|Long-Term Deficit Crisis is Closer Than You Think||Health Care Reform Presents Opportunity for Major Entitlement Reforms, as Momentum Builds||Administration Releases FY 2010 Budget Details||Administration Proposes Program Cuts||Obama Calls for Curbs on Tax Havens to Raise Revenues|
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Track 1- Economic Stimulus:
Track 2 - Completion of '09 Appropriations:
Track 3 - FY 2010 Budget:
Track 4 - Stabilizing the Financial, Housing, and Auto Sectors (Ongoing)
Last week GAO (the Government Accountability Office) released an update of its long-term deficit scenario. In a nutshell, the deficit crisis is quickly growing worse. According to GAO's data:
(These projections are based on GAO's "Alternative Fiscal Policy Simulation," under which: expiring tax provisions are extended, except for expiring provisions in the Recovery Act and after 2019, revenue is assumed to be brought back to its 40-year historical average of 18.3%; and Medicare spending is based on projections assuming that physician payments are not reduced as specified under current law.)
Consider the consequences of these scenarios. By 2025, all federal revenues will be consumed by the rapidly growing costs of Medicare, Medicaid, Social Security and interest payments--the rapid growth being the result of rapidly rising health care costs and retirement of the baby boomers. This leaves no room in the budget for defense, veterans, education, health research, children's programs, law enforcement, education....in other words, all of the functions of government.
Why the rapidly deteriorating outlook?
The other stark reality is that the longer we as a nation fail to address the deficit crisis, the more difficult and costly the solutions become.
A key -- but often overlooked -- detail of this year's budget process, is that Congress' FY 2010 Budget Resolution requires that the costs of health care reform be fully "offset," that is, paid for by entitlement spending cuts and/or tax increases.
There are two legislative routes to enactment of health care reform:
1. If Congress moves a free-standing health care reform bill, the Budget Resolution requires that the bill must be "deficit neutral." (This path to enactment would effectively require 60 votes in the Senate to overcome a filibuster by bill opponents.)
2. If Congress moves health care reform as part of this year's Budget Reconciliation bill, the Budget Resolution requires that the bill's bottom line must reduce the deficit by one billion dollars. (This path to enactment would effectively require 51 votes in the Senate since budget reconciliation bills are filibuster-proof.)
The key point here is that either path to enactment of health care reform requires that the costs of expanding health care coverage must be offset by spending cuts and/or tax increases.
The Administration, in its FY 2010 budget request, has proposed that the costs be paid for by: (1) reforms in Medicare and Medicaid; (2) limiting tax deductions by upper income earners; and (3) tax enforcement measures.
From a long-term fiscal responsibility perspective, the fact that the projected growth rate of Medicare and Medicaid expenditures may be significantly trimmed as part of health care reform is significant.
Medicare and Medicaid are growing much faster than the economy itself and are -- more than any other federal programs -- the source of dire long-term fiscal projections. For example, Medicare, Medicaid, and Interest on the Debt will consume all federal revenues by 2035.
Consequently, this year's budget process framework may lead to some tough decisions on reforming Medicare and Medicare. In the short-run these reforms will contribute to expanding health care coverage, and in the long-run have the possibility of contributing in a significant way to making Medicare and Medicaid costs sustainable.
One caveat though: the Budget Resolution requires only that the new costs of health care coverage be fully offset. That does not necessarily mean that the pre-existing unsustainable growth of Medicare and Medicaid will be successfully brought under control.
CBO has published an extensive book of health care deficit reduction options. Among the more significant options for reducing Medicare and Medicaid expenditures are the following (dollars reflect 10-year budget savings in billions of dollars) -- (Note: items are included in this list for illustrative purposes only and do not constitute an endorsement by the Concord Coalition)
In other health reform news, momentum continues to build behind comprehensive health care reform as the President hosted a meeting today with representatives from hospitals, the insurance industry, medical device and pharmaceutical companies, labor and physician groups. The groups set forth an objective to reduce the annual health care spending growth rate by 1.5 percentage points for each of the next 10 years. Some of the changes the coalition is working on, and explained in their fact sheet, include:
The Administration today released the remaining details on its FY 2010 budget request. Economic assumptions will not be revised from the Administration's February estimates until the Mid-Session Review is released in July. However, the new budget documents reflect worsening deficit estimates, which now stand at $1.841 trillion for FY 2009 ($89 billion more than February) and $1.258 trillion for FY 2010 ($87 billion more than February). Budget highlights:
- For taxpayers with incomes over $250,000, the Bush tax cuts would be allowed to expire. The top rate would jump from 35% to 39.6%; the tax on capital gains would jump from 15% to 20%, and the tax on estates worth more than $3.5 million would be taxed at the current rate of 45%. Also, the earnings of hedge fund managers would be taxed as normal income, rather than the lower 15% capital gains rate. These provisions would generate more than $600 billion in revenues over 10 years.
- For all other taxpayers, the budget would extend the Bush tax cuts--including the 10, 15, 25, and 28 percent brackets, the child tax credit, and marriage penalty relief--at a cost of more than $2 trillion over 10 years (including debt service). The budget would also make permanent the stimulus bill's annual $800 per family tax cut at a cost of $504 billion over 10 years (paid for by new "cap & trade" revenues -- see below).
The Obama Administration's FY 2010 budget details includes a volume called "Terminations, Reductions, and Savings" that proposes to trim 121 programs by $17 billion in FY 2010. A few important points to keep in mind about the proposed cuts:
Examples of the budget cuts released this week include:
President Obama's FY 2010 budget outline released in February called for $353 billion over 10 years in "other revenue changes and loophole closers." Of that amount, $210 billion (over 10 years) was to come from "implement(ing) international enforcement, reform deferral, and other tax reform policies."
Last week, the Administration released details on their plans to reduce overseas tax deferrals. Obama called his proposal a "down payment" on broader tax reform. (Earlier this year, Obama tapped former Fed Chair Paul Volcker to lead a tax reform panel charged with "closing loopholes, streamlining the law and generating revenue." The report is due December 4th of this year.)
A major component of the revenue raising plan is to tighten "deferral" rules--which allow multinational corporations to delay paying taxes on income earned overseas. The changes to deferral would raise $60 billion.
Proponents of limiting "deferral" argue that it gives companies a major incentive to mover operations overseas. However, business groups and many in Congress argue that the availability of deferral simply allows U.S. companies to compete on a level playing field with foreign competitors who are not taxed by their home nations on income earned abroad.
Other proposed tax provisions include:
In addition, the tax package would use some of the new revenues to permanently extend the R&D tax credit, costing $75 billion over 10 years.