JOINT STATEMENT ON THE NEED FOR

JOINT STATEMENT ON THE NEED FOR
PAY-AS-YOU-GO DISCIPLINE

The five organizations joining in this statement have warned that large,
chronic budget deficits pose a threat to the economic health of our nation.
For that reason, we are increasingly alarmed at the apparent willingness of
lawmakers to propose new initiatives, without offsets, that would increase
deficits in both the short and long term. At a time when fiscal policies
should be focused on reducing deficits in recognition of the enormous strains
that the retirement of the baby-boom generation will soon place on federal
resources, failure to offset new initiatives on a pay-as-you-go basis would
send a dangerous signal that fiscal discipline in Washington has all but
disappeared. At the very least, lawmakers need to stop digging the hole
deeper.

Our organizations have maintained consistently that the President and the
Congress should reestablish the pay-as-you-go rule — applying to all tax cuts
and all mandatory spending increases — to require lawmakers to consider the
tradeoffs inherent in the enactment of costly new legislation. In light of
great fiscal challenges facing the nation in the long term, this pay-as-you-go
principle should take into account the impact of legislation on revenues and
spending in years beyond the current budget window. While adherence to such a
rule would not itself improve the fiscal outlook under current policies, the
establishment of a rule making it harder to enact legislation further
worsening the nation’s fiscal problems would represent an important step
forward in the struggle to restore fiscal responsibility. And even in the
absence of a formal pay-as-you-go rule, policymakers need to discipline
themselves not to pass costly legislation without offsetting the full costs.

The mindset in Washington today, unfortunately, seems to be the opposite.
Various lawmakers from both parties are now considering or promoting new tax
breaks that would substantially increase federal deficits and debt. In fact,
these tax cuts would go far beyond violation of the principle of
pay-as-you-go. They even would violate the budget resolution adopted by the
Congress earlier this spring, which itself increases the deficit by $168
billion over the next five years. The total costs of these tax cuts would far
exceed the $106 billion in tax cuts assumed in the budget resolution.

Serious bipartisan efforts are now underway to: 1) repeal permanently the
estate tax or to reach an estate tax “compromise” that would reduce revenues
and increase deficits and debt nearly as much as full repeal; 2) repeal the
individual alternative minimum tax (AMT); and 3) expand or establish tax
breaks related to retirement. Proponents of these various tax cuts generally
have not proposed to offset their costs and seem generally to believe offsets
are not necessary. Enacting these tax cuts without offsets, however, could add
$1 trillion to $2 trillion in deficits and debt over the next 10 years, and
add much larger amounts to deficits and debt in future decades when the full
effect of these revenue reductions would be felt.

Such efforts, in the face
of already unsustainable deficits, illustrate the unrealistic and growing gap
between what Americans are being promised in federal programs and what they
are being asked to pay for those programs. Such efforts also demonstrate why
it is more important than ever to reestablish — in law and in spirit — the
principle that any tax cut or spending increase should not increase the
deficit.

Some of the proposed new initiatives seek to address legitimate policy
concerns, and some changes in tax policy may warrant consideration. But in
this environment of already excessive red ink, no tax cuts or entitlement
increases — whether new measures or extensions or expansions of existing
measures, including the entire package of tax cuts enacted in 2001 and 2003
and the Medicare prescription drug benefit — should be enacted without offsets
ensuring that they do not increase short- or long-term deficits and debt. We
are particularly concerned about legislation that appears to have little cost
over the next five to 10 years but would substantially increase deficits
outside of the budget window. And we are concerned that lawmakers may focus on
the seemingly modest cost of individual proposals without fully appreciating
the substantial cumulative impact of all proposals together. It is not
responsible to continue to promote legislation that is supposed to improve the
lot of the American people without considering the corrosive effects that the
cumulative deficits and debt added by such legislation would have on current
and future citizens.

Background

The Congressional Budget Office projects deficits
totaling $1.2 trillion over the next five years under current policies. If the
tax cuts enacted in 2001 and 2003 are allowed to expire in 2010, as scheduled
under current law, modest surpluses would be achieved starting in 2012. But,
according to CBO, if the President’s policies (including extension of the tax
cuts) are enacted, there would be deficits in every year through 2015 (with a
deficit of $256 billion in that year), and deficits would total $2.6 trillion
in 2006 through 2015. Even those figures are too optimistic, because they
assume no new funding for Iraq and Afghanistan in any future year.

In the longer run, the deficit situation will become considerably worse as
larger numbers of baby boomers retire and per-person health care costs
continue to grow rapidly. CBO warned in 2003 that over the long term “current
fiscal policy [is] unsustainable.” The Government Accountability Office has
issued similar warnings.

