“It’s fiscally responsible. It’s fully paid for.”
— President Biden, remarks on announcing the framework for his Build Back Better plan, Oct. 28
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“What I see are shell games, budget gimmicks, that make the real cost of the so-called $1.75 trillion bill estimated to be almost twice that amount.”
— Sen. Joe Manchin III (D-W. Va.), remarks to reporters, Nov. 1
We’ve been tracking how well President Biden’s ambitious spending plan is meeting his announced goal of not increasing the federal budget deficit by a “single penny.”
On the one hand, it’s admirable that the administration has the stated goal of being fiscally responsible. The 2017 tax cut, after all, was deficit-financed and sold on the bogus notion that the tax cuts would pay for themselves.
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But as Biden’s vision has shrunk as he tries to strike a deal that will the get votes for passage, has his fidelity to fiscal responsibility shrunk as well? That’s the charge made by Manchin, a key player in Biden’s battle to win congressional approval.
The Facts
In the spring, Biden’s “Build Back Better” spending plan had two components — a $2.25 trillion 10-year infrastructure plan and a $1.8 trillion American Families Plan, which consisted mostly of transfer payments that would keep going year after year, such as free pre-K programs, free attendance to two-year community colleges and child-care support.
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Together, the two plans would have added $1 trillion to the federal budget deficit over 10 years. But over 15 years, White House officials argued, the plans would be in balance, as the tax increases used to fund the infrastructure spending would keep bringing in revenue long after the money was appropriated.
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The infrastructure plan, which Biden wanted to pass on a bipartisan basis, shrank to about $550 billion in new spending over 10 years and then was passed in the Senate with no tax increases — the price of winning GOP support. It’s no longer funded by tax increases that would keep going; a big chunk of the funding comes from unused funds taken from a previous coronavirus bill.
Moreover, the Congressional Budget Office estimated that the bill would add to deficit (though lawmakers who negotiated it, including Manchin, rejected that analysis.)
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The other half of the plan at one point was pegged as high as $3.5 trillion in new spending, but last week Biden announced a reduced framework of $1.75 trillion — as well as almost nearly $2 trillion in revenue to pay for it. That’s more than enough revenue for Biden to claim it would reduce the deficit.
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Biden’s numbers may have shrunk and some of his proposals eliminated, but when you look under the hood what remains is still a lot of the same ambition. Originally, he would have extended a child tax credit through 2025 and established an affordable child-care program and universal pre-K.
Now, in a 10-year budget bill, the child tax credit is extended for only one year, while the universal pre-K and affordable care programs only last six years. A plan to provide Obamacare tax credits to low-income people in states that did not expand Medicaid would run for four years. Such maneuvers reduce the top-line number, but they also mean lawmakers would soon face pressure to extend the programs when they expire. (The framework also includes substantial spending on green-energy programs.)
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The Penn Wharton Budget Model estimates that if all of the spending initiatives in the new framework lasted 10 years, the total spending would amount to $3.98 trillion, in large part because the child tax credit would cost $244 billion a year by 2031. The Committee for a Responsible Federal Budget will soon release a similar estimate, according to Marc Goldwein, senior vice president. He said that extending all programs would add close to $2.1 trillion to the official figure of $1.75 trillion.
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Of course, there is no guarantee everything would be extended, and White House officials in interviews adamantly rejected the idea that Biden was failing to meet his commitment. They argue that this bill must be viewed as its own entity and that Biden is committed to fully paying for any future legislation to extend the programs.
One official noted that trillions of dollars in potential revenue raisers had been identified, providing an extensive menu of options for a bill extending the programs in the future. “We will have to get new bills passed,” the official said.
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White House officials contrasted their approach with the 2017 tax bill approved by Republicans. That law not only was deficit-financed, it also had short-term elements, principally the individual tax cuts touted by the GOP. The scorekeepers at the CBO said the Trump tax bill inflated the deficit by about $2 trillion over 10 years, but only because tax cuts for individuals were set to expire after 2025. That maneuver reduced the 10-year deficit forecast by about $500 billion. Nevertheless, it increased the deficit — something that Biden has said he will not contemplate.
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Goldwein said the Biden administration earns “some credibility points” for presenting a package that, on paper, does not increase the deficit. But he said administration officials are “setting themselves up for immense future pressure to extend these programs without paying for them.” He said that history has shown that often popular programs may start out being financed with dedicated tax revenue, but they eventually get classified as current policy and do not have to be paid for.
Meanwhile, the White House’s estimates of how much revenue it will raise might fall short once it is officially scored.
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One item — that $400 billion in net revenue would be raised in 10 years if an additional $80 billion was dedicated to IRS enforcement — has raised eyebrows. The president’s 2022 budget had only estimated a gain of $245 billion. Another White House official said the increase of $155 billion stemmed from a better understanding of the indirect effect of tougher IRS enforcement, mainly few people willing to cheat on their taxes. (This was explained in a letter to Congress written by Mark J. Mazur, assistant secretary for tax policy.)
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But the CBO in September issued a report saying it only anticipated a net gain of $120 billion over 10 years, even after considering indirect effects. “The estimate reflects CBO’s expectation that the increased enforcement activities would change the voluntary compliance rate — that is, the share of taxes owed that are paid voluntarily and on time — only modestly,” the report said.
In its analysis of the framework’s revenue provisions, Penn Wharton concluded the plan would raise $1.527 trillion, or almost $500 billion less than the administration’s estimate. For instance, Penn Wharton found the IRS provision would only net $190 billion.
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Another potential wrinkle is a continuing effort by lawmakers to suspend a provision in 2017 tax law that put a $10,000 cap on the deductibility of state and local taxes. The provision was aimed at blue states, but repealing it would be enormously costly (and mainly favored the wealthy). One idea under discussion would be to suspend it for two years, then pay for that revenue loss by extending the SALT cap even beyond the expiration of the individual tax cuts in 2025 when it was due to disappear anyway. So the two-year relief from the SALT cap would be paid for with anticipated funds in later years from the very tax provision that lawmakers want to eliminate.
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The maneuver — which Goldwein called “the ultimate shell game” — would raise money on paper, but it’s not sustainable. It would certainly set up another issue to be fixed in a future bill since the lawmakers demanding a SALT suspension now as a price for their votes will certainly play the same card in the next go-round.
The Bottom Line
In watching this process, we’re reminded of the old joke that camel is a horse designed by a congressional committee.
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Biden started the year saying he would pay for 10 years of spending over 15 years. Now, in effect, he’s embraced paying for a few years of spending over 10 years. Pending an official ruling by budget scorekeepers, the numbers add up on paper as reducing the deficit. But it does rely on some budget gimmicks, and it leaves unresolved whether some key proposals are permanent or temporary, setting up a battle not only in this Congress but in a future Congress.
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