Last night, the Senate passed legislation sent over from the House to avoid a deep cut to physician payments through a 12-month “Doc Fix.” Later this week they will likely pass a bill restoring and extending emergency unemployment benefits. These proposals have two things in common. First, they both would cost money and add to the deficit. And second, their proponents claim they would not add to the deficit, and they use data from the non-partisan Congressional Budget Office to support this claim.
How do you spend more without adding to the deficit on paper? Budget gimmicks, that's how.
Under current law, “pay as you go” rules require legislators to find $1 in savings for every $1 in new spending (or cut taxes) over 10 years. This rule is meant to control the debt and prevent frivolous new tax and spending plans. But budget gimmicks offer an escape hatch for policymakers to evade the rule. My organization, the Committee for a Responsible Federal Budget, released a chartbook explaining many of these gimmicks. Here’s how they work:
Using the Magic Window to Hide Spending
The Congressional Budget Office relies on a 10-year budget window, meaning they currently project costs and savings through fiscal year 2024. In order to make it appear as if a proposal saves money, lawmakers will sometimes enact changes that require or allow individuals or business to pay taxes or premiums now, instead of paying them later. These proposals show up as savings within the budget window, while costs are hidden in later years.
Policymakers used this trick in the fiscal-cliff deal at the beginning of 2013, raising revenue by allowing people to shift to Roth retirement accounts where they pay taxes on their income before putting it into a retirement account but receive a tax break when they withdraw their money many years later.
This gimmick is also used to pay for $6 billion of unemployment benefits in the Senate bill currently under consideration. In this case, a provision called “pension smoothing” allows companies to contribute less to their employee pensions now and instead pay more into their pensions later. As a result, corporate taxable income goes up in the first seven years, raising $19 billion. But then it falls as companies make up for lower contributions later on, resulting in no real increase in government revenue over the long-run.
Shifting Savings Inside the Budget Window
The use of the 10-year budget window allows for some even more egregious timing shifts than those described above. Policymakers can literally identify revenue or spending cuts meant to occur in the 11th year and move them to year 10.
In the past, lawmakers have revised the dates corporations are required to make quarterly tax payments by a few days in order to bring that revenue “inside the budget window.” But recently, they learned a new trick.
Under current law, a mandatory sequestration imposes a two percent annual cut to Medicare providers through calendar year 2024. But savings in the second half of the calendar year don’t appear in the budget until fiscal year 2025.To pay for $5 billion of the recently-passed “Doc Fix,” policymakers doubled the provider cut from 2 percent to 4 percent in the first half of 2024, but cut it to 0% in the second half.
That might seem like savings in a 10-year budget window, but all it really does is reduce spending in 2024 and increase it by an equal amount in 2025.
Paying for Permanent Costs With Temporary Savings
In most cases, if a tax increase or spending cut is sufficient to pay for a new expense over ten years it is likely to do the same (more or less) over the long-run. But sometimes, policymakers use temporary savings to pay for permanent costs.
This was exactly the approach taken by House Republicans recently, when they used revenue from a five-year delay of the individual mandate to pay for the cost of enacting a permanent “Doc Fix” to increase scheduled payments to physicians. This bill would certainly reduce deficits in the short-run, since fewer Americans would sign up for government-subsidized health insurance. But after the mandate is reinstated, the savings go away, yet the cost of the Doc Fix would continue.
This particular bill would reduce deficits by nearly $50 billion over the decade, but could increase them by $200 billion or more in the next decade.
Using Phony War Savings to Finance Real Costs
The wars in Iraq and Afghanistan have cost over $1.5 trillion so far, but as we continue to withdraw our troops from the region the costs are waning. Annual costs have already fallen in half from a high of nearly $190 billion in 2008 to closer to $90 billion today, and they are likely to fall to as low as $30 billion in the next few years.
Some lawmakers want to take credit for the drawdown already underway and spend the “savings” elsewhere. Specifically, they would impose a cap on future war spending at or above expected costs for a likely drawdown path and count the difference between what we’re spending now (adjusted for inflation) and that cap as deficit reduction. This is exactly the approach used in legislation from House Democrats to offset a permanent Doc Fix.
But for a budget cap to reduce spending, it has to lead Congressional appropriators to spend less than they otherwise would. This proposal would do no such thing. As the Congressional Budget Office has explained, these caps “might simply reflect policy decisions that have already been made and that would be realized even without such funding constraints.”
The left-leaning Center on Budget and Policy Priorities argues that these reductions “do not represent real savings” while the right-leaning Heritage Foundation calls them “phony war savings.” No one takes these phantoms savings seriously, not even those peddling them in Congress.
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With the fiscal grand bargain on life support and election season well underway, few expect substantial deficit reduction to be enacted this year. But pay-as-you-go rules are in place to at least stop our leaders in Washington from making things worse.
The entire purpose of these rules is force Congress and the president to recognize the very real trade-offs involved in the decisions they make.
Budget gimmicks might seem like an easy way out, but they are a short-sighted one. There is no such thing as a free lunch, and one way or another the bill will ultimately come due.
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