August 20, 2014

Bad Omens in This Year's Retreat From Hard Choices

Following last year’s bipartisan budget agreement, this was supposed to be the year of a harmless fiscal ceasefire on Capitol Hill. Unfortunately, the ceasefire is becoming a retreat for fiscal responsibility.

On issues ranging from tax and entitlement reform to highways and veterans health, Congress has backtracked, ducked and gimmicked its way around hard choices. This pattern does not bode well for any attempt to put the budget on a sustainable track after the fall elections.

Backing away from military retirement reforms. The first sound of retreat came in February with overwhelming votes in the House and Senate to repeal a provision included as part of their budget agreement just a month earlier that limited cost-of-living adjustments for working-age military retirees.

The minor change supported by the Pentagon would not have saved a huge amount of money (roughly $7 billion over 10 years) but represented the type of difficult choice necessary to reduce defense spending. However, in the face of complaints from veterans groups, Congress quickly backed down. To save face, lawmakers replaced the savings on paper with unspecified automatic cuts 10 years from now, but it was still a clear case of kicking the can down the road.

Another short-term fix on Medicare payments to physicians. The next punt came on finding a permanent fix for the Medicare Sustainable Growth Rate (SGR) formula, which under current law requires a 24 percent cut for physician reimbursements.

Congress has struggled for years with this issue, passing a series of short-term patches that leave even bigger cuts to be made in the future. Yet this was supposed to be the year for a permanent solution, with partisans in both houses of Congress reaching an agreement to reform the formula in a way that would help rein in health care inflation.

The effort sputtered over trying to offset the $140 billion cost, however, and so for the 17th time, Congress passed another short-term patch. It only lasts until March of 2015, and included a blatant timing gimmick so the cost would appear to be fully offset.

Failing to follow through on tax reform rhetoric. Political will has been lacking as well when it comes to expiring tax provisions. These deductions, exclusions, exemptions and credits (i.e. “tax expenditures”) drain more than one trillion of potential revenue every year. Eliminating or scaling them back could be used to lower rates, reduce economic distortions and improve the nation’s long-term fiscal outlook.

Tax reform, in the abstract, enjoys considerable bipartisan support. Yet when it comes to actually casting the tough votes to make it happen, there are few takers.

So far, the House Ways and Means Committee has approved more than $600 billion of permanent tax cut extensions and expansions without offsets. The Senate has also approved a large package of extensions but downplayed the lost revenue by sunsetting them again at the end of 2015 so that they appear to cost only $85 billion. In both cases, pay-as-you-go considerations were swept aside.

Reluctance to pay for VA improvements. A new problem cropped up with revelations that many veterans are not getting timely doctor appointments. While excessive VA wait times are a legitimate problem, the House and Senate have crafted bills that could potentially double spending on the program while avoiding budget caps and the need for offsets by deeming the new spending to be an “emergency.”

The Senate version would go further by turning such funding into an uncapped “mandatory appropriation,” or in other words an entitlement exempt from the annual appropriations process. So far, neither version includes offsets.

Little progress on fixing the highway trust fund. And despite the supposed ceasefire, Democrats and Republicans have failed so far to resolve growing problems with the highway trust fund, which will run out of money sometime this summer and is facing a 10-year shortfall of $167 billion.

All proposals to deal with the shortfall have resorted to gimmicks in one form or another. The most straightforward proposal by Senators Corker (R-Tenn.) and Murphy (D-Conn.) would raise the gas tax to fund the shortfall but would also extend unspecified tax breaks, thus increasing the overall deficit.

Trying to take some Medicare changes “off the table” for fiscal reforms. Even the process for making hard choices would be made more difficult in a new proposal by Sen. Mark Pryor (D-Ark.). It would provide special protection against Medicare changes that eliminate or reduce guaranteed benefits, or restrict eligibility, by exempting them from “reconciliation” bills that cannot be filibustered in the Senate. This would effectively raise the bar to 60 votes for any such changes and would undermine the purpose of reconciliation, which was to facilitate politically difficult votes. In fact, Democrats used reconciliation to pass pieces of the Affordable Care Act.

If enacted, this proposal would have highly negative consequences for any bipartisan fiscal negotiations. For years, Democrats have resisted efforts by Republicans to impose hurdles on tax increases by arguing, correctly, that “everything must be on the table.” If they now attempt to build a protective wall around Medicare beneficiaries they will signal to Republicans that they do not intend to negotiate on a level playing field. At a minimum, this would no doubt draw demands from Republicans that the same exemption be given to tax increases. With the nation still facing unsustainable deficits caused largely by a growing gap between health care benefit promises and current revenues, the last thing the budget process needs is a race to clear the table of potential reforms.

Elections may help explain all the can-kicking.

Wanting to shield themselves from potential attack ads, whether in primaries or the general election, incumbents are often tempted to support things that will make it all the more difficult to govern if they manage to get re-elected. Thus we see votes to “protect” veterans, seniors, taxpayers and anyone else who may benefit from the status quo.

And yet some changes are inevitable because the status quo is unsustainable.

These lawmakers would do well to ask themselves how they will ever get out of the straightjacket they are now drawing tighter and tighter around themselves.