In a new study, Chuck Blahous, who is a public trustee for Medicare and Social Security, concludes that the 2010 health law will add at least $340 billion to the federal deficit from 2012-2021. This is contrary to the official estimates by the Congressional Budget Office, which initially figured the Affordable Care Act would reduce the deficit by about $132 billion from 2012-2019.
Who’s right? Who knows? In truth, unknowable and unpredictable changes in overall health costs will dwarf the variation between Chuck’s estimate and CBOs.
However, Chuck makes some important points in his analysis. One, which TaxVox has written about recently as well, is the potential double-counting of increased Medicare payroll taxes. The 2010 law raises the Medicare levy by 0.9 percent for high-income workers. But, due to CBO scoring conventions, the money it generates appears to both make the Medicare Hospital Insurance (HI) Trust Fund appear more solvent and reduce the general fund deficit.
It can’t simultaneously do both, as Chuck correctly notes. In reality, if the extra tax goes to the general fund to “pay for” health reform, Medicare would be required to reduce its hospital benefits, absent some other new funding source. Chuck argues Medicare would cut benefits. CBO assumes it would not.
Btw, Chuck and TaxVox are hardly the only ones to have raised this issue. Medicare actuary Rick Foster, who is well-known in Washington for calling ‘em as he sees ‘em, has been making exactly the same point since even before the law passed. My Tax Policy Center colleague Donald Marron, a former CBO director, blogged about it all back in 2009. And CBO itself has been upfront about the oddities of this scoring issue.
Some of Chuck’s other assumptions are more controversial. For instance, he projects more people will participate in subsidized health exchanges than CBO estimates, and that Congress will hike those subsidies more than CBO projects in future years. He also discounts anticipated revenues from the “Cadillac tax” on high-value health insurance plans by assuming Congress will roll back this levy before it is ever imposed.
He may be right, of course. But he is merely guessing. CBO at least has the anchor of the actual law to rely on. Chuck is basically expressing an opinion.
And keep in mind that while the spread between the two projections represents real money, it is margin-of-error stuff when it comes to the size of the federal budget and total health spending.
Is Chuck’s analysis valuable? It is, if only to highlight the uncertainty in these estimates (that CBO has already acknowledged) and to remind us all about the dangers of double-counting.
Predictably, the politicians are ranting about the sign: “The law will lower the deficit…No, it won’t. Yes, it will….” But, as usual, they are missing the real message.
The tax code is chock full of credits, deductions, deferrals, exclusions, exemptions, and preferential rates. Taken together, such tax preferences will total almost $1.3 trillion this year.
That’s a lot of money. But it doesn’t necessarily mean that $1.3 trillion is there for the picking in any upcoming deficit reduction or tax reform. In fact, even if Congress miraculously repealed all of these tax preferences, it would likely generate much less than $1.3 trillion in new resources.
Where did I come up with that number? For a short piece in Tax Notes, I simply added together all the specific tax expenditures identified by the Department of Treasury; these were reported in the Analytical Perspectives volume of the president’s recent budget.
Treasury doesn’t report this total for a good, technical reason: some provisions interact with one another to make their combined effect either larger or smaller than the sum of their individual effects. As a result, simple addition won’t give an exact answer. That’s an important issue. In the absence of a fully integrated figure, however, I think it’s useful to ballpark the overall magnitude using basic addition.
In your travels, you may find other estimates that do the same thing but come up with a figure of “only” $1.1 trillion. Why is mine higher? Because it includes some important information that Treasury reveals only in footnotes. Treasury’s main table estimates how tax expenditures reduce individual and corporate income tax receipts; those effects total $1.1 trillion. But they also have other effects. Refundable credits like the earned income tax credit increase outlays, for example, and some preferences, like those for employer-provided health insurance and alcohol fuels, lower payroll and excise taxes. I include those impacts in my $1.3 trillion figure.
Budget hawks and tax reformers have done a great job of highlighting tax expenditures in recent years. I fear, however, that we have lifted expectations too high. Just because the tax code includes $1.3 trillion in tax preferences doesn’t mean it will be easy to reduce the budget deficit or pay for lower tax rates by rolling them back. Politics is one reason. It’s easy to be against tax preferences when they are described as loopholes and special interest provisions. It’s another thing entirely when people realize that these include the mortgage interest deduction, the charitable deduction, and 401(k)s.
