WASHINGTON -- As the House of Representatives considers legislation to permanently extend all provisions of last year's tax bill beyond their scheduled 2010 expiration date, including rate reductions not even scheduled to take effect until 2004 and 2006, The Concord Coalition said today that such action was premature in the absence of a broader agreement between Congress and the Bush administration to balance the budget again without tapping into the Social Security surplus.
“Before voting to permanently extend the entire series of escalating tax cuts approved last year, House Members should ask themselves whether they would have voted for the full $1.3 trillion package in the first place had they known then what they know now. If the answer is ‘no,' then they should not compound the problem by making the entire package permanent,” said Robert Bixby, Executive Director of the Concord Coalition.
“Last year's tax bill was approved on the assumptions that it would not cause a breach of the Social Security surplus, that the nation would not be at war, and that even with a $1.3 trillion tax cut the public debt would be virtually eliminated by the end of the decade -- before the Baby Boomers' retirement and health care benefits become a major drain on the budget. It is now clear that all of those assumptions were wrong. A logical response to such dramatically changed circumstances would be to reassess whether or not the entire tax cut plan should be phased in over the next several years as scheduled. But the House bill moves aggressively in the opposite direction by removing the sunset provision at a 10-year cost of almost $400 billion despite the fact that the fiscal outlook is much worse than it was when the tax bill was passed last year,” Bixby said.
That was then -- this is now
Last year, the President's budget projected non-Social Security surpluses for every year. This year, the opposite is true. There is no year in which a non-Social Security surplus is projected.
Last year's CBO baseline projected a 10-year non-Social Security surplus of $3.1 trillion. This year's most recent CBO baseline, which does not include the economic stimulus bill passed in March, projects a non-Social Security deficit of $590 billion over the same 10 years (2002-2011). And even this assumes that discretionary spending growth will slow from more than 7 percent annually in recent years to below 3 percent.
Last year the President's budget projected that even with enactment of his recommended tax cut there would be a 10-year budget surplus of $3.4 trillion -- enough to virtually eliminate the debt held by the public. This year's budget, assuming enactment of the President's policies, projects a surplus of just $665 billion over the same 10-year timeframe.
Last year's January CBO baseline projected that the statutory debt limit would not be reached until 2009. This year, the debt limit has essentially been reached.
Since last January's CBO baseline, projected net interest payments over the 2002-2011 period have gone up by $1 trillion, from $620 billion to $1.6 trillion -- roughly $10,000 per American household or $1,000 per household per year.
Even a fiscally responsible response to the new security environment will result in substantially higher spending than was anticipated last year. In the wake of the September 11 attacks, the President's budget appropriately states, “Achieving our homeland security objectives will require vast sums of money, strenuous labor and many years.” Defense and homeland security proposals have already added about $650 billion of new expenses to the President's budget over the next 10 years and more is promised.
One major item on the fiscal agenda has not changed. The unfunded obligations of Social Security and Medicare are still unfunded. These costs will begin to impact the budget in 2008 when the first Baby Boomers qualify for Social Security retirement benefits. Boomers will begin to qualify for Medicare in 2011. It will take nearly $9 trillion in today's dollars just to cover the cash shortfalls in Social Security and Medicare Part A between 2016 and 2040 -- to say nothing of the 75 percent general revenue contribution to the rapidly rising costs of Medicare Part B.
“It is important to recognize that last year's tax bill has locked us into a smaller stream of revenue at the same time that spending has escalated sharply due to resurging health care costs and increased national security needs at home and abroad. This dynamic reverses the trend of the 1990s in which rising revenues, lower defense spending and modest health care costs produced declining deficits and eventually four consecutive surpluses, two of which (1999 and 2000) were big enough to preserve the entire Social Security surplus. The result of this reversed dynamic is likely to be larger deficits and, if they occur at all, smaller surpluses than official projections indicate.
“The proponents of removing the tax cut sunset are correct that the absurd results of this provision must be dealt with at some point. No one believes that the tax code will, or should, suddenly revert to its 2001 status on midnight December 31, 2010. But the sunset provision serves a very useful purpose -- it is the ultimate ‘trigger.' As events unfold over the next year or two, and we see whether deficits are as short term and modest as the President hopes, it may make sense to adjust the phase-in of tax cuts accordingly -- perhaps extending some of them permanently while limiting or delaying the effect of others. With deficits back, the Boomers scheduled to begin receiving entitlement benefits in just six years and the upper level of future spending on national security still very uncertain, what is needed more than extended tax cuts is a new long-term fiscal policy plan. In the absence of any such plan it is likely that Congress and the President will continue spending the Social Security surplus indefinitely -- in effect, wasting the opportunity to use this resource for needed national savings. Removing the tax cut sunset should only be done after some much more difficult choices have been made,” said Bixby.
The Concord Coalition is a nonpartisan, grass roots organization dedicated to balanced federal budgets and generationally responsible fiscal policy. Former U.S. Senators Warren Rudman (R-NH) and Bob Kerrey (D-NE) serve as Concord's co-chairs and former Secretary of Commerce Peter Peterson serves as president.