REFRAMING THE BUDGET AND TAX DEBATE Eugene Steuerle Richard B. - - PowerPoint PPT Presentation

REFRAMING THE BUDGET AND TAX DEBATE Eugene Steuerle

Richard B. Fisher Chair & Institute Fellow, Urban Institute

Minnesota Center for Fiscal Excellence Minneapolis, MN October 10, 2018

3 Necessary Reforms for Today Budget World

• 1. Report changes in spending & taxes, past & projected, in real dollars
• Requires a minimum of only 2 years of comparable data
• Best to also separate out newly proposed from changes in “current services”
• 2. Explain clearly the new lack of flexibility in budgets
• Requires measuring for at least 2 years mandatory/ automatic//or current services

3.Offer budget reforms that restore long-term flexibility

• Requires legislative agreement to constrain growth & pay bills currently
• Examples: annual appropriations; triggers that limit growth not newly legislated

• BACKGROUND

Opportunity or austerity?

• A time of extraordinary possibility, not austerity
• Yet constrained by a disease unique to our time:
• Culmination of decades of effort to control an uncertain

future

• Misdiagnosed at least at the federal level by the symptom
• f deficits
• But common to both federal and state governments

7 Deadly Consequences (4 Economic, 3 Political)

ECONOMIC THREATS TO GROWTH & INNOVATION

1. Rising and unsustainable levels of debt 2. Weakened ability to combat recession & address emergencies 3. Lower growth through budgets for declining nations 4. Limited innovation through stale & antiquated government

POLITICAL THREATS

5. Decline in Fiscal Democracy

Voting public feels it lacks control

6. Politicians trapped in “prisoners’ dilemma”

Santa wins elections & agenda; Scrooge loses Psychology: Elected officials want to operate on “give away” side of budget

• 7. Difficulty in “fixing” government
• Politicians must renege on past “promises” to the public

How today really is different

Revenues increase with economic growth. Spending increases only with new legislation.

Future Years

Revenues Spending

Real Dollars Long-run surpluses Short-term deficits Future Years

Spending Revenues

Real Dollars Widenin g long- run

Spending scheduled to grow automatically faster than revenues.

Today’s Budget Traditional Budget

Q: What programs most constrain the future? A: The ones with the most built-in growth!

EXAMPLES Health Accepts new demand & new supply, then tries to cut back Retirement

• Improved mortality

Makes a population younger, not older But policy design leads to higher spending/fewer taxes

• Declining fertility (indeed, does “age” the population)
• Underfunded pension plans
• A Labor force, not just spending, issuei

Interest

• If don’t pay bills currently (federal debt; state pension plans)

Permanent tax subsidies

• SOME EXAMPLES FROM U.S. DATA

5 10 15 20 25 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Federal Outlays for Social Security and Major Health Programs, 1940-2088

Eugene Steuerle and Caleb Quakenbush, Urban Institute, 2013. Data compiled from CBO Long-Term Budget Outlook (2013) and OMB Historical Tables, FY2014. Medicare outlays are net of offsetting receipts. Projections assume extension of payment rates for Medicare physicians and other cost control mechanisms for Medicare and health subsidies do not take full effect.

Percentage of GDP Medicare Social Security Medicaid, CHIP, & Exchange Subsidies

269,000 487,000 185,000 616,000 543,000 731,000 655,000 962,000 813,000 39,000 156,000 18,000 422,000 140,000 621,000 179,000 965,000 227,000

308,000 37,000 643,000 203,000

1,038,000

683,000 1,352,000 834,000

1,927,000

1,040,000

Benefits Taxes Benefits Taxes Benefits Taxes Benefits Taxes Benefits Taxes 1960 1980 2015 2030 2050 Year Couple Turns 65

Social Security Medicare

Source: C. E. Steuerle and C. Quakenbush, Urban Institute, 2015. Based on earlier work with Adam Carasso and Stephanie Rennane. Calculations based on data from Social Security and CMS trustees Notes: Totals are expected present values adjusted for mortality at age 65 and assume a constant 2 percent real discount rate. (Age 50 in 2015) (Age 30 in 2015)

2015 dollars

Present Value of Lifetime Social Security and Medicare Benefits and Taxes at Age 65

Married couple earning the average wage ($49,000 in 2015)

Lifetime Social Security and Medicare benefits increase with each generation

Boomers Millennials

Social Security benefits provided for about 13 years more than in 1940 through longer lives (shown below) & earlier retirement

5 10 15 20 25 30 35 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Years of Benefits (life expectancy at ERA)

Year Cohort Turns 65

Expected Years of Retirement Benefits, Earliest Retirement Age

Couple (at least one partner living) and Individuals

Notes: Calculations based on mortality data from the 2013 OASDI Trustees' Report . Calculations for a couple assume that at least one partner is still living. ERA was set at 62 for women in 1956 and men in 1961. C. E. Steuerle and C. Quakenbush, Urban Institute 2013.

