Senate Budget Republicans Estimate $1.9 Trillion Tax Increase in Obama Budget

 

Where is the President's $4 Trillion Savings?

 

 

 

The budget fails the pledge the president made on February 23, 2009 at his Fiscal Responsibility Summit:

The 2013 budget also fails the test the president set in February 2010 when he created his Fiscal Commission. Two years ago he set a goal to reduce the deficit so that it is no higher than 3.0 percent of GDP in 2015. But his 2013 budget would result in a deficit that is 3.4 percent of GDP in 2015.²

 

President's 2013 Budget Proposal

 

Deficits And Debt According To The President's Estimates

 

 

 

Under this budget package, gross debt will increase from $14.8 trillion (98 percent of GDP) at the end of 2011 to $17.5 trillion by the end of 2013 (106 percent of GDP). By 2022, debt under the president's policies will increase to nearly $26 trillion, remaining above 100 percent of GDP. The following graph illustrates the growth of job-crushing debt and how it continues to rise essentially as much under the President's proposals as it would have even after enactment of the Budget Control Act (BCA).

 

Where is the President's $4 Trillion Savings?

 

 

 

* OMB Adjusted Baseline, excluding physician payment

The president's claimed deficit reduction is based on the following deceptions:

• It does not count the cost of replacing the $1.2 trillion sequester (spending reduction plus interest savings) required under current law. This is plainly true because the president eliminates the reductions required by the law that he signed and replaces it with tax increases. Then he fails to score the cost of repeal, a monumental deception.

• It counts the inevitable winding down of the war costs in Afghanistan -- all of which is borrowed -- as $1 trillion in spending reduction; and

• It buries the $522 billion cost of freezing the Medicare physician update in the baseline, without identifying any source of funds to pay for it.

                 Deficit Effect Of The President's Fiscal Plan

Tax Increases The president's big-government vision imposes a heavy cost: diminishing economic opportunity through massive tax hikes that depress wages and stifle job creation at a time when millions of Americans remain out of work. In total, the president's budget seeks $1.9 trillion in new taxes on families, small businesses, and job creators.

The budget reflects the president's pledge to raise taxes on higher income individuals. It assumes that the top marginal income tax rate rises to 39.6 percent at the end of 2012. The personal exemption phase-out and limitation on itemized deductions (otherwise known as Pease) would be reinstated. It would also raise the capital gains tax rate to 20 percent.

Although the president has talked a great deal about imposing a Buffett Rule that would tax millionaires at 30 percent, no such proposal was included in his budget. Instead, the president would treat dividends as ordinary income for upper income individuals, which would more than double the tax rate from 15 to as high as 39.6 percent. This proposal was not included in last year's budget. Considering that some high income individuals receive a significant portion of their income in the form of dividends, the Administration may be proposing this new tax treatment as a proxy for the Buffet Rule. Together, the individual income tax increase would increase revenues by $849 billion over the next ten years, according to the Administration's claims.

Once again the president has proposed capping the value of tax expenditures at 28 percent, which is estimated to raise $584 billion. This reduces the value of itemized deductions and income tax exclusions for those in the top two marginal rate brackets. The four largest tax expenditures are the health care exclusion and the deductions for mortgage interest, state and local taxes, and charity. Limiting the benefit of these expenditures will reduce spending on health care, housing, and charitable contributions. Individuals in relatively higher tax states will bear the full burden of the taxes their governments impose.

It also assumes that the estate tax rate increases to 45 percent and the exemption amount falls to $3.5 million, generating $143 billion over ten years. The exemption amount would not be indexed for inflation. Currently, estates are taxed at a 35 percent rate and receive a $5.0 million exemption, which is portable between spouses. The budget would limit the use of valuation discounts and grantor retained annuity trusts.

The president's budget includes other revenue raisers that were also proposed last year, such as $12 billion in additional revenues from efforts to reduce the tax gap and $142 billion in higher taxes from closing so-called loopholes like eliminating carried interest and repealing last-in-first-out accounting. His budget would also increase taxes by $19 billion on the financial and insurance industries. Proposals to simplify the tax code would actually reduce revenues $1 billion.

