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 of 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 Traditional Budget Today’s Budget Revenues increase with economic growth. Spending scheduled to grow automatically faster Spending increases only with new legislation. than revenues. Real Dollars Real Dollars Revenues Spending Long-run surpluses Widenin g long- run Short-term Spending deficits Revenues Future Years Future Years

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

Federal Outlays for Social Security and Major Health Programs, 1940-2088 Percentage of GDP 25 20 15 Medicaid, CHIP, & Exchange Subsidies 10 Medicare 5 Social Security 0 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 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.

Lifetime Social Security and Medicare benefits increase with each generation Present Value of Lifetime Social Security and Medicare Benefits and Taxes at Age 65 Married couple earning the average wage ($49,000 in 2015) Social Security Medicare Millennials 2015 dollars 1,927,000 Boomers 1,352,000 965,000 1,038,000 1,040,000 621,000 834,000 227,000 422,000 683,000 179,000 643,000 140,000 156,000 962,000 308,000 813,000 203,000 731,000 655,000 616,000 39,000 543,000 487,000 18,000 269,000 37,000 185,000 Benefits Taxes Benefits Taxes Benefits Taxes Benefits Taxes Benefits Taxes 1960 1980 2015 2030 2050 (Age 50 in 2015) (Age 30 in 2015) Year Couple Turns 65 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.

Social Security benefits provided for about 13 years more than in 1940 through longer lives (shown below) & earlier retirement Expected Years of Retirement Benefits, Earliest Retirement Age Couple (at least one partner living) and Individuals 35 Years of Benefits (life expectancy at ERA) 30 Couple 25 20 Individual 15 10 5 0 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Year Cohort Turns 65 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.

A budget for a declining economy: little for opportunity Total Outlays and Tax Expenditures for Major Budget Categories for Select Years under Current Law 2016 2026 Billions of 2016 dollars 3,556 2,609 1,493 1,338 1,220 966 683 315 310 256 Largely Inclusive Largely Non-Inclusive Income Maintenance Public Goods Net Interest Opportunity Opportunity Programs Programs Programs 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

Steuerle-Roeper Index of Fiscal Democracy Percentage of federal receipts remaining after mandatory and interest spending 80 60 40 20 18.0 0 2016 1962 1972 1982 1992 2002 2012 2022 -20 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.

Taxonomy of State Budgeting Restrictions DRAFT analysis, not for citation 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 Federally-financed spending on non-Medicaid and non- funds transportation programs. Other dedicated state Funds earmarked for specific purposes and programs, such as funds transportation funds and nonmajor special revenue funds. Spending that is obligated by the state constitution , not addressed Other constitutional in the categories above. For example, K-12 Standards of Quality obligations funding in Virginia. Court- or DOJ-imposed Court interpretations that create new spending requirements, as well obligations as federal Department of Justice settlements. Restrictions imposed by state budgeting institutions , such as Institutional obligations balanced budget requirements, tax and expenditure limits, or rainy day funds. Other miscellaneous programs not elsewhere classified , and which Other state mandatory may include required intergovernmental transfers, or programs spending politically off limits.

Restricted Spending in Virginia 2004 – 2015 (DRAFT analysis, not for citation) Percentage of total state expenditures 100% 90% Spending from other dedicated 80% funds, 20% 70% Other dedicated federal funds, 12% 60% Other state 50% mandatory, 6% Long-term 40% obligations, 10% 30% K-12 education (Constitutional … 20% 10% Total Medicaid and CHIP , 24% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015