May 21, 1998
Effects of the Kasich Budget Plan
by Robert Greenstein and Sam Elkin
This analysis of the budget resolution the House Budget Committee approved May 20 updates an earlier Center analysis of a more-detailed Kasich budget plan released May 12. The budget plan Rep. Kasich released May 20, which his committee passed the same day, contains the same level of reductions in mandatory and discretionary programs as Rep. Kasich's May 12 proposal. As a result, this piece is similar to the earlier Center analysis.
The Kasich budget plan approved May 20 by the House Budget Committee includes $100 billion in budget reductions over the next five years. It would result in large reductions in non-defense discretionary programs and disproportionate cuts in basic benefit programs for poor and moderate-income families, particularly low-income working families and those seeking to leave public assistance for work.
Reductions in Non-defense Discretionary Programs
Expenditures for non-defense discretionary programs would fall by about one-fifth between fiscal year 1998 and fiscal year 2003, after adjusting for inflation. Proponents of the Kasich plan speak of it as cutting the federal budget one percent, but expenditures for non-defense discretionary programs would decline much more than that.
The new reductions in non-defense discretionary programs would be in addition to those already required as a result of last year's budget agreement. The Congressional Budget Office estimates that under the budget agreement, expenditures for non-defense discretionary programs would drop by 2002 to three percent of the Gross Domestic Product, the basic measure of the size of the U.S. economy. That will be the lowest such level in more than 40 years. The Kasich budget plan would drive this level lower.
- A five-year freeze on overall appropriations for non-defense discretionary programs would itself cause a decline of 13 percent in the purchasing power of these programs by fiscal year 2003, using CBO's inflation projections. Last year's budget agreement places overall expenditure levels for non-defense discretionary programs over the next five years below this five-year freeze level.
- The Kasich plan would add new reductions in non-defense discretionary programs on top of the reductions in the budget agreement. It would cut expenditures for non-defense discretionary programs an additional $46 billion over the next five years.
- By fiscal year 2003, overall expenditures for non-defense discretionary programs would be 17 percent to 21 percent lower (about one-fifth lower) than in fiscal year 1998, after adjusting for inflation.(1)
- Some non-defense discretionary programs would not be cut significantly because their political support is too strong (for example, highway spending) or because they cannot be cut that much without jeopardizing basic operations of government. As a result, other programs would have to be cut substantially more than 17 percent to 21 percent for non-defense discretionary expenditures as a whole to decline by that amount. Reductions of this magnitude would be painful and likely prove difficult for Congress to achieve.
Reductions in Programs for Low- and Moderate-income Working Families
The documents that Rep. Kasich released May 20 describing his plan do not provide any information about how its $55 billion in reductions in mandatory programs would be achieved. This is unusual. Virtually every previous budget resolution that has included "reconciliation instructions" requiring specific Congressional committees to cut mandatory programs by specified amounts has explained its assumptions about which mandatory programs would be reduced.
Nevertheless, the assumptions underlying the mandatory program reductions in the Kasich budget plan can be identified. This can be done by examining the more detailed budget document that Rep. Kasich released May 12. That document specified which mandatory programs would be cut, in what amounts, and in what manner. Although the descriptions of specific mandatory program reductions in the earlier budget document were dropped from the budget documents that Rep. Kasich unveiled May 20, the committee-by-committee reconciliation instructions in his May 20 budget plan appear to match the specific mandatory cuts in the earlier document. Furthermore, Rep. Kasich stated on May 20 that the budget cuts detailed in the May 12 document still represent the recommendations of the Republican members of the House Budget Committee.(2)
Among the most striking features of the mandatory program cuts in the Kasich budget, as reflected in the description of these reductions in the May 12 Kasich budget document, are the disproportionate reductions that would be made in programs for low-income families and the cuts in support for low-income working families and those seeking to leave public assistance for employment.
