October 1, 2014

Washington Budget Report: Jan. 15, 2013

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Debt Limit Should Be Raised and Reformed

With Democrats and Republicans squaring off over upcoming budget decisions, The Concord Coalition is urging elected officials to promptly raise the federal debt limit and then reform the debt limit process. Such a reform could be part of a comprehensive plan to put the federal budget on a more responsible and sustainable course.

“There should be no delay in voting to increase the debt limit,” Concord says in a new issue brief. “Despite its name, the debt limit has never proven to be an effective means of controlling debt. And yet, failure to raise the debt limit risks serious long-term harm to the nation’s creditworthiness.”

If the debt limit is not raised, the issue brief points out, “All of the same obligations would still accrue. The only change would be to compel a default on commitments that result from past policy decisions.” No one has presented a plausible set of policy options that could prevent the debt from exceeding the current limit.

“With an unnecessary crisis over the debt limit averted, Congress and the President should promptly develop a comprehensive, specific and credible plan to place our nation on a sustainable fiscal path,” Concord says. “Lawmakers should consider the entire federal budget to be on the table – including entitlement programs, domestic discretionary spending, defense spending, and revenues.”

Fitch Ratings today offered a reminder of the need to raise the debt limit and produce a solid fiscal plan, warning of a possible downgrade in the country’s AAA rating later this year if Washington fails to come up with “a credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances.”

The recent “fiscal cliff” legislation shows how Washington makes policy decisions without regard to their effects on the debt limit. The new law will increase deficits by an estimated $4.6 trillion over 10 years, relative to what had been current law, according to the Congressional Budget Office. Yet that legislation made no provision for increasing the debt limit.

Citing a 2011 report by the Government Accountability Office (GAO), Concord says that Congress “should more closely align debt limit increases with the fiscal policy decisions that create a need for more borrowing.” Any legislation that would require borrowing beyond the limit, for example, could be required to include an increase in the limit.

At a press conference Monday, President Obama emphasized the importance of raising the debt limit soon to avoid “disastrous” economic consequences. In addition, Treasury Secretary Tim Geithner sent a letter to Congress yesterday saying the Treasury’s “extraordinary measures” to postpone a U.S. default could be exhausted between mid-February and early March.

In response to Obama’s comments, House Speaker John Boehner issued a statement saying the American people “do not support raising the debt ceiling without reducing government spending at the same time.” He said the House would pass “responsible legislation that controls spending, meets our nation’s obligations and keeps the government running.”

Last week Democratic leaders in the Senate told Obama he should be prepared to take “any lawful steps to ensure that America does not break its promises and trigger a global economic crisis – without Congressional approval, if necessary.” Senate Republican Leader Mitch McConnell criticized that message as “the height of irresponsibility.”

Obama Nominates Jack Lew as Treasury Secretary

President Obama last week praised White House Chief of Staff Jack Lew, his nominee for Treasury secretary, as someone who has his “complete trust” and has “built a reputation as a master of policy who can work with members of both parties and forge principled compromises.”

Lew served two stints as White House budget director, first in the Clinton administration and then under Obama. He also held a variety of other positions in government and the private sector.

If confirmed by the Senate, Lew would succeed Tim Geithner, who is leaving the administration after serving as Treasury secretary throughout Obama’s first term. The President praised Geithner as a “steady hand” who played a key role in helping the economy recover after a severe recession.

Lew was heavily involved in the intense political battle over the federal budget and the debt limit in 2011, and some Republicans have voiced concerns about his nomination as Treasury secretary. Sen. Jeff Sessions of Alabama, the ranking Republican on the Senate Budget Committee, voiced particularly strong opposition to Lew for earlier congressional testimony about the administration’s budget that Sessions described as “outrageous and false.”

Robert L. Bixby, executive director of The Concord Coalition, said he thought that Lew would like for the administration to make a deficit-reduction deal with Republicans and would be willing to accept some changes in entitlement programs as part of such an agreement.

“The funny thing is that Lew came in as somebody who could strike deals,” Bixby said. “He had brokered deals with Reagan and O’Neill, and Clinton and Gingrich. Now Republicans are saying they can’t work with him.  . . .  I don’t know if something has changed about Jack Lew or something changed about the Republican Party.”

Taxpayer Advocate Laments Cost of Complexity

National Taxpayer Advocate Nina E. Olson bolsters the case for tax reform in her annual report to Congress, calling the complexity of the U.S. tax code – which now weighs in at nearly four million words -- a “significant, even unconscionable burden” on Americans.

In addition to frustrating taxpayers, the complexity of the code costs the government revenue in a variety of ways.

“The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,” Olson writes. “It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.”

Olson’s report, released last week, urges Congress to greatly simplify the tax code, largely by reassessing the need for many “tax expenditures.“ These exclusions, exemptions, deductions and credits are projected by the Joint Committee on Taxation to total $1.09 trillion in the current fiscal year. In comparison, individual income tax revenue is expected to total $1.36 trillion.

The Concord Coalition has long supported a significant reduction in tax expenditures. This could simplify the tax system, make the economy more efficient and help reduce federal deficits.  

Task Force Spotlights State Fiscal Challenges

Many states face severe fiscal challenges that could be made even more difficult by Washington’s budget problems, according to the State Budget Crisis Task Force.

The bipartisan organization focused much of its research on six states. Its recently released reports on Texas and New York complete a series that also covers Illinois, California, New Jersey and Virginia.

Gridlock and irresponsible fiscal policies in Washington could aggravate the difficulties in these and other states. In an overview last year, the task force said states could “suffer greatly” from future federal cuts and warned that severe fiscal challenges were facing local governments as well.

The task force co-chairs are Richard Ravitch, former lieutenant governor of New York, and Paul A. Volcker, former chairman of the Federal Reserve. Volcker also serves on The Concord Coalition’s Board of Directors.

The task force report on Texas notes improvements there in the last two years but cautions that “the structural fiscal issues… have not gone away and will present challenges in future sessions.” The New York report points to challenges such as an aging population and an out-of-date transportation system.

There are parallels between federal and state budget concerns, as Volcker and Ravitch have made clear: “The existing trajectory of state spending, taxation, and administrative practices cannot be sustained.”