Revised May 4, 1998

Highway Bill Likely to Cut into Funding for Other Non-Defense Discretionary Programs
by Sam Elkin and Robert Greenstein


The highway bill now in a conference committee between the Senate and House threatens to precipitate large reductions in the next several years in the non-defense discretionary part of the federal budget. Programs in areas ranging from education and child care to environmental, agricultural, rural, veterans, and foreign aid programs, as well as scientific research, are likely to be affected adversely.

The versions of the highway bill that both the House and Senate have passed would sharply increase highway spending to levels well in excess of what was agreed to during last year's budget negotiations between Congress and the President. Due to the binding caps the budget agreement placed on expenditures for discretionary (i.e., non-entitlement) programs, increased highway spending must automatically lead to reductions in other discretionary programs unless the increased highway spending is offset in some other manner.

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That the highway bill will have this effect on other discretionary programs is not well understood. There is a widespread — but wholly mistaken — view that the increased highway spending is being financed out of the highway trust fund in a way that does not affect funding for other programs. The highway trust fund, however, is essentially a bookkeeping mechanism. Its existence does not alter the fact that discretionary spending on highways is counted under the discretionary spending caps — and an increase in highway spending consequently requires reductions in other discretionary programs so that overall discretionary spending remains within the cap.

The budgetary realities related to these matters are as follows:

CBO Affirms that the Highway Trust Fund Will Not "Pay"
for Increased Highway Spending

On April 28, 1998, June O'Neill, director of CBO, wrote to Senator Pete Domenici, Chairman of the Senate Budget Committee, in response to several questions the Senator posed regarding the highway bills. In its letter, CBO dispels the myth that the increases proposed in the Senate and House highway bills would be offset by gas tax receipts earmarked for the Highway Trust Fund or by cash balances in that trust fund. The CBO letter states that discretionary spending on highways falls under the discretionary caps and an increase in such spending necessitates corresponding reductions in other discretionary programs. Excerpts from the CBO letter follow.

  1. Why are gas tax receipts not an offset to ISTEA spending?

    "Most of the ISTEA outlays are discretionary — subject to annual obligation limitations in appropriation acts — and thus fall under the discretionary caps. The excise taxes, in contrast, are subject to the pay-as-you-go mechanism; changes in such taxes can only be
    offset, for pay-as-you-go purposes, by changes in other revenues or in direct [i.e., mandatory] spending that were enacted in authorizing bills."

    "Both S. 1173 and HR. 2400
    [the Senate and House highway bills] would only have modest effects on revenues over the next five years but would substantially increase spending for surface transportation programs (assuming appropriation action consistent with the bills). Thus, even if the separate budgetary categories did not exist, the small changes in revenues resulting from S. 1173 or HR. 2400 would not offset the additional spending."

  2. Why is the current Highway Trust Fund cash balance not an offset to ISTEA spending?

    "... the cash balance in the trust fund reflects tax revenues that the government has already received and has counted in calculating the budget deficit or surplus. Counting the balance as an offset to spending
    [such as the spending in the highway bill] would have the effect of counting revenues twice."

  3. Why is reducing or eliminating the current cash balance in the Highway Trust Fund not an offset to ISTEA spending?

    "The cash balance of the Highway Trust Fund plays no part in calculating the deficit or surplus because it is neither a receipt nor an expenditure. It is simply a summary of previous budgetary transactions — the prior deposits into the fund less the prior spending out of the fund. Eliminating or reducing the cash balance without changing federal spending or revenues...would have no effect on the surplus or deficit."


Background on the Discretionary Caps

In negotiating the Balanced Budget Agreement, Congress and the President agreed to extend the strict spending limits on discretionary programs that have been in place since 1991. These limits, known as caps, were set in law through 2002.

Defense and non-defense discretionary programs operate under separate caps until the end of fiscal year 1999. After that, defense and non-defense discretionary programs are subject to a single cap. The discretionary part of the federal budget encompasses a wide range of government responsibilities, including the military, international programs, NASA, civilian energy, agricultural and biomedical research, environment, national parks, community and economic development, education, job training, Head Start, public health programs, housing, veterans hospitals, law enforcement, rural programs, general governmental operations, and highways, among others. Funding for these programs as a whole cannot exceed the amount of the caps without triggering automatic across-the-board cuts in discretionary programs.

