Navigating
Near-Term Fiscal Issues
Introduction
Our nation has pressing social needs that require greater public investment and a more robust set of income support and social insurance protections. We also have higher-than-optimal fiscal deficits even at today’s too-low spending levels. The clear path to boosting living standards and economic security for the vast majority while also stabilizing the nation’s debt to gross domestic product (GDP) ratio in coming decades is by raising revenue. The first tranche of revenue raised should be from progressive sources, but then if opportunities for substantial increases in broad-based social insurance programs become available, the broad benefits of these expansions should be financed by broader-based taxes.
EPI’s model tax and budget plan provides an aspirational plan for a progressive governing majority. Its political moment is admittedly not right now. But there remain realistic political opportunities in front of us to take some steps towards our goal of maintaining social insurance and income support programs as well as the vital public investment efforts begun in recent years to accelerate decarbonization.
Top Three Policy
Recommendations
1. Address Provisions of the Tax Cuts and Jobs Act (TCJA)
The most obvious political opportunity is the expiration of many of the individual income tax provisions of the 2017 tax law (commonly called the TCJA). These scheduled expirations — which, crucially, are current law — would see large revenue gains relative to a baseline where they were instead continued. Many of these expirations will raise revenue in a progressive manner. To put it simply, step one in the effort to whittle down the size of deficits in coming years by boosting revenue should be to simply “stop digging”. In practice, this means allowing the vast majority of the provisions currently scheduled to expire to actually phase out.
The TCJA, like the large tax cuts of 2001 and 2003, had large provisions that were temporary because its architects were transparently trying to game the legislative rules around budget reconciliation. Making these provisions temporary was a political strategy premised on the assumption that there was no political will to ever allow taxes to rise even when the law cutting them was explicitly written to be temporary. This assumption has so far largely proved correct — far too much of the 2001 and 2003 tax cuts became permanent, causing large revenue losses at a time when the spending side of the federal budget was subject to extreme austerity during the 2010s.
Part of why the 2001 and 2003 cuts were so hard to rollback is because their expiration coincided with extreme economic weakness. The debate at the end of 2012 over the “fiscal cliff” had some real logic to it — at the end of that year many fiscal provisions were set to expire at a time when the economy was still extremely weak after the 2008–2009 financial crisis and recession. The 2001 and 2003 tax cuts were actually the least-damaging fiscal provisions set to expire, but, even their expiration would have dragged a bit on recovery. We are not in that situation today. The economy is strong and can absorb a reduction in the budget deficit driven by a rollback of tax cuts mostly aimed at high-income households.
Finally in regards to the TCJA, just because some of its provisions do not have an automatic phase-out does not mean they should not be on the table. Its permanent provisions overwhelmingly benefit the owners of corporate equity — a group that is vastly overrepresented among the richest households in the United States. Revenue from the corporate income tax in the United States today is at historic lows and is extremely low relative to other advanced country peers. The rate cuts for corporate income taxes in the TCJA should be (at least partially) reversed, and much better base-broadening measures should be instituted, particularly to stop profit-shifting to lower-tax overseas locales.
2. Strengthen Social Security Trust Funds
Some near-term relief from the possible expiration of parts of the Social Security trust funds could be obtained by raising the taxable maximum on OASDI payroll taxes. This step has broad popular support and much of the revenue raised in this manner would simply be replacing an unforeseen revenue loss that came about through rising inequality after the early 1980s.
In a sense, this is more maintenance and repair than fundamental reform. If short-term Congresses do not want to go this far, a more-modest step could be to subject pass-through business income to Self-Employment Contributions Act (SECA) taxes and impose a material participation standard.
3. Reduce Healthcare Costs
The prescription drug bargaining provisions included in the Inflation Reduction Act (IRA) should be expanded to provide more savings to Medicare. These provisions are highly popular and address a key source of potential cost growth. Further, while the degree of excess costs associated with Medicare Advantage (MA) plans has shrunk a bit in recent years, there are still excess costs in MA.
Further, the population served by MA plans has risen significantly, meaning that this problem of excess MA costs needs attention and offers a chance for significant savings. A number of policy options to reduce this overpayment problem have been forwarded by various researchers — the next administration should move quickly to assess and implement these.
Shorter-Term Issues
The discretionary spending caps included in the Fiscal Responsibility Act (FRA) — like many such caps before them — provide a deeply flawed model of how to approach fiscal issues. Appropriations should be legislated through regular order and their levels should be set by serious calculations about what resources are needed to govern effectively, not by arbitrary top-down caps.
The issue of Highway Trust Fund expiration should be addressed in the short-run by raising the federal gasoline tax and indexing it to inflation. This tax has not been increased since 1993; it is well past time. In the longer-run, a commission to assess how to keep the Highway Trust Fund viable in a future of electric vehicles should be established to evaluate solutions such as vehicle miles traveled charges, higher vehicle registration fees, or fees on electric utility bills. But, roads and transit are crucial public infrastructure that must be maintained and paid-for.
Conclusion
Finally, addressing the threat of the statutory debt ceiling and its weaponization by partisan actors is crucial — it is by far the most useful thing that could be done to defuse the possibility of any acute fiscal crisis. The statutory debt ceiling is currently suspended until early 2025. But because it has been repeatedly weaponized in what should be routine legislative debates, and because the consequences of a debt ceiling breach are so large, at some point the threat of a debt ceiling crisis needs to be taken off the table. The optimal solution is simple abolition — most advanced countries do not have a statutory debt limit and there is no reason we need one. Compromises could be offered — one might be that when the debt limit is breached it triggers a day on the congressional calendar to debate fiscal issues. Another solution would be to invoke the 14th Amendment and argue that the debt ceiling and Congressional legislation around taxes and spending levels gives the executive branch conflicting directions and hence they are free to choose the least-damaging path to reconcile them. One way or the other, though, the debt ceiling threat needs to be defused — we have had far too many near-misses and it is by far the most likely source of a future fiscal crisis.
Explore other plans
Bipartisan Policy Center
BPC’s plan prioritizes reforms of key processes surrounding the most basic elements of governing, including proposals to address the debt limit, discourage government shutdowns, and ensure on time budgeting.
Center for American Progress
The CAP plan places America on a more stable fiscal trajectory while safeguarding commitments to seniors, investing in the American people, and preventing interest costs from crowding out private and public investments.
Manhattan Institute
Manhattan Institute’s proposal would stabilize the long-term debt at around 100 percent of GDP through 2040 through a combination of reforming social security, healthcare entitlements and raising revenues responsibly.