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NAW News

Budget, Spending, Fiscal Crisis

- May 2013

The “Fiscal Cliff” legislation:

Congress began its work in January, as is so often the case, by completing unfinished business from the previous year. This year, as the new 113th Congress prepared to convene in January, the “fiscal cliff” legislation necessary to prevent trillions of dollars in tax increases remained unfinished business. Also still unknown was the final fate of the spending “sequester” – the automatic across-the-board spending cuts enacted in the “Budget Control Act” in 2011 set to take effect at the beginning of 2013.

In a rare New Year’s Day session – following an equally rare New Year’s Eve session, and with the new Congress scheduled to convene just two days later – the House and Senate finally passed the American Taxpayer Relief Act (ATRA), the so-called “fiscal cliff” legislation. However, the legislation that prevented our dive off the fiscal cliff in fact provided no soft landing. The legislation raised about $600 billion in new revenue and extended the patchwork quilt of dozens of expired and expiring provisions that complicate our tax code. (See separate staff report for specifics of the ATRA tax provisions.)

More important even than what was enacted into law on January 1st was the unfinished business; specifically, the ATRA did absolutely nothing to address the out-of-control spending responsible for creating the fiscal crisis. The President had claimed for months that he would insist on a “balanced” approach to addressing the spiraling debt; that spending cuts would accompany the tax increases he demanded Congress enact. We were originally promised $3 of spending cuts for every $1 in tax increases. Then the President’s ratio slid to $2-to-$1. Then it got worse.

According to the Congressional Budget Office, the bill he signed into law raised more than $10 in new taxes for every dollar of spending cuts. The legislation delayed for two months the $110 billion in automatic spending cuts that were scheduled to take effect in January, and the only spending cuts in the bill were an insignificant $50 billion to offset both that delay and the so-called “doc fix” to prevent a reduction in Medicare reimbursement payments to health care providers.

With enactment of the ATRA, the 112th Congress finally adjourned, and the first session of the 113th Congress convened. And Washington turned its attention to the next in the endless series of fiscal issues: the sequester now set to take effect in March, the debt limit extension, enactment of another Continuing Resolution to keep government funded after March 31st, and the Budgets that both houses of Congress and the President are required by statute to produce.

The Sequester:

The President proposed, and the Congress agreed to, the sequester as part of the Budget Control Act in August 2011. The sequester, irrational and indiscriminate across-the-board spending cuts, half from defense and half from non-defense discretionary programs, were designed not to actually take effect, but to provide an incentive for both Parties to agree to a more rational debt reduction proposal.

The President and his allies assumed that Pro-defense Republicans would object strongly to the sequester defense cuts, and that they would be joined in an effort to avert the sequester by Democrats who opposed the domestic spending cuts. However, fiscal hawks argued that government spending had to be restrained and that the sequester should be allowed to take effect as the only sure way to get spending cuts.

As March 1st approached, the President and Senate Democrats proposed legislation that would replace the $85 billion spending cuts with a combination of half spending cuts and half tax hikes, apparently assuming that pro-defense Republicans would accept the tax hikes in order to avert the defense cuts. To the surprise of the Administration and pro-social spending Democrats, Congressional Republicans made it clear that they were fully prepared to have the sequester’s across-the-board cuts take effect, and that they would agree to no more tax increases given the $600 billion in tax hikes enacted in January.

Countering the Democrat’s tax-hike-and-spending cut proposal, Senate Republicans offered legislation that would have given the President broad authority to modify the sequester’s across-the-board cuts so the Administration could make the spending reductions more rational and less arbitrary.

The President rejected the Senate Republican offer to give him the discretion to make careful and rational spending cuts, then initiated a publicity campaign to raise public opposition to the sequester: they cancelled White House tours, threatened to close thousands of air traffic control towers, and announced that children’s health vaccines would be unavailable. A White House report said that “Unless Congress acts by March 1st, a series of automatic cuts—called the sequester—will take effect that threaten hundreds of thousands of middle class jobs, and cut vital services for children, seniors, people with mental illness and our men and women in uniform.”

As the New York Times reported on February 27th, “… White House strategists say they believe that a constant drip of bad news will emerge in Congressional districts across the country in the weeks ahead, generating negative headlines and, they hope, putting Republicans on the defensive for their refusal to raise taxes.”

The Administration even invoked the sequester in response to the very disappointing March jobs numbers released by the Labor Department the first Friday in April. White House Press Secretary Jay Carney argued in a press briefing that the sequester spending cuts were “at least partly to blame” for the lackluster jobs growth, and White House Council of Economic Advisors Chairman Alan Krueger released a statement that said, “It is important to bear in mind that the March household and payroll surveys are the first monthly surveys to look at employment since the beginning of sequestration.”

As of this writing, the sequester has been in effect for six weeks. There are many months remaining in this year’s sequester, but so far policy makers are concluding that the President over-reached in his prediction of immediate dire consequences of the mandated spending cuts – cuts that amount to less than 2% of the discretionary spending budget.

Debt Limit and Continuing Resolution:

Failure to extend debt limit ceilings when our borrowing reaches its statutory cap could result in default on our debts and a further lowering of our credit rating, and failure to enact legislation to fund government agencies and departments could result in a government shutdown. Given the critical importance of these must-pass measures, spending bills and debt limit extensions have recently been highly controversial measures, with fiscal conservatives in the House and Senate attempting to attach spending and debt reduction provisions to the legislation.

