ObamaCare’s Premium-Assistance Glitch: Orrin Hatch Edition
The Senate Finance Committee’s ranking member is not amused.
A Weak Defense of an Illegal Fix to an ObamaCare Glitch
In this November 16 op-ed, Jonathan Adler and I explain how the Obama administration is trying to save ObamaCare (“the Affordable Care Act”) by creating tax credits and government outlays that Congress hasn’t authorized. (The administration describes this “premium assistance” solely as tax credits.) This week, the administration tried to reassure everybody that no, they’re not doing anything illegal.
Here’s how IRS commissioner Douglas H. Shulman responded to a letter from two dozen members of Congress (emphasis added):
The statute includes language that indicates that individuals are eligible for tax credits whether they are enrolled through a State-based Exchange or a Federally-facilitated Exchange. Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation of the Affordable Care Act discusses excluding those enrolled through a Federally-facilitated Exchange.
And here is how HHS tried to dismiss the issue (emphasis added):
The proposed regulations issued by the Treasury Department, and the related proposed regulations issued by the Department of Health and Human Services, are clear on this point and supported by the statute. Individuals enrolled in coverage through either a State-based Exchange or a Federally-facilitated Exchange may be eligible for tax credits. …Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation discussed limiting the credit to those enrolled through a State-based Exchange.
These statements show that the administration’s case is weak, and they know it.
When government agencies say that a statute indicates they are allowed to do X, or that their actions are supported by that statute, it’s a clear sign that the statute does not explicitly authorize them to do what they’re trying to do. If it did, they would say so. (A Treasury Department spokeswoman offers a similarly worded rationale.)
In our op-ed, Adler and I explain why the statutory language to which these agencies refer does not create the sort of ambiguity that might enable the IRS to get away with offering premium assistance in federal Exchanges anyway. (Nor does the fact that the CBO and the JCT misread portions of this 2,000-page law create such ambiguity.) That’s because there is no ambiguity in that language. There is only a desperate search for ambiguity because the law clearly says what supporters don’t want it to say.
Finally, the fact that these two statements are so similar shows that the administration considers this glitch to be a serious problem and wants everyone on the same page.
Washington & Lee University law professor Timothy Jost is an ObamaCare supporter and a leading expert on the law. He is also too honest for government service, for he has acknowledged that ObamaCare “clearly” does not authorize premium assistance in federal Exchanges, and that it is only “arguabl[e]” that federal courts will let the administration get away with offering it. (Again, in our op-ed, Adler and I explain why that argument falls flat.)
After reading the administration’s statements, Adler writes, ”If that’s all they got, they should be worried.”
Federal Spending Hits $4.1 Trillion
If you looked at the new CBO report on the budget, you may have noticed that federal spending this year will be $3.6 trillion.
In fact, federal spending this year will top $4 trillion. But virtually all reporters and budget wonks (including me) routinely use the lower number when discussing total federal spending. I don’t think the higher $4 trillion number even appears anywhere in the CBO report.
The $3.6 trillion figure is “net” outlays. But “gross” outlays, or total spending, is quite a bit higher. The difference is caused by “offsetting collections” and “offsetting receipts.” These are revenue inflows to the government that are netted against spending at the program level, agency level, or government-wide level. Some examples are national park fees, Medicare premiums, and royalties earned on mineral deposits. There are hundreds of these cash inflows to the government that offset reported spending.
Details on these revenue offsets can be found in Chapter 16 of OMB’s Analytical Perspectives (pdf). In fiscal year 2010, net federal outlays were $3.456 trillion, but gross outlays were $4.057 trillion. Thus, gross outlays were 17 percent larger than widely reported net outlays.
In FY 2011, OMB expects gross outlays to be about 15 percent larger than net outlays. Thus, gross outlays this year will be $4.1 trillion, compared to net outlays of $3.6 trillion. As a share of GDP, gross outlays will be about 27.3 percent of GDP, compared to net outlays of 23.8 percent.
Accounting for offsets in this manner is a long-standing convention, but it is one of the sneaky ways that Washington tries to hide its large intrusion into the economy. Certainly, the CBO and OMB should include more prominent presentations of gross outlays in their regular budget updates.
For citizens and reporters, a rule-of-thumb to remember is that total federal spending is 3 to 4 percentage points of GDP larger than usually reported by officials.
New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget
The Congressional Budget Office has just released the update to its Economic and Budget Outlook.
There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”
This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.
Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.
But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.
The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.
That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.
Debunking the Left’s Tax Burden Deception
I testified yesterday before the Joint Economic Committee about budget process reform. As part of the Q&A session after the testimony, one of the Democratic members made a big deal about the fact that federal tax revenues today are “only” consuming about 15 percent of GDP. And since the long-run average is about 18 percent of GDP, we are all supposed to conclude that a substantial tax hike is needed as part of what President Obama calls a “balanced approach” to red ink.
