How the House Trade Bills Abide by PAYGO
Big economic policy news came last week when lawmakers announced a bipartisan agreement (H.R. 1890) to revive Trade Promotion Authority in order to give fast-track consideration for trade deals. Flying somewhat below the radar are two accompanying bills introduced in the House (H.R. 1891 and 1892) that would extend various trade-related provisions and fully offset them. The Senate Finance Committee is marking up versions of these bills today, although there is only a CBO score for the Senate equivalent of H.R. 1891. Here's a rundown of what's in the House bills:
- Trade Adjustment Assistance: A main sticking point in the agreement was the fate of Trade Adjustment Assistance (TAA), which helps domestic workers who are adversely affected by imports. The deal extends TAA through June 2021 at a cost of $2.7 billion over ten years. In addition, the deal revives and extends the closely-related Health Coverage Tax Credit that subsidizes health insurance premiums for TAA recipients (among others). The credit expired at the end of 2013, but was one of the few provisions not revived in last year's tax extenders legislation. This legislation revives the credit retroactive to 2014 and continues it through 2019 at a cost of $173 million.
- Trade Preference Extensions: A separate bill from the TAA legislation would revive/extend several trade preferences. Specifically, it would revive the Generalized System of Preferences (expired since July 31, 2013) and extend it through 2017, extend the African Growth and Opportunity Act (which expires at the end of September) through FY 2025, and extend several preferences for Haiti (which expire in 2018 and 2020) through 2025. These extensions cost $5.8 billion.
- Customs and Merchandising Fees: Customs user fees have frequently been extended a year or two at a time, providing savings in the tenth year of the budget window. The most recent extension pushed them through 2024 in last year's highway bill and it was the only legitimate savings found in the bill. This bill would extend those fees through 2025, saving $1.7 billion. In addition, the trade preference legislation extends merchandising fees originally enacted in the Korean free trade agreement from June 2020 to June 2025, saving $5.9 billion.
- Child Tax Credit/Foreign Income Exclusion: Eligibility for the child tax credit (CTC) is determined using a special definition of income that adds back in the value of the foreign earned income exclusion, a $100,800 exclusion available to U.S. taxpayers living abroad. This calculation is intended prevent someone abroad with a very high income from using the exclusion to reduce their income below the CTC's limit. This legislation would go further by specifically disallowing those who claim the exclusion to also claim the refundable portion of the CTC, saving a modest $293 million.
- Medicare Sequester: On a few occasions, lawmakers have used a pure timing gimmick with the Medicare sequester by shifting cuts from the second half of a calendar year to the first half in order to get more savings just inside the ten-year window. This doesn't actually save additional money; instead, it just shifts savings from the 11th to the 10th year. As a result of this practice, in 2024, the usual 2 percent across-the-board cut is instead 4 percent in the first half of the year and 0 in the second half. This legislation increases the second half cut to 0.25 percent, which represents real savings and an effective increase in the 2024 sequester to 2.125 percent. This saves only $700 million, but it could set the precedent for Medicare sequester increases in other years (for better or worse).
- Renal Dialysis Payments: One provision addresses a minor point about payment for dialysis for those with acute kidney injury. For several years, Medicare allowed hospitals to contract with outpatient end-stage renal disease (ESRD) facilities for dialysis for these patients. Then in 2012, it issued a rule that Medicare would only cover ESRD services performed in these facilities. The bill clarifies that ESRD facilities can give dialysis to those with acute kidney injury and sets the payment rate equal to that used in the ESRD bundled payment. This saves nearly $300 million through 2025.
- Corporate Tax Payment Shift: As we explained in our discussion of the physician payment legislation, pay-as-you-go (PAYGO) rules require that lawmakers offset the cost of bills over both five and ten years, although people generally focus on ten-year numbers. Because of the de-emphasis on five-year PAYGO, lawmakers at times have used a gimmick that increases required corporate tax payments in the third quarter of a year and decreases them by a similar amount in the fourth quarter, shifting revenue from the sixth fiscal year to the fifth fiscal year. Both bills (H.R. 1891 and 1892) increase third quarter payments by a combined 8 percent and decrease fourth quarter payments by a similar amount. This shifts $5.8 billion of revenue into the five-year window, but does not affect the ten-year numbers. At the same time, by allowing upfront costs to only be offset by very backloaded savings, the bill allows for the accumulation of $1.4 billion of interest costs through 2025 that swamp the primary savings.
|Costs/Savings (-) in the House Trade Bills|
|2015-2020 Effect||2015-2025 Effect|
|TAA and HCTC||$2.1 billion||$2.9 billion|
|Trade Preferences||$3.6 billion||$5.8 billion|
|Customs Fees||$0||-$1.7 billion|
|Merchandising Fees||$0||-$5.9 billion|
|Child Tax Credit/Foreign Exclusion||-$0.2 billion||-$0.3 billion|
|Medicare Sequester||$0||-$0.7 billion|
|Renal Dialysis Payments||-$0.1 billion||-$0.3 billion|
|Corporate Tax Payment Shift||-$5.8 billion||$0|
|Total||-$0.3 billion||-$0.1 billion|
The trade bills show that it is certainly still possible to abide by PAYGO despite recent indications to the contrary. Further, the bill's temporary costs are offset with some permanent savings, so it should reduce deficits beyond the first ten years. The bill is not entirely ideal because it games five-year PAYGO, thus ensuring that the savings are more backloaded than the costs, but at least it offsets its costs over ten years.