September 19, 2014

Washington Budget Report: Dec. 13, 2011

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Debate Continues on Payroll Tax Cut, Other Proposals

Congressional debate continues this week on plans to extend the Social Security  tax cut, unemployment benefits and other expensive provisions that are about to expire. Last week the Senate again voted down earlier Democratic and Republican proposals that would have reduced the Social Security payroll tax next year, with a number of GOP lawmakers rejecting their leadership’s plan.

On Friday House Republicans released a proposal to extend this year’s 4.2 percent rate on workers’ taxable income, which is two percentage points below the normal rate for Social Security taxes.

The House GOP legislation included extended unemployment benefits and postponement of a steep reduction in Medicare payments to health care providers, something Congress has repeatedly done in the past. The legislation also included provisions opposed by many Democrats, including a measure to hasten a large pipeline project.

Democrats have sought a 3.1 percent Social Security payroll tax rate next year and disagree with Republicans on how to pay for the proposed tax cuts and other year-end measures. The proposed tax cuts -- like this year’s cut -- would not affect Social Security benefits. But the loss of this payroll tax money increases Social Security’s reliance on general government revenues.

Members of Congress are also considering an adjustment in the alternative minimum tax to again protect middle-class taxpayers from what was originally intended as a measure to ensure reasonable taxes on high incomes.

The Concord Coalition has long argued that the government can provide effective short-term support for the economy  through measures such as extended jobless benefits while still putting long-term fiscal reforms in place to hold down government debt in the future.

Will Congress Follow Through on Deficit Reduction?

The federal government might escape some of its widely anticipated fiscal problems over the next few years, but only if it follows the budget path laid out in current law.

At a forum last Friday Mark Zandi, chief economist for Moody’s Analytics, said he was more optimistic than many analysts about the likelihood that Washington would move the federal budget towards greater sustainability. But Robert L. Bixby, executive director of The Concord Coalition, offered a more guarded assessment.
 
The forum was sponsored by the University of New Hampshire School of Law,  the Whittemore School of Business and Economics, the New Hampshire Business and Industry Association, and Concord. It was part of “Next-Generation Matters,” a series of conversations in New Hampshire about the country’s economic future.

Zandi said it was encouraging that both parties had agreed that projected deficits should be reduced by about $4 trillion over the next decade. And while more work is needed, he said, the government is at least on track to achieve a little more than half of that under current law.

Bixby, however, expressed concern about Washington’s “political dysfunction” and emphasized that elected officials had done nothing this year on the key areas of tax and entitlement reform.

After an audience member suggested that the deaths of baby boomers in 20 years would ease the government’s financial burdens, the two speakers – both baby boomers – noted that they exercised regularly.

“I am 52,” Zandi said. “I represent the largest single-year age group. And I’m running every day, buddy.”

Read more with New Hampshire Forum: Weighing the Prospects for Fiscal Reform

House Republicans Propose Budget Process Legislation

Last week, House Budget Committee Chairman Paul Ryan and other committee Republicans introduced several bills proposing changes to the federal budget process.  The legislation includes measures to restrict spending and change the annual process, but does not significantly address revenues.    

The bills would make the budget resolution legally binding, establish limits on deficits and spending, convert to a biennial process, and establish an expedited process for Congress to review spending cuts proposed by the President.  Also included are proposals to prevent government shutdowns and require periodic reviews of all federal programs. The legislation would cap long-term spending, require Congress to periodically review long-term budget trends, and permit the reconciliation process to be used to reduce spending beyond the traditional 10-year budget window.
 
The Concord Coalition has long been concerned that the orderly budget process included in the Budget Act has been replaced by a chaotic process that frequently involves skipping a budget resolution and cobbling together a series of continuing resolutions and omnibus bills to fund federal agencies through the year. The fiscal challenges facing our nation require a more effective process and the specific revenue and spending policy choices to place us on a sustainable path.

The House Republican proposals include some examples of budget enforcement mechanisms that could potentially be used to restrain spending and may improve the budget process.  For example, The Concord Coalition has previously supported proposals to establish biennial budgeting, strengthen the rescission process and give the budget resolution the force of law.   It is also encouraging that the proposals would require Congress to regularly review federal programs and long-term spending trends.

However, some of the proposals are unlikely to be effective.  For example, the legislation would require the Congressional Budget Office to use “dynamic scoring” to take into account the macroeconomic effects of legislation.  But the uncertainties of “dynamic” analysis, as described by the CBO, make it inappropriate for the standardized scoring of legislation. If policymakers would like tax cuts to appear less expensive, they should focus on policy decisions such as eliminating tax breaks -- not on changing the scoring.

As is often the case with process proposals, the legislation lacks the specific policy decisions that will be needed to comply with the enforcement mechanisms.  It is also disappointing that the proposals focus almost entirely on spending and do not significantly address revenues.

In the past, process proposals without these details have had a mixed tracked record of success.  Budget process proposals are most effective when they consider the entire federal budget to be on the table  (spending and revenues), include realistic targets, and are accompanied by a bipartisan commitment both to enforce the targets and support the specific policies necessary to meet them.