Policy: Budgets & Deficits

Five jaw-dropping gimmicks in President Obama's budget

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Beltway Confidential,Opinion,Philip Klein,Taxes,Budgets and Deficits

President Obama's budget released Tuesday claims to reduce deficits by trillions of dollars, but a closer look at the details reveals that the deficit reduction is dependent on a number of gimmicks.

Overall, Obama's budget for fiscal year 2015 still projects deficits of $4.9 trillion between 2015 and 2024 if all of his policies are adopted. But that is about $3 trillion less than what the Congressional Budget Office is projecting for the period and $2.2 trillion less than what the White House's own Office of Management and Budget is estimating for the period if there are no changes to current laws.

However, this budgetary feat is less impressive when one considers the following gimmicks on which Obama relies. This is by no means a comprehensive list.

Rosier economic assumptions

Budget projections are highly dependent on changes in economic growth. A robust economy means more people are employed, individuals and businesses are earning more, and fewer people are reliant on social safety net programs. This translates into higher tax revenue and lower government spending. Even seemingly small fluctuations in economic growth can have significant implications on deficits. In February, the CBO estimated that if economic growth were just one-tenth of one percent lower each year over the next decade, it would increase deficits by $311 billion over the period.

Obama’s budget assumes that economic growth will average 2.7 percent annually over the next decade, which compares with a 2.4 percent estimate from the CBO. This helps explain why even before considering the effects of a single Obama proposal, the White House’s 10-year deficit forecast goes down to $7.1 trillion – an instant reduction of $800 billion compared with the CBO estimate.

To be sure, economic forecasts are consistently unreliable, so it may turn out that the White House economic assumptions prove closer to reality than the more pessimistic CBO estimates. But it's worth noting that in the past, the Obama administration has tended to overestimate growth. For instance, in Obama's fiscal year 2011 budget, even after the depth of the nation's economic crisis was apparent, the White House estimated that real growth in gross domestic product would average 4.1 percent annually for calendar years 2011 through 2013. The actual average turned out to be 2.2 percent, according to the latest revisions.

Phony war savings

As is his wont, Obama also claims $695 billion in deficit reduction from lower spending on “overseas contingency operations.” Translated, this means that spending is lower than a baseline that assumes that without Obama's policies, the wars in Iraq and Afghanistan would continue at elevated levels in perpetuity - even though they were already scheduled to wind down.

Corporate tax reform slight of hand

Obama's budget isn't the most transparent document. Those wanting to get a breakdown of the tax increases (without the benefit of my awesome recent post on the subject), would have to go line-by-line through a 24-page table, in which tax and fee increases are mixed in with changes to Medicare and other mandatory spending. Starting on page 195, and continuing for several pages, there's a long list of tax increases on businesses totaling $250 billion, described as a “reserve for long-run revenue-neutral business tax reform.”

Then, on the bottom of page 200, there’s a footnote, which reads: “Because the Administration believes that these proposals should be enacted in the context of comprehensive business tax reform, the amounts are not reflected in the budget estimates of receipts and are not counted toward meeting the Administration’s deficit reduction goals. The budget estimates do include $150 billion in temporary revenues that would be generated by the transition to a reformed business tax system, shown as part of the proposal to reauthorize surface transportation above.”

Wait, what?

It turns out that the $250 billion in corporate tax proposals aren’t actually counted in the budget, they’re merely suggested ways to finance a tax reform that would close loopholes and lower corporate rates. But that doesn’t mean the budget isn’t claiming any revenue from corporate tax reform.

Another section of the budget describes “a four-year, $302 billion surface transportation reauthorization proposal.” The section goes on to explain that, “the transition to a reformed business tax system will generate one-time, temporary revenue, for example from addressing the $1-2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. The Budget proposes to use the one-time savings generated from transitioning to the new business tax system to fill the Highway Trust Fund shortfall and pay for the four-year transportation reauthorization proposal included in the Budget.”

In other words, Obama’s budget lists a bunch of loophole closures toward the theoretical adoption of corporate tax reform that wouldn’t have a net impact on revenue. But then the budget still uses a one-time revenue windfall resulting from this theoretical reform to help finance Obama’s other domestic priorities.

Tobacco tax trick

Obama’s budget claims to pay for a universal preschool program by hiking cigarette taxes. The move has obvious political appeal, by allowing Obama to portray opponents as putting smokers over innocent kids. But it’s fiscally suspect. The reason is that if tobacco taxes are effective in reducing the number of people who smoke, they will decline over time as a source of revenue. On the other hand, the cost of financing early education will grow over time. This is apparent in the White House’s own numbers.

Though Obama’s budget projects that tobacco taxes would raise $78 billion over the next decade, more than paying for the $76 billion increase in early childhood education, the trend is problematic. Whereas in 2016, the White House projects tobacco taxes will raise $10 billion compared with $1 billion in spending for early childhood education, by 2024, tobacco tax revenues are projected to decline to $6 billion while early childhood education spending is expected to increase to $11 billion. Thus, over time, Obama’s financing mechanism will prove insufficient to pay for his education proposals.

Gaming immigration reform

The Obama budget also assumes the adoption of comprehensive immigration reform, which it estimates would boost revenue by $456 billion as newly legalized immigrants pay taxes. Overall, the budget estimates reform would reduce deficits by a net $158 billion after the immigration reform-related spending is accounted for. However, a big chunk of increased revenue from immigration reform comes from payroll taxes, which provide a short-term revenue injection for the government, but also impose long-term obligations to the Social Security system that would come due outside of the 10-year budget window. Though the Obama budget doesn't provide a detailed breakdown of how much of the revenue would come from payroll taxes, a similar June 2013 CBO estimate of the Senate immigration bill found that $214 billion of the $459 billion in increased revenue would come from payroll taxes.

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