- Programs targeted on low-income families and individuals make up 23 percent of all mandatory program expenditures but would bear 42 percent of the mandatory program reductions specified in the earlier Kasich budget document.(3) These programs thus would bear nearly twice their proportionate share of the plan's mandatory program cuts.
These reductions would come on top of the highly disproportionate cuts in these programs made by the 104th Congress. Some 93 percent of the mandatory program reductions enacted under the 104th Congress were in programs targeted on low-income families and individuals.
- Many of the cuts that Rep. Kasich proposes in mandatory programs would primarily or exclusively affect low-income workers and those seeking to work. His budget would eliminate all remaining funds in the welfare-to-work block grant enacted as part of last year's budget agreement. That block grant provides funds to states and cities to help move the hardest-to-employ welfare recipients into employment. Thirty-five states have already submitted applications for these welfare-to-work funds, accompanied by commitments of state and/or local matching funds as required by law, and a number of other states are preparing to submit applications.
The Kasich budget also would eliminate the funding for food stamp workfare slots included in last year's budget agreement. The 1996 welfare law contained a provision, co-authored by Rep. Kasich, that limits the provision of food stamps to non-disabled individuals aged 18 to 50 who are neither employed nor raising minor children to just three months out of every three years, except for months in which these individuals perform workfare. When offering this proposal in 1996, Rep. Kasich said on the House floor that it merely required those who could not find jobs to do workfare. "If you cannot get a job," he declared, "you go to a workfare program; 45 out of 50 states have a workfare program." That statement was incorrect, however, as very few states ran food stamp workfare programs, and the Kasich proposal provided states no new funds to establish such programs. To address this gap in this Kasich provision of the welfare law, last year's budget agreement provided funds to states to create workfare slots for these individuals. The new Kasich budget plan would eliminate the funding for the workfare slots.
The Kasich budget also would repeal a provision of the Balanced Budget Act that allows states to grant a limited number of hardship exemptions from this three-month food stamp cut-off requirement. These components of the Kasich budget would mean that many destitute individuals who could not find a job in three months due to very low skill levels would simply be thrown off food stamps. They would be given no opportunity to perform workfare, and their state would not be permitted to grant them a hardship exemption.
- The Kasich budget also would reduce funding for child care for low- and moderate-income working families. It would cut the Social Services Block Grant by $3.1 billion over five years; part of SSBG funding is used to fund child care. While reducing this program, the budget assumes no increase in discretionary funding for child care programs. The combined effect would be a reduction in child care funding.(4)
- The budget cuts detailed in the budget document Rep. Kasich issued last week included a cut in job training programs designed to help low-income and disadvantaged individuals improve their skill levels and be better able to find and retain jobs that lift a family out of poverty. The budget document proposed a cut in job training of $2.1 billion below a freeze level over the next five years.
- The Kasich budget also would raise taxes on some of the nation's poorest workers. It would eliminate the Earned Income Tax Credit for workers not raising minor children who have earnings of less than $10,000 a year.
Analysis by CBO has shown that between 1980 and 1993, the percentage of income these households pay in federal taxes rose faster than did the percentage of income any other group of Americans pay. The CBO data show that the percentage of income the poorest fifth of non-elderly households without children pay in federal taxes rose 38 percent during this period. The CBO data also show that by 1993, the percentage of income this group was paying in federal taxes was several times larger than the percentage of income other low-income households pay.(5) To help address these sharp tax increases, which resulted primarily from increases in regressive payroll and excise taxes, Congress established a small Earned Income Tax Credit for these workers in 1993.
The EITC these individuals can receive simply offsets a portion of the payroll taxes they pay. It never exceeds their payroll taxes. By eliminating the EITC for these workers, the Kasich plan would remove this partial offset for payroll tax burdens, causing the overall tax burdens of these low-income workers to rise. This tax increase would come at the same time that this group could face substantial increases in their average tax burdens as a result of the pending tobacco legislation.