The caps the Balanced Budget Agreement established are quite restrictive; under these caps, the total amount of inflation-adjusted spending available for discretionary programs shrinks over the next several years. Programs must be reduced or eliminated if overall spending is to fit within the caps. If Congress continues to abide by the defense spending levels assumed in last year's budget agreement (which assumed that the relative shares of discretionary spending that go to defense and non-defense programs would remain essentially stable), expenditures for non-defense discretionary programs (including highway spending) will by 2002 be 8.4 percent below the 1998 level, after adjusting for inflation.


The Highway Bill Takes Substantial Funding Away from Other Programs

The highway bill would deepen the cuts required in discretionary programs other than highway and mass transit programs, because it would increase highway and mass transit spending and leave less money for other discretionary programs under the discretionary spending caps. The highway bill the House has passed would raise highway and mass transit spending to a level 25.7 percent higher in 2002 than its 1998 level, after adjusting for inflation. As explained below, the House version of the highway bill also would wall off highway and mass transit spending from other discretionary spending, thereby guaranteeing that deeper cuts must be made in other discretionary programs.

The Effect of the Highway Bill on Discretionary Spending
Discretionary spending, in billions of FY 1998 dollars
  Fiscal year Percent change,
  1998 1999 2000 2001 2002 1998 to 2002
Discretionary spending levels agreed to in the Balanced Budget Agreement of 1997            
Highways and Mass Transit* $25.2 $25.3 $25.1 $24.6 $24.1 -4.6%
Other non-defense programs $261.2 $261.3 $257.5 $249.9 $238.4 -8.7%
Defense $266.8 $260.9 $257.5 $253.0 $249.2 -6.6%
Total $553.3 $547.5 $540.2 $527.5 $511.7 -7.5%
Discretionary spending levels under House version of the highway bill.            
Highways and Mass Transit* $25.2 $27.2 $29.7 $31.6 $31.7 +25.7%
Other non-defense programs $261.2 $259.4 $252.9 $243.0 $230.8 -11.7%
Defense $266.8 $260.9 $257.5 $253.0 $249.2 -6.6%
Total $553.3 $547.5 $540.2 $527.5 $511.7 -7.5%

* Highways and other discretionary programs covered by The House highway bill (H.R. 2400)
CBPP calculations based on CBO estimates of H.R. 2400 and the Bipartisan Budget Agreement (May 15, 1997)
Notes:  Assumes all nominal increases in Transportation spending under the Budget Agreement go to highways and mass transit. (See footnote 2.)

Each extra dollar in discretionary spending the bill gives to highways and mass transit must be taken from other discretionary programs, unless the extra spending is offset by cuts in mandatory programs. Since defense spending is unlikely to be reduced below the levels assumed in the balanced budget agreement (and may be raised to levels higher than that), increases in discretionary spending for highways and mass transit programs will, in all probability, need to be paid for through deeper cuts in other non-defense discretionary programs.

As the table above shows, if the House version of the highway bill is enacted, total spending on all non-defense discretionary programs other than highways and mass transit will have to be cut a cumulative total of $58.8 billion between 1998 and 2002. In 2002 alone, spending on these programs will have to be $30.4 billion — or 11.7 percent — below the 1998 level, after adjustment for inflation.

The House bill also would ensure that Congress could not lessen the magnitude of the reductions in non-defense programs in future years by paring back the highway and mass transit spending increases. The House bill would take highway and mass transit spending "off budget" and result in lower caps being applied to other discretionary spending.(3) Rep. Bud Shuster, chairman of the House Transportation Committee, has suggested an alternative approach for conference, but the alternative approach would have essentially the same effect. It would place highway and mass transit spending under a separate cap and lower the cap for other discretionary spending accordingly.

In either case, the impact on other discretionary programs would essentially be the same — these programs would be reduced by the amount the highway bill increases discretionary spending for highway and mass transit programs. Other discretionary programs would have to be cut dollar for dollar by the amount the legislation boosts discretionary spending on highways and mass transit.