Despite pledging to reform the corporate tax code to make America more competitive, the president has yet to release a tax reform plan. Instead, the president repackaged a set of existing proposals from prior year budgets around making the research and development tax credit permanent that would reduce revenue by $156 billion. The budget also would double the Section 199 manufacturing deduction for advance manufacturing. However, the president included many of his proposals from last year to raise taxes on U.S. multinationals that operate worldwide by reducing the benefit of the foreign tax credit and limiting deferral, which would generate $148 billion of additional revenue, thereby nearly offsetting the benefit of making the R&D tax credit permanent.

The budget also reflects a continued hostility on the part of the president towards the largest sources of domestically produced energy. The president is once again proposing a repeal of several provisions related to fossil fuels, raising taxes by $41 billion over ten years. There are also proposals to reinstate Superfund taxes and increase the Oil Spill Liability Trust financing by one cent (raising taxes a combined $22 billion). These are also coupled with a proposed fee on so-called "nonproducing oil and gas leases" that would raise nearly $1 billion and impose special assessments on domestic nuclear utilities that would total $2 billion over ten years.

Temporary Tax Relief The president proposes to extend recently enacted temporary tax relief by continuing some of the measures enacted or extended in the stimulus bill or subsequent legislation. The most significant tax proposal is the extension of the American Opportunity Tax Credit. This proposal will result in about $75 billion in forgone revenue over the next ten years. Since this credit is also refundable, another $62 billion of increased outlays is reflected on the spending side of the budget. The Administration also proposes to reactivate and reform the Build America Bonds (BABs) program that Congress decided to let expire at the end of calendar year 2010, which would increase spending $58 billion. This policy assumes that BABs gradually replaces the existing interest exclusion of tax exempt state and local bonds. Of note, the president does not propose to extend either the Make Work Pay Tax Credit or the 2.0 percent payroll tax reduction for tax year 2013.

                    PRESIDENT'S TAX PROPOSALS IN 2013 BUDGET

The Supercommittee did fail, but now the Administration proposes to repeal the fallback sequester and replace the required spending cuts with $1 trillion in tax increases. The failure of the Supercommittee has already resulted in OMB redefining the two categories of discretionary spending caps as required by the BCA (the "security" category now is identical to the defense budget function, and the "non-security" category is all other discretionary spending). But the president's budget proposes to amend the BCA to redefine the security and non-security categories back to the initial levels and components set by the BCA before the Supercommittee's failure. The president's request for discretionary appropriations would fit under these original caps in every year. For 2013, the caps would be re-set at $686 billion for security agencies and $361 billion for non-security agencies. (For 2014-2022 the president proposes to return to a single, overall discretionary limit.)

A comparison of non-emergency, non-war discretionary budget authority (excluding Changes in Mandatory Programs (ChiMPs) and Disaster-designated spending) shows that the president's request for the security category in 2013 would nudge appropriations up slightly from the level enacted in 2012, while the non-security request for 2013 is slightly lower than the 2012 enacted level. Some agencies, however, would see significant increases, such as the Departments of Energy and Commerce (at the expense of the Department of Housing and Urban Development, the Department of Labor, and the Corps of Engineers).

         Year-Over Year Change in Discretionary Appropriations

                    Increase in Proposed 2013 Discretionary

The president's request does not reflect the potential $500 billion in defense cuts from automatic enforcement procedures (fallback sequester) required under the BCA as a result of the failure of the Joint Select Committee on Deficit Reduction. Instead, the budget proposes to "turn off" that sequester (replacing it with tax increases) and to revise the 2013 security and non-security caps back to their initial BCA levels and to one overall cap for 2014-2021.

The budget proposes $96.7 billion for Overseas Contingency Operations (OCO) in 2013, a decrease of nearly $30 billion from 2012. This request includes $88.5 billion for activities under the Department of Defense and $8.2 billion for the Department of State and other international programs. Of the OCO funding for State and USAID, $3.3 billion is for Afghanistan, $1 billion is for Pakistan, and $4 billion is for Iraq.

After 2013, the budget includes an annual placeholder of $44.2 billion for 2014-2021, reflecting the president's proposal to cap OCO budget authority at $450 billion over the 2013-2021 period. The administration is claiming nearly $850 billion in "savings" from the implementation of these caps over the 2013-2022 period, despite the fact that OCO funding was already on its way down and the amounts provided in the baseline were never expected to be spent. The use of caps on OCO spending to provide offsets or claim deficit reduction is widely acknowledged as a budget gimmick.⁵

Health Care The mandatory health care components of the president's 2013 budget submission are nearly identical to his proposal to the Joint Select Committee on Deficit Reduction last September. Predictably, the president does not propose repealing, defunding, or delaying any of the major programs in his health care law.

