Congress: Don’t Fall for These “Fiscal Cliff Follies”
NTU Issue Brief #186
By Pete Sepp and Brandon Arnold
December 3, 2012
Introduction
As negotiations over a package addressing “fiscal cliff” issues intensify, lawmakers are being presented with numerous proposals pertaining to federal revenues and expenditures. Congress should approach these plans with caution: many are counterproductive plans supposedly aiming to reduce budget deficits, while actually relying on budget “gimmicks” to achieve savings. Others are simply longstanding anti-taxpayer schemes in search of a legislative vehicle that will carry them to passage in the waning days of the session. Congress should reject the “fiscal cliff follies” listed below and instead pursue sound legislative strategy to bring the federal debt back under control and facilitate a robust economic recovery.
(1) Pretending Enactment of the Farm Bill Would Save Taxpayers Money:
With nearly $1 trillion of direct spending over their authorized life spans, neither the House nor Senate Farm Bills would appear to contribute to deficit reduction, yet proponents insist that the Congressional Budget Office’s (CBO) cost projections affirm their position. Supporters fail to mention that another portion of CBO’s estimate points to an additional $27-$29 billion in appropriated spending. Further, CBO’s research is based upon estimates that crop prices will remain at record-high levels. As the American Enterprise Institute points out, if crop prices fall to historic averages, the House Farm Bill’s price tag would increase by $20 billion annually. This would more than wipe out the minuscule “savings” CBO reports in direct spending for the House’s bill. Indeed, as our colleagues at Taxpayers for Common Sense have calculated, the 2002 Farm Bill exceeded its post-passage cost by 42 percent, while the 2008 legislation is expected to run at least 50 percent over budget. Thus, relying on the Farm Bill to avoid the fiscal cliff is akin to tying a toy balloon around an anvil, hoping it will somehow fly.
Nor can CBO’s “savings” claim account completely for the impact of agricultural policies outside of Washington. For example, the proposed Dairy Market Stabilization Program (DMSP), advertised as trimming expected outlays, embarks on a federal milk supply and demand control regime whose goal, according to the Congressional Research Service, is “a higher future farm price for milk.” As a consequence, consumers (especially lower-income families) suffer from higher prices at the cash register and federal nutrition programs could become more expensive. If Congress is interested in reaping budgetary restraint from the Farm Bill, much more work will need to be done on the legislation, including reform of the proposed “shallow loss” insurance program.
(2) Curtailing So-Called “Tax Expenditures” without Reforming the Tax Laws:
Systemic tax simplification should focus on eliminating distortionary and complex deductions, exemptions, and carve-outs in favor of lower rates. Rather than pursue this goal, which can lead to long-term revenue stability through economic growth, some policy makers are chasing short-run cash infusions for the Treasury. Their preferred strategy: brand these provisions as “tax expenditures,” cap them, and skip corresponding rate reductions. This would add even more complexity to the labyrinthine Tax Code and squander an opportunity to implement real tax reform and simplification.
One particularly egregious example would be to cap the itemized deduction for charitable contributions. Wise tax policy would acknowledge that among deductible activities, giving money to a charity results in no direct net financial benefit for the individual. Thus, if anything, the Tax Code should be revised to recognize a simple exclusion of these donations from adjusted gross income. At the very least, Congress should avoid tinkering with the deduction and imperiling the resources charities need to deliver human services (generally more efficiently and effectively than government ever could). Some elected officials seem to believe that a “tax expenditure” is anything standing in their way of grabbing whatever they deem appropriate from families and businesses. In reality, “expenditures” result from policies such as refundable tax credits, not from people keeping more of their own money. Congress should recognize this difference and proceed with honest tax reform, not tax hikes disguised as “loophole closing.”
(3) Taking Military Spending “Off the Table”:
While we certainly understand lawmakers’ desire to take more focused draw downs in specific defense programs than the sequester mechanism permits, this should not be employed as an excuse to avoid the issue altogether. This summer the House moved to trim Food Stamp spending – a necessary step in its own right – but did so in order to reduce the impact of the sequester on the trajectory of military expenditures, even as a Defense Appropriations bill was brought to the floor containing $3.1 billion more than the Pentagon requested. Such ironies are not lost on the American people. Nor can Congress easily dismiss the findings of the National Taxpayer Union Foundation’s research (confirmed by other sources) that shows discretionary defense spending has risen by an average of $24 billion annually, in constant dollars, since 2001. With our military operations in Iraq and Afghanistan winding down, now is a time for realizing taxpayer savings.
