July 22, 1999

Is an $800 Billion Tax Cut Fiscally Responsible?
by Robert Greenstein and James Horney(1)

Testimony of CBO director Dan Crippen released July 21 notes that the reduction of the publicly held debt would be modestly larger over the next 10 years under the policies assumed in the Congressional budget resolution than under the President's revised budget request. The testimony projects that the debt held by the public would fall to 13 percent of GDP by 2009 under the Clinton plan and 12 percent of GDP under the budget resolution.

This has led to claims by some policymakers that the CBO testimony shows that the $800 billion tax cut now before Congress is fiscally responsible and would lead to greater debt reduction than the Administration's proposal. Such claims, however, are inaccurate; the CBO testimony does not demonstrate anything of this sort. Such claims rest on misapplication of the CBO figures.

In fact, if one uses CBO's estimates and applies realistic assumptions about discretionary spending levels, the finding is that tax cuts of the magnitude of the tax reduction measures now before Congress could lead to cumulative non-Social Security deficits exceeding $800 billion over the next decade.


What The CBO Testimony Actually Says

The CBO testimony says that if both of the key sets of assumptions in the budget resolution are faithfully followed and enacted — both the budget resolution's tax cuts and its rather extraordinary reductions in expenditures for appropriated (i.e., discretionary) programs — then the plan would result in slightly more debt reduction than the President's over the next 10 years. But there appears to be virtually no chance that the discretionary spending reductions assumed in the budget resolution — or anything close to them — will be adopted.

But the notion that discretionary cuts of this magnitude can be made is wildly unrealistic. The discretionary side of the budget includes everything from defense to education, highways, the FBI, veterans' hospitals, environmental protection and clean-up, aid to Israel and Egypt, NIH research to find cures for diseases, air traffic control, food safety, and programs such as Head Start and WIC.

The Second 10 Years

The figures in the July 21 CBO testimony have a major limitation — they stop after 10 years. Even using the budget resolution assumptions that cuts of stunning depth will be achieved in discretionary programs, the Congressional plan would produce substantially less debt reduction than the Clinton plan once you get past the initial 10-year period.

Using the Joint Tax Committee's estimates of the cost of the tax cuts through 2009 and conservative assumptions for the years after that, the Center on Budget and Policy Priorities has estimated that the House tax package would explode in cost from $792 billion in the first 10 years to $2.8 trillion in the second 10 years. The Senate Finance Committee package would burgeon in cost from $792 billion to $2.0 trillion in the second 10 years.

These explosions in costs would occur in the same years that the baby boom generation begins to retire and Social Security and Medicare costs mount. Projections by the Social Security actuaries and CBO indicate that in these years, both the Social Security surplus and the non-Social Security surplus will stop growing and start shrinking.

By contrast, the Administration's proposals do not similarly burgeon in cost after the first 10 years. After 2010, the Administration's proposal calls for using a sizeable share of the non-Social Security surplus for transfers to the Social Security trust fund, rather than for increases in government expenditures or tax reductions.


Will Congress Make These Discretionary Cuts?

The evidence is accumulating daily that Congress will not make such cuts in discretionary programs. In its July 1 budget report, CBO reported that due to scoring gimmicks that the appropriations committees are using, they already have effectively raised the caps by $14 billion for 2000 and consumed all of the non-Social Security surplus projected for 2000. (See the box on page 6 of the CBO report.) Moreover, on July 21, the same day the CBO testimony was released, the House Republican leadership called off indefinitely a mark-up of the largest domestic appropriations bill — the Labor, Health, and Human Services bill — because the leadership could not secure the votes for cuts of sufficient magnitude to fit within the spending constraint set for that bill.

Furthermore, these developments concern the difficulties of fitting the FY 2000 appropriations bills within the FY 2000 discretionary spending cap. The caps for the years after 2000 are tighter than the 2000 cap.


What Happens Under More Realistic Assumptions?

The CBO testimony also employs a second unrealistic assumption, which applies to CBO's analysis of both the Clinton and the budget resolution plans. The CBO budget projections effectively assume zero emergency spending over the next 10 years. (CBO lacks a specific emergency spending level to assume so it makes no assumption in this area.) No one seriously believes, however, that there will be no hurricanes, tornados, floods, or international incidents for the next 10 years.

If two more realistic assumptions are made — that overall discretionary spending will simply remain at FY 1999 levels adjusted for inflation (which would require real reductions in non-defense expenditures if defense spending rises), and that emergency spending will remain at its 1991-1998 average level, excluding expenditures for Desert Storm, a picture of fiscal irresponsibility emerges. Using CBO figures — including CBO estimates of expenditure levels for discretionary programs if discretionary spending remains at today's levels adjusted for inflation — we find the following:

Does the Clinton Plan Also Make Unrealistic Assumptions?

The Clinton budget also assumes some savings measures that appear unachievable, such as a proposed tobacco tax increase, legislation requiring that a portion of state tobacco settlement proceeds be used in certain program areas (with accompanying reductions in federal expenditures for those areas), and some proposals to narrow or eliminate special-interest tax breaks. These measures differ, however, from the unrealistic discretionary cuts assumed in the Congressional budget resolution in two important ways.

First, these Administration measures are much smaller. The savings from such measures are dwarfed by the $775 billion in discretionary program cuts the Congressional budget resolution assumes. Second, the Clinton savings measures that may be unrealistic are entitlement and tax proposals. This means that if they are not approved, the amounts they would save cannot be used. By contrast, the Congressional budget resolution assumes large unspecified reductions in discretionary programs, the vast bulk of which would be slated to be achieved in future years by future Congresses. This is precisely the sort of approach that creates substantial risk that unrealistic and unachievable assumptions will be conveniently employed now to enable large tax cuts to be enacted this year, without Congress having to enact specific cuts in specific programs and without the assumed savings actually materializing.



When realistic assumptions are used, $800 billion tax cuts are seen to lead to the return of substantial on-budget deficits. The figures appearing to show greater debt reduction under these plans than under the Administration's proposal rest upon assumptions of rather gargantuan cuts in the non-defense discretionary spending, the first installment of which Congressional leaders already are flinching from making.

End Notes:

1. James Horney recently joined the Center on Budget and Policy Priorities as a Senior Fellow. Until July 12, he directed the budget projections unit at the Congressional Budget Office, which coordinates CBO's estimates of expenditures, surpluses, and deficits. Robert Greenstein is the Center's executive director.

2. The depth of the reductions in non-defense discretionary spending is not quite as sharp (although it still is very large) under the budget resolution. This, however, is because the budget resolution conveniently assumes real cuts in defense spending from 2006 through 2009, to make room on paper for a bigger tax cut.