

From those numbers, it’s clear that – despite what some might think – Social Security helps other age groups, in addition to the elderly. How many children receive Social Security payments?

Over 3 million children receive their own benefits as dependents of retired, disabled, or deceased workers. And about 6 million children – that’s about 8 percent of all children in the country –  live in families that receive income from Social Security.  As I said earlier, of those about 1 million are lifted out of poverty by Social Security.

Is Social Security effective at reducing poverty across the country or only in a few states?

Social Security reduces poverty dramatically in every state in the nation.  Without Social Security, the poverty rate for those aged 65 and over would EXCEED 40 percent in almost all of the states.  With Social Security, the elderly poverty rate in the large majority of states is less than 10 percent.  In California alone, Social Security lifts over 1 million elderly people out of poverty.  In our own DC-Maryland- Virginia region, the program keeps more than 400,000 elderly from being poor.

What’s the bottom line?

Social Security has made a very large contribution to reducing poverty, and cutting Social Security benefits could substantially increase poverty, particularly among the elderly.

You can download a podcast of this conversation here or on iTunes.