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The Balanced Budget Agreement itself accorded somewhat more favorable treatment to transportation programs than most other programs, largely due to Chairman Shuster's efforts last year. (See table above.) The pending highway legislation goes much further. In the year 2002 alone, discretionary spending on highways and mass transit under the House highway bill would be $7.7 billion, or 31.9 percent, above the level the budget agreement envisioned. Other non-defense discretionary spending would have to be cut $7.7 billion below the level the budget agreement assumed for 2002.


Defense Spending Increases May Further Erode Funding for Non-Defense Discretionary Programs

The estimates cited above assume that defense and non-defense programs will retain approximately the same shares of total discretionary spending over the next five years. Beginning in 2000, however, the budgetary mechanism that prevents Congress from cutting non-defense programs more deeply to increase funding for the military (and vice versa) will disappear.

Defense spending has been reduced over the course of recent years, and proponents of a larger military clearly intend to push for increases in defense spending at the expense of non-defense programs as soon as the opportunity arises. (Some, including Representative Floyd Spence, chairman of the House National Security Committee, are even urging Congress to reopen the budget agreement now to increase defense spending. Spence recently declared: "How are the military services supposed to stabilize their downsized post-Cold War force structure, protect quality of life and readiness, and end the decade-long procurement 'holiday' when they lose purchasing power every year?"(4)) Many budget observers, including the authors of this paper, believe it is likely Congress will raise defense spending over the next few years to levels exceeding those assumed in the budget agreement. Doing so would mean that reductions in non-defense discretionary programs would be larger than the figures cited here.

Military spending thus is likely to grow at the same time that highway spending would increase. If defense spending is raised to higher levels than those the budget agreement assumed and the House highway becomes law, non-defense discretionary programs will need to be cut more than 11.7 percent by 2002.

Furthermore, some non-defense programs Congress favors may receive special treatment. If such programs receive additional funding, or if they simply receive enough to keep up with inflation and are not reduced, that will further shrink the funds available to other non-defense discretionary programs.

Despite the likelihood of reductions in discretionary programs, some in the House are proposing still deeper cuts in the overall amount available for non-defense discretionary programs. According to news reports, the budget resolution that House Budget Committee chairman John Kasich has written and is discussing with other House Republicans would lower the discretionary caps and cut non-defense discretionary funding by an additional $100 billion or more over the next five years, on top of the reductions in last year's budget agreement.


The Senate Budget Resolution and Increased Highway Spending

Both the Senate and House versions of the highway bill increase highway spending substantially over the levels reflected in the budget agreement. Neither version of the highway bill pays for these increases by making offsetting cuts in other programs.

Some in the Senate have said the Senate version of the budget resolution would pay for increased highway spending without requiring additional reductions in other discretionary programs. The Senate budget resolution envisions that Congress would accommodate the increased highway spending by writing offsetting cuts in entitlements and other mandatory (i.e., non-discretionary) programs into this year's appropriations bills.

There is strong reason to believe, however, that only a modest portion — if any — of these mandatory savings will actually materialize as offsets to the increased highway expenditures. The budget resolution is not a piece of legislation; it cannot make these cuts itself. The appropriation committees would have to do that. But some of the assumed mandatory cuts are highly controversial and will be politically difficult to achieve. It is far from clear that appropriators will be willing — or more important, will be able — to make some or all of these cuts. In addition, the process of using cuts in mandatory programs to offset increased discretionary spending might not be acceptable to the House, where a number of conservative Members would prefer to use savings from reductions in mandatory programs for larger tax cuts and appear ready to exact further reductions in non-defense discretionary programs.

A budget resolution is only a framework for the development of legislation and generally can enforce reductions in mandatory programs only through "reconciliation instructions." This year's Senate budget resolution contains no reconciliation instructions. Even if the Senate budget resolution approach for financing highway spending increases is ultimately written into the final budget resolution that both the Senate and House adopt, there likely will be no enforcement mechanism to require that the proposed reductions in mandatory programs actually be made.

Moreover, the Senate budget resolution does not actually contain these mandatory program reductions. The Senate Budget Committee report accompanying the budget resolution simply lists reductions in mandatory programs that it assumes the appropriations committees will make during the appropriations process.

