Fiscal Fact Checker: What Caused the Swing From Surplus to Deficit?

The Hill points to a press release by Senator (and former OMB director) Rob Portman (R-OH) that claims the upper-income portion of the 2001/2003/2010 tax cuts accounted for only 4 percent of the swing from surpluses to deficits starting in the early 2000s. The release also argues that increased spending and interest on the debt are much more responsible for the increase in deficits than tax cuts.

The number he cites comes from an interesting CBO document that details how and why actual deficits have differed from their January 2001 projection, when they projected $5.9 trillion of surpluses from 2001-2011 and the federal government paying down the debt within the ten-year window. In reality, we ended up with deficits of $6 trillion over that period, a $11.9 trillion swing from the old CBO projection.

Determining how much the upper-income tax cuts cost over that period requires some calculations since the legislative scores at the time the laws were passed did not necessarily separate out the upper-income provisions from other parts of the tax cuts--specifically, the income tax rate cuts and the capital gains and dividend rate cuts. To determine how much these provisions cost, we went to the Administration's "Green Book" from 2010, which gives an idea of how much of the cost of the rate cuts goes to high income people. We then applies those ratios to those provisions and add in other appropriate provisions--including estate tax changes--from the 2001, 2003, 2005, and 2010 tax cuts. The total comes to about $500 billion, or 4 percent of the total swing, so Sen. Portman is correct on this number.

Cost of the Upper-Income Tax Cuts (billions)
  2001-2011 Cost
Economic Growth and Tax Relief Reconciliation Act of 2001 $340
Jobs and Growth Tax Relief Reconciliation Act of 2003 $80
Tax Increase Prevention Reconciliation Act of 2005 $40
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 $30
Total Cost $490
Percent of Total Change in Surpluses/Deficits 4%
Memorandum: Total Change in Surpluses/Deficits $11,900

Sources: Treasury, JCT

As with most things in the budget world, you can cut the numbers different ways. One could also look at the cost of these tax cuts as a percent of just legislative changes. About $3.3 trillion of the swing comes from CBO being overly optimistic on their economic and technical assumptions in the 2001 projection. That leaves $8.6 trillion of higher deficits caused by legislative changes, of which the upper-income tax cuts constitute 6 percent. If you exclude increased interest on the debt from legislative changes, they represent 7 percent. Bottom line: they are a small portion of the total swing.

On Portman's second claim, increased spending excluding interest accounts for $4.3 trillion from 2001-2011, with about two-thirds of that cost coming from increased discretionary spending as the caps from the 1990s expired in 2002 and spending was ramped up on the wars overseas. The Medicare prescription drug law, the 2009 stimulus, and increased refundable tax credits from the tax cuts also play a role on the mandatory side.

Total tax cuts, though, are no small part either, accounting for about $2.9 trillion of the swing. Much of that cost comes from the 2001/2003/2010 tax cuts and legislation that modified those provisions in 2002, 2004, and 2006. The 2008 stimulus, the Troubled Asset Relief Program (TARP), and the 2009 stimulus also play a part. Portman's release attempts to minimize specifically the role that the tax cuts passed under President Bush played in contributing to the deficits, saying that spending and interest were three times larger than those tax cuts. That is correct even when accounting for spending (refundable tax credit increases) contained in the tax cuts ($5.6 trillion to roughly $1.9 trillion), although it is somewhat misleading to include interest in that total since a sizeable portion of that interest is due to the tax cuts. Including the 2010 tax cut--since it extended many provisions from previous tax cuts--would also change the calculation.

Legislative Changes Over the Past Decade (billions)
  2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001-2011
Discretionary $2 $50 $120 $171 $221 $270 $287 $339 $417 $546 $526 $2,950
Mandatory $11 $21 $51 $49 $49 $81 $84 $121 $409 $269 $259 $1,403
Subtotal, Spending $13 $71 $171 $220 $270 $351 $371 $460 $826 $815 $785 $4,353
Revenue $71 $75 $179 $265 $211 $190 $222 $373 $363 $414 $517 $2,879
Subtotal, Non-Interest Changes $84 $146 $350 $485 $481 $541 $593 $833 $1,189 $1,229 $1,302 $7,232
Interest $1 $4 $14 $35 $60 $92 $130 $174 $225 $287 $353 $1,393
Total Changes $85 $150 $364 $520 $541 $633 $723 $1,007 $1,414 $1,516 $1,655 $8,625

Source: CBO

In short, Sen. Portman is correct to claim that the upper-income tax cuts were a small portion of the swing from surpluses to deficits over the past decade. He is less correct to minimize the effect of total tax cuts over the past decade on the budget, since they make up 40 percent of the legislative changes that added to the deficit. Ultimately, both sides of the budget contributed plenty to the significant deterioration of our fiscal outlook over the past decade.