The House will soon vote on a new version of the “tax extenders+ bill,” which is formally labeled H.R. 4213, The American Jobs and Closing Tax Loopholes Act of 2010.
Must … not … call it … Stimulus IV.
A better name might be The Hypocrisy Act of 2010. This bill is getting far less press coverage than it deserves.
Precis of the bill (bill text, summary)
- increases infrastructure spending by $26 B over ten years;
- extends a raft of expiring tax provisions, mostly for one year
- provides funding relief for certain employer pension plans;
- raises a bunch of taxes, mostly on businesses and a certain kind of partnership income called “carried interest;”
- extends unemployment insurance benefits, increasing federal spending by $47 B over the next two years;
- increases Medicare payments for doctors through the end of 2013 for eighteen months at a $63 B cost;
- increases health insurance subsidies for the unemployed (through “COBRA”) by $8 B over the next two years; and
- increases federal Medicaid spending by $24 B for a six-month policy change.
CBO gives us the net budgetary effects of the bill over the 11-year period 2010-2020:
- $40 B net tax increase;
- $174 B spending increase;
- $134 B deficit increase.
I count at least four reasons this bill deserves the title The Hypocrisy Act of 2010.
1. It would increase the deficit by $134 B, violating the much-ballyhooed PAYGO law.
The annual extension of expiring tax provisions is a fairly routine legislative matter, with an accompanying annual partisan fight about whether the revenue loss from extending these tax cuts should be offset by other tax increases or spending cuts.
Adding on another $174 B of spending without offsets is far from routine. $174 B is a lot of taxpayer money.
Here is Speaker Pelosi on February 4, 2010:
So the time is long overdue for this to be taken for granted. The federal government will pay as it goes. That we will be on a path of deficit reduction and that every action that we take and any bill that we take will have to meet the test: Does this reduce the deficit? Does this create jobs? Does this grow our economy? Does this stabilize our economy well into the future?
Central to all of that and a very strong pillar of fiscal responsibility is this PAYGO legislation that we have here today. I couldn’t be more thrilled for what this means about the fundamentals of how we govern, how we choose, and how we honor our responsibility to future generations to reduce the deficit.
In February the Speaker said, “and any bill that we take will have to meet the test: Does this reduce the deficit?” For this bill, no. The amendment being considered by the House would result in a $134 B increase in the budget deficit, a direct result of a $174 B increase in entitlement spending. So much for “the federal government will pay as it goes.”
A secondary irony is the one-sided nature of the deficit impact. For years Democrats have accused Republicans of hypocrisy for their embrace of a pay-as-you-go rule only for spending increases and not for tax cuts. This bill does the opposite, which I understand is the result of internal dynamics within the House Democratic Caucus. It appears House Democrats refused to support a bill that resulted in a net reduction in taxes, but apparently were OK with increasing government spending by more than $100 B without offsetting it.
I wonder how moderate “Blue Dog” House Democrats, who led the charge for a PAYGO House rule change and then a PAYGO law, will justify voting for this deficit increase driven by increased entitlement spending. Some will certainly argue the spending (further extending unemployment benefits and health insurance subsidies for the unemployed, and further increasing infrastructure spending) is necessary or even vital. That judgment is supposed to be independent of whether the deficit impact should be offset by other spending cuts or tax increases. PAYGO doesn’t provide a “good policy” exemption to offsetting spending increases or tax cuts. This “vital policy” argument is a punt to avoid having to make hard choices.
When a similar PAYGO inconsistency was pointed out in the Senate, moderate Senate Democrats took refuge in the political cover provided by a few moderate Senate Republicans who supported the bill. But that merely makes the hypocrisy bipartisan since some of those Republicans also claim to support PAYGO.
By the way, you can add much of the +$174 B onto the ultimate cost of the stimulus law, since the bulk of it results from extensions of provisions within that law. The ultimate cost of the stimulus and its extensions is approaching an even trillion.
2. The health care laws would no longer reduce the deficit.
According to CBO, the amendment being considered by the House would increase Medicare payments to physicians over the 3.5-year 18-month period from June 1 of this year through the end of 2013 2011. This 3.5-year 18-month “doctor’s fix” would increase federal spending by $63 B over the next decade. And that leaves the “doctor’s fix problem” unsolved after 2013 2011, necessitating even more expensive subsequent “fixes.”
CBO estimated that the two health laws enacted earlier this year would reduce federal deficits by $143 B over the period 2010-2019. This $63 B is just the beginning of the Medicare doc fix spending. Another 2-3 years of that policy should easily swallow the remaining $80 B of deficit reduction, leaving the net result of (two health care laws + repeated short-term increases in Medicare physician spending) to increase significantly the deficit over the next decade.
The Administration and Democratic Congressional Leaders knew they were leaving this additional Medicare spending out when they enacted the two health care laws in March. Back then they needed to tell their Members they were voting for deficit-reducing legislation and they couldn’t make the numbers add up, so they kicked the Medicare doctors can down the road to now.
3. Double-counting increased oil spill liability payments
The House amendment would extend and quadruple a tax from 8 cents per barrel to 32 cents per barrel. These funds are earmarked to prefund the Oil Spill Liability Trust Fund. In theory, balances are accumulated in the trust fund as revenues are paid in, and the fund is drawn down when there’s a big spill (like we have today). So far so good.
The hypocritical part is claiming that these higher per-barrel taxes will both increase the balances of the Oil Spill Liability Trust Fund and reduce the deficit. You can claim one or the other, but you cannot legitimately claim two purposes for a single dollar. This is not a technical or legal violation, as it is allowed under the budget rules. But the bill summary provided by Chairman Levin Rangel says,
To ensure the continued solvency of the Oil Spill Liability Trust Fund, the bill would increase the amount the oil companies are required to pay into the fund.
And the CBO/JCT score incorporates the increased revenues in its calculation of the total deficit effects of the bill. Claiming both is a foul.
4. The not-so-temporary stimulus
The stimulus law “temporarily” increased federal Medicaid subsidies to state governments. These subsidies are scheduled to expire December 31, 2010. The new House amendment would extend those subsidies for another six months, at a cost of $24 B. Who wants to wager against them being extended for at least another six months as June 30, 2011 approaches? Governors from both parties will be pressing Congress for another extension, as they are undoubtedly doing now.
I will not make the same argument for the extended unemployment insurance and health insurance (COBRA) subsidy benefits, because I think those provisions eventually will be allowed to expire once the unemployment rate declines significantly.
This increased federal Medicaid spending, however, looks and feels like it’s well on the way to becoming an additional +$50 B per year in federal spending, forever. The stimulus was sold as a temporary deficit increase.
Every extenders bill contains special interest goodies. Here are my favorite three from this bill:
- extending the 7-year depreciation rule for “motorsports entertainment complexes” Go NASCAR. Go monster trucks.
- extending the one-year expensing rule for the first $15-20 M of productions costs for film and TV producers in the U.S.; and
- repeal of a provision designed to limit Medicare payments to nursing homes that were gaming the system and the taxpayer.
When you hear someone argue that the $134 B deficit increase and PAYGO violation are OK because the policies contained within the amendment are vital, ask them about these three provisions of The Hypocrisy Act of 2010.
(photo credit: Free Parking Jackpot by teamjenkins)