Key Themes of the FY 2018 Trump Budget - PowerPoint Presentation

Slide1

Key Themes of the FY 2018 Trump BudgetRE-CAP: ACA Repeal-and-Replace Shifting Spending Priorities from Non-Defense to DefenseTax Reform: Corporate and Individual Infrastructure InvestmentRaising the Debt Ceiling

Charles S. Konigsberg

Publisher,

FedWeb.com

Assistant OMB Director, Clinton Administration

General Counsel & Chief Health Counsel, U.S. Senate Finance Committee

Counsel, Senate Budget and Rules Committees

March 30, 2017Slide2

Repeal and Replace the Affordable Care Act

Key Priority of Trump Administration and GOP congressional leaders was to repeal & replace the Affordable Care Act.

Congress adopted in January an FY 2017 Budget Resolution, including enabling language for a

filibuster-proof Budget Reconciliation bill

to advance “repeal-and-replace” legislation drafted by the House Ways & Means and Energy & Commerce Committees.

The Budget Reconciliation process was utilized because Reconciliation bills cannot be filibustered.Slide3

Budget

Reconciliation

Background on Reconciliation:

The Senate typically allows

unlimited debate

and measures are not voted on until all debate is concluded.

A

filibuster

is simply a tactic to prevent a vote on a bill or amendment by extending debate.

Under Senate Rules,

60 votes

are required to end a filibuster in a procedure called cloture.

With increased partisanship, Senators are increasingly

presuming

that all major legislation will be filibustered, and that 60 votes are necessary to invoke cloture and reach a final vote.Slide4

Budget

Reconciliation

(continued)

However, because debate time on Reconciliation Bills is limited by statute, it

cannot be filibustered

and requires only

50 votes

for passage (w/ VP breaking a tie).

Because this is a radical departure from the Senate’s general rule of unlimited debate, the

Senate’s “Byrd Rule” strictly limits

Reconciliation bills to provisions that are “budgetary” in nature.

Also, Reconciliation bills

cannot increase outyear budget deficits

– which is a key factor for tax reform.

The ACA repeal-and-replace bill was therefore advanced as a filibuster-proof Budget Reconciliation Bill. Slide5

House Withdrew the Repeal-and-Replace Reconciliation Bill March 24Affordable Care Act (current law)ACA expanded Medicaid to cover all Americans up to 138% of poverty (32 States opted in)Current Medicaid program guarantees federal payments to States for all covered servicesACA provides need-based subsidies

to purchase private health insurance for people up to 400% of poverty and

caps out-of-pocket expenses

.

Bars denial of coverage due to pre-existing conditions

or

lifetime benefit caps

, and requires coverage of children

up to age 26

Caps premiums for

older (3X

young adults)

Requires non-grandfathered plans to provide

essential benefits

New taxes:

increase in payroll taxes for high-income and surcharge on investment income

Individual and employer mandates to fund broader coverage (tax penalty for violation)

American Health Care Act (withdrawn)

Phased out

Medicaid expansion

Capped

underlying Medicaid program with annual per-enrollee payments to States (cutting Medicaid by

$800 billion over 10 yrs

)

Subsidies replaced with

flat, age-based

tax credits ($2000-$4000) and no cap on out-of-pocket or adjustment for area premiums

Same

Premiums up to 5x

Allows less comprehensive, less expensive plans

Repealed new taxes and delayed Cadillac tax on expensive plans to 2025

($883 billion)

Mandates replaced with “continuous coverage” requirement (30% premium penalty)Slide6

Health

Care Legislation Withdrawn

Reconciliation Bill

withdrawn

on March 24

Opposition from conservatives

to the new tax credits and the “slow” phaseout of Medicaid expansion

Opposition from GOP moderates

and governors to Medicaid cuts, affordability of insurance under the new tax credits, and repeal of essential benefits

Opposition from doctors, hospitals, nurses, AARP to increases in uninsured (14 million in 2018 and 24 million by 2026) and higher premiums for older

Fight Over? No – expect continuing fights over HHS administration of the ACA, appropriations for HHS, and ways to stabilize exchanges in areas that lack insurers or sufficient competitionSlide7

Shifting Priorities from Non-Defense

Programs

into Defense

President Trump’s discretionary spending budget, released on March 16, calls for a

dramatic shift in federal spending

from

non

-defense discretionary spending to defense discretionary spending.

The President’s request would

shift $54 billion from

non

-defense into defense spending.

The funding levels are the President's 

requested

funding. Congress writes the appropriations bills  (following adoption of a Congressional Budget Resolution) and can

accept, ignore, or change

the requested funding for each  program.

Appropriations

bills effectively need

60 votes

in the Senate (to overcome a potential filibuster), requiring

bipartisan agreement

(unlike the ACA repeal-and-replace legislation which needed only 50 votes due to the fast-track Budget Reconciliation process).Slide8

“Discretionary spending” – about 30% of the budget – is set by Congress in detailed annual appropriations bills. Non-defense discretionary includes broad spectrum of govt. functions: law enforcement, veterans health care, homeland security, education, prisons, NASA, disease and epidemic control, highways & bridges, food and drug inspection, disaster relief, airports, health research, housing assistance, and environmental protection. “Mandatory spending,” the other 70% of the budget, is principally entitlement programs that spend out according to benefit formulas

and

eligibility requirements

in federal law.