Basic fiscal math is another challenge. Tax expenditure estimates do not translate directly into potential revenues. Indeed, there are several reasons to believe that the potential revenue gains from rolling back tax preferences are less than the headline estimates. One reason is that the estimates are static—they measure the taxes people save today but do not account for the various ways that people might react if a preference were reduced or eliminated; those reactions may reduce potential revenues. Second, most reforms would phase out such preferences rather than eliminate them immediately. That too reduces potential revenues, at least over the next decade or so.
Finally, the value of tax preferences depends on other aspects of the tax code, most notably tax rates. If a tax reform would lower marginal tax rates, the value of deductions, exclusions, and exemptions would fall as well. Suppose you are in the 35 percent tax bracket. Today, each dollar you give to charity results in 35 cents of tax savings—a 35-cent tax expenditure. If the top rate were reduced to 28 percent, as some propose, your savings from charitable donations would be only 28 cents. The 20 percent reduction in tax rates would thus slice the value of your tax expenditure by 20 percent. That means that the revenue gain from eliminating the deduction—or any other similar tax expenditures—would also shrink by 20 percent, thus making it harder for tax expenditure reform to fill in the revenue gap left by reducing tax rates.
My message is thus a mixed one. Tax expenditures are very large—$1.3 trillion this year alone if you add up all the individual provisions – and deserve close scrutiny. But we need to temper our aspirations of just how much revenue we can generate by rolling them back. It isn’t as though there’s an easy $1.3 trillion sitting around. In coming months, the Tax Policy Center will explore how to translate tax expenditure figures into more reasonable estimates of the potential revenues that tax reformers and budget hawks can bargain over.
P.S. For an interesting analysis of how individual tax preferences interact with each other, see this piece by TPC’s Dan Baneman and Eric Toder.
Two Ohio Members of Congress have introduced a bill to allow states to issue tax-exempt bonds to demolish buildings. Not to build them, but to destroy them.
Score this one as a bad solution to a real problem.
The lawmakers, Republican Steve LaTourette and Democrat Marcia Fudge, want to allow state governments to issue up to $4 billion in revenue bonds to flatten abandoned buildings. Half would be divided among all states, the other half would be allocated only to states that Congress designates as hardest hit by the housing crisis (of which, I assume, Ohio will be one). Thanks to The Bond Buyer’s Jennifer DePaul for finding this one.
The problem is serious. Cities in Ohio and Michigan struggle with entire neighborhoods that have been nearly depopulated by the combination of foreclosures and disappearing jobs. Abandoned houses and commercial strips are magnets for crime and blight and may discourage future redevelopment. Tearing down often-gutted structures might sometimes make sense.
But why should the federal government subsidize what is the most local of activities? While teardowns may be the answer in some communities, why encourage the activity even when it is not appropriate?
Grassroots solutions are sprouting. In Flint, MI, the Genesee County Land Bank is acquiring foreclosed properties and returning them to productive use. In some neighborhoods of Detroit, cheap housing and low cost commercial space is beginning to attract trendy artists, designers, and high-tech types. Local markets will sort this out.
But with targeted demolition bonds, it would not be hard to imagine a developer getting a bigger subsidy for nuking a house than restoring it. And, of course, there is the matter of who will benefit: well-connected local construction firms, to say nothing of investment bankers and bond lawyers.
Trust me, it won’t often be the couple who want to do a tear-down or the three business partners who want to buy and repair a couple of houses at a time.
In the end, it may not be local taxpayers either. Investors in revenue bonds demand a steady stream of cash to repay the debt, such as a bridge toll. But it is hard to imagine an empty lot generating much revenue.
Supporters of the bill say the funds would come from non-profits, appropriated state and local dollars, or perhaps local land banks. This is not, shall we say, the kind of predictable revenue stream investors like. It will drive up interest costs. And guess who may end up holding the bag if the bonds crater.
State and local governments have been using tax-exempt bonds to pick winners and losers in the housing and commercial development markets since the 1970s. When the abuses became too egregious, Congress cracked down by limiting the purposes for which these revenue bonds can be used or capping the amount of this debt that can be sold.
