August 2, 2006
PUTTING THEIR CARDS ON THE TABLE:
Senate Budget Bill Indicates Intention to Pay for Tax Cuts by Sweeping Cuts
in Programs for Middle- and Low-Income Households
by Robert Greenstein and Isaac Shapiro
The tax cuts enacted since 2001 have been
financed through borrowing — that is, through higher deficits. The sharp
estate-tax cut that was approved by the House of Representatives on July 29 and
is about to be considered in the Senate would be deficit financed, as well.
A new Treasury Department analysis issued on July 25 acknowledges, however, that
if tax cuts are made permanent, they eventually must be paid for. The
difficult task of adopting “offsets” — cuts in programs or increases in other
taxes — has been postponed but not eliminated.
Because the tax cuts have not yet been paid for,
the balance sheet on the tax cuts — whether Americans at various income levels
will come out ahead or behind, once the measures adopted to pay for the tax cuts
are factored into the equation — is incomplete at this point. Only when
the cuts in government programs or increases in other taxes that ultimately are
instituted are taken into account will the tax cuts’ full effects on American
households be discernible.
The Senate majority leadership has now begun
to develop a vision for how to pay for the tax cuts and address projected
deficits. On June 20, the Senate Budget Committee approved legislation (S.
3521) that would radically alter federal budget procedures and lead to deep cuts
in domestic programs over time. Although it is unlikely this legislation will
be enacted this year, the legislation is important because it appears to reflect
a growing consensus among many conservatives about how to extend the tax cuts
and start addressing deficits. Investor’s Business Daily has described this
legislation — which was introduced by Senate Budget Committee Chairman Judd
Gregg, has been co-sponsored by 26 other Senate Republicans, and was approved by
the Budget Committee on a party-line vote — as a “vision statement.”[1]
The bill has won plaudits from the Heritage Foundation, the American Enterprise
Institute, and other conservative groups.
As other analyses by the Center on Budget and
Policy Priorities have shown, the legislation that the Senate Budget Committee
approved would lead to sharp reductions in domestic discretionary (i.e.,
non-entitlement) programs. If the recent tax cuts are extended, the Budget
Committee legislation would result in strikingly large cuts in entitlement
programs, as well.
The Budget Committee bill would establish deficit
targets for each year. It would require that all entitlement programs
except Social Security be automatically cut across-the-board by whatever
percentage is needed to hit the deficit target for the fiscal year in question.
To hit the target for 2012 while extending the tax cuts and relief from the
Alternative Minimum Tax — and in the case of the estate tax, adopting the sharp
reductions in the tax that the House passed July 29 — would require cutting
entitlement programs by an estimated $206 billion that year, in addition to the
cuts that the bill would mandate in discretionary programs. Entitlement
programs other than Social Security — including Medicare, veterans programs,
school lunches, and basic assistance programs for the poor, among others — would
have to be cut an average of 15.6 percent to hit that year’s target.
The Senate Budget Committee bill has been
described by its proponents as legislation that is needed to tackle the deficit.
The bill is structured, however, to shield tax cuts from fiscal discipline.
Furthermore, the deep domestic program cuts that the bill would engender would
essentially finance the tax cuts, rather than reduce deficits.
This can readily be seen. The bill would
set a deficit target of 0.5 percent of the Gross Domestic Product in 2012 and
subsequent years and, as noted, would trigger automatic cuts in entitlement
programs of the depth needed to hit this target. But if the
Administration’s tax cuts are not extended, or if they are paid for through
other measures (including offsetting revenue-raising measures), then the
projected deficit already will be below 0.5 percent of GDP in 2012. In
other words, in the absence of the tax cuts, the deficit target that the bill
would set for 2012 would be met without any of the deep cuts in domestic
programs the bill is designed to produce.
In fact, over the period from 2007 to 2016, if
the tax cuts are extended, the Senate bill would lead to an estimated $1.6
trillion in cuts to entitlement programs. If the tax cuts are not
extended, the Senate bill would lead to $80 billion in entitlement cuts over
this period. That is, over the 10-year budget window as a whole, 95
percent of the entitlement cuts the Senate bill would trigger would be averted
if the tax cuts are not extended or are financed by offsetting revenue-raising
measures. (See Figure 1.)
