Caution: Tax Increase Ahead, Regardless of Political Rhetoric

Posted March 3, 2008 at 3:17pm

It’s becoming increasingly clear that, at some point after the current economic difficulties fade into history, Congress and the White House are going to have to face up to the need to increase federal revenues.

[IMGCAP(1)]This is not, of course, what the candidates are saying. But electoral politics is almost completely irrelevant. The situation will be the same regardless of who is elected president and which party controls the House and Senate.

This is hardly breakthrough analysis. Budget analysts and economists of practically every political persuasion have been saying for years that this will be the case if federal spending isn’t cut.

And it hasn’t been. So let’s do some Q&A.

Won’t the budget problem be taken care of by higher economic growth? It will, but only if you believe the economy will grow faster for a much longer period than it has ever grown before.

But as former Treasury Secretary John Snow repeated so often when he was in office that it sounded like his mantra, isn’t the federal budget situation “manageable”? Yes, but only if you mean the problem will explode after you leave office so it will be someone else’s responsibility. It was the politics of the budget rather than the budget itself that Snow meant could be handled.

And isn’t the current deficit at or below some arbitrarily selected historical average, so we don’t really have anything to worry about? That’s absolutely true, as long as you ignore the fact that the additional annual government borrowing is on top of federal debt that is already much higher than it was during that arbitrarily selected period. It’s also true only if you focus on just this year instead of looking ahead to what we know is coming in the no-longer-distant future.

What’s directly ahead? It’s no secret that Medicare will be a huge, growing and politically explosive budget issue in less than a decade. But that’s not even close to the only problem.

The steady series of what now must be considered actual or potentially catastrophic failures of federal public protection and safety programs over the past seven-plus years makes it obvious that substantial additional spending will be required in a number of agencies. The Federal Emergency Management Agency is the most obvious example. But others, like the Food and Drug Administration — which over the past few years admitted it hasn’t had the resources needed to oversee both food and drugs — and the Centers for Disease Control and Prevention — which said its budget didn’t allow it to plan properly for an outbreak of tuberculosis (i.e., to do its job) — have to be included in this category.

Others became public last week. In separate reports, the Project on Government Oversight said the inspectors general at many federal agencies don’t have adequate budgets or staff to do their jobs properly, and the Federal Aviation Administration doesn’t have the resources it needs to properly review the quality of the spare parts being used by the airlines. In other words, the FAA isn’t doing its job, but the IG can’t find out.

This is not pork-barrel spending: No one is talking about an impossible-to-fathom bridge to nowhere. They are not programs that can be questioned on a philosophical basis. For the most part, these are as close to pure public good activities as you get and things we count on the government to provide because no one else will.

Another clearly federal responsibility — military spending — is also very likely to rise significantly in the years immediately ahead. Even if there is no long-term U.S. presence in Iraq and Afghanistan (which supposedly will cost between $20 billion and $30 billion a year), the cost of retaining people in the military and recruiting new ones to replace them when they do leave will be substantial. Similar personnel-related increases will be needed for the National Guard and reserves.

Other military programs will also increase. The best example is military health care, which, as the catastrophe at Walter Reed Army Medical Center demonstrated, had been dramatically underfunded even before the casualties from Iraq and Afghanistan put an overwhelming additional burden on the system. This burden will soon have to be borne by the Department of Veterans Affairs, which didn’t have anything close to adequate health care resources before activities in Iraq and Afghanistan began.

Then there’s the alternative minimum tax. As sure as anything can ever be in politics, AMT will be fixed so that in the next few years it does not begin to apply to millions of Americans who consider themselves middle class. But it will be expensive. Fixing the AMT could increase the deficit more than all of the spending increases that will be seriously considered on the domestic and military sides of the budget — combined.

Interest on the national debt, the last part of the equation, will also be growing in the years ahead. Not only will the amount of government debt continue to increase, but the average interest rates paid may well rise from current levels as the debt from the past few years is refinanced.

In much the same way that we’re still guessing about how much gasoline prices have to rise before Americans start changing their driving habits, we don’t know how high the deficit can go before it starts to be a political problem that can’t be ignored. We also don’t know when, because of actual or expected inflation, a large deficit will be considered the wrong fiscal policy. And we certainly don’t know when the current overseas appetite for U.S. bonds, bills and notes, which has been making it possible to avoid rising interest rates in this country, will end.

But my guess is that we’re a lot closer to one or all of these than most people running for office want us to believe.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is Capital Gains and Games.