Still, tax-exempt mortgage bonds for private housing have been so ubiquitous that I can’t help but wonder how many of those now-vacant homes were subsidized with tax-exempt dollars in the first place.
What a deal. First taxpayers pay to build them. Then we pay to flatten them. Then…. Well, you know what will come next.
I’ve finally finished my income tax returns for 2011. The last task—and least pleasant—is figuring my Virginia use tax. That’s the sales tax I owe on our many out-of-state web purchases. It’s a pain to plow through 12 months of receipts to identify untaxed transactions but I do it every year, stubbornly—some say foolishly—insisting on paying what I owe.
But in a couple of years, Amazon will ease my task when it starts collecting Virginia sales tax on things I buy. I can hardly wait.
All 45 states that impose sales taxes also have use taxes that apply to all taxable purchases on which buyers paid no sales tax. Relatively few taxpayers know about use taxes, much less pay them, and most states exert little effort to collect them.
Nearly half of taxing states include a section on their income tax returns where filers can pay use tax. In those states, less than 2 percent of taxpayers ante up, at least in part because paying requires figuring out how much you owe. Nine states simplify the process by providing look-up tables of acceptable amounts based on income. About 3 percent of filers in those states pay the tax, compared with about half a percent of those in other states that collect the levy on income tax returns (which includes Virginia). States with separate collection mechanisms undoubtedly see even less compliance. And most states don’t seem to try very hard to make consumers pay.
States have worried for years about losing revenues as retail sales have moved from in-state bricks-and-mortar stores to on-line firms that rarely collect state sales taxes. The Supreme Court ruled a few decades back that a state cannot force sellers to collect sales tax unless the seller has a commercial presence in the state. That ruling effectively exempts many e-tailers from having to collect sales tax.
But states have recently tried to force some big sellers like Amazon to charge state and local taxes with mixed success. Some, like New York, enact “Amazon laws” that assert that companies with in-state affiliates must collect sales tax, even if the companies themselves have no physical presence in the state. That worked for New York and a few other states: Amazon currently collects sales tax on purchasers who live in Kansas, Kentucky, New York, North Dakota, or Washington (where Amazon’s headquarters give it physical presence).
At least five states have cut deals with Amazon, deferring required tax collection in exchange for not legislating such a requirement. For example, Amazon will start collecting tax on sales to Virginians starting in September 2013. California, Indiana, South Carolina, and Texas will join that list over the next two years.
Congress could short circuit this piecemeal process and require e-tailers to collect state and local sales taxes, as Howard Gleckman noted last fall. The Streamlined Sales and Use Tax Agreement (SSUTA), onto which at least 24 states have signed, simplifies sales tax rules in order to make it easier for out-of-state sellers to collect sales taxes on sales to non-residents. The Main Street Fairness Act, introduced last year in Congress, would authorize states to implement SSUTA with restrictions. But congressional efforts have gone nowhere so far.
Since most of my untaxed on-line purchases are from Amazon, the company’s agreement with Virginia will cut my use tax calculations substantially—for my 2014 tax return. In the meantime, I can only hope that Congress will give states authority to require all e-tailers to collect the sales taxes we are all supposed to pay.
It is the unfounded rumor that never dies: You will have to pay a 3.8 percent federal health care tax on the sale of your house.
This is one of those seemingly immortal Internet stories. You know the ones: They usually start with the assertion that, “They don’t want to know this but….” In the words of one blogger, “Obamacare will impose a 3.8 percent tax on all home sales and real estate transactions.”
Umm, no it won’t. Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income starting in 2013. But that tax applies only to couples with adjusted gross income of $250,000 (or individuals with AGI of $200,000). About 95 percent of households make less than that, and will be exempt from the law no matter what.
In addition, couples who sell a personal residence can exclude the first $500,000 in profit from tax ($250,000 for singles). That would be profit from a home sale, not proceeds. So a couple that bought a house for $100,000 and sold it for $599,000 would owe no tax, even under the health law.
If that couple had AGI in excess of $250,000 and made a profit of $500,010, it would owe the new tax. On ten bucks. That would be an extra 38 cents.
The Tax Policy Center figures that in 2013 about 0.2 percent of households with cash income of $100,000-$200,000 would pay any additional tax under this provision. And they’d pay, on average, an extra $235. Keep in mind that is added tax on all sources of non-wage income, not just home sales.
