The Biden Administration unveiled its new budget today. Law requires presidents to submit their budget in late January or early February. Incoming presidents are allowed a grace period so they can put their imprimatur on the final documents of a budget process that started months before they entered office. No new presidents have met the statutory deadline since it was set in 1990.
So while late budgets are not out of the ordinary, it is highly unusual to release the budget mid-afternoon on a Friday. This "Friday news dump" is normally a time when politicians release bad news to escape scrutiny during a gap in the news cycle. The gap is extended this year as Americans mark Memorial Day this coming Monday.
However the budget has not escaped NTUF’s scrutiny. Below is an overview of the good, the bad, and the ugly in the first Biden budget.
Growth in Spending Outpaces Revenues, Fueling Deficits
For the past 20 years through 2019, tax receipts have averaged 16.8 percent of GDP. Under this budget, they would rise to an average of 19.3 percent over the decade. Yet spending would rise even faster. The budget requests $6 trillion for FY 2022. This is a significant drop from 2021 levels, which were pumped by COVID-19-related emergency spending.
However, it is resetting the budget on a higher level compared to pre-COVID when FY 2019 outlays were $4.4 trillion and not expected to surpass $6 trillion until 2026. Under this plan, outlays would average to nearly a quarter of GDP each year, up significantly from average over the past twenty years through 2019 of 20.4 percent.
This imbalance fuels deficits which will total $14.5 trillion over the decade, an annual average of $1.5 trillion.
The Tax Cuts and Jobs Act (TCJA) of 2017 was enacted to simplify and lower individual income taxes and to reduce business taxes to make the U.S. more competitive internationally. It helped to fuel economic growth, expanding employment opportunities. The new budget would let the TCJA expire and its tax increases include a higher top marginal tax rate for high-income taxpayers, increased taxes on capital gains, taxes on carried interest, and an increase of the corporate tax rate from 21 percent to 28 percent.
While the budget does not directly increase the fuel excise tax, it would repeal certain cost recovery credits for development of oil and gas. Despite claims to the contrary, these are not special privileges for the energy sector, but rather cost recovery measures akin to those available in many other manufacturing and production industries. Repealing them would constitute discriminatory treatment for oil and gas businesses and put upward pressure on fuel prices.
In addition to the tax hikes, the budget plans to double the IRS to strengthen enforcement efforts and increase tax-related reporting requirements. While the administration may find that this will not raise as much revenue as hoped, the expansion of paperwork burdens increases the compliance costs of the tax system. In our recent studies on tax complexity, NTUF has now tracked three straight years in which compliance burdens have fallen. In 2017, taxpayers cumulatively spent 8.06 billion hours on tax preparation and filing. The TCJA helped in part to reduce that time burden to 6.08 billion hours. Under this budget that progress will be reversed.
This means that people will be spending more time on taxes rather than more productive pursuits. And time is money: along with the out-of-pocket expenses, NTUF calculated that the net cost of tax compliance had fallen from $357 billion to $304 billion since 2017. This is like a hidden tax on top of the actual taxes paid.
Higher taxes are also a drain on the economy: the American Action Forum noted that higher taxes shrink long-term economic growth. They ran a dynamic score of Biden's $3 trillion tax plan from his campaign and found that it would reduce GDP by 0.2 percent over ten years.
“Tax Cuts” That Are Actually Higher Spending
The budget also claims to provide "middle class tax relief" by extending many of the temporary provisions included in the American Recovery Plan Act (ARPA). However these are refundable credits, which are more akin to government spending programs than genuine tax relief. These tax credits reduce eligible filers' tax liability, but unlike other credits, the amount of the credit that exceeds income tax liability is "refunded" to filers as cash. These are recorded in the federal budget as outlays. NTUF clarified this issue earlier in the year after inaccurate news reports that called ARPA the biggest tax cut in modern history.
In the Congressional Budget Offices' January outlook, federal debt held by the public was set to rise 107 percent of GDP in 2031. Adding in the $1.9 trillion ARPA which was passed after CBO's report, brings the ten-year baseline projection to 113 percent of GDP. The budget ratchets debt up even higher to 117 percent. That would make 12 consecutive years starting with 2020 that debt tops GDP. Federal debt has only exceeded the size of the economy previously for two years at the end of World War II.
Where Are the Budget Reforms?
Starting under President George W. Bush, budget releases would often include a supplemental document of budget reforms. President Obama introduced these as well through his 2012 budget release, and President Trump continued the effort. (Historical budget documents are available online from the Government Publishing Office.) A similar document has not yet been introduced along with this budget. NTUF hopes this report is forthcoming. Executive branch leadership is needed to help work with Congress to set the budget on a sustainable path.
We need policies that incentivize work and productivity and ease the burden of big government. Instead of charting a moderate course toward a sustainable budget, the Biden Administration has chosen a spending binge that would have been unthinkable even a few years ago. Enacting this budget in its entirety runs the risk of setting back the much-needed recovery after the pandemic and economic shutdown.