Largest entitlements are Social Security, Medicare, and Medicaid; others are veterans benefits, military & civilian retirement, food stamps, EITC, unemployment benefits, SSI, TANF, child nutrition, and farm programs.

Background: 2 types of federal spending:

Discretionary spending

Mandatory spendingSlide9

History of the

Discretionary

Spending

Caps

In order to reduce projected deficits, the Budget Control Act of 2011 placed

caps

on total defense and non-defense discretionary spending for each year through 2021.

Discretionary Caps were automatically reduced much further when Congress’ special Joint Committee failed to address entitlement and tax reform.

However, in 2013 and again in 2015, Congress eased the defense and non-defense caps.

The

caps for FY 2018

remain at very tight levels (lower than 2017 and no accommodations for inflation, a growing & aging population, security or infrastructure needs):

Defense Discretionary Cap: $549 b

Non-Defense Discretionary Cap: $515 bSlide10

Trump

Budget

would shift

$54 billion

into

Defense Programs

10% increase

in current defense cap: $549 billion

Advocates

point to a general downward trend in defense expenditures 

as a percent of the economy

: currently 3.3% of GDP (Gross Domestic Product) 

compared to

 4.7% in 2010, 4.5% in 2011, 4.2% in 2012, 3.8% in 2013, and 3.5% in 2014. 

Opponents

point out i

n dollar terms,

 the U.S. spends more than one-third of global defense spendingSlide11

Most Striking about the Administration Budget Plan

The decision to fund massive increases in defense spending through

major cuts in domestic

and other non-defense spending, rather than new revenues or entitlement reforms.  

Reduction

in foreign aid and development assistance (sometimes called "

soft power

") in favor of defense spending ("hard power").

Heavy emphasis on eliminating ineffective programs in the domestic budget but the

absence of similar scrutiny on the defense side. Slide12

Most Striking about the Administration Budget Plan

(continued)

Scaling back 

federal support for

health research, environmental protection, job training, education, rural programs, low-income energy and housing assistance.

No indication of how the

infrastructure initiative or the border wall

will be financed without increasing the debt.

Elimination of numerous programs

with small budgets but high-impact results including Appalachian Regional Commission; AmeriCorps; the Corporation for Public Broadcasting; the Legal Services Corporation; the Overseas Private Investment Corporation; and the United States Interagency Council on Homelessness.Slide13

Increases Requested for:Defense: 10%, $54 bHomeland Security: 7%, $3bVeterans: 6%, $4.4b

Largest Decreases

Proposed for:

EPA:

31%

, $2.6b

State Dept-USAID

:

28%

, $10b

Agriculture

:

21%

, $4.7b

Labor

: 21%, $2.5bHHS: 18%

, $15bEnergy (non-nuclear): 18%, $3bEducation

:

13.5%

, $9b

Transportation

:

13%

, $2.4b

Interior

:

12%

, $1.5b

Proposes cuts in federal workforce,

although

it is already smallest since 1966Slide14

Tax Reform:

Corporate

and

Individual

Tax Reform is

more likely to succeed than in previous Congresses

:

One-party (GOP) control of the White House and Congress; 

The intention of the President and GOP congressional leaders to use the filibuster-proof

FY 2018 Budget Reconciliation process

to enact tax reform; and 

Similar tax reform goals:

House GOP Tax Reform Blueprint released on June 24, 2016; and

Trump tax proposals laid out in three speeches last year (August 8, September 13, and September 15, 2016).Slide15

House GOP Tax Plan v. Candidate Trump Tax Proposals (2016)Both plans reduce individual brackets from 7 to 3.Both plans would reduce the individual 

top rate 

from 39.6% to 33%.

Both plans would eliminate the alternative minimum tax (

AMT

).

Both plans would repeal the 

estate and gift 

tax (impacting the top 0.2% of taxpayers since more than 99% are already exempt).

Both plans would increase the 

standard deduction 

and repeal personal exemptions.

Both plans would limit

itemized

deductions with the House plan repealing all but charitable and mortgage interest and the Trump plan capping all itemized deductions.

Proposals in the Trump plan also include eliminating

carried interest

which allows some fund managers to treat investment income as capital gains; increasing the Earned Income Tax Credit (

EITC

); and creating a new credit for

child care

.

Both plans would cut the

corporate tax rate

from 35% — Trump to 15% and House to 20%;Slide16

House GOP Tax Plan v. Candidate Trump Tax Proposals (2016)Both plans would have reduced rate for businesses taxed as pass-throughs:Trump 15%; House 25%.

House plan includes a 

destination-based, border-adjusted cash flow tax (BAT)

 and Trump has hinted at support for a BAT.

Under the BAT, 

all

goods destined for domestic consumption are taxed and goods produced for foreign consumption would not be taxed — so that 

off-shoring business operations becomes irrelevant

.  (However, the BAT is highly contentious, with retailers and other importers strongly opposed.)

