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Lawmakers from both parties have proposed as well as criticized pension smoothing, depending on the circumstances. “There isn’t really much of a partisan difference in the types of gimmicks each side prefers, though Republicans tend to prefer those that produce revenues on paper without actually increasing taxes and Democrats prefer those that appear to reduce spending without actually cutting spending.”
Lorenzen defines a budget gimmick as a provision “that makes legislation appear fiscally responsible when it really is not, either by hiding the true cost of a policy or producing savings on paper that are not real.”
He added that budget gimmicks, in most cases, “are provisions that are only being proposed because they help meet budget rules and would not be considered otherwise.”
Pension smoothing is a textbook example, shifting payments and revenue over time while creating economic impacts that may be hard to measure.
The Senate measure (S 1845) proposed this year would have raised an additional $17 billion in revenue over the first six years but then lost $13 billion over the next five years, the CBO estimated. Pension smoothing would temporarily reduce the amount that companies are required to pay into their pension funds. By taking fewer deductions for employee compensation, companies would have higher profits subject to taxes and pay more in taxes for a while.
But as Chye-Ching Huang, a tax policy analyst at the CBPP, wrote about pension smoothing last year, “the revenue gain would be only temporary. Employers would have to contribute more to their pension funds in later years under the smoothing formula. That means they would take higher tax deductions for pension contributions in those later years and pay less income tax than under the current rules.”
A motion to limit debate on the bill fell short of the required 60 votes on Feb. 6.
Boccia points to Senate Majority Leader Harry Reid’s plan last year to replace one year’s worth of the spending cuts of the sequester with $110 billion in savings from capping spending on military and diplomatic initiatives in Iraq and Afghanistan for three years. She said the savings are “phony” because the cost of the activity, also known as overseas contingency operations, or OCO, is winding down, not growing with inflation, as represented in the CBO baseline.
War spending has been falling in the past six years, from $187 billion in 2008 to an estimated $92 billion this year.
The CBO discouraged the idea by saying this month the agency would not consider caps on OCO spending as an offset to a proposed increase in spending in mandatory programs such as unemployment benefits or military pensions.
“It spends now and delays savings until later,” Boccia said, noting that it raised discretionary spending caps in 2014 and 2015 by a combined $63 billion and offset the resulting spending increase with a combination of cuts to mandatory spending programs and non-tax revenue increases spread over 10 years.
Boccia said she remains concerned that a cap on overseas contingency operations may arise as an offset to increased discretionary spending.