March 17, 1999
Republican Tax Plan Risks New On-Budget Deficits After 2009
by Iris J. Lav and Sam Elkin
The proposed House and Senate Republican budget resolutions include tax cuts designed to absorb most of the on-budget (non-Social Security) surplus for the next ten years. To follow the path of the anticipated surplus, the tax cuts start relatively small and grow substantially over time. The proposed resolutions include tax cuts costing $142 billion over the first five years, with the cost rising to $636 billion in the second five-year period. In the words of Ways and Means Committee Chairman Bill Archer, the tax cuts "....wedge out as the years go on."(1)
In fact, by 2007 the annual cost of the proposed tax cuts exceeds the amount of the on-budget surplus the Congressional Budget Office estimates will be available.(2) The additional tax reduction is "paid for" by further reductions in non-defense discretionary spending, beyond those the 1997 budget agreement already requires. By 2009, the Senate budget resolution would require non-defense discretionary programs as a whole to be cut 28 percent below the fiscal year 1999 base, adjusted for inflation. Under the House resolution, the cut would be 29 percent by 2009.(3)
Needless to say, it would be difficult actually to enact spending reductions that eliminate one-quarter to one-third of non-defense discretionary spending. Because some non-defense discretionary programs are deemed essential, and others such as education, highways, veteran's health, crime programs, and NIH research would be protected from cuts or slated for increases, the remaining non-defense discretionary programs would have to be cut even more deeply or eliminated.
Looking beyond 2009, the problem becomes still greater. Three factors suggest these tax cuts will become unaffordable after 2009 and would almost certainly bring back deficits in the non-Social Security budget.
- CBO baseline projections indicate that the non-Social Security surplus stops growing and begins to shrink during the five years after 2009.(4) Once the surplus stops mounting and begins to contract, there will be a smaller non-Social Security surplus each year to support a tax cut.
- But the cost of the tax cut is likely to continue growing substantially after 2009. The size of the tax cut in the Senate resolution grows from $32 billion in 2003 to $177 billion in 2009, an annual average increase in cost of more than $24 billion a year. Between 2008 and 2009, the cost grows by $26.5 billion.(5) If this incremental growth were to continue in the years beyond 2009, the cost of the tax cut would rise from $636 billion in 2005-2009 to $1.25 trillion in the five years from 2010 to 2014.
Even if growth in the tax cut could be held down to the rate of growth in GDP in years following 2009 which likely would require reductions in tax relief at that time the cost of the tax cut in the five years from 2010 to 2014 would exceed $1 trillion. (See Figure 1.)
- With the size of the non-Social Security surpluses beginning to decline and the cost of the tax cut continuing to grow, the only way to avoid a re-emergence of on-budget deficits would be to make cuts in programs on top of those that would made by 2009. Such cuts, which could entail eliminating a sizable share of what remained in non-defense discretionary spending, are not likely to be achievable. As a result, the tax cuts in the House and Senate budget resolutions would likely result in a return of deficits in the non-Social Security budget.
1. Bureau of National Affairs, Daily Tax Report, March 12, 1999, p. GG-1.
2. These figures are based on CBO's "capped baseline," which assumes discretionary spending increases with inflation after the current caps expire in 2002. This is the standard baseline that CBO and OMB use to estimate the extent to which the budget will be in deficit or surplus.
3. The fiscal year 1999 levels for non-defense discretionary programs used here exclude emergency spending.
4. The CBO baseline goes through 2009. The CBO capped baseline was extended to 2014 for purposes of this analysis by applying the growth rates in the CBO long-term forecast. The projections show that annual surpluses in the non-Social Security budget begin to decline after 2012. Policy changes could shift by one or a few years the specific year in which these surpluses begin to shrink, but such shrinkage is virtually certain to occur some time shortly after the baby boom generation begins to retire.
5. In the Senate budget resolution, the size of the tax cut grows by an average of $24.2 billion a year between 2003 and 2009, while in House version the average annual growth is $24.6 billion. In the House version, the cost grows from $30.7 billion in 2003 to $178 billion in 2009, and growth between 2008 and 2009 is $24.8 billion.