Committee for a Responsible Federal Budget

How Low Could Debt Go?

We talked last week about several policies making their first appearance in the President's budget. What we didn't mention is that in addition to introducing new policies, the President has dropped a few old ones. Among the policies the President had previously proposed but did not include in this year's budget are:

  • Adoption of the chained CPI government-wide.
  • Increases in federal employee retirement contributions for workers hired before 2013.
  • Two Medicaid reforms to keep states from gaming the system and simplify matching rates.
  • Greater expansion in Medicare means-tested premiums.
  • Elimination of the "check the box" rule for foreign entities.
  • A more aggressive tax on financial institutions.

This list excludes policies that were overridden by legislative agreements, such as increasing tax rates for people making between $250,000 and $450,000 and taxing dividends as ordinary income.

Interestingly, if the President were to embrace these policies and add them back into his budget, they would generate by our estimate about $575 billion of additional deficit reduction through 2024 -- or slightly above 2 percent of GDP. That might not seem like a lot, but under OMB projections it would result in debt levels falling by 1.1 percentage point between 2023 and 2024 (adjusting for timing shifts) to 67 percent of GDP, rather than by 0.7 points to 69 percent. 

And under our rough simulation of a CBO re-estimate, these policies would be the difference between a stable and upward debt path. Our simulation showed debt levels rising from 71.5 percent of GDP in 2018 to 73 percent in 2024 under the President's budget. With these additional policies, debt would remain stable at about 71 percent through the entire budget window. In fact, after accounting for the economic impact of immigration reform, debt would be on a modest downward path and fall to 69 percent of GDP by 2024.

In other words, were the President to re-embrace the deficit-reduction measures he previously proposed (the largest being chained CPI), it could make a big difference for the debt.

So what exactly are these policies? Below, we describe them.

Chained CPI: In last year's budget, the President called for using the chained CPI to adjust most inflation-indexed programs and tax provisions. The budget exempted means-tested programs from the change and included benefit enhancements for very elderly people on Social Security. According to CBO, last year's proposal would raise $100 billion of revenue, save $89 billion from Social Security and reduce $44 billion of other spending through 2023. Through 2024, the proposal as a whole would likely save about $285 billion. Although this has been removed from the President's budget, the White House does say that the President remains open to the policy as part of a bipartisan debt deal.

Federal employee retirement contributions: The President originally proposed to increase retirement contributions in his offer to the Super Committee, and would save $21 billion over ten years. Currently, civilian pension benefits cost the equivalent of 12.7 percent of wages, and the policy would increase the portion paid by current federal employees from 0.8 percent to 2.0 percent. This policy was included again in the FY 2013 budget and FY 2014 budget proposals. Shortly after the 2013 budget, Congress increased contributions by 2.3 percent for new workers to help finance a payroll tax cut, SGR, and unemployment extension. The Bipartisan Budget Act increased contributions by an additional 1.3 percent. However, both of these adjustments applied only to new workers, and after the first (which was the larger of the two), the President continued to support the increase for current workers. That policy is no longer part of the FY 2015 budget.

Medicaid reforms: In his offer to the Super Committee, the President called for several Medicaid reforms -- with substantial savings coming from two policies. First, the President proposed reducing what is called the "provider tax threshold" to make it harder for states to inflate their federal Medicaid match by simultaneously taxing and increasing payments to providers. Second, the President proposed replacing the multiple matching rates for CHIP, base Medicaid, and the Medicaid expansion with a single "blended rate" for all costs. Although these policies were included in the President's FY 2013 budget, they were not included in his FY 2014 budget -- in part due to concerns over their interacting with the Supreme Court decision to effectively make the ACA Medicaid expansion voluntary. Together, these policies would save about $55 billion over ten years according to OMB, and $85 billion according to CBO.

Means-testing of Medicare premiums: Currently, most Medicare beneficiaries are responsible for about one quarter of Part B and Part D costs; however, some higher-income seniors pay a larger percentage of 35, 50, 65, or 80 percent. These higher premiums begin at $85,000/$170,000 of income, and all the thresholds are frozen through 2019 (otherwise, they grow with inflation). Since the Super Committee offer, the President has proposed freezing the thresholds until 25 percent of beneficiaries are paying the higher premiums, up from about 5 percent currently, and increasing the premium percentages. In the FY 2013 budget, he increased the four brackets by about 15 percent each. In the FY 2014 budget, he increased the number of brackets to nine, still with a top bracket of 90 percent but higher brackets for most other beneficiaries. This year, the President's budget proposes five brackets, with most beneficiaries paying less than they would have under last year's budget and some paying less than under the prior year's budget as well. In other words, while the President's budget still calls for expanded means-testing, this year's proposal is not as aggressive as last year's. By our rough estimates, the difference results in roughly $15 billion less in savings.

Means-Tested Premium Policies in the President's Budgets
IncomeCurrent LawFY 2013 BudgetFY 2014 BudgetFY 2015 Budget
Less than $170,00025%25%25%25%
$170,000-$184,66635%40.25%40%40%
$184,666-$199,33446.5%
$199,334-$214,00053%
$214,000-$249,33450%57.5%59.5%52.5%
$249,334-$284,66666%52.5/65%*
$284,666-$320,00072.5%65%
$320,000-$356,00065%74.5%79%77.5%
$356,000-$392,00085.5%
$392,000-$428,00090%90%
$428,000+80%90%

 Source: Kaiser Family Foundation, Department of Health and Human Services
Note: Income brackets are for a married couple. They are half that for a single person.
*Premium increases from 52.5% to 65% at the midpoint of this income range

Check-the-box rule: In 1997, the IRS adopted a regulation, known as check the box, intended to simplify the way that domestic businesses could classify themselves. Rather than using a six-factor test, businesses could check a box to determine whether they wanted to be taxed as a corporation or a pass-through business. Unintentionally, this rule encouraged multinational corporations to avoid taxes by shifting profits to low-income countries. A corporate subsidiary could elect to be treated as a "disregarded entity" and its income would not be taxed by the United States. Thus, if a subsidiary was in a low-tax or no-tax jurisdiction, it would avoid most tax. The President's first budget for FY 2010 proposed undoing check the box for foreign entities by requiring that the parent company and subsidiary be organized in the same country to be treated as a disregarded entity. OMB estimated that this change would raise $87 billion over ten years, although JCT only anticipated $31 billion. This change did not show up in any subsequent budgets.

Bank tax: Starting with the FY 2011 budget, the Administration has proposed a "financial crisis responsibility fee" both to cover the costs of actions to assist the financial sector in recent years and to discourage excessive risk taking. The original fee applied a .015 percent tax to the covered liabilities of banks with $50 billion or more in assets and raised $90 billion over ten years, but the fee has been modified to raise less in subsequent budgets. In the FY 2015 budget, it is a .017 percent tax on certain liabilities and only a .0085 percent tax on liabilities which are "more stable sources of funding." The current version of the tax only raises about $55 billion.

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There is no rule that says once a President proposes something he must continue to propose it into the future. However, the above analysis shows that if the President were to restore many of the policies he previously supported, it could make a real difference in improving our fiscal situation. This is especially true over the long run, where policies such as the chained CPI and Medicare and Medicaid reforms could produce growing savings over time.