October 20, 2014

Efforts to Reduce Structural Deficits Must Mean More Than Rigging the Scorecard

Public concern about the nation’s rising debt burden is beginning to have an impact on the legislative agenda.  

That much was evident as the House passed a scaled back “extenders” bill (H.R. 4213) on May 28 by a slim margin. Originally estimated to have a gross cost of $192 billion and a net deficit increase of $134 billion, the final bill carried a gross cost of $114 billion and a net deficit increase of $54 billion.

While this cost reduction was a victory for House Democrats -- mainly Blue Dogs -- who objected to the deficit impact of the original bill, much of it was accomplished by timing shifts rather than a change in policy. For example, shortening the extension period of certain unemployment benefits “saved” about $8 billion and sunsetting an increase in the Medicare physician reimbursement rate (the “doc fix”) after 19 months “saved” almost $40 billion. 

It remains to be seen whether concerns about the immediate deficit, which is largely driven by economic conditions, will be translated into hard choices on the long-term structural deficit. 

In that regard, it is worth noting that the policies extended in the extenders bill carry large long-term costs whether they become visible now or in the future -- or whether they are exempted from PAYGO.

To begin with, there is the package of “temporary” tax breaks that Congress has created over the years and routinely extends when they expire. These are the “extenders” that give the bill its name. All of them are subject to PAYGO but because they are sunset after just one year, their official cost is only $32 billion. However, if one assumes that Congress has every intention of extending them indefinitely - and there is no reason to think otherwise - then the full cost would be around $500 billion.

The Medicare “doc fix” is another example of a short-term policy extension with large long-term costs. With certain limitations, the PAYGO law exempts this policy adjustment for five years, but not beyond, at a cost of about $88 billion. A permanent solution will obviously cost a great deal more. Yet one would never get a sense of this pending balloon payment to Medicare doctors by looking at the current extenders bill.

Of course, all of this ignores the cost of extending many other policies, with even bigger costs, that Congress plans to take up later in the year. Specifically, the 2001 and 2003 tax cuts are scheduled to expire at the end of this year. President Obama has recommended that most of these tax cuts be made permanent at a cost of $2.2 trillion over 10 years. Congress seems inclined to go along.

Then there is the cost of reforming the Alternative Minimum Tax (AMT), which Congress has chosen to “patch” on an annual basis rather than acknowledging the problem and paying for a permanent solution. As with the “doc fix” the “AMT patch” was given a limited (2-year) exemption in the new PAYGO law. That, however, does not change the underlying cost of reform.

Congress must eventually come up with hundreds of billions of offsets for a long-term deficit-neutral solution or add hundreds of billions to the debt. For context,  the Congressional Budget Office scored the 10-year AMT patch in the President’s budget as costing $577 billion.

As the extenders bill now moves to the Senate, much of the debate will be about provisions that the House dropped and the offsets it retained. There are legitimate, and conflicting, concerns with each. From a fiscal standpoint, however, it will be important to keep an eye not so much on the official score but on the cost of maintaining the policies that Congress votes to extend. Concern about deficits must mean more than simply rigging the scorecard.