Some thoughts about the omnibus budget package

See reader comment posted at the end.

In mid-December, at the proverbial last minute, the two houses of Congress passed and the president signed an omnibus spending & tax bill (H.R. 2029) called the “Consolidated Appropriations Act, 2016.” This legislation put in place all of the specific appropriations for fiscal year 2016, which had been negotiated within the confines of an overall deal on discretionary spending levels (about 1/3 of the total budget) – basically an exercise in “dividing the loot.”

The CAA also perpetuated a slew of temporary tax credits, etc., making some of them permanent (e.g., the Research and Experimentation Tax Credit, which had been extended 16 times since being enacted in 1981) while continuing others for varying time periods. And it deferred several scheduled tax increases (e.g., excise taxes on “Cadillac” healthcare insurance plans and medical devices tax, and an annual fee on healthcare insurance providers, as provided for in the Affordable Care Act).

Most observers felt Democrats had come out ahead in the deal, and conservatives complained about a perceived GOP surrender. Had Americans really elected Republican majorities in both houses of Congress to support a liberal legislative agenda? GOP sells America down the river, Rush Limbaugh,
12/17/15.

Several Republican presidential candidates slammed the CAA and the legislative process that produced it, including three senators (Cruz, Paul, and Rubio) who had a chance to vote on it (Cruz & Paul voted no, Rubio missed the vote). Senator Rand Paul on the bad omnibus bill, Onan Coca, godfatherpolitics.com,
12/21/15.

Senator Paul on a talk radio interview: It was over a trillion dollars, it was all lumped together, 2,242 pages, nobody read it, so frankly my biggest complaint is that I have no idea what kind of things they stuck in the bill. I voted against it because I won’t vote for these enormous bills that no one has a chance to read.

For their part, Republican leaders in Congress noted purported pluses in the CAA and claimed that it represented a respectable outcome under the circumstances (the GOP would have been blamed for a government shutdown). Republican leaders win tax battles, party unity despite concessions, Stephen Dinan & Tom Howell Jr., Washington Times,
12/20/15.

The media reported on passage of the budget package and comments thereon over a period of several days and then, in typical fashion, moved on to newer stories. So the CAA is now “yesterday’s news, but we think several points deserve further attention.

A. Effect on deficits – According to several media reports, the CAA increased deficits by “hundreds of billions” of dollars. This rather offhand statement refers to projected deficits for fiscal years 2016-2025, and it is the net result of two factors:

•Spending for 2016 was carried over at about the overall levels projected in the president’s budget proposal in February, i.e., was not reduced (nor increased either) as a result of congressional review. The CAA is only applicable to discretionary programs, but we’re not aware of any material changes to mandatory programs that constitute about 2/3 of the overall budget.

•The renewal of numerous tax preferences and deferral of planned tax increases resulted in projected deficit increases of $679B over the 10-year period (including $157B in 2016, a big number due to the first year effect of extending “bonus” depreciation).

Here is a year-by-year recap of the tax-related adjustments (Divisions P&Q). H.R. 2029, as cleared for the president’s signature, Congressional Budget Office,
12/18/15.

Screen Shot 2016-01-09 at 4.53.04 PM

The budget resolution for 2016 that Congress passed in early May was basically scrapped during ensuing congressional battles, leaving the president’s budget proposal (PB) adjusted by the CAA as the closest thing there is to an approved 2016 budget. Here is our guess of what it would look like if anyone had seen fit to publish such a budget, including a line at the bottom for the Congressional Budget Resolution (CBR).

Screen Shot 2016-01-09 at 4.54.22 PM
*Fiscal year 2016, Mid-session review, OMB,
7/14/15.


The latest word is that the deficit for the first three months of fiscal year 2016 was $36B higher than the same period of the prior fiscal year. Although revenues were up 4% (double the rate of economic growth), spending rose 7% (primarily due to growth in mandatory spending). The Congressional Budget Office will update its outlook for the full year on Jan. 25. Deficit rises to $212 billion, Joseph Lawler, Washington Examiner,
1/8/16.

In sum, the upshot of the congressional review of the 2016 budget was not to shrink the initially projected deficit – or even hold the line – but rather to increase it by 45%.

Many observers seemed unconcerned about this, including economists who view government deficits as providing desirable stimulus during economic downturns (while typically neglecting the Keynesian corollary about running surpluses during economic booms). A glimpse of what bipartisan compromise looks like, Alan Blinder [Princeton economics professor], Wall Street Journal,
12/30/15.