The Congressional budget resolution adopted in
April would increase the deficit, relative to CBO’s current policy
projections, by $168 billion over five years, not an auspicious start. In
addition, influential lawmakers now seem willing to promote large new
initiatives that are not fully reflected in the budget resolution, are not
offset, and would increase deficits and debt further. Some of these proposals
would have a particularly deleterious effect on the long-term budget outlook.

For instance, a number of lawmakers are promoting permanent repeal of the
estate tax (under current law, the tax is repealed in 2010, but reinstated in
2011, using the 2001 parameters) or changes in the tax that would cost nearly
as much as repeal. According to the Joint Committee on Taxation (JCT), making
repeal permanent would cost $290 billion in 2006 through 2015, and $72 billion
in 2015 alone. This 10-year estimate understates the long-term cost of making
repeal permanent, however, since that policy would not begin to take effect
until 2011. The revenue loss in the first 10 years in which the full effect of
repeal would be felt — 2012 through 2021 — would be far higher, about $745
billion. When the associated $225 billion in higher interest payments on the
debt are taken into account, the total cost in the first 10 years of making
the estate tax permanent would be nearly $1 trillion.

Furthermore, seven
members of the Finance Committee (and one Senator not on the Finance
Committee), including the Senate Majority Leader and the Chairman and Ranking
Democrat on the Finance Committee, have introduced legislation that would
repeal the individual alternative minimum tax (AMT). According to CBO,
repealing the AMT would reduce revenues by $611 billion over 10 years,
assuming that the 2001 and 2003 tax cuts are allowed to expire in 2010. If
those tax cuts are extended, the revenue loss from repealing the AMT rises to
$954 billion over 10 years. Including the associated interest costs, the total
increase in deficits and debt would be $1.2 trillion.

The House Ways and
Means Committee is expected to consider new retirement-related tax cuts as
part of Social Security legislation. It is not yet clear what tax cuts may be
included. The goal of increasing saving for retirement is certainly laudable,
but many proposed tax cuts in this area are structured so that they would cost
little in the short run but have large long-term costs. For instance, an
Administration proposal to establish “Retirement Savings Accounts” would cost
little over the next 10 years but eventually could cost as much as $90 billion
a decade. Any tax cuts included in Social Security legislation should be
offset both over ten years and over the longer term.

Finally, some lawmakers
appear to be interested in expanding the Medicare prescription drug plan,
enacted in 2003. There are many ways to structure changes, but all would be
costly, and any expansion should be offset so as not to increase the deficit
further either in the short or long run.

None of these measures are fully reflected in the President’s budget or the
Congressional budget resolution. We would note that the President did not
propose any change in the AMT in his budget; instead, he asked his Advisory
Panel on Federal Tax Reform to include AMT reform in the proposals it will
report later this summer. He stated that the panel’s proposals must be revenue
neutral (after taking into account the cost of making the 2001 and 2003 tax
cuts permanent). The President — to his credit — thus is on record in support
of fully offsetting the costs of AMT reform through changes elsewhere in the
tax code.

The President’s budget did propose to make estate tax repeal
permanent and to establish Retirement Savings Accounts. But since little of
the cost of those proposals would occur before 2011 and his budget extends
only through 2010, the full cost of those proposals is not reflected in his
budget.

The Congressional budget resolution did not comply with the
pay-as-you-go principle. Yet even that resolution could not accommodate all of
the tax cuts described here. The resolution assumes total tax cuts will not
exceed $106 billion over five years. Repeal of the AMT itself would reduce
revenues by $337 billion in 2006 through 2010. (Estate tax repeal and
Retirement Savings Accounts could be accommodated in the budget resolution but
only because they have little cost in 2006 through 2010; their big costs come
after that.)

There are many national needs that could potentially be addressed through
tax cuts or entitlement increases. Lawmakers can disagree about whether the
specific tax cuts discussed here would help meet those needs. But lawmakers
should agree that there is an overriding imperative to bring unsustainable
deficits under control. On our current path, we are in danger of
ever-expanding deficits and declining growth in our national output and living
standards

As a first, critical step toward meeting this imperative,
policymakers should agree not to take any actions that make the deficit
outlook worse. They should immediately reestablish and abide by the principle
that — no matter how worthy the goal of the proposed policy — any tax cut or
entitlement increase (including the extension of expiring tax cuts or
expansion of existing entitlement benefits) must be offset in order to avoid
digging the fiscal hole any deeper.

To be clear, budget process alone cannot
reverse these trends. No matter how tightly budget laws are drawn, they will
not work without the political will to make hard choices. However, budget
rules such as pay-as-you-go establish hurdles that make it more difficult to
enact fiscally irresponsible policies. Restoring the pay-as-you-go principle
would, at a minimum, force Congress to weigh the short-term political
attractions of new proposals against the long-term fiscal consequences. Given
where deficits now stand and the known fiscal challenges that lie ahead, it is
policymakers’ responsibility to do this. They owe future generations no less.

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