The president claims that the health care proposals in his budget will result in gross spending reductions of $366 billion over the next decade (2013-2022), including roughly $303 billion in Medicare savings, $56 billion in Medicaid savings and $8 billion in other health-care related savings. However, the president's budget would continue to freeze Medicare payments to physicians over the next 10 1/2 years (rather than letting them fall at the end of this month by nearly one-third as scheduled under current law), which will cost $438 billion. On net, therefore, spending on mandatory health programs will increase by $72 billion under all the policies reflected in the president's budget.

Under the president's proposals, Medicare and Medicaid spending will total $11.1 trillion over the next decade. While the president's proposals result in modest savings relative to current law near the end of the decade, they will increase spending on net over the ten-year period. However, the president's proposals will not significantly alter the course of long-term spending for these programs.

 

Obama's Medicare & Medicaid Budget

 

75 Years of Total Mandatory Spending

 

 

 

Senate Budget Committee minority staff estimates that under current law total mandatory spending for Medicare and Medicaid will exceed $76.3 trillion over the next 75 years. In the long term, the president's proposals would only reduce that amount to $76.1 trillion, a reduction of less than one half of one percent. The president admitted in the introduction to his budget that health care is "the major driver of future deficit growth," but his plan fails to address that single biggest driver of our long-term fiscal problems.

Medicare The president's budget increases Medicare spending by $135 billion over 2012-2022, despite including the following proposals (numbers in [brackets] are savings [-] or costs [+] estimated by OMB over the 2013-2022 period):

• Force pharmaceutical manufacturers to pay Medicaid-level rebates to Medicare for low-income beneficiaries [-$155 billion]

• Reduce payments to rural providers and post-acute care services [-$65 billion]

• Reduce Medicare bad debt and graduate medical education payments [-$45 billion]

• Increase income-related premiums under Medicare Parts B and D [-$28 billion]

• Prohibit drug companies from delaying the availability of generics and biologics [-$9 billion]

• Modify the Part B deductible, create a Part B premium surcharge on near-first dollar Medigap coverage, and add a home health co-pay for new beneficiaries [-$5 billion]

• Reduce the exclusivity period for follow-on biologics [-$4 billion]

• Reduce waste, fraud and abuse in Medicare [-$2 billion]

• Interactions [+$8 billion]

• Extend the Qualified Individuals (QI) program through 2015 [+2 billion]

• Further empower the Independent Payment Advisory Board (IPAB) [No savings in the budget window]

• Restrict the use of Medicaid provider taxes [-$22 billion]

• Establish a single blended matching rate to Medicaid and CHIP [-$18 billion]

• Rebase Medicaid disproportionate share hospital (DSH) payments [-$8 billion]

• Limit Medicaid reimbursement of durable medical equipment (DME) to Medicare rates [-$3 billion]

• Reduce waste, fraud and abuse in Medicaid [-$3 billion]

• Prohibit drug companies from delaying the availability of generics and biologics [-$2 billion]

• Reduce the exclusivity period for follow-on biologics [-$0.2 billion]

• Extend Transitional Medical Assistance (TMA) through 2014 [+$1 billion]

• Introduce more federal control and oversight of state Medicaid programs, add state program integrity reporting requirements, and enable states to require "benchmark" benefit plans for non-elderly, non-disabled adults above 133% FPL [No savings]

• Increase TRICARE pharmacy benefit copayments and TRICARE-For-Life premiums [-$17 billion]

• Rescind resources available for the prevention and public health fund [-$4 billion]

• Enable OPM to contract directly for pharmacy benefits for Federal Employee Health Benefit (FEHBP) [-$2 billion]

• Enact Food Safety and Inspection Service (FSIS) fee [-$0.1 billion]

• Postal Service reforms [+13 billion]

• Expand small business health insurance tax credit from the president's health law [+$1 billion]

• Funding for the Secretary of Health and Human Services to implement proposals [+$0.4 billion]

• Extend Social Security Insurance (SSI) for qualified refugees [+0.2 billion]

• Increase child support payments [+$0.1 billion]

• Accelerate "State Innovation Waivers" [No savings]

Absent any policy changes, current law requires SSA to significantly reduce the retirement and disability benefits for future retirees once the trust funds are exhausted. For example, according to the 2011 report of the Social Security trustees, the disability trust fund will be exhausted in just 6 years, resulting in lower disability benefit payments. Despite this near-term danger, the president's budget fails to include any proposals to strengthen Social Security for retirees or for the disabled.

