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Taxpayer's Tab Issue #9

March 6, 2014

 

 

 

Vol. 5 Issue 9, March 6, 2014

Obama's Unfinished Budget Portrait Still Leaves Taxpayers Wondering, Worrying, Research Group’s Analysis Shows

Incomplete, inconclusive, and indecipherable -- those three adjectives describe many parts of President Obama's Fiscal Year 2015 budget proposal and the credibility of the picture it paints for the nation's finances, according to an analysis from the National Taxpayers Union Foundation (NTUF). Because the White House failed to provide some of the customary details surrounding its budget proposals, many of the so-called "topline" numbers the Administration released today are difficult to reconcile or verify. Nonetheless, given the available data on elements of the plan -- many of which were rehashed from past budgets -- NTUF calculates that Obama's 10-year "deficit reduction" blueprint would, on average, raise five dollars in revenue for every dollar it cuts in expenditures from the baseline.

"The President's latest budget, once again behind schedule and this time missing key analytical documents, puts some familiar brushstrokes on the fiscal policy canvas," said NTUF Director of Research Demian Brady. "Unfortunately, the lack of detail only adds doubt to the final policy portrait, one whose facial features were already looking highly disturbing to taxpayers concerned about overspending."

As Brady noted, two helpful volumes that can better evaluate the underlying assumptions in a White House budget -- the Analytical Perspectives and the Historical Tables -- were missing from this year's documents. This means, for example, that projections of beneficiary populations for changes in entitlements, or number of federal employees affected by various changes in compensation and appropriations, are unavailable to researchers. Furthermore, there are no agency-by-agency breakdowns as to how the $55.4 billion "Opportunity, Growth, and Security Initiative" would be spent. "Taxpayers are left to conclude either that the Administration wants to hide the reasoning behind its latest proposals, or it has no reasoning to offer," Brady quipped. "For what was supposed to be the most transparent Administration ever, this is basic managerial negligence."

Highlights of the NTUF analysis, providing little-known facts about the President's Fiscal Year 2015 budget, include:

  • Current Deficit Reduction: Failing to Give Credit Where It's Due. A comparison of last year's White House budget compared to the one released today shows why the budget deficit dropped so significantly in Fiscal Years 2013 and 2014. Revenues rose by roughly $31 billion more than the Administration expected in last year's budget, but outlays dropped by $357 billion more -- in part due to caps on "discretionary" (i.e., appropriated) and some mandatory spending (such as unemployment benefits). Obama's budget would ignore those caps after 2015 and boost unemployment benefits.

  • Future Deficit Reduction: Heavily Reliant on Revenues. The Administration claims that the proposals it outlines in the budget will reduce federal deficits by $2.167 trillion over the next ten years versus the tax and spending baseline. According to overall figures for that period, $1.802 trillion of those lower deficits will result from more revenues coming into the Treasury, while just $364 billion will come from less expenditures -- a five to one ratio that contradicts claims of a "balanced approach" to fighting red ink.

  • Revenue Forecast: Inordinately Sunny. All told, the budget hopes for an average annual growth rate in federal revenue of 7.1 percent over the next five years and 6.2 percent over a 10-year timeline, with a massive 11.2 percent jump expected in the coming year. This is down somewhat from previous budgets' forecasts. Compared to annual economic output, the White House is hoping to set an all-time record -- revenues as a percentage of Gross Domestic Product are supposed to rise annually in nine out of the ten years in the budget window. Prior to 2010 there have been only two postwar period of multiple-year revenue-to-GDP growth (1978-1981 and 1993-1998).

    Yet, the budget persists in making unrealistic assumptions about its plan to hike the cigarette tax by more than a dollar per pack and index the increase to inflation. Revenues from tobacco have been highly unreliable and unstable and will continue to be that way, especially as smokers quit or consumers turn to other purchasing options. If the 10-year, $78 billion pot of revenue from this proposal (which could also be affected by state tax hikes) fails to materialize, the recycled "pre-K" initiative from the President would have to be underwritten by other taxpayers.

    The Summary Tables of the budget document contain at least 17 new or expanded fees.

  • Spending Forecast: Brighter for Government, Darker for Taxpayers. All told, federal outlays under the President's plan would balloon by an annualized average of 5.3 percent from FY 2015 through FY 2019, then by 4.6 percent from FY 2019-2024. Last year's budget predicted 3.8 percent growth over its first five years and 4.9 percent in its last five.

    Expenditures are still on track to blow past $4 trillion in 2016 and $5 trillion in 2021. By comparison, it took nearly 200 years of the nation's history for outlays to reach the $1 trillion mark (1987). The figure first exceeded $2 trillion in 2002 and topped $3 trillion in 2009.

    Familiar spending hikes from past budgets included in the FY 2015 are a national infrastructure bank ($7.7 billion over 10 years) and a veterans' job corps ($1 billion).

