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National Taxpayers Union: "Savings" in President's Budget Are Smoke and Mirrors 

The budget battle is official on and it's going to get ugly fast. Criticism over the proposal has been puring out all day and it will hit a feverish pitch on Wednesday when the House has its first cut on Budget cuts.

Some policy analysts are predicting the Obama administration's budget is already dead on arrival and that the White House's real strategy is to sit back and watch the Republicans call for Draconian cuts and bring about a government shut down.

To get the full breakdown of what this budget means to the American taxpayer, I spoke with Pete Sepp, Executive Vice President of the moderate, conservative group, the National Taxpayers Union who did a line by line cost analysis and exclusively gave me the breakdown.

The National Taxpayers Union Foundation (NTUF), the research affiliate of the National Taxpayers Union, broke down the numbers.

LL: There will be many top headlines pulled from this budget what would be the one big headline for the NTU?

PS: Less ax—and more tax—than meets the eye.

LL: How much budget restraint are you seeing ?

PS: So far, neither the Administration’s budget nor Congress’s Fiscal Year 2011 reductions would make dramatic reductions in the federal deficit or the debt; that’s because neither end of Pennsylvania Avenue has gotten serious yet about entitlement reform. We can hope that the House Republicans’ five-year Budget Resolution will tackle these questions more directly and initiate a much-needed discussion on how these programs can be sustained.

To its credit, the Administration has been moving toward spending discipline in some areas, including defense, having proposed a $78 billion budget authority reduction between 2012 and 2016 (other savings would accrue from lower costs on “overseas contingency operations.” Congress will need to follow suit on this so-called “discretionary security” spending. One big test will be the Administration’s call to end procurement of the C-17 military transport aircraft, which has been a major pork-barrel project for many lawmakers.

The White House is claiming $1.1 trillion in savings over 10 years. Taxpayers should be wary of these long-term projections, numbers that large over that time period may mislead people into thinking that federal outlays will decline, but that is not that case.

It is important to look at the bottom line of the budget: total federal outlays. The government will continue to grow, albeit at a slightly slower pace than the track it was previously on.

The savings amount to $110 billion a year—if maintained. Remember, this is the FY 2012 budget: Long-term outlooks beyond next year are a useful indicator of where the budget is headed, but projections for future years are not written in stone and will depend upon the decisions made by Presidents and Members of Congress each year.

As a somewhat ironic aside, the purchase price of the budget documents themselves—whether in paper or in CD format—seems to have defied most attempts at economization. This year the four volumes comprising the budget presentation cost $214 total, up $3 from last year. Compared to 10 budgets ago—FY 2002—the price of the printed volumes has risen 29 percent, compared to a 23 percent rise in CPI-All Items average from 2001 to 2010. The Budget on CD-ROM—offered at $19 for the FY 2002 presentation, is now $27, a 42 percent increase.

LL: How much of the "savings" are smoke and mirrors?

PS: A large amount of savings gets plowed into other programs rather than reducing the deficit, which is the fiscal policy equivalent of running in place. At least you’re not going in the wrong direction, but it doesn’t mean you’re reaching an ideal destination either.

Examples include the President’s plan to maintain expanded Pell Grant amounts in part by ending their availability for summer programs and accelerating interest payments. Here again, this is preferable to simply adding to the national debt, but it isn’t reducing current or future debt.

Smoke and mirrors are also being used on the revenue side. The budget proposes to eliminate special rules modifying the amount of estimated tax payments by corporations. This will shift $53.6 billion in receipts from years FY15 and FY 16 to FY14. Also, over $800 billion is being classified as “costs avoided by allowing upper-income tax cuts to expire.” This assumes that allowing anyone to keep more of what they’ve earned is a “cost” to the government.

The President’s budget assumes an astonishing jump in corporate income tax receipts of 100 percent in two years (FY 2011-2013). The last time this happened was between 2003 and 2005—ironically, when the Bush Administration was reducing tax rates, largely on the personal side but also on items like dividend income.

LL: The NTU has recently said the spending hikes are masquerading as Tax Cuts. Can you give specific examples?

PS: Many tax credits are “refundable,” meaning that an individual or company can get more money back than they originally paid in tax. Here are some examples of how “refundable” credits amount to actual spending in the budget, not just foregone revenues.