Congress has been shown ample opportunities for setting prudent defense priorities. Last year a joint report from NTU and U.S. Public Interest Research Group identified nearly $450 billion of “common ground” savings that could be achieved over 10 years by addressing outdated or ineffective programs across the armed services. Many other sources have provided credible options for rightsizing the military budget without compromising national security. Just last month, Senator Tom Coburn (R-OK) released a report outlining $67.9 billion in specific expenditures on “missions that have little or nothing to do” with defending the nation, such as “spending more on grocery stores than guns.”
Squandering tax dollars in any area of the federal budget, including defense, is never acceptable; in the current fiscal environment, it is suicidal for our nation’s future security at home and abroad.
(4) Squeezing More Government-Mandated “Rebates” from Prescription Drugs:
Discussed both as a deficit reduction option and a “pay-for” to alter the Medicare Sustainable Growth Rate formula, “rebates” in this context amount to federally-forced price controls on prescription drugs for certain classes of dual-eligible and low-income Medicare Part D beneficiaries (other parts of Medicaid already require these payouts). Ironically, these individuals would not see any “rebate” check, even as other Medicare participants might see their premiums rise. The price bubble would likely extend even further to employers providing health insurance and finally to the overall health care sector. As we warned last year while the “Super Committee” was engaged in its deliberations:
[A]ttempting 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.
NTU opposed both the passage of Part D in 2003 as well as the Affordable Care of 2010 in part because they served as distractions from the fundamental sustainability problems of the entire federal retirement health care apparatus. Those maladies will only grow more dire in the next few years, which is why Congress should now be discussing broad-based reforms such as premium support and means-testing rather than narrow, ultimately self-defeating “fixes.”
(5) Imposing Discriminatory Taxes on Energy:
Discriminatory tax treatment for the traditional energy sector seems to be a recurring favorite among would-be revenue raisers, but the idea has only grown more intellectually decrepit with age. Contrary to supporters’ clever rhetoric, two main proposals to “repeal Big Oil subsidies” would actually mean stripping certain oil and gas firms of two provisions available to many industries: the section 199 domestic production activities deduction and dual capacity credits for U.S. companies with overseas operations. Features like section 199 are indeed a poor substitute for a tax system that ought to offer low rates and a consistently broad base, and Congress should evaluate them as part of an across-the-board reform effort. In the current context, however, singling out oil and gas companies as part of a punitive tax-hiking exercise takes the Tax Code in the wrong direction. Instead of more pick-winners-and-losers tax policy, the nation’s prospects for job creation, investment, competitiveness abroad would all be better served by removing frivolous regulatory impediments to energy development. Doing so could even increase revenues (due to higher economic activity) generated from the oil and gas sector.
(6) Heaping More Costs on Travelers:
Even as the average inflation-adjusted price of airline tickets has declined since federal deregulation began in the late 1970s, the tax load on airlines and their customers has become heavier. Over the past two decades alone, federal collections from air travel have doubled. Incredibly, some lawmakers have resurrected proposals to worsen the situation, such as increasing the Transportation Security Administration (TSA) segment charge. To passengers, labeling this exaction – or the Passenger Facility Charge, or the Animal and Plant Health Inspection Service Fee – something other than a tax doesn’t make it easier to bear. With the typical tax bite on a $300 airline ticket exceeding 20 percent, Congress must take a new direction now. This means easing government-imposed pain on air travel, reforming TSA’s financial management practices, and embracing more fundamental, private-sector-driven changes to air traffic control and aviation security.