- The Kasich budget also would convert the Medicaid program to a block grant (except for the long-term care component of the program), another proposal that would adversely affect low-income working families. Many states are accompanying welfare reform initiatives with measures to cover more low-income working parents and children under Medicaid, as part of broader efforts to emphasize work over welfare. Under a Medicaid block grant, however, states would no longer be assured of receiving federal Medicaid matching funds for the cost of covering more low-income working parents and children. That would tend to discourage such initiatives on states' part.
In addition, a block grant would erode the longstanding commitment of the federal government to share with states in the cost of providing coverage for health care services to low-income families and elderly and disabled people. Under the block grant, states would bear 100 percent of the cost of unanticipated increases in Medicaid acute care expenditures that were caused by factors beyond states' control such as increases in unemployment, outbreaks of a disease (such as a flu epidemic), the emergence of a new disease such as AIDS, population growth, an increase in the proportion of a state's population that is elderly (and consequently has higher-than-average health care costs), and the development of new medical treatments that can cure diseases or slow their spread but are very costly.
- The level of savings generated by the Medicaid block grant proposal in the Kasich budget document released May 12 is not as large as the amounts that earlier block grant proposals would have produced. Nonetheless, the proposal would establish a ready mechanism for Congress to secure additional reductions in federal Medicaid expenditures in future years to finance tax cuts, transportation projects, or other politically appealing items. Once a block grant is in place, Congress could generate additional federal savings simply by ratcheting down the rate at which the size of the block grant is allowed to increase over time.
Under the proposed block grant, Congress would reduce federal Medicaid spending, and states would decide whether to use state funds to fill in for the loss of federal dollars, cut back on Medicaid eligibility levels, or reduce the scope or quality of the health care coverage provided to beneficiaries. In general, the easiest way for states to respond to the loss of federal funds would be to scale back eligibility by lowering Medicaid income limits. The families closest to the Medicaid income limits are overwhelmingly working families. The principal effect of lowering the Medicaid income limits thus would be to make groups of low-income working families ineligible for Medicaid.
The reductions in mandatory programs outlined in the Kasich budget document released last week also have another distinguishing characteristic they could hit working families particularly hard during recessions.
- Under a Medicaid block grant, federal Medicaid funding for states generally would not rise during recessions even though that is a time when the number of families that are unemployed and uninsured rises. Such families would no longer be assured of Medicaid coverage when they lost their jobs and were cast into poverty.
- In addition, the Kasich plan would convert to a block grant the current state entitlement to federal matching funds that reimburse the states for half of their administrative costs in operating the Medicaid and food stamp programs. Under current law, federal funding for these costs increases automatically when the cost of operating these programs rises due to caseload growth caused by a recession, growth in a state's population, or state efforts to reach more of the uninsured. Under the Kasich plan, that would no longer be the case. This would make it difficult for states to meet the additional needs that arise when working parents lose their jobs in large numbers during recessions.
Marriage-penalty Tax Relief
The principal purpose of these budget reductions will be to finance marriage-penalty tax relief. If marriage-penalty tax relief is deemed desirable, however, it need not cost anywhere near as much as the Kasich plan contemplates.
