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A $1.5 Trillion Tax Cut Could Trigger Entitlement Cuts This Year – or Later

As the Senate continues debating a budget plan that paves the way for a $1.5 trillion tax cut over ten years, the pay-as-you-go (PAYGO) law remains on the books, with potentially big implications for key budget programs.  Under PAYGO, which policymakers first enacted in 1990 and, after it expired, restored in 2010, the President and Congress must offset a tax cut or entitlement expansion with a compensating tax increase or entitlement cut.  A failure to do so triggers automatic spending cuts.

Under the law, were policymakers to enact a $1.5 trillion tax cut this year, as the Republican majority hopes, it would trigger automatic spending cuts to Medicare and a host of other programs by no later than January 15.  While policymakers will likely waive the PAYGO requirement and prevent such automatic cuts from taking effect, PAYGO is a timely reminder that tax cuts aren’t free.

Although many entitlements are exempt from PAYGO’s automatic spending cuts, many are not.  To offset the cost of a $1.5 trillion tax cut, Medicare payments to doctors, hospitals, and insurance plans would be automatically cut 4 percent for each of the next ten years, on top of the 2-percent cuts that those payments are already experiencing under the sequestration triggered by the 2011 Budget Control Act. 

In addition, the automatic cuts would bring the complete elimination of more than 150 mandatory payments for farmers, health insurance, the military retirement trust fund, housing, social services, victims of crime, child nutrition, and many others, all lasting a decade. The 16 programs of $1 billion or more in 2018 that would be eliminated include:

Programs Facing the Risk of Elimination for 10 Years Under PAYGO
2018 funding levels in billions of dollars
Crime Victims Fund payments to states $15.0
Farm programs of Commodity Credit Corporation 9.0
Concurrent receipt payments to the military retirement trust fund 7.6
Risk adjustment program payments 5.3
Farm security and rural investment programs 3.9
Operations and support, Citizenship and Immigration Services 3.8
Build America Bond payments 3.7
Vocational rehabilitation state grants 3.5
Accelerated, refundable corporate Alternative Minimum Tax credits in lieu of bonus depreciation 3.2
Troubled Asset Relief Program housing programs 3.0
Operations and support, Customs and Border Patrol 1.8
Social Services Block Grant 1.7
Assets Forfeiture Fund 1.7
Section 32 Child Nutrition Funds for Strengthening Markets 1.5
Mineral leasing and associated payments 1.5
Student aid administration 1.3

Even if the President and Congress prevent these automatic cuts by waiving PAYGO, there’s a larger point: Sooner or later, higher deficits and debt will likely push policymakers to make equally deep cuts to entitlement programs — maybe different ones, but just as deep.  Whether now or later, whether this list or some other, deficit-increasing tax cuts put key federal benefits at risk.