Keep Gimmicks Out Of A Deal
As the government shutdown continues into its 11th day, the two parties have just begun having serious negotiations about reopening the government and raising the debt limit to prevent a catastrophic default in the next week or so. According to press reports, Senate Republicans are seriously discussing a proposal that would deal with both. The plan has several promising elements: it would give federal agencies two years of flexibility to deal with the sequester cuts, in addition to funding the government and raising the debt limit. However, the proposal has one troubling element: it relies on a budget gimmick that would end up increasing deficits in later years.
Any deal struck as a part of budget negotiations should decrease the deficit, not increase it. This proposal would repeal the 2.3 percent tax on medical devices that was passed as part of the Affordable Care Act. However, it would pay for the $30 billion cost with "pension smoothing," a provision we've previously described as a budget gimmick. The provision produces one-time revenues which artificially improve the short-term budget picture while leading to greater long-term liabilities.
If the proposal is similar to one included in the 2012 transportation bill, the proposal would raise money by temporarily reducing the amount that companies are required to pay into their pension funds. Even though pension smoothing saves the government money in the short term, it increases future deficits by more than it saves. In the short term, this raises revenue because companies have higher profits (or employees have higher wages) subject to taxes since companies take fewer deductions for employee compensation (or employees have more taxable income). However, contributing less to pension plans now means that companies must make greater contributions in later years, thus increasing their deductions, reducing revenue, and increasing the deficit. Also, any seriously underfunded pensions that are unable to pay benefits would be bailed out through the Pension Benefit Guaranty Corporation.
Any bipartisan solution to end the government shutdown is a step in the right direction, and we welcome proposals that would end the fiscal showdown and allow lawmakers to turn their attention to addressing our long-term fiscal imbalance. However, Congress needs to focus on solutions that decrease, not increase, the long-term deficit.