November 28, 2014

Washington Budget Report: June 21, 2011

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Good News in Vote to Cut Ethanol Subsidy

In an encouraging vote last week, a bipartisan Senate majority approved a repeal of the ethanol tax credit. Although the repeal is not expected to become law, the 73-27 vote raised the possibility of further bipartisan agreement on the elimination of such “tax expenditures” to reduce federal deficits.

Tax expenditures are government subsidies that increase the deficit, but they tend to receive far less public attention and congressional scrutiny.

Yeas and nays on the ethanol subsidy were nearly evenly divided among Democrats and Republicans. Why would reducing a tax expenditure receive such broad support? Because it raises revenue without increasing marginal tax rates (so Republicans can support it) and it cuts spending without eroding programs that favor lower-income households (so Democrats can accept it).

That’s why the President’s fiscal commission -- and many other bipartisan groups -- have recommended reducing tax expenditures to help achieve fiscal sustainability.

Budget Talks Aim High

Vice President Joe Biden says the budget talks he chairs are “getting down to the hard stuff” and aiming to curb deficits by $4 trillion over the next decade or so. That's ambitious goal which would be hard to achieve with the limited options that the group reportedly has been discussing so far.

Picking up the pace of its work, the group of key lawmakers and top administration officials met three times last week and plans at least three more meetings this week, starting today. The talks are aimed at producing an agreement to raise the federal debt limit, which the Treasury says must be done by Aug. 2 to avoid default.

A small bipartisan “gang” of senators has also continued to meet to discuss a broad, long-term fiscal reform plan based largely on recommendations the President’s bipartisan fiscal commission issued half a year ago.

Late last week the International Monetary Fund cut its forecast for U.S. economic growth and expressed concern that American political consensus “remains missing” on “a comprehensive and balanced set of specific measures” to underpin a credible “medium-term (fiscal) adjustment plan.”

The Congressional Budget Office plans to release its 2011 Long-Term Budget Outlook at 10 a.m. Wednesday on its website, CBO.gov.

Political Posturing on Default Could Cost Billions

Lawmakers received a stark warning last week from a host of prominent economic and federal policy experts: The mere prospect of a U.S. default could raise interest rates, forcing taxpayers to pay many billions of dollars more on the government’s borrowed funds.

Douglas Elmendorf, director of the Congressional Budget Office, said an interest rate increase of just a tenth of one percent could cost taxpayers $130 billion over 10 years. And Federal Reserve Chairman Ben Bernanke, who spoke last week at a conference sponsored by the Committee for a Responsible Federal Budget (CRFB), warned that “failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation.”

Invoking the Hippocratic oath, Bernanke admonished lawmakers to first “do no harm.” Any suspension of payments on the Treasury’s debts would likely cause interest rates to rise, “slowing the recovery and, perversely, worsening the deficit problem.”

The CRFB conference included numerous other budget and economic experts who expressed concern about partisan gridlock and the nation’s unsustainable fiscal path.

AARP Stance on Social Security: Essentially Unchanged

Contradictory reports last week created confusion over the AARP’s stance on possible changes in Social Security. Although the program is now spending more money than it takes in and will face even greater strains as more baby boomers retire, the powerful organization that represents older Americans has long been wary of reform efforts.

On Friday The Wall Street Journal reported that AARP “is dropping its longstanding opposition to cutting Social Security benefits”  after “a wrenching debate” inside the organization. The story featured quotes from John Rother, an AARP executive vice president.

With other news media picking up the story, the AARP quickly released a statement Friday from CEO A. Barry Rand that said: “Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.” And only a day before, the AARP announced a multi-million-dollar television campaign urging Congress “not to make any deal to pay the nation’s bills that would result in harmful cuts to critical Medicare and Social Security benefits.”

A New York Times article on Saturday quoted Rother as saying AARP would be willing to discuss benefit cuts if they were “minimal,” were aimed “far off in the future” instead of affecting current recipients, and were offset by increases in tax revenue.

So after all the dust has settled, the AARP’s position on Social Security remains essentially unchanged. It has always been open to limited benefit changes along the lines suggested by Rother so long as they are part of a Social Security solvency plan. What the organization opposes are cuts aimed at deficit reduction.

While it is good that AARP is not ruling out benefit cuts under any circumstances, it remains to be seen whether the organization will help or hinder current efforts to develop a plan for a fiscally sustainable budget.

House Moves Forward on Appropriations

After a week-long recess, the House continued last week to make progress on FY 2012 appropriations bills. The second and third bills to clear the House were for Military Construction/ Veterans Affairs and Agriculture.

The House Appropriations Committee completed action on the Defense and Energy/ Water bills and approved revised subcommittee allocations that included an increase in defense spending. Also last week, the subcommittee completed action on the Financial Services/ General Government bill. This week the defense bill is expected to be considered on the House floor.

While the House has been making progress on the bills, House passage is only the first step in what is likely to be a contentious process. Many of the bills include significant domestic program cuts that congressional Democrats and President Obama strongly oppose. Also, the Senate has not approved a budget resolution including the allocation to its Appropriations Committee.  With no overall allocation to guide the process, the committee has yet to act on any of the Senate bills.

Also hanging over this year’s process is the possibility that bipartisan negotiations led by Vice President Biden could produce an agreement including cuts or budget process proposals that would impact appropriations.

Debits & Credits

Cut Back on the Gravy: Sen. Lindsey Graham (R-S.C.) explained why he could support some new government revenue by eliminating certain subsidies built into the tax code: “That doesn't raise taxes, that takes special interest groups (and takes) their gravy train away, and helps pay off the debt.”

Paranoia Over Tax Reform: Sen. Orrin Hatch (R-Utah) doesn’t want tax reform to remain part of the negotiations over holding down the federal debt because he fears “a ruse for a backdoor tax increase.” The word “ruse” more accurately describes the special deals for well-financed special interests that real tax reform would target.