But it’s not just statist politicians making this argument. After making fun of his assertion that Obama is a conservative, I was hoping to ignore Bruce Bartlett for a while, but I noticed that he has a piece on the New York Times website also implying that America’s fiscal problems are the result of federal tax revenues dropping far below the long-run average of 18 percent of GDP.
In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P. But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943. Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era.
To be fair, both the politician at the JEC hearing and Bruce are correct in claiming that tax revenues this year are considerably below the historical average.
But they are both being a bit deceptive, either deliberately or accidentally, in that they fail to show the CBO forecast for the rest of the decade. But I understand why they cherry-picked data. The chart below shows, rather remarkably, that tax revenues (the fuschia line) are expected to be back at the long-run average (the blue line) in just three years. And that’s even if the Bush tax cuts are made permanent and the alternative minimum tax is frozen.
It’s also worth noting the black line, which shows how the tax burden will climb if the Bush tax cuts expire (and also if millions of new taxpayers are swept into the AMT). In that “current law” scenario, the tax burden jumps considerably above the long-run average in just two years. Keep in mind, though, that government forecasters assume that higher tax rates have no adverse impact on economic performance, so it’s quite likely that neither tax revenues nor GDP would match the forecast.
$2 Trillion in Cuts in Perspective
Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.
Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.
The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:
Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.
Federal Budget Cap at 3%
The federal government is approaching its legal borrowing limit, and fiscal conservatives in Congress are wondering what spending reforms they can extract in return for supporting a debt-limit increase. Various sorts of balanced budget amendments and debt limits relative to GDP are being kicked around. I support those ideas, but I fear that they may be too complicated to gain traction right now.
A simpler idea would be to impose a statutory limit on annual spending growth of 3 percent. If total federal outlays in a year were $4 trillion, the government couldn’t spend more than $4.12 trillion the next year. It would be that simple.
Such a limit would be easy for policymakers and the public to understand and enforce. It would put ongoing pressure on Congress to cut discretionary programs and reform entitlements. With spending growth limited to 3 percent, the budget would be balanced in just over a decade and growing surpluses would be generated after that. The federal government would shrink as a share of GDP. The math is simple: federal revenues and GDP are expected to grow substantially faster than the 3 percent spending limit over the next decade and beyond.
I want Congress to enact major cuts to spending, not just to limit spending growth. But one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards.
Under such a limit, the OMB and CBO would issue regular reports showing spending for the coming fiscal year relative to the projected legal cap, which would make it clear to political leaders, reporters, and voters how much needs to be cut. The president would also be required to propose a budget each year that fit under the estimated legal cap. If the beginning of a new fiscal year arrives and spending is still expected to be above the limit, the president would be required by law to impose an across-the-board cut to bring spending into line.
In the past, I’ve proposed a spending growth cap equal to the sum of inflation plus population growth. (This sum is expected to be about 3 percent in coming years). But a fixed and explicit percent cap would be even simpler and easier to enforce. A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.
The chart shows the proposed spending in Obama’s new budget compared to spending capped at 3 percent. The spending cap line assumes that the GOP’s discretionary cuts are put in place this year. It also assumes that spending grows at the maximum 3 percent each year, but if spending were restrained more than that, the cap would ratchet down to a lower level. The chart also shows projected federal revenues based on CBO data, assuming the extension of current income tax cuts and AMT relief. (See page 22).
Limiting spending growth to 3 percent is a modest goal, but over time the results would be quite dramatic compared to Obama’s no-reform spending plan. Spending in 2021 would be about $1 trillion less than the president is projecting—$4.7 trillion rather than $5.7 trillion. As a share of GDP, Obama’s 2021 spending of 23.9 percent would be cut to 19.9 percent. And the budget would be closing in on balance that year with revenues at 18.6 percent of GDP with tax relief in place. (Figures based on OMB GDP).
At DownsizingGovernment.org, I’ve proposed spending cuts that would take the federal government down to 15 percent of GDP or less. But getting a new budget mechanism signed into law takes centrist support, and I think that a 3 percent growth cap to balance the budget in a decade or so is a reasonable goal that could gain broad agreement.
Finally, it makes sense to include in such a budget law the ability of policymakers to spend over the cap temporarily for emergency war funding with a two-thirds vote in both House and Senate. Without such a temporary escape hatch, Congress would likely simply repeal the law when it entered a costly war.
I’ve discussed a spending growth cap in more detail here and here and here. Dan Mitchell has made similar observations about spending growth rates. The folks at One Cent Solution are recommending a tighter cap.