Education The budget requests $69.8 billion for discretionary programs in the Department of Education for 2013, which is a $2.4 billion increase over the 2012 funding level of $67.4 billion.

The president would increase the maximum award for Pell Grants to $5,635, up from $5,550 in 2012. This maximum award is made up of $4,860 from the discretionary award and $775 from the mandatory add-on ($85 more than the mandatory component of $690 in 2012). To fund these award levels, the budget includes $36.1 billion, of which $22.8 billion is discretionary. In order to sustain this level of Pell Grants in future years, the Administration proposes increasing mandatory spending by $14 billion to reduce the burden on the discretionary spending cap and make room for other discretionary spending. This continues the recent practice of using new funding streams in the place of substantial reforms for a program that has doubled in cost since 2008.

The president also proposes new mandatory grant programs over the budget window. These include: $4 billion for a community college initiative (matched by another $4 billion in the Department of Labor), $5 billion for a competitive grant program for states and districts to work with teachers and unions to recruit new teachers, $1 billion to establish career academies, and $500 million to overhaul TEACH grants and replace them with Presidential Teaching Fellows.

Regarding student loan programs, the budget proposes to prevent the interest rate on subsidized Stafford Loans from reverting this summer to the previous fixed rate of 6.8 percent for the 2012-2013 academic year and beyond, as required by current law. Over the past four years, the interest rate on this subset of loans has been temporarily declining to 3.4 percent for this 2011-2012 academic year, with an increase to 6.8 percent set to kick in as a result of the College Cost Reduction and Access Act, enacted by Democratic-controlled Congress in 2007. This proposal to maintain the interest rate at 3.4 percent for one more year will cost $5.7 billion over the 2012-2022 period.

The president also renews his proposal to reform and expand the Perkins loan program, claiming savings of nearly $9 billion over the budget window. For this proposal, the Administration relies on faulty credit reform scoring to show that lending to students makes the federal government a profit. For a similar proposal last year, the Congressional Budget Office found that using a more realistic fair-value estimate of the proposal, which captures market-risk, shows a multi-billion dollar cost to taxpayers.⁶

Transportation Trust Fund (TTF) Despite $35 billion in transfers from the General Fund of the Treasury over the past four years, the Highway Trust Fund (HTF) will become insolvent at some point in 2013. The president's budget does not address this issue; rather, its most transformative proposal appears to be to simply rename the HTF as the Transportation Trust Fund. Then, without changing the stream of trust fund revenues, it would increase the burdens on the trust fund by expanding the number of highway safety, transit, and passenger rail programs to be paid for by the TTF.

Just over the 2013-2018 period of its reauthorization proposal, the Administration would set spending authority at $231 billion more than the expected revenues, which will require a transfer from the General Fund to prevent the fund from becoming insolvent. (The budget claims it is using some "savings" from spending less money on the war for transportation spending, but this is a meaningless statement. This offset is an accounting trick because it claims artificial savings from money that would never be spent in the first place.) This is the opposite of the proposal in the 2012 request where the president swore off any permanent transfers from the General Fund ("the Administration's proposal does not require any future General Fund transfers . . ."; see page 153 of last year's Analytical Perspectives).

The Administration's proposal also stands in stark contrast to the bills currently being debated on the House and Senate floors, which increase spending only slightly and do not create future unsustainable burdens on the HTF with new programs. The proposal would reclassify all outlays associated with these programs as mandatory and subject to the PAYGO law (thereby eliminating one byzantine feature of the current program that makes it impossible for most people to understand how it operates). Separate from the trust fund, the budget proposes a mandatory appropriation of $50 billion in 2012 for a transportation stimulus program.