. . . the federal deficit that President Obama proposed for fiscal 2016 was merely 2.5% of GDP—a number in line with historical norms. There was no need to shrink it. Furthermore, with a still sluggish economy and the Federal Reserve beginning to raise interest rates, a little fiscal stimulus is welcome, even if the agreement provides very little. The big bucks in the budget deal come in the tax extenders, which everyone knew would be extended regardless. So making some of them permanent does not provide stimulus, nor does it really raise future deficits.

We disagree. Chronic deficit spending is a bad habit, which in due course will have dire consequences. SAFE has been making this point for the past 20 years, but the problem keeps getting worse. SAFE newsletter, Winter,
2015.

At the end of 1997, the gross federal debt was about $5.3 trillion; it’s nearly $19 trillion now – which works out to an inflation-adjusted growth rate of 5% per year. Even Grandpa might have trouble helping to carry the growing load.

The congressional budget resolution this year was supposed to set the stage for balancing the budget by 2024, a timetable that seemed far too slow but could have represented a step in the right direction. The budget process grinds on,
5/4/15.

People need to walk before they can run, and the adoption of a congressional budget for the first time in six years is a real achievement – provided Side B doesn’t say “mission accomplished” and let up. A lot of hard work remains to be done, consisting of not only living within the budget this year but also laying the groundwork for structural changes in the future.

After months of further discussion, however, the goal of starting to systematically reduce (and in due course eliminate) the deficit wound up being sidetracked. Count this as an opportunity lost, which reflects poorly on the members of both political parties.

B. Tax reform – What about the argument that the temporary tax preferences were going to be extended anyway, as they have been in the past, so the increase in deficits as a result of making some of these provisions permanent was a matter of facing facts versus acting irresponsibly?

House Ways and Means Chairman Kevin Brady (R-TX) posted a summary of this line of reasoning. See the excerpts below, with our comments. Setting the record straight on the “costs” of tax extenders,
2015.

# Instead of continuing Congress’s charade of passing so-called “temporary” tax provisions each and every year in December, this bill finally makes them permanent. Whether extended for one year, two years, or made permanent, it’s the same amount of money on a yearly basis.

Clearly many of the tax preferences in question have been extended repeatedly, which has had the effect of minimizing projected budget deficits. If Congress intends for a given tax preference to remain in effect indefinitely, it’s better to say so than to continue pretending the provision is temporary.

All of the temporary tax provisions were extended, however, instead of making some of them permanent and letting others expire. In other words, what was done here was to take the path of least resistance rather than sincerely trying to improve the tax system.

# [This] conservative legislation [averting tax increases] prevents Washington from raising billions of dollars in new taxes on Americans for more wasteful spending.

SAFE holds no brief for raising taxes. Indeed, we have often argued against proposed tax increases on grounds that they would wind up being used as a pretext for increased government spending rather than applied to reduce the deficit. But there is an easy way to eliminate tax preferences without increasing tax revenues – make offsetting reductions in tax rates.

#This bill is an important step forward on the path to fundamental tax reform. Supporting permanent tax policies promotes certainty for American businesses and families—generating economic growth and jobs. These provisions do not increase tax spending; they simply protect American families and American job creators from a tax hike.

Our concept of tax reform is to vastly simplify the tax law and focus on collecting revenue versus attempting to influence economic markets and social behavior. SAFE’s SimpleTax proposal,
2010.

The goal should be . . . a tax system that will minimize the damage from withdrawing money from the private sector to pay for the agreed level of government spending. To this end, we should avoid favoring specific industries or economic activities, reduce the clerical burden for taxpayers and the government alike, and hopefully reduce the incidence of noncompliance.

Tax rules should be understandable, and, while not necessarily “permanent,” not in constant flux – which undermines confidence in the private sector. Tax rates should be kept low. The tax base should be broadened. The vast majority of the population should pay taxes, even if the burden varies with ability to pay. For lack of a better name, our proposal might be labeled the SimpleTax.


Accordingly, almost all tax preferences should be eliminated while slashing tax rates to the lowest practicable levels. Forget about attempting to differentiate between “good” and “bad” tax preferences, keep only those that are truly essential, e.g., business expense deductions and foreign tax credit.

All other [individual] income tax exemptions, deductions (mortgage interest, charitable contributions, state and local taxes, childcare, casualty losses, etc.) and tax credits (Earned Income, Child, energy, etc.) would be eliminated. While some of these tax preferences have arguable merit, a case-by-case review would trigger endless debate.