Still, like Dracula, this rumor can’t be killed. Politfact tried to knock it down in 2010. A couple of months ago, my Tax Policy Center colleague Donald Marron did the same in a Tax Notes article called “Health Reform’s Tax on Investment Income: Facts and Myths.”
People who send Internet chain letters probably don’t read Tax Notes. Still, imagine Donald’s surprise when just last week he met a guy in Kansas City who insisted that the tax not only exists, but the rate is 7 percent (some sort of weird bracket-creep, I guess).
Now imagine my surprise when, after I wrote a TaxVox article the other day about the (real) tax provisions of the health law, I got an email from a frustrated housing industry tax specialist. “There is usually some confusion/disinformation associated with new tax rules,” he wrote, “but I’ve never seen an issue that has as much as this one.”
So the bottom line is this: If you are a married couple whose AGI exceeds $250,000, and if you make more than a $500,000 profit from the sale of your house, yes, you may owe this tax. But if you are anybody else, spend your time worrying about how you’re going to win the next $600 million lottery—or whether you are going to get bopped in the head by a stray asteroid on your way to work.
There is more to the Affordable Care Act than the individual mandate. There are also, for example, taxes. And since this is TaxVox, I thought it would be useful to think about some of those revenue provisions in the wake of the Supreme Court’s three-day hearing on the fate of the ACA.
The law includes both tax increases and tax cuts. Even if the controversial individual mandate is struck down, most of those tax changes would survive—unless, of course, the High Court grants the law’s critics their fondest wish and kills the entire act.
The only tax—if it is a tax at all—that relates directly to the mandate is the penalty people would owe for failing to buy insurance. Whatever High Court does to the mandate, it will be interesting to learn whether the justices decide this levy is in fact a tax or a penalty. The Obama Administration is firmly on both sides of this question, as are the opponents of the law.
The ACA also includes some important tax cuts—generous credits aimed at subsidizing small businesses that buy insurance for their employees. You might not know these tax cuts are in the law given the $1 million-plus the National Federation of Independent Business reportedly paid for legal and other fees to challenge the ACA, but they are there nonetheless.
Query: Does it make sense to maintain the subsidy if the Court rejects other key elements of insurance reform? I’m sure the NFIB will say so.
Finally, the law includes several tax increases, including a new excise tax on high-value employer sponsored health plans (starting in 2018) and a provision that makes it tougher for people to itemize deductions for their medical costs.
The first is a 0.9 percent increase in the Medicare wage tax for high-income workers. This would help finance the senior health system. The second is a new 3.8 percent tax that high-income households will have to pay on income from investments and other non-wage sources. Sometimes called a Medicare surtax, its real purpose is to bankroll some of the costs of the ACA.
In a new study, the Tax Policy Center finds that the new taxes would indeed hit very high-income households–some quite hard. Combined, in 2013 the two new levies would raise taxes for households making between $500,000 and $1 million by an average of about $4,600 and boost taxes for those making at least $1 million by more than $41,000. These estimates are relative to current law, where the 2001/2003 tax cuts expire at the end of 2012.
These taxes will hit incomes in excess of $250,000 for couples ($125,000 for singles). But because that threshold is not indexed for inflation, the number of households facing these taxes will nearly double over the next decade, from 2.4 percent of all taxpayers in 2013 to 4.6 percent in 2022.
Don’t forget about these tax provisions. Even if the Supreme Court leaves all them untouched, I suspect we have not heard the last of them.
The budget proposal House Budget Committee Chairman Paul Ryan (R-WI) released last week is, essentially, an effort to have low- and middle-class households bear the entire burden of closing the fiscal gap and bear the costs of financing an additional tax cut for high income households.
The Tax Policy Center (which I co-direct) analyzed the revenue policies as proposed by Rep. Ryan. We simulated the effects of repealing the AMT and reducing ordinary income tax rates to 10 and 25 percent. These proposals would cost about $3.2 trillion over ten years, on top of the $0.3 trillion lost from repealing taxes enacted to pay for Affordable Care Act, the $1.1 trillion lost from his desired reduction in the corporate tax rate, and the $5.4 trillion lost from first extending the Bush-Obama tax cuts (which he also supports). By 2022, the tax policies he has specified would lower federal revenues to just 15.8 percent of GDP. Talk about digging yourself a hole.