The marriage-penalty proposals that carry costs as high as the Kasich plan envisions generally are proposals such as H.R. 2456, a bill with 236 co-sponsors, under which more than 80 percent of the tax cuts would go to the top third of households. That is the same group that received the lion's share of the tax cuts enacted last year. Other marriage-penalty proposals, such as proposals to make the standard deduction for married couples twice that of single filers, would provide about the same amount of tax relief to married families with incomes under $50,000 as the more expensive proposals, but at a fraction of the cost.(6)
Furthermore, if it is determined that providing marriage-penalty tax relief is a priority this year, much of the cost could be financed by closing inefficient or unproductive tax breaks. The Administration's budget proposes $26 billion in such revenue-raising measures, according to CBO estimates. The Kasich budget does not appear to contain savings in this area, despite Rep. Kasich's past criticisms of corporate welfare and CBO findings that more than two-thirds of the corporate subsidies the federal government provides are delivered through the tax code.(7)
It should be noted that CBO has found that the number of families that receive a marriage bonus under the current income tax structure that is, the number of families whose income tax bills go down when they marry exceeds the number of families subject to a marriage penalty. CBO also has found that the total amount provided in tax reductions to married families that receive a marriage bonus exceeds the total amount of tax increases those subject to a marriage penalty face.(8)
CBO's analysis of issues related to the marriage penalty also explains that the current income tax code seeks to balance three important principles that can conflict with one another: married couples with equal incomes should pay the same amount of income tax regardless of how earnings are divided between the spouses; taxes should not be affected by marriage; and households with higher incomes should pay a larger percentage of their incomes in taxes than households with lower incomes. The CBO study explains that seeking to eliminate or reduce marriage penalties generally increases problems in at least one of these other two areas.
Most current proposals to reduce marriage penalties would cause many married families with the same level of income to owe substantially different amounts of federal income tax. A number of the current proposals also would increase marriage bonuses for many of those already receiving such bonuses, which is one reason many of these proposals are very expensive.
Furthermore, it is unclear to what extent the funds secured by the $100 billion in domestic program reductions the Kasich plan contains would be used for marriage-penalty tax relief. Some of these funds could be used for other tax cuts. Rep. Bill Archer, chairman of the House Ways and Means Committee, has called for deeper capital gains tax cuts and larger reductions in the estate tax. Such tax cuts would primarily benefit the wealthiest families. If these measures were enacted, some of the most affluent families would be further enriched, and the cost of enlarging their after-tax incomes would be financed in part through budget reductions that make working poor and recently unemployed families and individuals poorer.
1. The exact percentage decline in FY 2003 cannot be determined at this time because the Kasich budget documents do not provide year-by-year figures on the amounts by which non-defense discretionary programs would be reduced in each of the next five years. They provide figures only on the amounts by which non-defense discretionary programs would be reduced in fiscal year 1999 and over the five years as a whole. If one-fourth of the total cuts the plan calls for in the last four years of the five-year period are made each year and there is no growth in the size of the cut from year to year, expenditures for non-defense discretionary programs in fiscal year 2003 would be 17 percent lower than in fiscal year 1998, after adjusting for inflation (using the CBO projections of inflation in discretionary programs). This method is virtually certain to underestimate the size of the cut in 2003. Alternatively, if there is a constant rate of growth in the size of these reductions each year between fiscal year 1999 and fiscal year 2003, the reduction would reach 21 percent in fiscal year 2003. That figure is likely to overstate the size of the cut in 2003.
2. Congress Daily, May 20, 1998.
3. This calculation does not include mandatory savings from asset sales, as those are one-time rather than ongoing savings and do not represent reductions in programs. If savings from asset sales are included in the calculations, cuts in low-income programs account for 37 percent of the mandatory spending reductions.
4. The Administration's budget contains the same reduction in the Social Services Block Grant, but the Administration would use these savings to help pay for a much larger increase in funding for other child care programs. The net effect in the Administration's budget is a substantial increase in child care funding.
5. See Robert Greenstein, "The Consequences of Eliminating the EITC for Childless Workers," Center on Budget and Policy Priorities, April 1997.
6. See House Budget Committee, Minority staff, The "Marriage Penalty" and Related Proposals, April 23, 1998.
7. The May 12 Kasich budget document included $6 billion in savings from narrowing tax breaks, a little less than one-quarter the amount the Administration has proposed to save in this area. It appears from the revenue totals in the May 20 Kasich budget document that this $6 billion in savings is no longer assumed, although that cannot be determined for certain from the skeletal May 20 document.
8. Congressional Budget Office, For Better or Worse: Marriage and the Federal Income Tax, June 1997.