How Deep Would the Budget Cuts Be?
The magnitude of the budget cuts that the bill
would require is stunning. The bill would establish caps on overall
funding for discretionary programs for each of the next three years, with the
caps being set at the discretionary funding levels proposed in the
Administration’s most recent budget. Unless Congress funded defense and
international programs at levels below those the President has requested,
Congress would have to institute cuts in domestic discretionary programs equal
in size to those the Administration has proposed. Under the
Administration’s budget, every domestic discretionary area in the budget would
be cut by 2009, except science, space and technology.
For example, under the Administration’s
budget, the acclaimed women, infants, and children nutrition program (WIC) would
be cut $459 million in 2009 (relative to the 2006 funding level, adjusted for
inflation) and would serve up to 680,000 fewer low-income pregnant women,
infants, and children under age five.[2]
Similarly, 420,000 low-income elderly people would be cut from the Commodity
Supplemental Food Program, which would be terminated.
In addition, in 2009, funding for the National
Institutes of Health, the federal focal point for medical research, would be cut
$2.5 billion, while the community oriented policing services program (COPS),
which helps state and local governments put police on the street, would be cut
75 percent. Similarly, EPA’s clean water and drinking water programs would
be cut nearly one fifth in 2009, and funding for energy conservation would be
cut 23 percent. (All reductions in discretionary programs described here
are measured relative to the Congressional Budget Office baseline, which equals
the 2006 funding levels for these programs, adjusted for inflation.)
The entitlement cuts are especially noteworthy.
If all entitlement programs except Social Security were reduced by the same
percentage, which is how the bill’s automatic cuts would work, then cuts of the
following magnitude would be instituted in 2012 (see Appendix 1 for a
description of how these cut levels were calculated):
- Medicare would be cut $83 billion, which
works out to an average of $1,750 per beneficiary;[3]
- Veterans
injured in combat would have their disability compensation benefits reduced an
average of $1,543, while families of veterans who died serving the country
would be subject to average benefit cuts of $2,293;
- The funds that schools receive for the school
lunch program would be reduced substantially, with schools having to increase
the prices charged to middle-income children for their school lunches by about
66 cents a lunch;
- A full-time minimum-wage worker with two
children would face a cut in the Earned Income Tax Credit of $798;
- Working-poor families with two children who
receive food stamps would have their food stamp benefits cut an average of
$670 a year, even though food stamps currently average only $1.06 per person
per meal; and
- Poor people who are elderly or have serious
disabilities would see both their food stamps and their Supplemental Security
Income benefits cut, with many facing SSI benefit cuts of more than $1,000 a
year. Under current law, a poor elderly widow is expected to receive a total of
$6,560 from SSI benefits and food stamps in 2012. Under the bill, she would
find this already-low level of income reduced by about $930 — to $5,630 — and
her income would fall from 60 percent of the poverty line to 51 percent.
Net Effect of the Budget Cuts and Tax Cuts: Most Americans Would Lose, But High-income
Households Would Gain Handsomely
As noted, these budget cuts would only be
necessary under the Senate Budget Committee bill because of the tax cuts.
The “vision statement” that the bill represents is consequently a clear
expression of priorities: deep cuts in domestic programs to finance large
tax cuts.
This raises the question of how households at
different income levels would fare from this combination of tax cuts and budget
cuts. The answer is that most lower- and middle-income households would be
net losers once the tax cuts were paid for, while high-income households would
be very large net winners. This should not be surprising. The tax
cuts for high-income households are far greater than the tax cuts that other
households receive, while budget cuts that are made in domestic programs tend to
have their most pronounced effects on low- and middle-income households.
- Assuming the tax cuts are extended, the
size of the budget cuts that would be made in means-tested entitlement programs
in 2012 (i.e., in entitlement programs limited to households with low or
moderate incomes) would be about four times the size of all tax cuts that the
bottom 40 percent of households would receive that year.[4]
Moreover, these households also would be affected by the reductions in other
entitlement programs such as Medicare and by the cuts in discretionary programs.