Spending Still Increases with GOP Cuts
House Republicans engineered a continuing resolution for fiscal 2011 that would trim $61 billion in “regular” discretionary budget authority versus fiscal 2010. The Obama administration and the Democratic majority in the Senate balked at the cuts, and a two-week continuing resolution will be passed in order to avoid a “government shutdown” and give the sides more time to reach an agreement.
Based on the Congressional Budget Office’s score of the continuing resolution containing $61 billion in funding cuts, and the CBO’s recent budget projections, both discretionary and total federal outlays (actual spending) would still be higher in fiscal 2011 versus fiscal 2010.
Keep these charts in mind the next time you hear or read that the Republicans’ supposedly “major spending cuts” will lead to reduced economic growth and hundreds of thousands of jobs lost.
As If Gov’t Spending Had Nothing to Do with It
This is how a front-page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:
Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillionThe still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.
Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit. Yet the Post blames the deficit only on inadequate tax revenue. Federal spending isn’t too high, the Post implies, tax revenue is too low.
This may not be an example of media bias. But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government. At a minimum, the Post has some explaining to do.
Nondefense Discretionary Spending Freezes
When it comes to reining in federal spending, House Republicans and the president have one idea in common: freezing nondefense discretionary spending. That category accounts for about 18 percent of total spending, so let’s see how such a freeze would affect the overall budget.
Today the Congressional Budget Office released updated budget figures and baseline projections of federal spending through fiscal 2021. Projecting the budgetary future is obviously an inexact science, and the CBO’s baseline reflects unrealistic assumptions. However, it does allow us to get an idea of the impact of a nondefense discretionary freeze on total federal spending.
Three proposals have been put forward:
- In his State of the Union address, President Obama proposed freezing nondefense discretionary spending for five years, beginning in fiscal 2012, at fiscal 2010 levels.
- The conservative House Republican Study Committee and Sen. Jim DeMint (R-SC) recently proposed freezing nondefense discretionary spending for ten years, beginning in fiscal 2012, at fiscal 2006 levels.
- Ever since the release of its “Pledge to America,” the House Republican leadership has been talking about returning spending to fiscal 2008 levels. They apparently have non-security discretionary spending in mind, which is an even smaller category than nondefense discretionary. It’s not clear if they intend to freeze it at the new lower level.
Using the CBO’s latest figures, I calculated baseline spending from fiscal 2012-2021 under ten year freezes in nondefense discretionary spending at fiscal 2006, 2008, and 2010 levels:
Note: To make an apples-to-apples comparison, I extended the proposed Obama freeze at fiscal 2010 levels from five years to ten years, and I assumed a ten year freeze at fiscal 2008 levels for the House Republicans. Also, projected annual interest payments on the debt are excluded. Therefore, the chart refers to “baseline program spending,” which is the sum of nondefense discretionary, defense, and entitlement spending.
The chart makes it excruciatingly clear that freezing nondefense discretionary spending at the levels specified or implied by Republicans and Democrats is only a start toward needed reforms in the federal budget. Congress also needs to cut defense spending, and spending on Social Security, Medicare, Medicaid, and other entitlement programs.
Republican Sellout Watch
Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months. Two items don’t bode well for fiscal discipline.
First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,
As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.
This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.
That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.
It is a good idea to get as much savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.
PAYGO, the CBO, and Repealing ObamaCare
One could argue that exempting ObamaCare from the PAYGO requirement is appropriate given the defects in current budget rules.
By law, the CBO must follow certain rules when doing cost estimates of legislation and projecting federal spending under current law. Under those rules, CBO projects ObamaCare will reduce the deficit. No question.
But Congress often defeats those budget rules by passing legislation with “pay fors” (i.e., spending cuts) that make the budget look better, yet are highly unlikely to be sustained because they are politically implausible. A good example of this is the “sustainable growth rate” formula, where Congress promises to ratchet down the government price controls that Medicare uses to pay physicians in future years. Congress has consistently reneged when those cuts come due. The pretense of future cuts that Congress writes into law makes 10-year budget projections/deficits look better than actual, unwritten policy would suggest.
This is a recognized problem. When the CBO believes that the law and actual policy are at variance, they actually do two types of cost projections: one based on the law as written and one based on the policy they think Congress is likely to adopt, based on past performance. They call the latter their “alternate fiscal scenario.”
ObamaCare opponents submit that this law is one of those instances where law and policy are at variance. So even though ObamaCare will reduce the deficit under existing budget rules, the spending cuts (actually, reductions in future spending growth) in the law were never going to take effect anyway. The CBO, CMS, and even the IMF have all discredited the idea that ObamaCare would reduce the deficit, because they all question the sustainability of ObamaCare’s spending “cuts.” Exempting ObamaCare repeal from PAYGO rules is appropriate if those rules have failed to protect taxpayers.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
