Revised February 5, 1998


Federal Government Would Continue to Consume
Less of Economy Under Administration's Budget

Tax Burdens Would Edge Down Slightly
by Robert Greenstein, Isaac Shapiro, and Sam Elkin


The new Clinton Administration budget contains a substantial number of program initiatives. The inclusion of these initiatives in the budget has led to several questions, including:

Examination of the budget shows the answer to all three questions to be "no." Under the budget, the government would continue to contract as a share of the economy between now and 2003, while taxes would be slightly lower than they are today as a percentage of income in four of the next five years. In addition, all of the projected surpluses in the unified budget would be preserved rather than spent.


Budget Contains Both Program Expansions and Program Reductions

Much attention is being focused on the initiatives in the budget, which would expand programs and tax credits. The budget also contains some significant program reductions although the Administration has not highlighted them. Some Administration critics have said that the budget contains $150 billion in added spending and expanded tax credits, but this figure counts only program increases and new or expanded tax credits without subtracting program decreases and provisions that pay for the tax credits by closing inefficient tax breaks. (See box below.)

The budget includes more than $30 billion over five years in reductions in entitlement programs, which are used to help pay for expansions in other programs, including discretionary programs. For example, the budget would save $17 billion over five years by limiting the payment of cash benefits under the veterans disability compensation program to veterans claiming disability on the basis of a smoking-related condition or illness that became manifest some time after they left the armed forces. In the absence of this budget proposal, the Department of Veterans Affairs will be required to spend billions of dollars on such payments, as a result of a recent legal ruling. (CBO estimates that when phased in fully, this ruling could require the Department of Veterans Affairs to spend as much as $15 billion a year on these payments.) The budget also would secure mandatory savings by reducing the federal share of expenditures for Medicaid and food stamp administrative costs, scaling back the Agriculture Department's Export Enhancement Program and the cotton program, making changes in the student loan program and the FHA single-family loan program, and adopting more aggressive methods to prevent or recover Medicare and SSI overpayments.

In addition, the budget contains reductions in a number of discretionary programs, although the savings these reductions would produce are significantly smaller than those the reductions in entitlement programs would generate. Among the discretionary programs that would be reduced are impact aid, public housing operating subsidies, Small Business Administration disaster loans, Public Law 480 market promotion activities, the Appalachian Regional Commission, construction of veterans' medical facilities, the Army Corps of Engineers, Naval Petroleum Reserve operating costs, and space flight and related activities.



The Net Expansion in Programs Would Be Modest

The program expansions would cost more than the program reductions would save. Expansion costs not paid for by program reductions would be financed primarily by revenues anticipated from tobacco legislation.

The overall net expansion in programs — including the expansion financed with tobacco revenues — would be modest; it would equal between one-tenth and two-tenths of one percent of the Gross Domestic Product in most years. (The Gross Domestic Product, or GDP, is the basic measure of the size of the U.S. economy.) This is less than the amount by which federal expenditures otherwise will contract as a share of GDP, due to the strictures of the 1997 budget agreement and continued economic growth. As a result, federal spending will fall as a share of GDP even with the initiatives.

Even with the program expansions, federal spending would decline from 20 percent of the Gross Domestic Product today to 18.8 percent in 2002. Throughout this period, federal spending as a share of the economy would be at its lowest level since 1974. (In the absence of the Administration's budget, federal spending would be 18.7 percent of GDP in 2002 under both the CBO and OMB estimates.)

Budget Does Not Contain $150 Billion in Increased Program Expenditures

Figures as high as $150 billion have been tossed around for the amount of the new program spending in the Administration's budget. These figures are inflated. Over the four years through 2002, the budget contains $57 billion in new spending. Over the five years through 2003, it contains $82 billion in new spending.

In economic terms, these amounts are modest, as the Washington Post noted in a February 3 editorial. The spending increases average about $16 billion a year over the next five years, or between one-tenth and two-tenths of one percent of the Gross Domestic Product. The Post editorial commented that "The proposed spending increases are a good deal smaller than the surrounding rhetoric on either side would suggest."

The $150 billion figure that some critics of the budget have cited is based on two problematic uses of data. First, increased expenditures in some programs that are fully paid for by cuts in other programs are counted as new spending. An example illustrates the shortcomings of this approach.

Suppose two programs each cost $300 million in a given year. If they cost the same amount the following year, there is no new spending. Now suppose the government sets priorities, increasing the more effective of the two programs by $100 million and cutting the less-effective program by the same amount. Total costs do not rise. But under the accounting method used by those who contend the budget contains $150 billion in new spending, this shifting of funds between programs is said to constitute $100 million in new spending.