Ryan claims he can fill this hole by eliminating tax breaks, which he correctly identifies as “spending through the tax code.” At first glance, this sounds like a step in the right direction: broaden the base and lower rates. Yet, like many recent proposals, the devil is in the details. Ryan never specifies which specific tax expenditures he would cut.
At a time when our country faces a daunting fiscal challenge, Ryan asks nothing of the wealthiest Americans. His budget proposal would simultaneously cut tax rates for the rich and corporations while slashing programs for the poor and elderly: he would shift many federal low-income assistance programs to state governments and would transform Medicare into a premium support system that will shift health care costs to seniors if health care inflation cannot be controlled.
Although I agree that spending cuts are necessary to meet our fiscal challenges, so too are additional revenues, for many reasons. They are the only way to get shared sacrifice from the wealthiest Americans. They could reduce the draconian spending cuts that Ryan proposes. Until he specifies which popular tax breaks he would eliminate, the Republican’s budget is clearly a win for the rich and a loss for everyone else.
Lastly, it is worth highlighting that Ryan is gaming the system in creating budget estimates. His budget proposal is too vague to be scored, so he simply told the Congressional Budget Office to determine the effect of his budget proposal **assuming** the proposal achieves its stated goals for spending and revenues. This is not the same as the usual approach – which involves asking CBO to determine whether the proposal actually achieves its stated goals. Instead, Ryan dictates the assumptions he wants and walks away with a seemingly favorable CBO report. This is smoke and mirrors. Ryan may not be the only politician to use the system this way, but that doesn’t make his actions any more forthright or reveal anything informative about this plan.
Oklahoma, Nebraska, and my home state of Kansas are debating proposals to sharply reduce or eliminate their personal income tax. That raises important questions about how they’ll make up the revenue. And it’s bad news for low-income families, who may end up paying higher taxes and losing critical safety net programs.
In 2009 (the latest year for which data are available), income taxes accounted for 27 percent of revenue in Kansas, 24 percent in Nebraska, and 17 percent in Oklahoma, according to TPC’s State and Local Finance Data Query System (SLFDQS). Even if these states desire smaller government, it seems unlikely they’ll be able to make ends meet without the income tax as a significant source of revenues.
If other states without an income tax are any guide, it may mean these states will move to replace lost revenues with property and sales taxes, according to a report released by the Center on Budget and Policy Priorities.
That may be problematic. Low- and middle-income families tend to spend a greater proportion of their income on sales and property taxes than higher-income families. That’s because they typically spend more of their income on basic goods, while higher income families have the luxury of saving a larger share of their money. Many states with an income tax – including Kansas, Nebraska, and Oklahoma – exempt families in poverty from the income tax. Without an income tax, these states lose an easy way to exempt low-income families from some tax. And even if income taxes are just scaled back considerably, the case with some proposals, opportunities to support low-income families dwindle. In the end, states that don’t have a personal income tax system tend to rely more on low- and middle-income families to pay for government.
None of these states is so flush with cash that large cuts ought to be considered. In 2010, Kansas raised its sales tax and cut spending to cover a projected shortfall. Nebraska projects a surplus this year, but enacted substantial budget cuts in the two prior years and Oklahoma is just starting to turn the corner on year over year revenue declines in FY09 and FY10.
Before going through with tax reform that could seriously limit or eliminate state incomes taxes, states ought to undergo a thorough analysis of exactly how much lost revenue will need to be replaced, and should give constituents an idea of how the replacement revenues will be raised – or what services will be cut. It could cause people to think a lot differently about the possibly exciting elimination or reduction of their state income tax.
When we talk about the federal budget, we usually rely on the government’s official definition of “spending” which is to say the amount of money that’s run through federal agencies.
But, in reality, the federal government spends a lot more than that. Using a broader definition of spending, which includes hundreds of billions in dollars of tax subsidies, my Tax Policy Center colleagues Donald Marron and Eric Toder have concluded that government spends 30 percent more than it admits.
Just take a look at the above chart.
It shows three measures of spending in 2007 (Donald and Eric picked 2007 so they wouldn’t get tangled in the stimulus, financial market and auto bailouts, and all of the other temporary outlays that government made in response to the 2008-2009 financial meltdown).
