Congress should reject hard caps on discretionary spending

July 26, 2010

Hard caps on nondefense domestic discretionary spending will not significantly reduce long-term deficits. That’s because the biggest factors contributing to long-term deficits are primarily the 2001 and 2003 Bush tax cuts and the costs associated with the wars in Iraq and Afghanistan – not domestic discretionary programs. According to the Center on Budget and Policy Priorities:

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including associated debt-service costs. 

Domestic discretionary spending is the portion of federal spending included in annual appropriations bills to fund a broad range of national priorities, including education, environmental protection, law enforcement assistance, food safety, nutrition, medical research through the National Institutes of Health and more. Nondefense domestic discretionary spending makes up about 18 percent of all federal spending.   

Earlier this year, Senators Jeff Sessions and Claire McCaskill introduced an amendment to the Federal Aviation Administration bill that would have imposed hard caps on all nondefense domestic discretionary appropriations bills for the next three years. According to the Center on Budget and Policy Priorities, the Sessions-McCaskill amendment would have required cuts totaling nearly $30 billion in fiscal year 2011 or five percent below the President’s budget request. In fiscal year 2012, the Sessions-McCaskill amendment could have required cuts totaling almost $100 billion; a 15 percent cut below the President’s budget request.

In addition to these spending cuts, the Sessions-McCaskill amendment also required a two-thirds supermajority vote in the Senate to change the hard caps on discretionary spending, with no exceptions for any changes in the national economy or other factors that could make reconsideration of the caps necessary. If the Sessions-McCaskill amendment were adopted, a minority of only 34 out of 100 senators could prevent Congress from raising the spending caps to meet a future economic challenge or emergency.

Placing hard caps on domestic discretionary spending would also impede efforts to raise revenues to reduce long-term federal deficits. That’s because in past deficit reduction agreements, multi-year discretionary spending caps were linked to revenue and entitlement savings. The Session-McCaskill amendment would result in deep cuts to domestic discretionary spending without securing any savings from other parts of the budget, including revenue increases. Simply imposing new caps on discretionary spending places all of the burden for reducing the deficit on one part of the budget and ignores how much tax cuts have contributed to deficits. The Center on Budget and Policy Priorities notes that the Bush-era tax cuts from 2001 and 2003 account for $1.7 trillion more in deficits from 2001 to 2008, and $3.4 trillion more over the 2009-2019 period.

Fortunately, the Sessions-McCaskill amendment was not adopted. However, it is likely that there will be continuing attempts throughout the remainder of this year to attach this amendment to individual appropriations bills or to a continuing appropriations bill later this year. A balanced approach to deficit reduction is needed — one that looks at both fair and appropriate spending cuts as well as the elimination of selective tax cuts that are contributing to long-term deficits.

-Steve Francisco

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President’s budget should target spending to speed recovery, reduce debt

January 31, 2010

The budget that President Obama will send to Congress on February 1 must address two seemingly conflicting goals: he must propose additional short-term spending in order to help the nation’s economy recover so that we can reduce the long-term national debt. Spend more now to reduce debt later? Yes, and here’s why.

With the nation’s unemployment rate above 10 percent, with a record number of home foreclosures and business bankruptcies, and with more Americans falling on hard times, it is clear that the path to economic recovery will be long and difficult. The federal government must continue to take temporary and targeted steps to boost the economic recovery, such as extending unemployment benefits, food stamps, and improvements in the Child Tax Credit and the Earned Income Tax Credit. These actions have the biggest bang for the buck because they put money into the hands of struggling individuals and families who will spend those dollars in their local communities.

Congress should also extend the Recovery Act’s provisions that increase the federal share of funding for Medicaid and state fiscal stabilization funds, which primarily support education. The $2.6 billion in federal Medicaid and stabilization funds that Minnesota received in 2009 was significant in a difficult year, and prevented many Minnesotans from losing health care and avoided deeper cuts in education. But Congress must act promptly, because current stimulus funds will run out by the end of 2010 while the states will still face deep budget shortfalls. Extending the federal contribution for Medicaid will help Minnesota and other states avoid making even deeper budget cuts that will hurt vulnerable Minnesotans, cost jobs and put a damper on the economic recovery.