The second problem with the $150 billion number is that it counts the cost of the tax cuts the Administration has proposed. Some who have used the $150 billion figure have made clear this figure includes tax cuts as well as program expansions; others citing this number have not been as careful and have implied the budget contains $150 billion in new spending. In any event, all of the tax cut proposals are paid for by closing various tax breaks.

Determining the actual amount of new spending the budget contains is straightforward. One compares the amount of program spending that would occur if there were no changes in policy to the amount of program spending under the Administration's budget proposals. This shows the budget includes $82 billion in new spending over five years.(1)

As noted elsewhere in this piece, this $82 billion in added program expenditures would be financed primarily from $65.5 billion in payments anticipated as a result of enactment of tobacco legislation. The other $16 billion would come from added revenue raised primarily by reinstating some expired environmental taxes levied on corporations and on hazardous substances and by converting the airline ticket tax to a user fee.

A portion of the $82 billion in added expenditures would be used for activities universally agreed to be a necessary part of any tobacco legislation that can pass, such as relief for tobacco farmers, expanded smoking cessation programs, increased research into tobacco-related health problems, and funds from tobacco legislation that the federal government would pass through to the states.


Taxes Would Decline as a Percentage of Income

The budget contains both provisions that would increase taxes and provisions that would reduce taxes. It raises $23 billion over five years in measures to broaden the tax base (i.e., to close unwarranted or low-priority tax expenditures) and uses these proceeds to finance virtually all of the $24 billion it proposes in new tax cuts.

The budget would result in a net gain of $16 billion over five years in revenue, exclusive of the anticipated tobacco payments. The net gain would come primarily from reinstating an environmental tax that is levied on corporations and used to finance the clean-up of toxic waste sites, along with related excise taxes on hazardous substances that also are used to finance clean-ups (both types of taxes expired at the end of 1995) and from converting the airline ticket tax to a user fee that would somewhat boost government receipts.

The net increase in receipts (exclusive of the tobacco monies) would be very small — about $3 billion a year, or a fraction of one-tenth of one percent of GDP.

Furthermore, over the next five years, the typical family would experience tax reductions, not tax increases. This would occur primarily because the tax cuts enacted as part of last year's budget agreement phase in over a number of years, so that a new tax cut effectively kicks in each year. For example, between 1998 and 1999, the child tax credit will rise from $400 to $500 per child, while the amount of interest payments on student loans that a taxpayer may deduct rises from $1,000 to $1,500. Income limits on tax-deductible contributions to Individual Retirement Accounts also will rise in 1999.

Some argue that the proceeds anticipated from tobacco legislation constitute a tax increase. At present, it is not known whether these proceeds would come in the form of payments from tobacco manufacturers or as an excise tax on tobacco products (the Administration's budget indicates it favors payments from the manufacturers), but the difference is not especially significant from a policy or economic standpoint. There is broad agreement that the principal goal of any tobacco legislation is to reduce smoking, especially among youth, and that one of the principal means of doing so is to raise the price of cigarettes. Extracting payments from tobacco manufacturers (which are then passed through to consumers in the form of higher cigarette prices) and imposing an excise tax on cigarettes are two methods to achieve the same goal — to raise cigarette prices and thereby discouraging smoking.

Policies that raise the price of cigarettes to deter smoking and protect Americans' health are not what most Americans think of when they hear talk of tax increases that cause them to keep less of what they earn. But even if the revenues the Administration anticipates receiving from tobacco legislation are counted as new taxes, the percentage of income that Americans pay in taxes still would edge down a bit under the Clinton budget.

Today, federal taxes equal 19.9 percent of the Gross Domestic Product, which essentially means that taxes equal about one-fifth of the national income. The budget shows that even if the tobacco revenues are counted, taxes will edge down slightly to 19.7 percent of GDP in 2002. In four of the next five years, taxes would be lower as a percentage of GDP under the Administration's budget than they are today. (Some Administration critics are citing the single year in which revenues would tick up slightly as a percentage of GDP — that is, 1999 — and not mentioning that the trend would be downward.) The typical family will pay less of its income in taxes, not more.(2)

End Notes

1. These figures do not include outlays for interest payments on the debt, which are not program expenditures. If changes in interest payments were to be counted, the net increase in outlays would be a bit less than $82 billion.

2. It is worth noting that Treasury data show the typical or median family of four now pays a lower percentage of income in federal income and payroll taxes than at any time in the past 19 years.