Some of the mandatory savings listed in the Senate Budget Committee report will be difficult to secure. More than half of the mandatory savings the Senate budget resolution assumes will be used to pay for increased highway spending — $10.5 billion out of $18.5 billion — comes from a proposal to deny veterans disability compensation to veterans with smoking-related disabilities. Although this proposal appears to have merit and also is included in the President's budget, it seems unlikely to pass.

The upshot is that there appears to be little chance that the highway spending increases will be largely or fully offset by reductions in mandatory programs. To the extent that increases in discretionary transportation spending are not offset by reductions in mandatory programs, other discretionary programs must be cut.


Presidential Priorities Endangered

A final point is that if some of the mandatory savings listed in the Senate Budget Committee report are used to offset a portion of the increase in highway spending, that will have other consequences. Virtually all of the mandatory savings measures the Senate Budget Committee envisions using to pay for added highway spending are proposals included in the President's budget to pay for Administration initiatives. To the extent these savings are used to pay for highway spending increases instead, various initiatives will be left without a financing mechanism.

The impact of the highway bill both on discretionary programs in general and on the Clinton initiatives in particular does not appear to be well understood. Supporters of some discretionary programs that the President's budget would increase may assume the question is what portion of the proposed increase these programs will receive. But in many cases, it appears such programs may more likely to be reduced over the next five years than expanded.

The President's budget substantially increased the discretionary caps; it used a combination of anticipated tobacco legislation revenue, revenue from closing certain tax breaks, and mandatory program savings to pay for the increase in the caps. The Congressional majority is rejecting that approach and, as noted, it may seek to reduce the caps. (In addition, the Congressional Budget Office has estimated the President's budget falls $32.3 billion short over five years of fully offsetting the cost of its initiatives.)

The bottom line is that if highway spending is increased without raising the discretionary caps, other discretionary programs must be cut. There is no way around that budgetary arithmetic. The question increasingly appears to be how large the additional cuts in discretionary programs will be.



Since highway spending falls under the discretionary caps, increases in it must come at the price of reductions in other discretionary programs, unless mandatory offsets are found. Neither the House nor the Senate highway bills include mandatory offsets. The Senate budget resolution assumes mandatory offsets but cannot make these reductions itself. And it is likely the appropriations committees will not be able to make many of the mandatory program reductions the Senate budget resolution assumes.

Non-defense discretionary programs consequently are likely to bear the brunt of most of the increased spending in the highway bill. Furthermore, the emerging question regarding many of the initiatives in the Clinton budget is not what portion of the initiative will be salvaged but how much more deeply discretionary programs overall — including some of the discretionary programs the Administration has proposed to expand — may be sliced over the next five years.

End Notes

1. The documents setting forth last year's Balanced Budget Agreement, released May 15, 1997, included agreed-upon levels for various categories of discretionary spending through 2002. Among these were specific levels for defense and non-defense discretionary spending; these levels kept the relative shares of discretionary spending going for defense and non-defense programs essentially stable. However, for fiscal years 2000 through 2002, these specific defense and non-defense levels were not set into law. For those years, only the overall ceiling on all discretionary spending is written into law.

2. The documents setting forth the terms of the Balanced Budget Agreement include assumptions for discretionary spending levels for transportation (Function 400 of the budget) for each fiscal year through 2002. These figures were not written into law. This paper estimates the highway and mass transit share of overall transportation spending that is reflected in the budget agreement by assuming a five-year freeze on spending for transportation expenditures other than highways and mass transit, with the increase above a freeze level in overall transportation spending assumed to go for highways and mass transit. If we had assumed instead that all transportation programs were expected under the budget agreement to grow at the same rate, the levels used in this analysis for the spending levels the budget agreement assumed for highways and mass transit would have been lower, and the amount by which the highway bill would increase highway spending above the budget agreement levels would have been larger than the figures cited here.

3. Under the Budget Enforcement Act, if a program is taken "off-budget," there is a corresponding reduction in the discretionary caps.

4. "Rep. Kasich Stirs up a Low-Calorie Budget", Washington Post, April 26, 1998.

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