41585698

TAX PROPOSAL
10-YEAR OUTLAY COST (in billions)
Continue certain expiring provisions $2.23
Designate Growth Zones $0.11
Expand Child and Dependent Care $3.39
Extend American Opportunity Tax Credit $37.30
Extend EITC for larger families $11.68
Provide for Auto-ernrollment of IRAs $0.88
Reform and extend Build America Bonds $59.70
TOTAL: $115.30
Source: NTU

LL: Any hidden tax increases that will burden consumers and workers?

PS: There are numerous examples. For one, the Administration proposes to cut grants-in-aid to airports by $1.1 billion and targeting remaining funding ($2.4 billion) to smaller airports. Not bad on its face. However, larger airports would be allowed to increase “non-federal Passenger Facility Charges,” or PFCs, to make up the difference. This would simply raise the cost of an airline ticket, which can already carry government tax and fee loads of more than 20 percent.

Another huge pass-through to consumers would be the plans to raise taxes on oil and gas companies in the U.S. (what the Administration calls “eliminate oil and gas preferences.”

More than 40 percent of the $43.6 billion the White House wants to raise from this area would come from repealing the Section 199 domestic manufacturing deduction, which is available to all kinds of companies, not just those in oil and gas development. Boosting these firms’ tax liabilities will show up in higher energy prices and even lower tax receipts of other kinds because fewer workers will be employed in those industries.

Still another major gas tax increase could be triggered by the Administration’s plan to make the $556 billion reauthorization of road and other surface transportation programs “mandatory” instead of appropriated spending. On the one hand, this could help cut down on special-interest earmarks in this area of the budget.

On the other hand, it’s also intended to comport with the Deficit Commission’s outline for deficit neutrality. The Commission recommended nearly doubling the gas tax as part of the plan. Obama’s budget doesn’t specifically endorse this approach, but now it seems likelier to be on the table.

LL: The word "investment" was used how many times in this budget?

PS: “investment”—appears 170 times in the main Budget book.

“investing”—appears 26 times in the main budget book.

“investment”—appears 1,149 times in the Appendix, but many of those instances are references to the titles of laws or budget line items reporting on various federal funds.

LL: Do you see momentum for passage of a balanced budget amendment this year?

PS: There’s definitely more momentum than in any Congress I’ve seen since the mid-1990s, in terms of number of plans introduced, number of cosponsors this early in the session, and even interest among state legislatures, which have the power to propose such an amendment for ratification if two-thirds of the states vote for a single-subject convention to do so.

Since the mid-1970s NTU has aggressively campaigned for such an amendment, having won House passage in 1995 and coming within one vote of Senate passage during that same Congress. Because two-thirds margins much pass such an amendment and three-fourths of the states must ratify it, getting a proposal that’s strong enough to do the job but flexible enough to attract broad support is always, well, a balancing act.

However, the deterioration of the federal government’s finances because of both parties reckless spending habits has led to a growing consensus that fundamental budget rules matter as much over the long term as any specific plan to reduce deficits does.

If you’d like to take some material from the following letter we recently wrote in support of a BBA you can find that on our Web site.

LL: The debt ceiling will have its own day in Congress and not lumped in like in years past. would the NTU oppose raising the debt ceiling if the Obama Administration would not agree to cuts?

PS: We’re told that world financial markets will be thrown into turmoil if an increase in the debt ceiling is not approved. In our view, the turmoil over the long term would be just as bad if the ceiling were raised without corresponding reductions in spending and reforms to the budget.

Fortunately, Congress can buy itself some time to sort through these issues by passing legislation called the Full Faith and Credit Act, which makes debt service payments a priority. As our letter endorsing the legislation noted, “This would allow the federal government to use its substantial cash flow to ensure that creditors are paid in full and on time. Although experts differ on the practical impact of an impasse over the debt ceiling, the threat (whether merely political or more substantive) of squandering the full faith and credit of the United States should not loom over Congressional negotiations on spending reductions.”

Our letter also noted, interestingly, that “prior to 1917, Congress actually had to separately approve each issuance of debt, including the maturity date and interest rate. With the passage of the Second Liberty Bond Act, Congress established a statutory limit on federal debt and granted the U.S. Treasury the authority to conduct auctions underneath that ceiling. Unfortunately, the debt ceiling mechanism has ceased to provide the kind of meaningful restraint on Congress’ spending habits that was clearly intended.”

LL: Will this budget get the nation back on track to restore its fiscal health?