Both plans are estimated by the nonpartisan Tax Policy Center (TPC) to have high revenue costs

House plan-- $2.2 trillion

 in second decade

Trump -- $8.9 trillion

 in second decade

In the first year, the 

top 1 percent

 of taxpayers would receive 76% of benefits under the House plan and 47% under the Trump plan.

In

dollar terms

, under the

House plan

, in the first year, the 

middle quintile 

of taxpayers would see an average tax cut of $260, and the top 0.1 percent getting over $1.2 million; and

Under the

Trump proposals

, the middle quintile gets an average cut of $1,010, with the top 0.1 percent getting cuts over

$1 million.Slide17

Tax Reform:

Timing

and

Challenges

FY 2018 Budget Resolution must be adopted

Ways & Means and Finance Committees mark-up Reconciliation legislation

Tax Reform Legislation is 

extremely complex

–

technically

(tax law is inherently complex);

fiscally

(finding offsets is very difficult)

economically

(economic implications of tax changes are highly complex and include effects on the value of the dollar);

politically

(with different economic sectors locking horns on each provision and repeal of ObamaCare taxes now adding to the political load); and 

internationally

 (due to potential implications of existing trade agreements on tax provisions that

directly

impact imports and exports). 

Expect a lengthy, contentious, and complex process.Slide18

Infrastructure

Investment

March 9, 2017:

  Quadrennial 

2017 Infrastructure Report Card

 released by

American Society of Civil Engineers

giving the U.S. a cumulative grade of

D+ (poor, strong risk of failure)

“We can no longer afford to defer investment in our nation’s infrastructure. To close the

$2.0 trillion 10-year 

investment gap

, meet future needs, and restore our global competitive advantage, we must increase investment from all levels of government and the private sector from 2.5% to 3.5% of U.S. Gross Domestic Product (GDP) by 2025.” 

State Budget Officers: In the 1960s, we spent 3.5% of GDP on infrastructure.Slide19

2017 U.S. Infrastructure Grades (Civil Engineers) A: Fit for the Future D: Poor, Strong Risk of Failure B: Adequate for Now F: Failing, Unfit for Use

C: Mediocre, Requires Attention

Roads:

D

Bridges: C+

Ports: C+

Dams:

D

Wastewater:

D+

Public Parks:

D+

Solid Waste: C+

Levees:

D

Schools:

D+Drinking Water:

DTransit: D-Energy:

D+

Hazardous Waste:

D+

Inland Waterways:

D

Rail: B

Aviation:

DSlide20

Compare how Feds and States Budget for InfrastructureFederal GovernmentUnified Budget: all expenditures – immediate, near-term & long-term – are included in the same budgetCongress is hyper-focused on balancing annual budgets that cannot be balanced because they include long-term investmentsConsider running a business w/o budgeting for long-term investment

Result: massive under-funding of U.S. infrastructure

States

Separate Operating and Capital Budgets

(nearly all States)

States are able to balance their annual operating budgets, because most have

separate capital investment budgets

funded by bonds for roads, schools, etc.Slide21

President has called for a

$1 trillion investment in infrastructure over 10 years

Roadblock:

short-term thinking, Congress focused on annual budgets subject to tight spending caps

Result: the

unified budget is a fiscal straightjacket

preventing long-term infrastructure investments

Policymakers are now looking for ways to

leverage private investment

in public infrastructure

This would distort

public policy decisions by limiting new infrastructure to projects that can

deliver cash flow to investors

.

Some Members of Congress have proposed using one-time revenues from

taxation on repatriated corporate assets Slide22

March 15, 2017:

The new

federal

Debt Ceiling

The statutory limit on the public debt, often called the “debt ceiling,” is a legal limit on the Treasury’s ability to borrow funds necessary to finance 

already incurred obligations

of the United States.

If Congress passes spending measures that exceed incoming revenues, but prevents the Treasury from borrowing funds to cover the deficit, the nation would 

default on its legal obligations

to lenders, Social Security beneficiaries, veterans, Medicare providers and all others to whom payments are legally owed. 

Default has never occurred and would have

catastrophic effects

on the ability of the U.S. Treasury to issue bonds in the future, as well as destabilizing global financial markets.

In the Balanced Budget Act of 2015, Congress suspended the debt ceiling through last week (March 15, 2017), at which time the statutory limit was automatically re-set at the current debt level.Slide23

Extraordinary

Measures

available

to the

Treasury Department

Treasury can take

extraordinary measures

 that allow it to continue borrowing for several months before hitting the new debt ceiling, including:

Suspending investments of the Thrift Savings Plan’s G Fund.

Suspending investments of the Exchange Stabilization Fund.

Suspend the issuance of new securities to the Civil Service Retirement and Disability Fund (CSRDF) and Postal Service Retiree Health Benefits Fund (PSRHBF).

Redeem, in advance, securities held by the CSRDF and the PSRHBF in amounts equal in value to benefit payments due in the near future.

Suspend the issuance of new State and Local Government Series (SLGS) securities and savings bonds.

Exchange Federal Financing Bank securities,

which do not count against the debt limit,

for an equal amount of Treasury securities held by the CSRDF.