As noted above, working-poor families and low-income people who are elderly or
have disabilities would face the loss of hundreds of dollars or more in benefits
as a result of the budget cuts. Many of them would be pushed significantly
deeper into poverty.
- Most middle-income families would be worse
off, as well. Data from the Urban Institute-Brookings Institution Tax
Policy Center indicate that the average household in the middle fifth of the
income spectrum would gain about $820 from the tax cuts in 2012, assuming the
tax cuts are extended and relief from the Alternative Minimum Tax is
continued. Most of these households would be likely to lose more than
that from the budget cuts under the Senate Budget Committee’s bill.
If all entitlement programs except Social
Security were cut by the same percentage, then the Medicare cuts alone would be
the equivalent of $1,750 per beneficiary in 2012. As noted above, disabled
veterans would stand to lose an average of $1,543 each. In addition,
middle-class families with two school children could pay $235 more per year for
their children’s school lunches. Middle-class families and individuals would
face significant income losses from cuts in an array of other programs as well,
such as student loans, and also could be adversely affected by cuts in such
areas as police and environmental protection. (Note that not all middle-income
households receive aid from these programs and that the sample cuts are not
additive — e.g., few households are aided by Medicare and veterans benefits
and
the school lunch program. Nonetheless, the examples illustrate a basic truth
about the Senate policy blueprint: most middle-class households would wind up
as net losers. See Appendix II.)
- In contrast, households with incomes exceeding
$1 million in 2012 would receive an average tax cut exceeding $150,000 that
year, according to the Tax Policy Center. In fact, the overall cost of
the tax cuts that would go to households with incomes over $1 million would
slightly exceed the combined savings from the cuts in Medicaid, veterans
benefits, the Earned Income Tax Credit, the refundable component of the Child
Tax Credit, and the Supplemental Security Income program. (See Figure
2.)
- Similarly, the top one percent of households
(those with incomes of more than $520,000 in 2012) — a group that would
receive tax cuts averaging about $61,000 that year — would receive more in
total tax cuts than the savings from the $83 billion in Medicare cuts that
would be instituted if all entitlements were reduced by the same percentage.
The size of the tax cuts that high-income
households would secure would dwarf the reductions in benefits from government
programs to which they would be subject. They would be the big winners.
Appendix I. Estimating the Reductions in
Entitlement Programs
This analysis includes a series of estimates
regarding the entitlement reductions that would be produced under the bill that
the Senate Budget Committee has approved. These estimates of the size of
the reductions in various entitlement programs assume that the recent tax cuts,
as well as relief from the Alternative Minimum Tax, are extended, that the
estate-tax reductions just passed by the House are adopted, and that overall
funding levels for discretionary programs are set equal to the discretionary
caps that the bill would impose through 2009 (and in years after 2009, are set
equal to the 2009 discretionary cap, adjusted only for inflation). Under
these assumptions, projected expenditures for entitlement programs other than
Social Security would have to be reduced by 15.6 percent to meet the bill’s
deficit target in 2012, the year in which the deficit target would drop to its
ultimate level under the bill of 0.5 percent of GDP.
The estimates of reductions in specific programs
presented here show what a 15.6 percent cut in projected expenditures for
entitlement programs other than Social Security would mean for benefit levels in
various programs, assuming that (as would be the case under the bill’s automatic
cut mechanism) all entitlements except Social Security were reduced by 15.6
percent across the board. The method used here generally assumes that the
15.6 percent reductions in particular programs would be achieved by reducing the
benefit levels provided under the programs by 15.6 percent.
For example, a 15.6 percent cut in the veterans’
disability compensation program would mean that veterans’ disability benefits
would be cut by 15.6 percent on average. This would result in veterans who
were injured in combat being subject to an average reduction of $1,543 in their
disability compensation payments in 2012. The same approach was used to
estimate reductions in programs such as food stamps, Supplemental Security
Income, and the Earned Income Tax Credit.