The column on the left shows how much spending shows up on government’s official books. The one in the middle includes what Donald and Eric call Spending-like Tax Preferences (SLTP): Tax subsidies that substitute for spending. Often, Congress dropped these initiatives into the tax code solely to hide the fact that they are spending.
Take the mortgage interest deduction. Instead of giving homeowners a tax subsidy, Congress could just as easily have had the Federal Housing Administration or some other agency write every homeowner a check to lower their monthly mortgage payments. Now, it may be more efficient to run this subsidy through the tax code. But a tax deduction is no less a subsidy than that check.
This is policy that fails what the lawyers like to call the duck test: If it looks like spending and quacks like spending, it is spending– even it resides in the Internal Revenue Code.
The last column adds another $230 billion in user fees and premiums (which government bean-counters like to call negative spending or offsetting receipts). By adding them back, the study shows the gross cost of programs such as Medicare, not just the part that is unfunded by those fees and premiums.
Add it all up and, in 2007, the government didn’t spend $2.7 trillion–the number that appears in the federal budget—it really spent the equivalent of $3.5 trillion.
Keep in mind that Eric and Donald didn’t include all tax expenditures in their calculations. They left out provisions such as low tax rates on capital gains, the step-up in basis for gains at death, 401(k)s, and accelerated depreciation of plant and equipment, none of which are quite equivalent to spending. That made their calculation of spending smaller than it might have been.
But they included many other well-known tax preferences, such as the exclusion for employer-sponsored health insurance, and deductions for mortgage interest, most state and local taxes, and most charitable gifts, as well as the Earned Income Tax Credit (the government already does treat the refundable portion of such credits as spending).
This study is important for two reasons:
First, it provides a much more transparent look at how big government actually is.
Second, it creates an interesting perspective when you look at plans to cut tax rates while scaling back these tax preferences. Looked at through Donald and Eric’s prism, trimming many of those subsidies is not raising taxes at all, but cutting spending. And maybe, just maybe, framing them that way may make those cuts possible.
No surprise here, but the tax cuts in Paul Ryan’s 2013 budget plan would result in huge benefits for high-income people and very modest—or no— benefits for low income working households, according to a new analysis by the Tax Policy Center.
TPC looked only at the tax reductions in Ryan’s plan, which also included offsetting–but unidentified–cuts in tax credits, exclusions, and deductions. TPC found that in 2015, relative to today’s tax system, those making $1 million or more would enjoy an average tax cut of $265,000 and see their after-tax income increase by 12.5 percent. By contrast, half of those making between $20,000 and $30,000 would get no tax cut at all. On average, people in that income group would get a tax reduction of $129. Ryan would raise their after-tax income by 0.5 percent.
Nearly all middle-income households (those making between $50,000 and $75,000) would see their taxes fall, by an average of roughly $1,000. Ryan would increase their after-tax income by about 2 percent.
Ryan would extend all of the 2001/2003 tax cuts, and then consolidate individual rates to just two—10 and 25 percent. In addition, he’d repeal the Alternative Minimum Tax, reduce the corporate rate from 35 percent to 25 percent, and kill the tax provisions of the 2010 health reform law.
Earlier this week, TPC projected the tax cuts in Ryan’s budget would add $4.6 trillion to the federal deficit over the next decade, even after extending the 2001/2003 tax cuts, which would add another $5.4 trillion to the deficit.
Ryan argues that eliminating or scaling back deductions, credits, and exclusions ought to be part of the GOP fiscal plan. But he won’t say how.
Cuts in those tax preferences could make a big difference in determining who wins and who loses from the tax portion of his budget. But until House Republicans describe which they’d cut, there is no way to estimate what those base-broadeners would mean.
In truth, unless Republicans raise taxes on capital gains and dividends, it is hard to imagine the highest income households getting anything other than a windfall from this budget. Other tax preferences, such as the mortgage interest deduction, are just not that valuable to them.
And since no high-profile Republicans want to raise taxes on gains and dividends (and many would cut investment taxes even further) this budget would likely result in a huge tax cut for those who need it least. That’s not a great way to start an exercise whose stated goal is to eliminate the budget deficit.