For Budgeting, Tough Accounting for ‘Gimmicks’
Assessments of a proposal by Senate Democrats this month to offset the cost of extending emergency unemployment benefits by temporarily reducing companies’ pension payments won rare agreement from the right and the left.
The conservative Heritage Foundation and left-leaning Center on Budget and Policy Priorities both derided the idea, called “pension smoothing,” as a move with some short-term budget gains that would quickly turn into costs.
In other words, it was another in a line of gimmicks, the groups said, aimed at jerry-rigging the numbers to make this year’s budget work out, sort of, while leaving the real impact to be considered sometime later.
The use of pension payments, budget watchers say, is one of an array of tweaks, adjustments, forecasting modifications and accounting maneuvers Congress seems to be turning to more frequently as lawmakers wrestle with the demands of popular programs and projections that project a rapidly growing cumulative deficit over the next decade.
Just last week, the Committee for a Responsible Federal Budget sent up a warning of what it called budget gimmicks to come as the Congressional Budget Office added $1 trillion to its deficit forecast through 2023.
CRFB President Maya MacGuineas said the most that can be expected of the current Congress is that members avoid making the long-term budget picture worse. “We look at the political environment with sort of resigned realism, and I think the best principle we think we should be able to expect people to hold themselves to this year is doing no harm,” she said.
Some approaches to offsetting spending increases or tax cuts that have come in for derision include shifting revenue toward the present from the future, shifting spending cuts to the future from the present, and counting on savings that are unlikely to materialize.
Critics say the gimmicks are exploited by Republicans and Democrats alike.
Last year, the fiscal cliff deal (PL 112-240) included a provision offered by Senate Republicans to partially pay for sequester relief with an increase in short-term revenue generated by a liberalization of the conversion of tax-deferred retirement funds into Roth individual savings accounts.
In 2012, the Congress approved a two-year highway bill that was partially paid for through a $9.4 billion pension smoothing provision.
“Both parties are prone to resorting to budget gimmicks to pass legislation that increases spending and claims deficit reduction at the same time,” said Romina Boccia, a fellow at the Heritage Foundation. “Often it means using a fake pay-for or phony offset.”
Ed Lorenzen, senior adviser to the CRFB, says lawmakers will use specific provisions “when it suits their interests and criticize them when they don’t.”
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.
The Heritage Foundation also was critical of the budget deal negotiated by House Budget Chairman Paul D. Ryan, R-Wis., and Senate Budget Chairwoman Patty Murray, D-Wash., last year.
“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.
“The risk with a phony cap on OCO is that it creates a slush fund for lawmakers to tap into to count ‘savings’ from spending that was never planned,” she said. “A cap on OCO below the current CBO projections for OCO would establish phantom savings.”
Lorenzen is more worried about pension smoothing, which he said “may have more traction as something Congress seriously considers since it has had bipartisan support in the past and has been proposed by Senate leaders and seriously considered by House leaders.”
But some budget watchers also warn that criticism of budget actions as “gimmicks” is often just part of the political back-and-forth aimed at attacking underlying policies.
Scott Lilly, senior fellow at the liberal Center for American Progress, said gimmicks are often “in the eye of the beholder.”
“One point that needs to be made in the current context of budget restraint is that a very large portion of the spending reductions that are occurring as a result of the sequestration that occurred last year and the current spending caps are in my view not only gimmicks but gimmicks that will prove very costly over the long term,” Lilly said.
“They involve the deferral of meeting obligations that the government will eventually have to meet,” he said.