This week, President Biden continued to roll out an ambitious policy agenda with release of the American Families Plan (AFP), described as “an investment in our children and our families.”
Major new initiatives in the plan include universal preschool for three and four year-old children, two years of free community college, child care support, and a paid family leave program. In addition, the AFP would extend several temporary provisions of the American Rescue Plan enacted in March. These include expansions of the Child Tax Credit, the Earned Income Tax Credit, the Child and Dependent Care Tax Credit, and health care premium tax credits under the Affordable Care Act.
In total, the plan has an estimated cost of $1.8 trillion over 10 years, partially offset with estimated revenue increases of $1.5 trillion over 15 years. It comes on the heels of the American Jobs Plan (AJP), which the administration says would cost roughly $2.3 trillion over 8 years, offset with revenue increases of more than $2 trillion over 15 years.
A Fact Sheet produced by the administration claims that, when considered together, the two plans “will be fully paid for over 15 years and will reduce deficits over the long term.”
The administration deserves credit for establishing the goal of paying for its proposals. The math behind the claim that it all balances out over 15 years can, and should, be tested in the coming months as the proposals work their way through Congress. Some of the assumptions seem uncertain at best and disingenuous at worst.
A good example of uncertainty is the assumption that an $80 billion investment in the Internal Revenue Service will net $700 billion in revenue from closing the estimated “tax gap,” which is the difference between taxes legally owed and taxes actually paid.
The tax gap has tantalized policymakers of both parties for years. It floats out there as a handy offset, but speculating on its size and actually realizing the gains are two very different things. As a reliable offset, it is no more certain than cracking down on the proverbial “waste, fraud and abuse” on the spending side of the budget.
Moreover, the administration’s estimate of the revenue gain is far in excess of the IRS’s most recent estimate of the average net tax gap ($381 billion for the years 2011-2013) and far in excess of a July 2020 CBO study finding that a $40 billion investment in the IRS could increase revenues by $103 billion over 10 years (a net gain of $63 billion).
This is no small matter since the net gain of $700 billion over 10 years from closing the tax gap amounts to almost half of the $1.5 trillion the administration says it will raise to pay for the plan’s spending and tax credits.
Another source of uncertainty worth noting is that the spending estimates go out 8 to 10 years while the revenue proposals cover 15 years. It is not clear what happens in the intervening years. Spending that may be deemed a “one time investment” are likely to have costs beyond the 10-year window. For example, the enhanced Child Tax Credit is assumed to expire after 2025. There is no policy rationale for this and in fact the administration acknowledges that its ultimate goal is to make the change permanent. If that is the case, the cost and the added revenues to pay for it should be shown. The same is true for any other program or tax credit that is intended to be permanent but is shown as temporary.
On the positive side, so far there are no dubious claims from the administration that the proposals will somehow pay for themselves or that any amount of government spending can be “paid for” by simply printing money.
A matter of concern, however, is that the administration still hasn't produced an actual budget where all of the President’s proposals are shown in the same place along with detailed estimates of 10-year spending, revenues, deficits and debt along with the baseline budget and economic projections on which they are built. A piecemeal rollout does not allow for complete assessment of the total.
For one thing, the size alone requires full exposure to grasp the magnitude of what is being proposed. Chopping it up into incremental pieces focuses attention on the individual components rather than the total cost. A series of $2 trillion packages obscures the fact that the grand total could add roughly $6 trillion in new spending or tax credits over 10 years and raise considerably less revenue over the same period.
Aside from the size, there is the sweeping scope across multiple policy arenas, affecting everything from childcare, family leave, health care subsidies and education, to physical infrastructure, long-term health care, community violence, supply chain improvements, gender inequities, income inequality, job training, medical research, prevailing wages, racial injustice, union membership, workplace safety, individual tax rates, corporate tax rates and IRS enforcement. Assessing how these priorities complement or conflict with existing policies cannot be done outside the regular budget process.
In presenting the most recent portion of his plans to a Joint Session of Congress on April 28th, the president justified his sweeping agenda by saying, “It is not enough to restore where we were prior to the pandemic.”
He’s right about that, but he left out one crucial element of where we were prior to the pandemic: the unsustainable trajectory of the nation’s debt.
Even before the pandemic hit, the nonpartisan Congressional Budget Office (CBO) estimated that budget deficits would top one trillion dollars (and rising) every year into the future and that the national debt as a share of our economy would more than double by 2050.
Paying for new initiatives, even if credible and fully implemented, would still leave the budget on an unsustainable path. Moreover, the opportunity cost of using more than $4 trillion of new revenues to fund new spending would take that money off the table as a potential source of filling the pre-existing long-term budget gap.
The president certainly inherited a mess but, to use a tax term, there is no “stepped-up basis” for the debt. He can’t reset the value of the national debt as of the time he took office. What came before matters. The pre-pandemic fiscal status quo is not a sufficient goal for the recovery. Instead, the administration should set its standards higher, to achieve an economy that grows at a more robust pace and implement a budget that is fiscally sustainable over the long-term.
Another missing element in the president’s proposals so far is any plan to ensure solvency for the federal trust funds of Social Security, Medicare Hospital Insurance and Highways. According to CBO projections, all of these trust funds face insolvency within the next 15 years, coincidentally the same time frame the administration is using for its new revenue proposals.
It seems an odd omission to commit $4 trillion or more to new spending over that time without any of it going to address these pending shortfalls. Addressing these shortfalls in a generationally equitable manner requires prompt action to begin phasing-in needed reforms. If the plan is simply to wait until it’s too late to do anything other than transfer general revenue to the trust funds, the entire rationale for having the trust funds to begin with would be undermined.
We are just at the beginning of what will be a highly significant debate over the size and scope of the federal government. To his credit, the president has made it clear that new proposals should be paid for. That is a good starting point for negotiations. As the process moves forward, The Concord Coalition encourages the administration, its allies and its congressional opponents to engage in good faith bipartisan negotiations with no preconditions and with due regard for fiscal sustainability. As is often observed, we are all in this together.