Strengthening the economy through temporary and targeted spending will put us in a stronger position to reduce annual deficits and our long-term debt. Let’s be clear: stimulus spending is not the primary contributor to our budget deficit. The Center on Budget and Policy Priorities issued a paper in December that found the biggest contributing factors to the increase in large federal deficits were the tax cuts enacted under President George W. Bush, the wars in Iraq and Afghanistan and the economic downtown that has led to an unprecedented drop in tax revenues.

Combining short-term spending to revitalize our economy with tax policies that increase revenue will strengthen our fiscal position and help reduce deficits. The President’s budget calls for allowing the temporary 2001 and 2003 tax cuts aimed at the top income categories to expire.  Congress should also heed the President’s call to restore the federal estate tax and to make permanent the 2009 parameters of the law, which would still provide a dramatic tax cut compared to 2001 levels and only 0.2 percent of estates would have any estate tax liability, according to the Tax Policy Center.

By temporarily targeting spending now to pave the way for economic recovery, and enacting fair and sensible tax policies, we will be in a better position to reduce our national debt in the long term.

-Steve Francisco

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Report: Don’t blame stimulus for deficit

January 6, 2010

The federal stimulus bill’s impact on the federal deficit is being overblown, according a new analysis by the national Center on Budget and Policy Priorities.

“[T]he tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years,” according to the Center’s analysis, published December 16.

The report analyzes American Recovery and Reinvestment Act spending and how it contributes to annual federal budget deficits from FY 2009 to FY 2019. It also estimates the deficit contributions of:

  1. the economic downturn
  2. the TARP/Freddie Mac/Fannie Mae bailout
  3. Bush-era tax cuts
  4. the Iraq/Afghanistan war costs

Here’s what it found. In each of the Recovery Act’s three peak spending years, FY 2009 to 2011, the biggest contributors to the deficit are the economic downturn and Bush-era tax cuts. It also finds that the Recovery Act’s impact on federal deficits is largely limited to those three peak spending years, while the impact of the economic downturn and the Bush-era tax cuts continue to be significant out into the future.

To quantify the economic downturn’s impact on the deficit, the Center used 2009 analysis by the Congressional Budget Office.

The recession began in late 2007. Housing foreclosures and unemployment rose while the stock market fell. Credit tightened. People had less money to spend. In early January, before the new administration took office, the projected FY 2009 federal deficit already topped $1 trillion.

The Recovery Act spent significant sums to preserve and create jobs, help states avoid damaging cuts to health care and other critical services, and revive the economy. Still, it accounts for only 17 percent of the annual deficit for its three peak spending years. Over a 10-year span, the Recovery Act contributes to less than 10 percent of the annual deficits.

The Center’s analysis raises an interesting if less discussed aspect of the Recovery Act: the significant share of the total cost that went to a short-term fix for the Alternative Minimum Tax (AMT). The total Recovery Act tab is $787 billion, and $70 billion or 9 percent is for a one-year AMT “patch”.

A short digression: The AMT was passed 40 years ago to keep top income earners from escaping all taxes by using multiple deductions and loopholes. AMT creates a parallel tax structure, with a broader income definition and fewer deductions. It also has a lower tax rate. Taxpayers pay the AMT amount if it is larger than their traditional tax calculation.

The AMT is not indexed for inflation. More importantly, the 2001 and 2003 federal tax cuts substantially lowered the taxes owed under traditional tax calculations without adjusting the AMT. Therefore, without a “patch”, more upper-middle-income taxpayers would pay the AMT.

In its deficit analysis, the Center on Budget excluded the $70 billion AMT patch from the Recovery Act’s price tag (lowering it to $717 billion). The Center reasoned that the patch would have passed regardless – patches have been passed each year since 2001 – and the Recovery Act was simply an easy legislative vehicle.

Instead, the AMT patch costs are included with the deficit costs of the Bush-era tax cuts. Leaders understood the future AMT problem at the time they passed the tax cuts, but they chose to expand the AMT’s reach in an effort to lower the costs of the tax cut bill. These costs are now showing up in the form of the AMT patch.

For more on the AMT issue, see the Minnesota Budget Project’s 2008 candidate briefing paper.

-Scott Russell

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First look at Obama’s budget

February 27, 2009

President Barack Obama’s first preliminary budget was delivered to Congress yesterday. A 140-page summary has been posted online by the Office of Management and Budget. Full details on the President’s budget are expected in April.