In practice, if Congress were able to enact
legislation to institute cuts in these programs in specific ways rather than
allowing the programs to be cut automatically, the cuts could be designed so
that some beneficiaries would receive larger cuts and others would receive
smaller cuts. For instance, the veterans’ disability compensation program
could be cut by 15.6 percent overall by eliminating benefits altogether for some
categories of current beneficiaries while leaving benefit levels unchanged for
others. In addition, Congress could elect to cut some entitlement programs
less deeply than 15.6 percent if it approved legislation to cut other
entitlement programs more deeply than 15.6 percent.
Appendix II. To What Degree Would Various
Households Gain or Lose
If the Tax Cuts are Offset Entirely by Spending
Reductions?
An earlier paper that the Center on Budget
and Policy Priorities and the Urban Institute-Brookings Institution Tax Policy
Center jointly issued in 2004 examined the distribution of the 2001 and 2003 tax
cuts if the tax cuts were made permanent and were paid for.[5]
That paper examined two alternative scenarios for financing the tax cuts.
One of the two scenarios bears some broad
similarities to the approach taken in the Senate Budget Committee bill. That
scenario assumed that each household would pay an equal dollar amount each year
to finance the tax cuts. Thus, about one-fifth of the budget cuts needed to pay
for the tax cuts would be borne by each fifth of households.[6]
As the joint paper explained, “Something close to this scenario could occur if
the tax cuts were financed largely or entirely through spending cuts.”
The joint paper found that under this scenario,
nearly four-fifths of households would ultimately lose more from the budget cuts
than they would gain from the tax cuts. The Senate Budget Committee plan
follows the basic approach that underlies this scenario in that it would, in
effect, pay for the tax cuts entirely through spending cuts.
To apply the approach of the earlier paper here,
assume that each household would pay an equal dollar amount to finance enough of
the tax cuts to hit the Senate bill’s deficit target of 0.5 percent of GDP in
2012. To do so would cost $1,318 per household. Yet the middle fifth of
the household would receive an average tax cut of $820 in 2012. Hence, the
middle fifth of households would lose an average of $498 each. The
lowest-income fifth of households would lose an average of $1,278 each. (To hit
the Senate bill’s deficit target of 0.5 percent of GDP in 2012, about two-thirds
of the tax cuts would need to be offset. If the full cost of the tax cuts were
to be offset by spending reductions, middle- and low-income households would
lose significantly more than just noted.)
By contrast, the top one percent of households
would receive tax cuts averaging $61,000 in 2012. If, due to the Senate
bill, these households also had to pay $1,318 apiece in 2012, they would end up
with an average net gain of nearly $60,000. Those with incomes of more
than $1 million would end up with an average net gain of more than $150,000.
End Notes:
[1] Jed Graham, “GOP Budget Hawks Make Push to Require Broad
Spending Cuts,” Investor’s Business Daily, July 3, 2006, p. A1.
[2] This is the amount by which WIC caseloads would have to be
reduced under the current program structure, if funding for the program in
2009 were set at the level shown in the President’s budget. The
Administration also has proposed shifting part of the costs of the WIC
program to states. If that proposal were adopted, the number of people
served through WIC would have to be cut 295,000 by 2009.
[3] It is not clear how the Medicare savings of $83 billion,
which works out to an average of $1,750 per beneficiary for the 47.5 million
beneficiaries projected to be in the Medicare program in 2012, would be
attained. The savings could be attained by: increasing the amounts that
beneficiaries must pay in premiums, deductibles, and co-payments; lowering
payments to hospitals, doctors and other health care providers; reducing the
health care services that Medicare covers; or through a combination of
approaches.
[4] Tax Policy Center estimates show the bottom 40 percent of
households will receive an average tax cut of $260 in 2012.
[5] William G. Gale, Peter R. Orszag, and Isaac Shapiro, “The
Ultimate Burden of the Tax Cuts: Once They are Paid For, Low- and
Middle-Income Households Likely to be Net Losers, On Average,”
Urban-Brookings Tax Policy Center and Center on Budget and Policy
Priorities, June, 2, 2004.
[6] This calculus is roughly accurate for middle-income
households, as available Census data (the data are somewhat limited in
scope) indicate that about one-fifth of government spending on benefit
programs goes to the middle fifth of households.
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