  • Savings Forecast: Same Old Clouds. The budget lists 82 programs to cut amounting to $6.1 billion, ranging from defunding the Harry S. Truman Scholarship Foundation to paring back the Low Income Home Energy Assistance Program. Of these, 56 were slated for cuts in the previous budget. In addition, the Budget lists seven program consolidations and savings worth $389 million, three of which were repeated from last year.

    Finally, the budget enumerates 14 "mandatory" (i.e., affecting entitlements and receipts) "cuts and savings," each one of which was also included in the past FY 2014 document. Just three would reduce mandatory outlays, including a commendable realignment of the taxpayer-subsidized crop insurance program (a savings of $14.3 billion over 10 years). Yet the remaining 11 would achieve "savings" by taking money away from the private sector. Overall (including discretionary and mandatory categories), 66.8 percent of all proposed savings would come from revenue-raising policies rather than outlay cuts.

    Other smart deficit-reduction proposals -- among them greater means-testing in Medicare -- are clouded by schemes such as drug "rebates" (see below).

  • Deficit and Economic Forecast: At Odds with Other Agencies. By the end of the current budget window -- Fiscal Year 2024 -- the Congressional Budget Office estimates that the annual budget deficit will be more than twice as high as what the White House predicts. Why the difference? CBO's Budget and Economic Outlook update from just last month projected that by 2024, Gross Domestic Product would be roughly $1 trillion less than what the White House envisions, while outlays would be $88 billion higher and revenues a whopping $552 billion lower.

    One huge windfall that is simply assumed in the President's plan would come from immigration reform, which would supposedly result in $456 billion of revenues over a decade (for a net of $158 billion in deficit reduction after increased expenditures are taken into account). Although analysts have noted major economic and fiscal impacts from comprehensive changes to immigration laws, those effects would be highly dependent upon the exact nature of the reforms that Congress would send to the President.

  • Indefensible Spending Gimmicks. To its credit the Administration has proposed some prudent reductions in Pentagon programs, such as ending the unnecessary Ground Combat Vehicle, implementing modest cost-sharing provisions in the TRICARE health system, and apparently capping purchases of the troubled Littoral Combat Ship at 32 vessels. Yet, the budget avoided the bold reforms to compensation that will be required for balancing sustainability with readiness, and failed to confront the flying "elephant in the room" -- the over-budget, underperforming F-35 aircraft.

    Worst of all, even as it claims to be holding the Pentagon's base expenditure level at zero growth, the White House proposes adding $29.9 billion a year (through 2021) in the "Overseas Contingency Operations" (OCO) account, which was once intended to cover the extra costs of conflicts abroad. Given the drawdown of the U.S. presence in the Middle East, this money looks more like a placeholder for a military-project "slush fund."

  • Where Is "Obamacare"? Certainly not in the 48 pages of the current budget's summary tables, which provide few if any clues to the future spending or revenue effects of the Patient Protection and Affordable Care Act.

  • New Taxes from Old Ideas. The Administration proposes a complex new scheme to impose an old standby of the Obama years, the so-called "Buffett Rule" on wealthy taxpayers. Yet, legislation enacted at the beginning of 2013 already raised the top tax rate to 39.6 percent, while the 2010 health care law's surtaxes on upper earners are showing up on this year's tax returns (not to mention last year's withholding and estimated taxes).

    As they have in the past, a potential shift on rules regarding "carried interest" income, especially with no prospect of rate reductions elsewhere in the tax system, will mean a great deal of controversy over how it would impact risk-taking fund managers and their investors.

    The current budget also expresses the White House's dissatisfaction with early 2013's "fiscal cliff" agreement, which reimposed the personal exemption phaseout and the "Pease limit" on itemized deductions. The Administration would once again limit the value of itemization to what it would provide for filers in the 28 percent tax bracket. This policy, on top of recent curbs on deductions and exemptions, could have especially negative consequences for charitable giving.

  • Old Taxes from New Ideas. The American Taxpayer Relief Act made permanent an inflation-indexed $5 million exemption to the federal estate tax, along with a rate hike to 40 percent. Beginning in FY 2019, the budget would unearth a policy last seen in 2009, by boosting the rate yet again to 45 percent and cutting the exemption to $3.5 million. This amounts to an additional six-year tax bite of $118 billion. As part of its initiative to shore up the unemployment benefit system, the Administration also calls for making permanent the older, higher Unemployment Insurance surtax rate that expired in 2011.

  • "User Fees" and "Rebates": Bad-Penny Ideas that Cost Billions. Once again air travel is in for an even bigger wallop if President Obama's budget takes effect. This year the Administration's plan to make the charges on airline tickets "more accurately reflect the costs of aviation security" seems less ambitious: the budget would raise nearly $5.4 billion from hiking the "Passenger Security Fee." This amount is less than in past iterations, but likely because the Ryan-Murray budget just recently increased the fee. However, the budget aims to raise another $291 million from an Animal Plant and Health Inspection Service fee that would hit travelers, plus $8.5 billion through a "mandatory surcharge for air traffic services." These impositions would mean higher prices for tickets, which already can carry total tax and fee loads of more than 20 percent.

