August 29, 2014

Washington Budget Report: Apr. 12, 2010

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Back From Recess, Congress Will Focus on Budget Resolution and Appropriations Bills

As Congress returns from its two-week recess, budget issues will be at the top of the agenda. We will be hearing a lot about the President’s budget, the Congressional Budget resolution, and appropriations bills. These terms are frequently used together, though each of them has a distinct purpose and role to play in the budget process.

The President’s Budget is a detailed request for budget authority for every federal program. It is not binding on Congress, which under the Constitution has the power to appropriate funds. The Budget Resolution establishes funding levels to guide Congress as it considers spending and revenue legislation. It is not signed by the President and does not have the force of law.

While the budget resolution includes an overall spending allocation to the Appropriations Committee, the Budget Committee does not decide the specifics of which accounts or agencies will receive the funding. That is done by the Appropriations Committees (and other committees that receive allocations). An appropriations bill is binding legislation that is signed into law by the President.

Shortly after Congress returns, the House and Senate Budget Committees will hold “mark-ups” which are business meetings that the committees use to consider the annual budget resolutions. The Budget Act requires action on the Budget Resolution to be completed by April 15, though there is no penalty for missing the deadline and it is rarely met. (According to the Congressional Research Service, since the timetable was established in 1974, Congress has met the budget resolution deadline only six times, most recently in 2003.)

Deficit Reduction and Other Key Issues to Watch as Congress Makes Funding Decisions

There are several key issues to watch in this year’s budget and appropriations process. The goal is to have all of the appropriations bills signed into law by the President by Oct. 1, the start of the new fiscal year. But complications and delays have become routine, particularly in election years. 

Deficit Reduction. What will the deficit reduction targets be in the congressional budget resolution and how will they compare with the President’s ambitious goals? Will the congressional targets be credible and based on realistic assumptions? Will there be specific details on offsets to new spending or tax cuts in any legislation implementing the budget resolution goals? The Concord Coalition believes that the deficit reduction targets should be at least as ambitious as the President's budget, which, according to CBO's March estimate, would still leave a deficit of $793 billion (4.3 percent of GDP) by the fifth year (FY 2015).

Reconciliation. Given that the "fast track" reconciliation process was used this year to pass health care and student loan legislation, there will be pressure to use the process again for new proposals. Concord believes Congress should only use the reconciliation process for its intended purpose: to consider deficit reduction legislation through an expedited process. 

Discretionary Spending. What will the overall discretionary spending level be in the budget resolution? Will the Appropriations Committees adhere to the limits without resorting to budget gimmicks? Concord supports the President’s proposed three-year freeze on most discretionary spending. 

Budget Enforcement. Will the FY 2011 budget resolution include credible budget enforcement mechanisms or will there be new exemptions and loopholes?

Upper-Income Tax Rates Would Need Dramatic Increases If President Wants to Keep His Tax Cut and Deficit Reduction Promises

Federal Spending & Revenues, 1980-2020

Recently on The Concord Coalition Blog, The Tabulation, Chief Economist Diane Lim Rogers examined how difficult it will for President Obama to both keep his pledge to reduce the deficit to around 3 percent of GDP annually and to not raise taxes on households earning less than $250,000 a year.

Using a recent analysis by the Tax Policy Center, Rogers suggests that the top two income tax rates would have to go from 33 percent to 72 percent, and from 35 percent to 77 percent. While this represents a highly progressive tax strategy, it would not necessarily be a "good" deal for even the vast majority of households not in the top income brackets.

Having a pattern of marginal tax rates that rises so steeply at the top would create huge disincentive effects on labor supply and saving. If marginal tax rates are raised to prohibitive levels, then the labor supply and saving of the rich are reduced, overall economic growth is reduced, and employment and wages -- economy-wide and throughout the income distribution -- suffer. Furthermore, even without this "supply side" argument, it's just not good or sustainable tax policy to rely on such a huge increase in taxes on such a small percentage of the population to fund a cause (deficit reduction) that would otherwise have large and broadly-distributed benefits.

Rogers concludes the easiest way to achieve the 3 percent deficit goal is to stick with current law, with all of the Bush tax cuts expiring as scheduled at the end of this year. Of course, a better way would be to stick to current-law revenue levels by reforming the tax system -- broadening the tax base to make it more efficient so that marginal tax rates would not even have to come up and we could still raise more revenue to achieve our deficit goal.

Fed Chairman Calls for "Credible Plan" to Deal with the Nation's Fiscal Challenges

Federal Reserve Chairman Ben Bernanke said last week that the country must start making tough decisions to rein in future deficits while still meeting the economic needs of an aging population. His unusual focus on fiscal policy came as International Monetary Fund (IMF) officials are also warning the U.S. and other developed countries about the dangers of snowballing debt. 

Sounding a note often heard on The Concord Coalition's Fiscal Wake-Up Tour, Bernanke told a Dallas audience: “The arithmetic is, unfortunately, quite clear.” To avoid unsustainable budget deficits, he said, the U.S. would have to raise taxes, modify Social Security and Medicare, spend less on everything else -- or some combination of those options.

With the economy still recovering from recession, Bernanke said this was not the time for “a sharp near-term reduction” in the federal deficit. But he said we should begin now “to develop a credible plan for meeting our long-run fiscal challenges.”

John Lipsky, who is the first deputy managing director for the IMF voiced similar concerns in a recent speech, saying “a higher public savings rate will be required to ensure long-term fiscal sustainability” for the United States.

Reports From Social Security and Medicare Trustees Delayed to Reflect Changes in Health Care System

The official annual reports on Social Security and Medicare will be delayed until June 30 so that they can include the impact of new health care legislation on the programs, according to an Associated Press story. The annual reports from the programs' trustees -- primarily administration officials -- are usually released in the spring.

The Congressional Budget Office (CBO) has indicated that the health care legislation will extend the solvency of the Medicare Trust Fund but not in a way that will improve the government's ability to pay future benefits.

Recent CBO projections also indicate that Social Security will begin paying out more in benefits than it collects through its payroll tax this year. The chief actuary of the Social Security Administration said last month that probably would prove to be correct.