 

Federal Taxes & Spending as % of GDP

 

 

 

Another way to indicate what is driving the unsustainable trends under the president's proposals is to look at components of spending, total spending, revenues, and deficits (as a percentage of the economy) that the Administration estimates will occur in 2022 and compare that to the average for those elements over the last 40 years (1972-2011). From the graph below, it is clear that Social Security and Medicare, which will consume 8.9 percent of GDP in 2022, are taking more resources out of the economy than the 6.1 percent they have on average for the past 40 years. Welfare programs demonstrate a similar 2.7 percentage point increase in 2022. Interest costs will be higher because the debt will be so much larger in 2022 than it has been in the past, with all other spending programs getting squeezed out. In total, outlays will be 1.8 percentage points higher in 2022 than the 40-year average, and revenues will be 2.2 percentage points higher. Clearly, tax increases in the president's budget contrast against a permanent 10 percent expansion in the size of the federal government (as a share of the economy).

 

Composition of Spending, Revenues & Deficits in

 

2022 under the President's 2013 Budget Strays from

 

Historical Patterns

 

 

 

Expedited Rescission The Administration proposes a special process for the president to submit rescissions of discretionary and non-entitlement mandatory spending for fast-track consideration. The rescissions would first be considered in the House, which would be required to vote on the package without amendment within a specified number of days. If the package passes the House, then the Senate would consider the same package, without amendment, within a specified number of days. The House has already passed a similar proposal (H.R. 3521, The Expedited Legislative Line-Item Veto and Rescissions Act) on February 8, 2012.

Limit on Advance Appropriations Although for the last decade or so the congressional budget resolution has set a limit on advanced appropriations, the Administration proposes that the advanced appropriations limit for 2014 should be $28.858 billion (which is higher than the limit of $28.821 billion proposed in the 2012 budget) and should remain at that level for subsequent years.

Debt Trigger The president includes the debt trigger proposal he originally submitted to the Joint Super Committee in September 2011. The proposal sets a target for federal debt (measured as debt held by the public, net of financial assets). If debt strays above the targets, then failure by Congress to enact sufficient savings to bring debt back down to the target would result in OMB implementing automatic reductions in spending and tax expenditures.

Expand the Race to the Top Model The president proposes to take the Race to the Top model used in education and replicate it in transportation, workforce training, and advanced vehicle development programs. Race to the Top is a competitive grant program to incentivize states to pursue educational reforms aimed at achieving certain goals.

The Administration's near-term assumptions about inflation are similar to CBO and Blue Chip forecasts. All see a continuation of low inflation, with growth in the consumer price index for urban consumers (CPI-U) projected to remain around 2.0 percent through 2013, with an eventual edging up above 2.0 percent in the longer term. The Administration sees inflation edging up to 2.1 percent by 2016 and thereafter, while CBO projects a mild acceleration of inflation from 2014 to 2018, where inflation stabilizes at 2.3 percent.

The Administration's near-term forecast for the civilian unemployment rate is more optimistic than CBO but not quite as low as Blue Chip. The Administration expects the unemployment rate to be 8.9 percent in 2012, subsiding slightly to 8.6 percent in 2013 and edging down further to 8.1 percent in 2014. Note that all forecasters expect unemployment to remain stubbornly high for years to come. The Administration does not expect the unemployment rate to fall below 7.0 percent until 2016, suggesting its policies will not quickly reduce the plight of the unsatisfactorily large number of unemployed Americans.

The table below compares the Administration's near-term economic assumptions with the latest "Long-Range Consensus U.S. Economic Productions" (from the October, 2010 Blue Chip Economic Indicators⁷) and CBO's January, 2012 Budget and Economic Outlook.

 Real GDP growth CY2012    Real GDP growth CY2013       Real GDP growth CY2014

² In 2010 the Administration also interchangeably claimed that the goal they set was to have the budget be in "primary balance" in 2015 -- where all spending except interest would match revenues. Even by their own metric, the 2013 budget fails this alternate version of the claim since "primary deficits" would persist through 2017.

³ For example, last year CBO estimated the President's 2012 budget would produce deficits of $9.5 trillion over 2012-2021 - $2.3 trillion higher than estimated by the President

⁴ This figure includes the outlay portion of refundable tax credits. It does not include the cost of the stimulus or the receipts component of mandatory spending programs. Without these adjustments, the tax increase is $1.883 trillion.

⁵ For more information about this gimmick, please click here to see a Budget Committee Republican background document.

⁶ Ranking Member Sessions has introduced legislation that would, among other things, require CBO to use a more realistic accounting method when scoring lending proposals.

⁷ Blue Chip long-range forecasts are published semi-annually in the March and October issues of Blue Chip Economic Indicators.