Couple Individual

A budget for a declining economy: little for opportunity

310 966 2,609 1,220 256 315 1,493 3,556 1,338 683 Largely Inclusive Opportunity Programs Largely Non-Inclusive Opportunity Programs Income Maintenance Programs Public Goods Net Interest

2016 2026

Billions of 2016 dollars

Total Outlays and Tax Expenditures for Major Budget Categories for Select Years under Current Law

Largely Inclusive Opportunity Programs: Examples include the Earned Income Tax Credit, children’s health and nutrition programs, and outlays for education Largely Non-Non Inclusive Opportunity Programs: Mainly tax expenditures for retirement saving and homeownership, which flow mainly to higher income households Income Maintenance Programs: Mainly transfer programs such as Social Security and health care entitlements, SNAP, and cash welfare Public Goods: Mainly national defense, federal highway spending, and general government

3 NECESSARY REFORMS BUDGET PRESENTATION & PROCESS

3 Necessary Reforms for Today Budget World

• 1. Report changes in spending & taxes, past & projected, in real dollars
• Requires a minimum of only 2 years of comparable data
• Next, separate out newly proposed from changes in “current services”
• 2. Explain clearly the new lack of flexibility in budgets
• Requires measuring for at least 2 years mandatory/ automatic/ or current services

3.Offer budget reforms that restore long-term flexibility

• Requires legislative agreement to constrain growth & pay bills currently
• Examples: annual appropriations; triggers that limit growth not newly legislated

18.0

• 20

20 40 60 80 1962 1972 1982 1992 2002 2012 2022

Steuerle-Roeper Index of Fiscal Democracy

Percentage of federal receipts remaining after mandatory and interest spending

Source: C. Eugene Steuerle and Caleb Quakenbush, 2016, Washington, DC: Urban Institute. Notes: Calculations based on data from OMB FY2017 Historical Tables and CBO, An Update to the Budget and Economic Outlook: 2016 to 2026, August 2016.

2016

Taxonomy of State Budgeting Restrictions

Constraint Description

Long-term obligations

Spending on debt service, and pensions, and OPEB.

Medicaid and CHIP

State- and federally-financed spending on Medicaid and CHIP.

Other dedicated federal funds

Federally-financed spending on non-Medicaid and non- transportation programs.

Other dedicated state funds

Funds earmarked for specific purposes and programs, such as transportation funds and nonmajor special revenue funds.

Other constitutional

• bligations

Spending that is obligated by the state constitution, not addressed in the categories above. For example, K-12 Standards of Quality funding in Virginia.

Court- or DOJ-imposed

• bligations

Court interpretations that create new spending requirements, as well as federal Department of Justice settlements.

Institutional obligations

Restrictions imposed by state budgeting institutions, such as balanced budget requirements, tax and expenditure limits, or rainy day funds.

Other state mandatory spending

Other miscellaneous programs not elsewhere classified, and which may include required intergovernmental transfers, or programs politically off limits.

DRAFT analysis, not for citation

Restricted Spending in Virginia

Total Medicaid and CHIP , 24% K-12 education (Constitutional … Long-term

• bligations, 10%

Other state mandatory, 6% Other dedicated federal funds, 12% Spending from

• ther dedicated

funds, 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Percentage of total state expenditures

2004 – 2015 (DRAFT analysis, not for citation)

Summary

• Our fiscal situation unique in all of our history
• Many similarities between national & state governments
• The modern disease: lack of flexibility
• Multi-decade growth in efforts to control an unknown future
• Not a time of austerity
• …but of opportunity foregone
• Advocates of fiscal excellence can reframe the debate:
• (1) Show better how NEW, REAL spending & taxes are being allocated
• (2) Show simply how past “promises” constrain flexibility
• (3) Offer options to restore flexibility by constraining promises & paying bills currently
• More flexibility no matter what the size of government

• SOME SOURCES

Find out more

• www.deadmenruling.com
• blog.governmentwedeserve.org