Some of the highlights in the President’s preliminary budget include:

  • Cutting the projected budget deficit in half by the end of his first term – from $1.75 trillion (equal to more than 12 percent of gross domestic product) to $533 billion. The major elements of his plan to accomplish this include reducing U.S. involvement in Iraq and allowing some of the Bush tax cuts to expire in 2011.
  • A $634 billion “down payment” on reforming the health care system to be financed through a combination of savings in health care expenditures and limiting the value of itemized deductions for families with incomes of $250,000 or more.
  • Making permanent the new “Make Work Pay” tax credit of $400 for individuals and $800 for married couples that was included in the recently-passed American Recovery and Reinvestment Act (ARRA). The tax credit will cost $66 billion next year and is currently set to expire at the end of 2010. The President proposes to pay for extending the tax credit by enacting a new cap-and-trade system that would require companies in certain industries to purchase allowances to cover their level of carbon emissions.

Unlike recent Presidential and Congressional budget proposals, the Obama budget eliminates the gimmicks that made future deficits appear artificially low. For example, the President’s budget does not ignore the continued costs of the wars in Iraq and Afghanistan, the expense of fixes to the Alternative Minimum Tax that are passed each year, or the need to respond to future natural disasters.

The President’s budget proposal is the first round of the budget-making process. Congress will begin hearings shortly on the President’s proposal and will ultimately craft its own Congressional budget resolution. The final Congressional budget resolution will likely move forward in April or May and will establish limits on the actual appropriations or spending bills that will be considered during the late spring and into summer.

We will, of course, continue to closely monitor all federal budget developments and will keep you posted on further developments.

- Steve Francisco

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State fiscal aid key part of federal economic recovery package

January 16, 2009

The incoming Obama administration and Congressional leaders have been working on an $825 billion economic recovery package that was released by the House yesterday. The package is in two pieces and is expected to move quickly through the House Ways and Means and Appropriations committees next week before going to the House floor for a vote. The bill is likely to be considered under a “closed rule” that limits amendments. In the Senate, the package will be considered by the Finance and Appropriations Committees before coming to a vote in the full Senate in early February. Congressional leaders hope to have a conference agreement passed by both the House and Senate before members go home for the President’s Day recess on Feb. 13.

One of the key features of the package is expected to be federal fiscal aid to states in the form of a temporary increase in the federal Medicaid matching rate. Currently, the federal government pays half of Minnesota’s Medicaid costs.  The House bill includes $87 billion in additional matching funds to the states through the end of FY 2010, which would help states maintain Medicaid coverage for low-income individuals and families even as they face budget shortfalls.

However, some in Congress, including Senate Minority Leader Mitch McConnell, R-KY, are now suggesting that any federal aid to states should be in the form of loans instead of grants, which would dramatically reduce the ability of the aid to stimulate the economy. In fact, some states are prohibited by their state constitutions or state law from taking loans. At a time when nearly all of the states, including Minnesota, are running cumulative budget shortfalls of more than $350 billion due to the nationwide economic downturn, it is imperative that the federal government provide aid through grants, not loans. Continued health care for low-income Minnesotans is at stake.

Stay tuned for more analysis in the days ahead.

-Steve Francisco

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Record federal deficit forecast for 2009; tough choices ahead

August 14, 2008


** If you are looking for information on Minnesota’s current state budget deficit for 2009 -
check out our blog entry on the announcement of the $4.8 billion deficit. **

The federal deficit will hit a record $482 billion in 2009, according to Jim Nussle, director of the Office of Management and Budget. Factors behind the red ink cited by Nussle include the costs of the wars in Iraq and Afghanistan, tax rebates and a weak economy. The new deficit estimate is sharply higher than the administration’s $407 billion estimate made last February. The higher deficit will also mean increased interest payments on the growing national debt, which now exceeds $9 trillion.

This latest bad economic news comes as Congress prepares for important votes next year on whether to make temporary tax cuts from 2001 and 2003 permanent after 2010. It is becoming increasingly clear that making the tax cuts permanent is simply unaffordable. In fact, making the tax cuts permanent, along with adjusting the Alternative Minimum Tax, would cost $4.4 trillion over ten years…adding to our national debt that now exceeds $9 trillion.

- Steve Francisco

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