Far from clearing the way for tax reform, the CAA has complicated matters by creating or reinforcing expectations that numerous tax preferences will be a permanent fixture of the tax law. Just what sort of “tax reform” is envisioned; do House Republicans hope to have “their cake and eat it” by keeping a host of tax preferences and cutting tax rates too? Sorry, but we don’t think such an approach would be politically realistic or fiscally responsible.

[Note: After our blog entry was posted, the linked PDF file of this document inexplicably ceased to display in words vs. code. Sorry. Here’s a related report that may be of interest. In case you missed it: “Brady plans to set stage for broader tax overhaul,” press release, 12/22/15.]

C. Energy policy – A number of extraneous provisions (aka “riders”) were inserted in the CAA, including repeal of the 40-year-old ban on exporting US-produced crude oil. In our view, this particular change was constructive and long overdue.

So could it be that Republicans gave a bit of ground on fiscal discipline in exchange for changes in the administration’s misguided campaign (Global warming alarmists go overboard, 1
2/14/15) against the use of fossil fuels? Nope, that’s basically the reverse of what happened.

In the first place, the oil export ban – like the Keystone Pipeline that had been previously delayed for years and ultimately blocked – did not relate to the amount of oil consumed around the world but only to where it would be produced (i.e., in North America or elsewhere). Accordingly, there was no reason to second-guess the decisions of the energy sector companies involved based on concerns about manmade global warming.

There are no obvious drawbacks of lifting the export ban and politicians on both sides of the aisle are always talking about their commitment to boosting the US economy, so one might think the change would be easily made. Guess again, because straightforward answers to simple questions are not the norm in Washington, DC!

The president and his supporters weren’t inclined to do any favor for the oil companies, and they had no intention of lifting the oil export ban without concessions that would promote the use of “renewable” (e.g., wind and solar) energy. Although this “what will you give us” attitude seemed wrong in principle and destructive in practice, it ensured that the ban could not be repealed on a standalone basis. Ending oil export ban should be easy decision,
10/5/15.

Both wind and solar energy tax credits were extended by the CAA as a quid pro quo for ending the oil export ban. And Republican proposals to legislatively block or delay the Clean Power Plan or other EPA regulations fell by the wayside, so Democrats gained far more ground in the energy policy area than they ceded. WH: Congress gave EPA a win in spending bill, John Siciliano, Washington Examiner,
1/7/16.

The omnibus bill that extended wind and solar tax credits for five years "bridges the low carbon future ... to the Clean Power Plan" and "ensures that clean energy wins," said Richard Duke, deputy director of the White House Office of Energy and Climate Change, at a Thursday event in Washington hosted by the Center for Strategic and International Studies.

Lifting the oil export ban will minimize the gap between US and international oil prices, to the benefit of US consumers. The US is and will remain a net oil importer, however, so the net effect on its balance of trade will be limited. The good, the bad, and the ugly in the omnibus spending bill, Marita Noon, netrightdaily.com,
12/27/15.

This helps American oil producers as it gives them a wider market for their product and allows them to sell oil at essentially the same price as the international benchmark prices — WTI goes up, Brent comes down. The lower global price helps consumers as the price of gasoline is based on the international price, not WTI. The win/win makes for good policy — a win I have pushed for many times in the past year and predicted last year.

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Aside from averting a government shutdown that neither side really wanted, we would be hard pressed to award the CAA a favorable rating. This legislation moved the deficit needle in the wrong direction, reinforced the obstacles to true tax reform, and supported misguided energy policies.

There has been talk about better days ahead, with Republicans vowing to restore regular order in the budgeting process (12 appropriation bills passed before the October 1 deadline). Maybe, time will tell, but we wouldn’t bet the ranch on it – especially in a hotly contested election year. GOP optimism on smoother spending-bill process faces reality, Kristina Peterson, Wall Street Journal,
12/28/15.

Rank-and-file lawmakers on both sides of the aisle are skeptical that leaders’ pledges to pass spending bills one at a time will materialize. “As long as the Tooth Fairy, Santa Claus and the Easter Bunny are on [the appropriations] committee, it’s absolutely what’s going to happen,” joked Rep. Mike Quigley (D., Ill.), a member of the panel.

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We are always disappointed by the GOP negotiators, but they also repeatedly tell us two things: we couldn’t have done any better (trust us) and things will be better next go around (again, trust us). What’s wrong with such statements? Though I am not Trump fan, for a variety of reasons, the establishment has created an anger and distrust that he can easily tap into. Many in the establishment still don’t get it. – Attorney, public interest law firm

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