Given that recent history, both measures were enacted earlier this year with surprisingly little attention or controversy.

In January the House passed a short-term (three month) debt limit extension with only one political provision attached: the bill provided that if either house of Congress failed to pass a budget by mid-April (when they are statutorily required), the members of that House would cease to be paid. On January 31st the Senate, which had not in fact passed a budget resolution for four years, passed the debt limit legislation, and sent it to the President for his signature.

Economic forecasters predict that we will again reach our statutory debt limit sometime this summer or early fall, and no one believes passage of another extension will be as clean or easy as the last one.

With almost as little controversy as the debt limit, both the House and Senate in March passed a Continuing Resolution funding government through the September 30th end of Fiscal Year 2013. And as with the debt limit, Fiscal Year 2014 spending bills should now be addressed by both houses of Congress. Few if any individual spending bills are actually expected to pass, so we will most likely see another continuing resolution as the beginning of FY 2014 approaches. And as with the debt limit, there is no assurance that a CR will again pass with so little controversy.

Budgets:

Statute requires that the President submit his annual budget to Congress in February, that each house of Congress pass a budget resolution, and that a conference report on the budget be agreed to by both houses of Congress by mid-April.

House: The House has consistently passed budget resolutions as required, and this year again passed House Budget Committee Chairman Paul Ryan’s (R-WI) plan on a close-to Party line vote. The House budget reduces the federal deficit by $4.6 trillion over ten years, producing a balanced budget in 10 years and eventually returning to budget surpluses, and limits the growth in Federal spending to 3.4 percent. The Ryan budget also provides a blueprint for revenue-neutral comprehensive tax reform, with details to be worked out by the Ways and Means Committee. Perhaps most important, the House budget calls for significant and structural entitlement reform. According to the Bipartisan Policy Center, the Ryan budget would reduce federal debt to 56 percent of GDP, well below the 77 percent CBO forecasts under current law.

Senate: The Senate budget – its first in four years – unfortunately took a very different approach. The Senate budget claims to reduce the deficit by $1.8 trillion over 10 years; but that number is not only a fraction of the House budget’s $4.6 trillion, it is also a deceptive number achieved by manipulating baselines and spending caps. The Senate budget increases spending by 5 per cent a year, culminating in a spending level of $5.7 trillion in 2023, which Forbes described as “the highest government spending in one year by any government in world history, almost double Bush’s $2.983 trillion in 2008.”

While calling for new stimulus spending and overstating its deficit reduction, the Senate budget just as blatantly understates its tax increases: The Murray budget admits that it calls for $975 billion in tax increases, but fails to include in that number the $100 billion in revenue to pay for new stimulus spending, and the $480 billion in revenue to replace the scheduled sequester cuts. In fact, the Murray budget would raise about $1.5 trillion in new tax revenue.

Consistent with its tax-and-spend provisions, the Murray budget fails to even modestly address entitlement reform, proposing no restraint in the growth of the programs which are the drivers of our debt and deficits.

Remarkably, the Senate budget seems not to even acknowledge the possibility that government spending should be restrained, but sees endless opportunities for tax hikes. Wasteful spending in the Senate budget is not a reference to federal outlays that should be reduced, but to taxpayer income that the government has not yet taxed. In the 114-page document the word “wasteful” is used 16 times – 15 of them used to describe wasted opportunities to increase taxes.

As NAW wrote in our letter to Congress opposing the Senate budget, “While the Senate has been widely and correctly criticized for its four-year failure to fulfill its statutory obligation to adopt a budget, the budget resolution before the Senate this week is notable primarily because the country would be better off without it.”

President: The President’s budget was finally sent to Congress on April 10th – more than two months late and after each house of Congress had already passed its own budget resolution. While it was submitted too late to be taken into consideration as Congress debated their budgets, the President’s budget nonetheless provides a clear picture of his priorities: an ever-growing government; unrestrained spending, deficits and debt; a budget that never balances; insignificant attention to out-of-control entitlement spending; and ever rising taxes that punish wealth and success.

A few provisions of the President’s budget are worth mentioning:

Deficit reduction: $1.8 trillion in deficit reduction, but a full third of that – $600 billion – would come from tax increases.

More spending: Increased spending on infrastructure, education and non-defense research.

Chained CPI: The President proposes changing the way inflation is measured in calculating entitlement benefits. While opponents of any entitlement reform have aggressively attacked the chained CPI proposal, entitlement reform advocates argue that this change does not seriously address the need for structural reform of the program. Moreover, since chained CPI also affects the way tax provisions are indexed to inflation, anti-tax activists argue that it is in fact a tax increase, and the Budget affirms that assessment since it claims the change to chained CPI would raise $230 billion in new revenue.

Tax increases in the President’s budget include:

  • Buffett rule – imposing a minimum 30% effective tax rate on income over $1 million;

  • A cap on itemized deductions at 28%, a $529 billion tax increase on high rate payers;

  • A cap on tax-deferred retirement plans, based on what amount would be required to produce income of $205,000, which for 2013 would be $3 million (numbers do not appear to be indexed to inflation); and

  • A new cigarette tax – raising the federal tax from 94 cents to $1.95 a pack.