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Avoid these Disastrous Debt Reduction Ideas!
An Open Letter to Congress.

July 21, 2011
By Pete Sepp

Dear Member of Congress:

During negotiations between Congressional leaders and the President over raising the federal debt ceiling, many proposals that would affect future federal expenditures and revenues have been offered. As a founding organization of the Cut, Cap, and Balance coalition, the 362,000-member National Taxpayers Union (NTU) continues to recommend your support for immediate program reductions, statutory spending caps, and a Balanced Budget Amendment to the U.S. Constitution amid these discussions. At the same time, there are numerous debt reduction ideas – including tax increases and fiscal gimmicks – you should not support.  Here, in random order, are some of the worst ones to watch out for in the current deliberations.

Yet Another Deficit Commission. Seven short months ago, the National Commission on Fiscal Responsibility and Reform (created by the President) became one of the latest panels to report on solutions for achieving fiscal sustainability. Tellingly, the Commission’s most important proposals affecting long-term expenditures were almost entirely ignored in President Obama’s budget and were instead relegated to interesting debate-starters for newspaper editorial boards. In fact, the Committee for a Responsible Federal Budget’s “Deficit Reduction Plan Comparison Tool” lists more than 30 recent, major proposals to tackle the nation’s fiscal problems (including one developed by NTU and the U.S. Public Interest Research Group). Surely this existing mass of information should be adequate to the task of drawing up appropriate reforms that rule out tax increases and focus on overspending.

Make no mistake: NTU believes that procedural mechanisms such as sequestration, binding caps, constitutional balanced-budget requirements, and permanent “sunset review” bodies can be an important part of restoring discipline to the nation’s finances. So can a “fast-track” process stipulating up-or-down votes on specific expenditure reductions. However, creating a special advisory-type commission now, to make another set of recommendations that will likely reflect past ones, is not necessary. Such a weak proposal would be perceived as a delaying tactic that won’t magically make other schemes – such as Senator McConnell’s debt-limit compromise plan – sufficiently palatable for NTU to endorse.

Government-Mandated “Rebates” on Part D Drugs. Likely the most deceptively-named scheme on this list, proposals to boost “rebates” simply amount to federally-forced price controls on prescription drugs to certain Medicare Part D beneficiaries (who would see no financial gain even as Washington’s coffers got fatter). As the system’s Actuaries have noted, Part D plan providers have already negotiated deep voluntary discounts of 20 to 30 percent from drug makers and pharmacies, saving both enrollees and taxpayers considerable sums. In addition, government-mandated “rebates” are now required for participants falling into Part D’s so-called “coverage gap.” Although NTU opposed creation of the Medicare prescription drug program in 2003, attempting to generate illusory savings today through rebate requirements as drastic as those under Medicaid would deprive innovators of the resources they need to continue creating new life-saving medications – ones that can reduce the need for costly surgeries and hospital stays. Current federal policies have done enough to erode the position of the United States as an island of drug-pricing freedom (and in turn drug development); further rebates could relegate this economically advantageous topography to desert status.

Higher Energy Taxes. Unlike tax credits whose refundable portions represent a direct drain on the Treasury, the tax-law provisions the President and his allies hope to repeal for the five largest oil and gas companies are not “subsidies.” Two of their biggest targets are, in fact, the Section 199 deduction for domestic manufacturing and the “dual capacity” credit for taxes paid to foreign governments – both of which are widely available to all kinds of industries.  Revisiting deductions and credits with an eye toward broadening the base and lowering rates across the board (i.e., systemic tax reform) could help U.S. competitiveness. However, singling out certain firms in one sector for punitive treatment is simply a capricious tax increase – which will ultimately drive up prices at the pump, harm job-creation, and hurt our business position abroad.

Dairy-Market Manipulation. None of the terribly flawed ideas mentioned here would be effective at easing long-term budget woes or nurturing an economic recovery.  However, advocates of a plan to allow government control over milk prices would, if successful, add complicated and contradictory fiscal ingredients to an already problematic mix. Based on the dairy co-ops’ “Foundation for the Future” tenets, this ploy would collect mandatory assessments against dairy farmers to fund a new federal program that would manipulate milk prices by both limiting supply and purchasing dairy products. The framework envisions devouring the entire federal spending baseline set aside for dairy as well as half the extra collections on dairy farmers, reportedly leaving a relatively minor “return” to the Treasury (by some estimates approaching $100 million over ten years). Thus, in the name of “deficit reduction” the result would be a statist market-manipulation regime that will greatly benefit co-ops but will raise prices (by billions) for consumers, increase federal expenditures, discourage dairy manufacturers from investing toward expansion, and even lead to layoffs in industries affected by higher costs for milk.  As NTU has contended in the past, this is precisely the opposite direction that badly needed dairy reforms should take. Why would any lawmaker support federal micromanagement of dairy markets – a policy with such devastating consequences – as stand-alone legislation or in a debt-limit package?

Poorly-Disguised Travel Tax Hikes. Air travel is already among the most heavily-taxed activities in America today, yet some negotiators in debt talks seem content to heap even more burdens on airlines and their customers. Two options under discussion are doubling the Transportation Security Administration segment fee on each airline ticket (applying it to one-way trips) and establishing a new $25 departure tax on each flight. But like similar schemes NTU has opposed before, such as increasing the Passenger Facility Charge or boosting the Animal and Plant Health Inspection Service fee on international arrivals, these latest proposals don’t suddenly become bearable to taxpayers simply by calling them “user charges” or “revenue raisers.” The federal government has more than quadrupled its collections from airlines and passengers over the past two decades, leading to a tax bite on a $300 round-trip domestic fare that often exceeds 20 percent. Policymakers should be seeking ways to reduce this bite rather than making it more painful, by instituting reforms that allow more private sector-driven management and innovation for air traffic control and security.

NTU has produced analyses and commentaries on many of these threats to taxpayers. More communications will follow as other “disastrous debt reduction ideas” are concocted. For further information, please call 703-683-5700 or visit Roll call votes on each issue listed here will be significantly weighted in NTU’s annual Rating of Congress, and “no” votes will be regarded as the pro-taxpayer positions. 

Pete Sepp
Executive Vice President