October 22, 2014

Washington Budget Report: October 1, 2013

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Congress Must Quickly End Shutdown, Raise Debt Limit

The federal government began a partial shutdown today because it lacked a budget for the new fiscal year, raising concerns about whether Washington has become so dysfunctional that it might also fail to raise the federal debt limit before the country starts defaulting on its financial obligations for the first time in its history.

“The government has shut down because politicians have failed the most basic test of leadership -- principled compromise,” Robert L. Bixby, executive director of The Concord Coalition, said today. “This embarrassing and economically damaging spectacle must end. It’s long past time to fund the government for 2014, raise the debt limit and get on to the critical business of negotiating a fiscal sustainability plan.”

The shutdown -- the first in 17 years -- will cost taxpayers millions of dollars and risk harming the economy, particularly if it drags on. The shutdown came after the House and Senate volleyed stop-gap funding legislation back and forth through last night, with the House approving provisions targeting the 2010 Affordable Care Act (“Obamacare”) and the Senate rejecting them.

Congress did pass legislation this week to allow some members of the military and some civilians who work with the Defense and Homeland Security departments to be paid during the shutdown. President Obama signed that legislation Monday night.

The shutdown comes after Congress failed to approve any of the 12 annual spending bills needed to fund the government in the coming year. Making matters worse is the insistence by the House that a funding bill for the entire government must repeal, entirely or partially, the Affordable Care Act.

“While fights over policy matters are not unusual in the appropriations process,” Bixby said, “it is unrealistic and unreasonable to condition funding for all appropriated programs on the dismantling of one particular program.”

As for the debt limit, the Treasury says that by Oct. 17 it will have exhausted its “extraordinary measures” to avoid default. It is possible this could happen even earlier, however, and turmoil could strike global financial markets before the debt limit is actually breached.

In a recently revised issue brief, Concord notes that raising the debt limit is essentially a decision to pay the bills. If Congress finds the vote on a debt limit embarrassing, the solution is not to risk default but to enact more fiscally responsible policies.

Business leaders have also become increasingly concerned. In a recent letter to lawmakers, the U.S. Chamber of Commerce and 235 other business organizations from across the country warned that a government shutdown would be “economically disruptive.” The letter also urged Congress “to raise the debt ceiling in a timely manner and remove any threat to the full faith and credit of the United States government.”

CBO Analyzes ‘Premium Support’ Options for Medicare

The Congressional Budget Office (CBO) recently released a report examining the viability of two “premium support” alternatives to the fee-for-service structure in Medicare.

Both alternatives would have the federal government pay subsidies to insurance companies offering plans providing the same benefit coverage as the current Medicare fee-for-service model. They would differ in how subsidies would be calculated and thus in the premium savings for seniors.

Premium support has been suggested by bipartisan groups like the Domenici-Rivlin task force to curb the unsustainable growth in Medicare spending as the population ages.

Under either option analyzed by CBO, if consumers selected a plan that cost less than the government subsidy, they would pay less out of pocket than they currently do under Medicare. However, there is also the risk that seniors could pay more, depending on the plan choice. Traditional fee-for-service Medicare would also remain an option, but perhaps with premium increases.

Relative to current policy, CBO projected, the government would spend from 4 to 11 percent less on Medicare, depending on the design of the subsidies. The savings would result from two factors: insurance market competition and seniors choosing less expensive plans. 

Premium support is a viable option to control Medicare spending over the long term -- something necessary for a sustainable fiscal future. However, plan design and whether there is a cap on Medicare spending (which neither CBO option had) could make a substantial difference in budgetary savings.

Coburn Throws a Flag on Tax Breaks

Legislation recently introduced in the Senate would strip away the tax-exempt status of professional sports leagues, including the NFL, NHL and PGA. (MLB switched its tax status to a limited liability corporation in 2007.)

The bill, introduced by Sen. Tom Coburn (R-Okla.), would bar professional sports leagues’ central offices from filing as tax-exempt trade associations under section 501(c)(6) of the tax code. That section was designed to allow certain organizations -- such as chambers of commerce and other business groups -- to file as tax-exempt if they promote the broad interest of their industries.

Coburn, however, says the sports leagues promote their specific multi-billion-dollar businesses. So in his view, their tax-exempt status simply leads to taxpayers subsidizing the profits of professional sports brands.

While the revenue the government would gain from changing this tax provision would be relatively small, it illustrates the way in which “tax expenditures” can provide subsidies for some organizations at the expense of other taxpayers.

The Joint Committee on Taxation (JCT) estimates that Coburn’s bill would raise $109 million in revenue over 10 years, but that number could fluctuate based on how the leagues would share their profits with their teams and other subsidiaries.

Altogether, however, tax expenditures cost the federal government $1.3 trillion a year in lost revenue while adding to the unnecessary complexity of the tax code.

The ideal solution would be comprehensive tax reform that would improve the efficiency of the tax code and dramatically reduce such tax expenditures, with at least some of the new tax revenue used to reduce federal deficits.