August 23, 2014

Washington Budget Report: June 25, 2013

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Costly Immigration Amendment Indulges Old Habits

Legislation to revamp the nation’s immigration laws is on track for Senate approval this week after an expensive border security amendment passed a key procedural vote yesterday. The amendment would cut into the projected savings of the original legislation, providing $38 billion more for additional border security measures.

From that additional funding, $30 billion is allocated for hiring at least 19,200 additional border agents; the original bill required hiring 3,500 new agents. The rest of the funds are allocated for additional fencing along the southern border. Close to $6 billion of this spending would be offset by fees imposed for immigration services.

Although the amendment has helped create bipartisan agreement on immigration reform, it does so by indulging some old habits: Throwing money at a problem without careful scrutiny of whether the funds are needed or can be effectively deployed, and spending some of the legislation’s projected savings.

Last week the Congressional Budget Office (CBO), working with the staff of the Joint Committee on Taxation (JCT), projected that the original legislation could produce savings of about $197 billion over the next decade.

The CBO estimated that the legislation would lead to a net increase of 10.4 million in U.S. residents over the next 10 years, and an increase of 16 million by 2033.

With a larger population, spending on benefit programs -- particularly for health care and refundable tax credits -- would boost federal outlays by $262 billion over the next 10 years. In addition, CBO estimated that the bill would lead to another $22 billion of discretionary spending over that time, if fully implemented.

The increased spending, however, would be offset by income and payroll tax revenue increases of $459 billion.

The $214 billion of new revenue estimated to come from Social Security payroll taxes is classified as "off-budget." Without this amount, the bill has an "on-budget" deficit that is subject to the statutory pay-as-you-go requirement. The original bill had an on-budget deficit of $14 billion, which would likely be higher under the amended version due to the increased border security spending.

This week, the CBO said the border security amendment would lower deficits by roughly $40 billion less than the original legislation.

Because of the original legislation’s long-term effects, the CBO and JCT incorporated certain economic assumptions and extended budget estimates to 20 years instead of the usual 10-year period.

Projected changes in direct spending and revenues would decrease federal budget deficits by about $700 billion over the second decade. Certain economic impacts could further reduce deficits by about $300 billion in that decade.

The CBO and JCT expect there will not be a significant difference in the net reduction of the deficit over the 2024-2033 period between the original legislation and the border security amendment.

House Farm Bill Fails and Chaos Reigns

Last week the House of Representatives unexpectedly failed to pass a new 5-year farm bill. Without legislation, policies covering everything from crop insurance and commodity subsidies to conservation programs and food stamps will revert to the 1949 farm bill -- the last permanent one written into law.

While the Senate passed its $955 billion bill earlier in June with 66 votes, the $940 billion House version was more contentious. Democrats objected to $20.5 billion in cuts to food stamp programs over the next 10 years, with the President threatening a veto, and Republicans objected partly to a $9 billion increase in crop insurance spending.

Both bills represent lost opportunities to fundamentally reform farm subsidy programs. One way to do that would be to follow the recent Simpson-Bowles proposal recommending elimination of direct and countercyclical payments along with crop insurance.

That would generate savings of at least $40 billion over 10 years while still implementing programs designed to protect farmers from dramatic risks. The Simpson-Bowles proposal also avoids cuts to the food stamp program and echoes a similar bipartisan proposal from the Domenici-Rivlin Debt Reduction Task Force.

Large Gap Between House and Senate Spending Plans

The House and Senate are far apart in their discretionary spending targets

House and Senate plans for appropriations bills for 2014 are currently about $91 billion apart, setting the stage for a possible government shutdown in October.

Appropriations subcommittees in the House and Senate have released “302(b) suballocations” that break down levels for discretionary spending in 12 categories, including defense, agriculture and transportation.

The Budget Control Act of 2011 caps 2014 discretionary spending on defense items at $498 billion and non-defense items at $469 billion. The House appropriations bill allocations meet the overall sequester limit of $967 billion, but exceed the defense spending limit by $28 billion at the cost of non-defense programs. The Senate allocations are set above sequester levels for both defense and non-defense programs.

Discretionary spending makes up just over a third of the federal budget, the rest of which is primarily social insurance, including Social Security and Medicaid. If congressional appropriations exceed the sequester-level discretionary limits established in the Budget Control Act, it will trigger another round of automatic sequester cuts divided equally between defense and non-defense items.

Congress could choose to overturn sequestration by passing new legislation on the overall trajectory of government spending and taxes. The large difference between House and Senate 302(b) allocations, however, suggests that a likely short-term scenario is a fight over a large continuing resolution to fund the government and a possible government shutdown at the end of the fiscal year this fall.