The Budgetary Effect of the State of the Union

Jan 30, 2014 | Taxes| Other Spending

While the President's 2014 State of the Union address largely eschewed talking about fiscal policy directly, it did touch on a number of proposals that would impact the federal budget. In this blog, we will talk about the potential costs or savings of various policies he mentioned.

Business Tax Reform

In the speech, Obama expressed his desire to undertake business tax reform. He said:

Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let's flip that equation. Let's work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.

Moreover, we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today's global economy, first-class jobs gravitate to first-class infrastructure.

In this excerpt, he brought up his plan from last summer to invest temporary revenue increases from business tax reform into infrastructure spending. Since some provisions of tax reform can naturally result in temporary revenue, rather than a permanent increase in tax burdens, having a goal of revenue-neutrality over the long run will result in some additional revenue upfront.

The President's business tax reform was first outlined two years ago, with plans to cut the corporate tax rate to 28 percent, increase tax benefits for manufacturing and R&D, and identify enough tax expenditure and other reductions to make it revenue-neutral. We noted at the time that the latter goal of revenue-neutrality had not been accomplished, and that remains true: according to the CBO, after dedicating revenue to expanding and making permanent the R&D tax credit and small business expensing, the President's budget identifies $66 billion in net revenue (including the elimination of fossil fuel subsidies he mentioned in the speech), enough to lower the corporate tax rate by about 0.6 percentage points. The proposal did identify further savings through a minimum tax for multinational companies and mentioned addressing depreciation schedules, so it is likely that additional revenue to pay for the rate reductions would come from there.

By definition, the proposal would be roughly deficit-neutral, but there would need to be more specifics on corporate pay-fors for the whole of the plan to work out. Also, if the transportation spending was not one-time but a more permanent investment, it would increase deficits over the longer term as the upfront revenue increases from corporate tax reform faded away.

Earned Income Tax Credit

In talking about helping low-income workers and reducing inequality, the President brought up the Earned Income Tax Credit:

There are other steps we can take to help families make ends meet, and few are more effective at reducing inequality and helping families pull themselves up through hard work than the Earned Income Tax Credit. Right now, it helps about half of all parents at some point. But I agree with Republicans like Senator Rubio that it doesn't do enough for single workers who don't have kids. So let's work together to strengthen the credit, reward work, and help more Americans get ahead.

Sen. Rubio's plan, which was first outlined in a speech earlier this month, has brought increased attention to the relatively meager EITC benefits for childless workers compared to those with children. The benefit for childless workers is only $500 (compared to $3,300-$6,100 for workers with children) and phases out completely at an income level of only $14,600 (compared to $38,500-$47,000 for workers with children). Rubio proposed taking the child aspect out of the EITC so that childless workers would receive the same benefit as workers with children. This proposal is in line with plans like the Domenici-Rivlin tax reform, which also paired that reform with an increase in the child tax credit.

While the budgetary effect of Rubio's plan depends on the details, we do have a score for increasing the childless EITC from the 2009 House cap-and-trade bill, which doubled the credit starting in 2012; that policy would have cost $25 billion through 2019. The score may have increased because CBO's projections of total wage and salary income have decreased since 2009 (the effect could go both ways), and the budget window is different. It would also depend on the start date of the policy.

Immigration Reform

In talking about immigration reform, Obama touted the fiscal and economic benefits, saying:

Finally, if we are serious about economic growth, it is time to heed the call of business leaders, labor leaders, faith leaders, and law enforcement – and fix our broken immigration system. Republicans and Democrats in the Senate have acted. I know that members of both parties in the House want to do the same. Independent economists say immigration reform will grow our economy and shrink our deficits by almost $1 trillion in the next two decades.

According to CBO, the Senate immigration reform bill would save $880 billion over the next 20 years ($200 billion in the first ten, $685 billion in the next ten). It would be more like $780 billion if discretionary spending caps were increased to accomodate additional appropriations that would need to be made, instead of cutting other spending under the caps to make space. The score is the result of additional income and payroll tax revenue outpacing spending on low-income programs (and later on, Social Security and Medicare). Over those two decades, the Social Security portion of the budget is responsible for $785 billion of the deficit reduction while the on-budget portion is responsible for $95 billion.

The Chief Actuary of the Social Security Administration has also estimated that the Senate bill would close 8 percent of the program's 75-year actuarial deficit. For more discussion of budgetary analyses of the Senate's immigration plan, read CRFB's report.

Unemployment Insurance

Not surprisingly, President Obama called for extending emergency unemployment benefits in the speech. A full-year extension of the 73-week maximum collecting period would cost $25 billion, and a three-month extension would cost $6.4 billion. Another proposal to extend benefits up to 57 weeks through late November is mostly offset, although it relied on some savings very late in (and beyond) the ten-year window. The President did not specify his preference for the length of the extension (other than it should be at least three months), the number of weeks benefits can be collected for, or offsets he would be willing to use for the extension, so the budgetary effect is up in the air. CRFB continues to ask lawmakers to pay for any extensions in emergency unemployment benefits.

Minimum Wage

Prior to the speech, the Obama Administration announced that it would raise the minimum wage for workers on new federal contracts from $7.25 per hour to $10.10. He also announced his support for bills in Congress to raise it nationwide to that same amount.

Although circumstances can be different, CBO estimated that the last minimum wage increase in 2007 from $5.15 to $7.25 would have a negligible effect on the federal budget. Judging by that, it is likely that the executive order for workers on federal contracts would also have a negligible effect, although it would entail slightly more discretionary spending for wages within the caps that are in place. One could assume the same for the legislation, but there is a kicker: unlike the 2007 bill, the bills in Congress would raise the minimum wage for tipped employees (which has remained the same for more than 20 years) from $2.13 per hour to 70 percent of the normal minimum wage. This extra provision would mean many more workers would be affected by the increase than in 2007, although it is not clear how many more or whether that would change CBO's score.

In short, the effect on the federal budget is likely to be small, although we would need an official score from CBO to confirm.

Job Training and Scientific Research

In his speech, President Obama decried cuts to federally-funded research (presumably as a result of the sequester) and called for a review of the job training system. While details on these changes were not given, they could result in increased spending, particularly in research. However, both of these areas are in discretionary spending, which is subject to caps, so overall spending would not be increased unless lawmakers changed those caps. Instead, those increases would result in less resources going to other areas.