What's New in the President's FY 2017 Budget
The final budget of the Obama Presidency continues a mix of long-standing policies (including a few that have been in all eight budgets) and policies that are finding their way into the budget for the first time. With regards to new policies, some were previewed during the State of the Union address last month, while others have been laid out in the weeks since then. Here's a rundown of some of the major new proposals in the President's budget.
Business Tax Reform
In his past three budgets, President Obama had proposed a revenue-neutral reserve fund for business tax reform, which included several corporate tax changes amounting to a net tax increase that would offset a reduction in the corporate tax rate to 28 percent. This year, the President has largely maintained the policies that were included in the reserve fund but is now dedicating the $549 billion of revenue to deficit reduction to pay for the business tax cuts in last year's tax deal.
Clean Transportation Investments
The President's budget includes several proposals to tackle climate change, the most ambitious being a $312 billion over ten years clean transportation investment plan. The proposal includes $200 billion for transportation projects including subways, buses, rail, and the TIGER grant program (part of this funding reflects a previous budget proposal to increase surface transportation spending by $116 billion). Another $100 billion would go to state and local governments for clean infrastructure projects. Finally, $20 billion would go to clean transportation research for things like self-driving cars, electric vehicle charging stations, and clean energy airplanes. These policies would be paid for with another new policy in the President's budget: a $10.25 per barrel oil tax. This tax comes on top of a pre-existing policy to reinstate Superfund taxes, which include a 9.7 cent per barrel oil tax.
Medicare Advantage Competitive Bidding
The budget includes a new competitive bidding process for Medicare Advantage, the program of private plans operating within Medicare. The current system has Medicare set payment benchmarks and then has private insurance plans submit bids, with plans receiving payments of 50-70 percent of the difference between the bid and benchmark if the bid is less. In recent years, the benchmarks have been above the cost of providing fee-for-service care, though that differential was reduced in the Affordable Care Act. In the FY 2017 budget, the Obama Administration has proposed using competitive bidding to set the benchmark, making it equal to the average bid plus 5 percent or the current law benchmark, whichever is smaller. The budget would also allow plans to keep the entire difference between their bid and the benchmark to more greatly encourage plans to bid low. This policy would save $77 billion over ten years.
Pass-Through Business Tax Change
This year's budget includes additional changes to the taxation of pass-through businesses, whose income is taxed at the individual level. The previous budget contained a policy that would apply self-employment taxes to an owner's/partner's business income if that person materially participated in the business, closing what is known as the John Edwards or Newt Gingrich loophole. This policy was estimated to raise $75 billion over ten years. This year's policy, though, raises substantially more -- $272 billion -- because it would also subject limited partners, who wouldn't otherwise pay self-employment taxes as a result of the previous change, to the 3.8 percent investment tax enacted in the Affordable Care Act. This would greatly expand the number of people affected by the change.
|Budgetary Effect of Select New Policies in the President's Budget|
|Policy||Ten-Year Cost/Savings (-)|
|Dedicate business tax revenue to deficit reduction||-$549 billion|
|Invest in clean infrastructure projects||$312 billion|
|Impose a $10.25 per barrel oil tax||-$319 billion|
|Utilize competitive bidding for Medicare Advantage||-$77 billion|
|Subject pass-throughs to self-employment/investment taxes||-$272 billion|
|Expand Medicaid in Puerto Rico and U.S. territories||$30 billion|
|Allow states expanding Medicaid after 2014 to get 3 years of 100% matching||$3 billion|
|Require remittances for Medicaid/CHIP managed care plans with medical loss ratios less than 85%||-$24 billion|
|Adjust Cadillac tax thresholds to gold plan premiums in states where they exceed original thresholds||$1 billion|
|Supplement National School Lunch Program with summer benefits||-$12 billion|
|Extend and expand short-time compensation funding||-$2 billion|
|Provide wage insurance for laid-off workers taking a lower-paying job||-$11 billion|
Source: Office of Management and Budget
Medicaid Payment Changes
The budget includes a few new changes to Medicaid. The first would increase Medicaid spending in Puerto Rico and other U.S. territories by removing the current cap on spending, expanding eligibility up to the poverty line, and increasing the federal government's share of costs from 55 to 60 percent. These changes, which are in part a response to Puerto Rico's economic and fiscal crisis, would cost $30 billion through 2026. The budget would also change Medicaid expansion matching rates in the Affordable Care Act for states that didn't expand the program in 2014. Matching rates are 100 percent of spending in 2014-2016, then 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and beyond. The budget proposes giving states the full match for three years regardless of when they expand (i.e. a state that expands Medicaid in 2016 would get 100 percent matching in 2016-2018). This would currently help Pennsylvania, Indiana, Alaska, Montana, and Louisiana -- who expanded in either 2015 or 2016 -- and could potentially help another 19 states if they choose to expand. The Administration estimates a cost of $3 billion through 2026, with all of the cost coming by 2023. Finally, the budget proposes requiring Medicaid managed care plans to remit money back to the federal government to the extent of their medical loss ratio, or the percent of premiums spent on health care benefits, is below 85 percent. This would save $24 billion through 2026.
Cadillac Tax Change
The Cadillac tax, a 40 percent excise tax on high-cost health insurance plans, was set to start in 2018 but was delayed to 2020 in last year's tax deal. To address one of the common criticisms of the tax -- that it doesn't account for regional differences in health costs -- the budget would set the tax threshold for a region at the average premium for a gold plan on the health insurance exchange if it would exceed the default threshold. This change would cost only $1 billion through 2026, but it could have greater long-term revenue implications since gold plan premiums will likely increase faster than the Cadillac tax thresholds, which are indexed to inflation. Essentially, the policy makes a trade-off of revenue for greater political sustainability.
Summer Food Benefit Program
To supplement the School Lunch program, the President would make available a Summer Electronic Benefit Transfer (EBT) to provide food benefits to School Lunch qualifiers during the summer months. The program would provide a $45 per month benefit, adjusted for inflation annually. The program would be phased up over time, starting out in 10 percent of states in 2017 and reaching all states by 2026. The ten-year cost of the program would be $12 billion, and it would cost $3.2 billion in 2026 when it is fully phased in.
Work-Sharing and Wage Insurance
The President's budgets have long included reforms to the unemployment insurance, but this year's budget for the first time includes an expansion of short-time compensation to prevent layoffs and wage insurance to get people who have been laid-off working again. The budget would extend and expand temporary funding for state short-time compensation (STC) programs, which spread around a reduction in hours to a business's workforce rather than having some employees laid off and pay partial unemployment benefits to those who had their hours reduced. The budget would permanently extend STC funding, match 50 percent of costs when state unemployment is high, and allow states to reduce employers' unemployment insurance taxes to encourage them to participate. These proposals would cost $2 billion over ten years. The wage insurance would apply to workers who were laid off and took their next job for lower pay at less than $50,000 per year, and it would pay half the difference between the new and old wage for a maximum of $10,000 for two years. This proposal would cost $11 billion through 2026.