October 2, 2014

Washington Budget Report: July 2, 2013

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Tax Reform, Starting From a Blank Slate

In a letter last week to their Senate colleagues, the chairman and ranking member of the Senate Finance Committee -- Max Baucus (D-Mont.) and Orrin Hatch (R-Utah) -- explained their plans to push for dramatic reform of the tax code.

The letter was noteworthy in that it explicitly embraced the tax reform strategy of the Simpson-Bowles and Domenici-Rivlin deficit-reduction commissions: “zero-based” reform or, as Baucus and Hatch termed it, a “blank slate” plan. It begins with the elimination of all tax expenditures and then adds back those that can be justified by proponents after comparing their costs and benefits.

The senators requested that any colleague interested in adding back a loophole, deduction or exclusion send them a detailed proposal or legislative language and explain how such a proposal meets this test for inclusion in the new tax code: Does it help grow the economy, make the tax code fairer, or effectively promote other important policy objectives?

Starting from a blank slate is the best way to go about tax reform. It puts the burden on supporters of special provisions to justify why the resulting revenue losses are worth everyone paying higher tax rates.

While The Concord Coalition supports this approach and applauds Baucus and Hatch for their bold letter, two key details have not been filled in: the revenue goal and rate structure. Without that information, supporters of special provisions won’t have to explicitly account for their fiscal and economic opportunity costs.

The tax reform discussion is easier politically if the revenue goal and desired rate structure are set aside. However, this puts the cart before the horse. As we have seen in attempts to enact a “grand bargain,” a major impediment to any deal has been the revenue amount and income tax rates. Without agreement on them first, there is no context for further discussion, and the likelihood of tax reform resulting in fiscal sustainability is diminished. Ultimately, taxes and spending cannot be considered in separate silos.

Pentagon Outlines Reductions Over Next Five Years

The Department of Defense has begun to scale back its operations to comply with $487 billion in spending cuts that were imposed by the Budget Control Act of 2011 (BCA).

The Army plans to remove combat forces from 12 bases and reduce its troop strength by 80,000 over the next five years. The Marine Corps is reducing its active-duty troops from 194,000 today to 182,000 by the end of 2017.

Additional cuts will be necessary if nothing is done to reverse sequestration. The Marine Corps would shrink by another 6,000 troops, for example.

The chairman and ranking member of the House Armed Services Committee each recently praised the initial reductions to comply with the BCA spending caps. But they warned that the consequences of sequestration could be much more serious if it is not addressed soon.

The Concord Coalition supports a balanced approach to fiscal reform that reaches into all parts of the federal budget, including defense. Concord continues to encourage elected officials, however, to find a more thoughtful and responsible alternative to sequestration.

 

Rules Waived for ‘Emergency’ Spending on Border Security

The Senate passed a sweeping immigration bill last week aided by a costly amendment that directs $46.3 billion more to be spent on border security than under current law. The Senate waived its budget rules to pass the legislation.

The Congressional Budget Office (CBO) and the Joint Committee on Taxation staff projected that the original Senate bill would produce savings of $197 billion over the next decade. To secure several wavering votes, however, the border security amendment was added. It reduced the total projected savings by roughly $40 billion.

The border security funding is designated as “emergency” spending in the bill, exempting it from budget caps, sequestration and pay-as-you-go (PAYGO) rules. This designation was politically convenient to pass the bill but it is inconsistent with the general view that emergency designations should be reserved for items that are necessary, sudden, urgent, unforeseen and temporary.

The Gang of Eight, a bipartisan group of senators who spearheaded the effort to reform immigration law, supported the “border surge” amendment. But the gang’s self-imposed July 4 deadline to pass a bill created a rush, with insufficient attention given to whether the additional funding was really necessary and could be used effectively.

Instead of negotiating a compromise that would retain the deficit reduction of the original bill, the Senate took an all-too-familiar path by hastily assembling political support with dubious additional spending.

Speaker John Boehner says the House will pass its own immigration laws, and is unlikely to vote on the Senate bill. 

Aging Population Means Challenges on Long-Term Care

As more baby boomers retire and the over-65 population rises from 12 percent of Americans in 2010 to 25 percent in 2030, paying for their care will become increasingly difficult, the Congressional Budget Office (CBO) warns in a new report.

The budget office notes one estimate that two-thirds of people over 65 will at some point in their lives need assistance, such as nursing home or in-house care, due to cognitive or physical limitations. About half of those who receive such care rely on “informal caregivers” such as family and friends.

Some experts expect a 70 percent increase in the total number of people requiring care by 2050.

This assistance, known as “long-term services and supports,” currently accounts for 1.3 percent of GDP but is projected to increase by at least 46 percent and perhaps as much as 150 percent by 2050.

This means difficulties for Medicare and Medicaid programs, which pay for much of the spending on these services.

On Thursday a special commission, created as part of the fiscal-cliff legislation passed in January, met for the first time to start considering some of these challenges. The Commission on Long-Term Care plans to discuss Medicare, Medicaid, private long-term care insurance and ways to deal with long-term care costs.

These costs are one of the key challenges facing the country as its population ages and millions of older Americans leave the work force each year. This challenge deserves careful consideration by members of the new panel -- and the rest of Congress.