(7) Unleashing Predatory Internet Tax Collectors:
Though their efforts have nothing to do with the federal government’s fiscal woes, large retailers intent on widening their competitive advantages have teamed up with revenue-hungry state officials to convince Congress that state and local governments will be devastated unless they are allowed to collect taxes on remote sales involving buyers beyond their borders. Legislation embodying this philosophy includes S. 1452/H.R. 2701, the Main Street Fairness Act, S. 1832, the Marketplace Fairness Act, and H.R. 3179, the Marketplace Equity Act. Make no mistake though: this dangerous expansion of tax collection authority is not some deferential nod to states’ rights. It would upend the constitutional doctrine of physical presence that protects taxpayers from many kinds of overaggressive revenue administration tactics and would severely undermine a basic tenet of our federal system: tax policy competition among jurisdictions. Furthermore, far from “leveling the playing field” among sellers, these tax proposals would tilt conditions against small “e-tailers” who, unlike brick-and-mortar stores, would be forced to remit sales taxes to numerous places where customers reside. Individuals and businesses know from bitter experience with income taxes that sales-tax compliance software won’t erase the inconvenience or cost of these liabilities.
If Congress wishes to wade into this highly controversial matter, it should do so through further hearings next year, where less-disruptive alternatives such as origin-based sourcing may receive the careful deliberation they deserve.
(8) Avoiding or Delaying the $109 Billion Sequester:
On November 12, NTU led an open letter signed by 22 fiscally conservative organizations asking lawmakers to stand firm on the $109 billion level of spending restraint provided by the Budget Control Act’s sequester mechanism, even if the composition of affected programs is altered. With the federal government facing yet another year of projected deficit spending, this makes sense. Delays or maneuvers to “shave” the sequester will only make it harder to get the nation’s fiscal house in order, in the process weakening the economy, saddling future generations with debt, and further undermining Congress’s credibility to lead.
The national debt has increased by approximately $1.7 trillion since the current sequester mechanism was first agreed upon in August 2011. Permitting these cuts to occur would constitute a modest first step toward addressing our debt crisis. Even with the Budget Control Act’s sequester and spending caps, total government spending is still expected to grow, albeit at a slightly slower rate. While it may be prudent to revise the actual make-up of the cuts, it would be unacceptable to reduce or put off the overall amount of spending reductions. As Congressman Jim Jordan (R-OH) stated, “… the only thing that’s worse than cutting national defense is not having any scheduled cuts at all take place.”
(9) Ignoring “ObamaCare’s” $1.1 Trillion in New Taxes:
What is often forgotten in the ongoing debate over the 2001 and 2003 tax laws is that Americans are facing $1.1 trillion in new or higher taxes over the next ten years as a result of the Affordable Care Act of 2010. Already the medical device industry, which employs over 400,000 people in the U.S., has begun laying off and freezing workforces in an effort to cut costs ahead of the 2.3 percent excise tax manufacturers face. On top of already potentially higher investment taxes, should the 2001 and 2003 tax cuts expire, ObamaCare heaps an additional 3.8 percent surtax on many forms of investment income. Taxing investment not only leads to less capital, further impairing the economy, but both medical device taxes and investment taxes will hit the elderly particularly hard due to higher health care costs and the dramatic loss of retirement savings. One of the more sinister features of the surtax is that its income threshold is not indexed for inflation, meaning more and more Americans will be trapped by it in future years.
(10) Implementing New “Stimulus” Spending Schemes:
President Obama reportedly is seeking an additional $50 billion in stimulus spending as part of a fiscal cliff deal. This is an attempt to double-down on the $831 billion failed economic stimulus package of 2009. While some defenders of stimulus spending have pointed to job creation that occurred as a result of the stimulus bill, the cost per job, according to CBO, could have been as high as $4.1 million. Further, a study by Ohio State University economics Professor Bill Dupor showed that of the jobs created or saved by the stimulus, 76 percent were government jobs. While the federal government continues to grow as a result of failed stimulus programs, the rest of the nation is suffering from the slowest post-recession economic recovery in American history.
These are just some of the more obtuse threats facing taxpayers in the lame duck session. Others are straightforward, such as the burden the burden to our economy (especially on capital gains and dividends) if the 2001 and 2003 taxpayer relief laws are allowed to expire. While Congress could make positive contributions toward spending restraint, entitlement reform, and tax simplification, it must first avoid the negative ones.
About the Authors:
Pete Sepp is Executive Vice President of the National Taxpayers Union (NTU), a 362,000-member grassroots taxpayer advocacy group dedicated to fighting for limited government at the federal, state, and local levels. Brandon Arnold is Vice President of Government Affairs for NTU.