Options Floated to Offset Israel Aid Package
Congress is currently considering $14.3 billion of supplemental emergency funding to aid Israel and Gaza, with the House having passed a version that would be accompanied by a $14.3 billion rescission of funding from the Internal Revenue Service (IRS). While the call to pay for new emergency spending is welcome news, the proposed IRS rescission would actually lose revenue and add to the deficit, resulting in almost $27 billion of deficit increases.
With interest rates high and debt approaching record levels, Congress should aim to pay for all new spending and tax cuts – even for true emergencies – whenever possible. Fortunately, many options exist to finance new emergency spending. We recently offered a menu of ten policy options that would generate roughly $100 billion of savings over four years (the time in which almost all of the emergency funding would be spent out) that includes both tax increases and spending cuts.
There are also several policy options being floated by lawmakers to directly offset the $14.3 billion of Israel aid. Specifically:
- An Endowment Tax. Senator Tom Cotton (R-AR) recently proposed imposing a 6 percent "endowment tax" on the top ten universities in America, which he estimated would raise over $15 billion of revenue. Most endowments already face a 1.4% tax and there have been other calls to boost that fee more broadly.
- Rescind Inflation Reduction Act (IRA) Energy Tax Credits. The IRA created a series of tax credits for clean energy, electricity, and electric vehicles. Lawmakers have apparently discussed repealing some of these credits (or perhaps modifying them) to offset the cost of an Israel aid package. For context, full repeal would save about $790 billion through 2033.
- Extend Expiring Customs Fees. Lawmakers have reportedly discussed extending customs fees, many of which expire after 2031, to help pay for Israel funding. Extending all the expiring customs and border patrol user fees, as proposed in the President's budget, would save about $15 billion over two years.
- Rescind Department of Commerce Funding. The Fiscal Responsibility Act (FRA) appropriated $22 billion of funding – generated mainly from unused COVID relief funds – to what is effectively a Department of Commerce slush fund known as the Nonrecurring Expenses Fund. The intended purpose of this trust fund was to allow appropriators to boost normal appropriations under one of the FRA's side deals. During the initial consideration of the Israel supplemental, Congressman David Schweikert (R-AZ) proposed rescinding this $22 billion from the Commerce slush fund to offset the Israel aid. Importantly, this rescission would generate virtually no outlay savings and thus would not prevent the Israeli funding from adding to the debt. However, it would neutralize one "side deal" that might otherwise add about $100 billion to the deficit over the next decade.
These are four of many possible options available to offset the costs of new spending and tax cuts. We encourage policymakers in both parties and chambers who do not support these options to put forward their own alternatives. Given the current fiscal and economic situation, policymakers should avoid adding to the debt whenever possible.