    The single largest "savings" item for the Department of Health and Human Services budget, accounting for nearly one-third of all savings from policies toward Medicare provider, is actually an increase in forced payments from pharmaceutical manufacturers to the Part D program. The planned $125 billion in provisions to "align Medicare drug payment policies with Medicaid policies" and "accelerate manufacturer discounts" are classified as offsetting receipts. The impact of these misnamed rebates, which have the same effect as taxes, is to raise costs on other consumers as well as starve companies of resources they need to develop new drugs.

    One bright spot for consumers, among these added burdens: a proposal to repeal the telephone excise tax.

  • Taxpayer "Relief" ... that Costs Taxpayers (?!). As in the past, many of the Administration's tax credit proposals are "refundable," meaning that an individual or company can get more money back than they originally paid in tax. The Treasury counts this portion of the fiscal impact as an outlay rather than foregone revenue. In FY 2014 current law refundable credits represent a direct expenditure of $86.7 billion. According to NTUF, the budget's eight proposals to expand or introduce new refundable credit proposals in the budget would, on net, boost federal spending by $135.86 billion over 10 years. Three provisions for savings among refundable programs would bring that total down to a net of $135.31 billion.

  • A Tax Reform "Reserve" Built on Targeted, Discriminatory Tax Hikes. The Administration has established a net $248 billion placeholder for "long-run revenue neutral business tax reform."Yet, the tinkering the President proposes to get to this net figure would in many respects make the system more complex and distortionary than it is now. While the White House's plan mirrors some of the changes in House Ways & Means Committee Chairman's recent tax reform discussion draft -- such as extending increasing expensing for small businesses -- it would also renew several "green energy" tax provisions.

    Meanwhile, the Administration's discriminatory attack on the oil and gas industry would continue with renewed fervor, going well beyond the moves in the Ways & Means blueprint, which takes aim at percentage depletion allowances and the "Last In, First Out" (LIFO) method of asset accounting. The Obama budget would pile on these additional tax hikes: zeroing out the already-reduced manufacturers' deduction while other industries could still take it, repealing the Intangible Drilling Credit (which has parallels to provisions available to other sectors), and modifying the "dual capacity" credit for global firms that write off tax payments made to foreign governments on their U.S. returns. Several other punitive schemes are designed to raise the tax burden on the coal industry, which, as with the harsh treatment of oil and gas, endanger jobs, portend higher energy prices, and ironically cost governments revenue in the long run due to reduced economic activity.

    Another counterproductive provision would strip away the deduction for certain reinsurance premiums paid to foreign affiliates, which many experts believe will have the perverse effect of reducing the capacity of private insurers to cover losses from large disasters (thereby putting taxpayers on the hook instead).

  • Soaring Debt Service and Loan Balances. Even though the budget claims "debt service" savings from its proposals, according to the White House's baseline, between FY 2014 and FY 2023 net interest paid by the federal government will more than triple: from $223 billion to $8866 billion.

    Direct loans, carried on the government's books as assets, will more than double over 10 years, from $1.07 trillion' to $2.19 trillion. This is likely due to the federal takeover of the student loans, which have drawn increasing concerns over the possibility of higher default rates.

  • Mounting Liabilities. Despite signals of White House support last year for a senate plan to wind down the operations of Fannie Mae and Freddie Mac over the next few years, this would apparently not end federal involvement or disinvestment in quasi-government mortgage entities. The budget envisions the Treasury owning $140 billion of preferred stock in government-sponsored enterprises all the way through 2024.

"A recent Washington Post headline proclaimed that President Obama's budget is signaling an end to the era of austerity," Brady concluded. "Many taxpayers are wondering how two years of relatively modest spending restraint constitutes an 'era' or 'austerity,' but now they have to worry as well as wonder: will the nation ever experience a true era of economic prosperity without a serious overhaul of the tax system, fundamental entitlement reform, and restoration of limits on discretionary programs? Unfortunately, this budget provides answers that are at best unclear and, at worst, totally unconvincing.”

About NTUF

The National Taxpayers Union Foundation is a research and educational organization dedicated solely to helping citizens of all generations understand how tax policies, spending programs, and regulations at all levels affect them now and in the future. Through NTUF's timely information, analysis, and commentary, we're empowering citizens to actively engage in the fiscal policy debate and hold public officials accountable every day.

NTUF is a 501(c)(3) research and education organization. Donations are deductible for personal income tax purposes. Please make a donation today to help further NTUF's mission of research and education!

This information is for educational purposes only and is not intended to aid or hinder the passage of any legislation or as a comment on any Member's fitness to serve. Cosponsor information obtained from GovTrack.us.

 



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