Tax Analysts Blog

Battle of the Baselines: Sperling vs. Ryan

Posted on Aug 3, 2011

Will the new Select Joint Committee on Deficit Reduction raise taxes? Probably not. That's because it would require at least one Republican to agree to tax hikes and the Republican leadership has vowed not to appoint any member to the Committee who vote to raise taxes. However, down the road, as the possibility of automatic $50 billion per year cuts in the Pentagon budget loom, the Republicans may be forced to compromise.

CAN the Select Joint Committee raise taxes? The answer is almost certainly "yes." It can close loopholes (on corporate jets, oil companies, hedge fund managers, etc). It can even propose a Bowles-Simpson like revenue-raise tax reform (although there is no time for that). But the question remains whether or not allowing all or part of the Bush tax cuts to expire can be counted as deficit reduction.

House Budget Committee Chairman Ryan says no. He says the legislation requires the CBO is use the current law baseline. Under current law, the Bush tax cuts expire. If they are assumed to have already expired, they cannot be cut.

The Republicans like this.(BUT note that this interpretation requires them to pass another law and get a president to sign legislation extending the tax cuts. In order words, the issues of extension of the Bush tax cuts is outside the framework of the new legislation.)

Gene Sperling, Chair of the President's National Economic Council, says the legislation let's the new Select Joint Committee choose any baseline it wants. If the committee chose to use a current policy baseline that assumed complete extension of the Bush tax cuts, then any trimming of those cuts could be counted as deficit reduction.

For decades I have tried to interpret the statutory language of budget legislation and have generally been unsuccessful. It is indecipherable to most humans. So I will not render a legal interpretation based on parsing the language. You can find more arguments about the technicalities on the web here, here, and here.

But I will say the Sperling interpretation that "anything goes" when it comes to baselines would render the whole Phase Two $1.2-$1.5 trillion of deficit reduction meaningless. In the extreme, the Committee could assume a baseline of government spending equal to 50 percent of GDP and avoid the triggers by proposing cuts to more normal levels.

With all due modesty, the chart below--not available anywhere else--is the best summary of what is going on. (It took about six hours of cutting and pasting CBO estimates that I don't think many others have the patience for). The bottom line: if the Bush tax cuts are extended and Congress continues to postpone limitation of reimbursements to physicians, we are still in a big heap of deficit trouble.

The skinniest line is the current law baseline deficit published by the Congressional Budget Office in March of 2011. It does not include the budget effects of extension of individual AMT relief and other expiring provisions, even though these almost certainly will be extended. It includes large limits of Medicaid physician reimbursements that will almost certainly be repealed. And it excludes extension of any of the Bush tax cuts scheduled to expire at the end of 2012. This baseline leaves us with a deficit of 3.2 percent of GDP in 2021.

The soon-to-be-formed Joint Select Committee is tasked with producing between $1.2 and $1.5 trillion of deficit reduction using an adjusted CBO March baseline(if Rep. Ryan's interpretation holds and if we follow Table 3 of CBO's August 1 cost estimate). The main adjustment is that the cost of the wars in Afghanistan and Iraq are excluded. This adjusted baseline (in the figure, the heavy dark line with no symbols) leaves us with a deficit with 1.9 percent of GDP in 2021.

The Phase One cuts of the new law—approximately $900 billion over 10 years—would leave us with a deficit of 1.2 percent of GDP in 2021. This reduces the deficit below the adjusted baseline to lower levels (in the figure, the line with the square symbols).

Finally, the Phase Two cuts—whether approved by Congress in December or automatically triggered as a result of congressional inaction—are scored by the CBO to reduce the deficit by $1.2 trillion over 10 years. Assuming these cuts are evenly spread over nine years (beginning in 2013) they would leave us with a federal deficit equal to 0.7 percent of GDP in 2021.

That would be an incredible feat of fiscal fortitude. After all, we only need to reduce our deficits to about 3 percent of GDP to put federal finances on a sustainable path, that is, to stop the ratio of debt to GDP from growing.

Unfortunately this is total fantasy in the current political climate. If—as Republicans are now insisting—all the Bush tax cuts are extended, full AMT relief is granted, and other expiring provisions are extended, the deficit in 2021 will be 4.3 percent of GDP (even after all the deficit reduction of the new law is counted). In the figure the resulting deficits are shown in dashed line on top. This does not include “doc fix” or the payroll tax cut President Obama insists should be extended or the cost of any current or future military conflicts.

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