PS: The budget doesn’t so much put the nation back on track as it does to give a few nods for possible ways forward. That’s not adequate given the current state of the deficit and the national debt.

LL: When you look at this budget breakdown do you think Obama has moved to the center?

PS: He may have tilted that way, but not too far. In early 2009, when the President released a fiscal blueprint called “A New Era of Responsibility,” FY 2011 outlays were supposed to reach $3.6 trillion; under his latest budget, outlays will reach $3.8 trillion in FY 2011. Over the longer horizon, however, the topline numbers don’t look much different at all. Two years ago the President’s tax and spending outline predicted that by 2019, federal expenditures would total $5.158 trillion.

In his latest budget, the figure for 2019 is $5.154 trillion—a difference of $4 billion or eight one-hundredths of one percent. At the rate the federal government spends money, this is the equivalent of seven hours out of an entire year. Revenues would actually be a little higher than initially assumed; in the 2009 document, total collections were supposed to reach $4.446 trillion by 2019. Now, the 2019 estimate has ticked upward slightly to $4.473 trillion. Although the President’s discretionary spending freeze has some near-term effects on keeping down spending, little has changed in the overall picture.

LL: There are so many deficit plans—Kent Conrad (D-N.D.) is pushing the Senate to embrace the Deficit Commission ideas, House Republicans are saying Paul Ryan's plan is too timid which plan do you think will be best?

PS: As discussed previously, there are a few items from the Deficit Commission that this budget embraces, not all of them good ones. We should also remember that the Commission took a “tax first, cut later” approach that’s not likely to win over taxpayers.

The Commission assumed that federal revenues should stabilize at 21 percent of Gross Domestic Product (GDP) when the historical average is closer to 18 percent. Just as important was the timing of that stabilization: according to Commission projections, federal revenues would climb to hit the 21 percent mark in 2025 —a full decade before federal expenditures are supposed to drop to 21 percent of GDP.

The House Republican plan for Fiscal Year 2011 reductions is at least moving the right way—toward the promised $100 billion mark after some initial hesitation. But the heavy lifting will be more evident in the Budget Resolution that the GOP is putting together, and will have to include defense as well as entitlement spending to be credible.

We shouldn’t rule out proposals from GOP Senators such as Rand Paul either. The political practicality of a single-year $500 billion spending cut aside, starting out with a big number is the only way we’ll wind up with an acceptable level of spending restraint at the end of the day.

LL: What other interesting facts can you tell me about?

PS: Outlays:

  • In FY 11, outlays are expected to climb by 10 percent to $3.819 trillion from $3.456 in FY 10. Outlays would fall by 2.36 percent in FY12, rise just 1.13 percent in FY13. In future years, outlays would increase by an average of 5.33 percent.
  • Compared to last year’s budget projection, outlays for each of Fiscal Years 11-20 are down by an average of 3.60 percent. Last year forecast the budget would exceed $4 trillion in FY14, this has been pushed back a year to FY15. The $5 trillion mark will be hit in 2019.

Receipts:

  • A rosy forecast? Receipts are expected to jump by 20.84 percent in FY 20112, then by 14 and nearly 11 percent in the next two years. Tax receipts will hit the $3 trillion mark in 2013, and will pass $4 trillion in 2017, three years after outlays reach that height.

Deficit:

  • Even with the slight bending of the “cost curve” and the perhaps rosy estimates of tax receipts, the government will spend $3.769 trillion more than it takes in over the next five years.

Also, some interesting patterns on budget saving recommendations:

The FY 2012:

  • Terminations, Reductions, and Saving includes 153 programs that would either be terminated or see reduced funding.
  • 50 of these programs were also listed in the FY 2011 Terminations, Reductions, and Savings. These 50 items if implemented would save $5.7 billion. Nearly half of this amount is from terminating the production of C-17 transport aircraft ($2.5 billion). This was one of 18 programs that were also listed in the FY2010 TRS. We counted 78 discretionary reductions in last year’s budget.

Budget Trillion Dollar Milestones Since 1950

YEAR
OUTLAYS (in Constant FY 2005 Dollars
Outlays as a Percentage of GDP
1950 $0.4 15.6
1968 $1.01 20.5
1984 $1.50 22.2
2000 $2.56 18.2
2006 $3.17 20.1
2009 $3.17 25.0
2016 estimate $3.57 22.6
2019 estimate $5.15 22.8
2020 estimate $5.70 23.1
Source: NTU

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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