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Press Release

    Issue Analysis 102 - Clinton's Bait-and-Switch FY 2001 Budget Raids Social Security and Taxpayers' Wallets

    02/02/2000

    The Clinton administration claims that its $1.84 trillion budget for FY 2001 is a “balanced and fiscally responsible” framework to retire debt, secure Social Security and Medicare, cut taxes, and invest in key priorities. Behind the rhetoric, however, the numbers show that Bill Clinton is proposing a massive increase in the size of government, a trivial amount of tax relief, and a phony scheme to extend the lives of the Social Security and Medicare trust funds.

    If enacted, the president’s FY 2001 budget would mean:

    A raid on the $2.2 trillion in projected Social Security surpluses in a phony scheme to retire federal debt in exchange for a mountain of IOUs, which do nothing to head off the large cash deficits facing Social Security in 14 years;
    More than $7 of new spending for every $1 of net tax cuts;
    Nearly $1.2 trillion in new spending over the next 10 years – an astonishing $857 billion in new discretionary spending and more than $300 billion in new entitlement initiatives;
    A return to “baseline” budgeting, which gives discretionary programs and their advocates a virtual entitlement to automatic spending increases each year;
    A paltry 23 percent of the $746 billion in projected non-Social Security surpluses would be returned to taxpayers in tax relief, the rest would be spent;
    More than 100 new tax and fee increases, in an attempt raise nearly $220 billion more revenue than the $24 trillion in total tax collections already forecast over the next decade;
    A $4 billion net tax hike in FY 2001, tempering the trivial $169 billion net tax cut over 10 years, equal to less than a penny on the dollar of total tax collections; and
    A plan to waste $334 billion in non-Social Security surplus funds to buy more IOUs for the Medicare trust fund.
    Charting a Course for Bigger Government

    The Clinton FY 2001 budget proposes $1.835 trillion in spending for next year, which on the surface appears to be a modest 2.5 percent increase above this year. The underlying story, however, is that Clinton has explicitly scrapped the discretionary spending caps that have governed budgeting for the past nine years and returned to the “baseline” method of budgeting that gives government programs a virtual entitlement to yearly increases.

    This bait-and-switch change in budget methods has subtly ensured a massive increase in federal spending over the next decade – shrinking the size of the projected surpluses – even before Clinton explicitly calls for a dollar of new spending. The bottom line is that Clinton’s budget calls for nearly $1.2 trillion in new spending over the next decade, even though the president is claiming credit for just a fraction of that amount.

    To be sure, the emergence of large budget surpluses over the past two years has undermined Washington’s commitment to the discretionary spending limits agreed to in the Balanced Budget Act of 1997. Two years ago, the White House and the Congress enacted spending bills that exceeded the FY 1999 spending caps by some $20 billion. Last year, lawmakers approved $31 billion more spending than the FY 2000 spending caps allowed. Over the past three years, lawmakers have used various gimmicks and emergencies to spend $78 billion more than was allowed by the original caps set by the 1997 Act.

    This year, Clinton has dropped any pretense of spending restraint or abiding by the discretionary spending limits. Indeed, as Chart 1 shows, his budget proposes $626 billion for discretionary programs in FY 2001. While this amount is just $8 billion higher than what was approved for FY 2000, it is $60 billion more than was allowed by the original spending caps.

    More troubling, however, Clinton’s Office of Management and Budget (OMB) has returned to the “baseline” method of budgeting for discretionary programs, which assumes spending will grow at the rate of inflation every year. As Chart 2 shows, when compared to current levels of spending, the administration’s use of this technique effectively “builds in” nearly $860 billion in new discretionary spending into the budget in the same way that Social Security’s cost of living adjustments (COLAs) are built in to the budget. What this means is that the administration has effectively captured $860 billion of future surpluses for new spending without having to formally request it. This new spending has simply been “assumed” within the budget.

    For taxpayers, the use of baseline budgeting leads to serious consequences. First, the technique gives program advocates a sense of entitlement over the projected annual increase. If spending should fall below this magical rate of increase, advocates will claim that lawmakers have “cut” the program’s funding when, in fact, spending has still increased. As a result, baseline budgeting distorts taxpayers’ frame of reference for understanding when an increase is an actual increase, and when a cut is an actual spending cut.

    Another practical effect of returning to baseline budgeting is that, unlike the discretionary spending caps that have been enforced since 1991, the baseline levels become a floor for congressional decisions, not a ceiling. So if Congress goes along with this way of budgeting, it is more than likely that discretionary spending will grow even more than the $860 billion already built into the budget.

    Clinton’s Shrinking Surpluses

    Since it has assumed such dramatic spending increases in its budget forecast, the White House’s projections of future budget surpluses are far less than even the mid-range projections of the Congressional Budget Office (CBO). The difference between these two forecasts is entirely due to their assumptions over what happens to discretionary spending over time. In contrast to OMB’s use of an inflated baseline, which it claims is “fiscally conservative,” CBO’s mid-range forecast assumes that discretionary spending is “frozen” at FY 2000 levels for 10 years. While this may not be entirely realistic, it is, at least, politically neutral since lawmakers must approve the level of discretionary spending each year.

    Higher Taxes Lead To Puny Tax Cuts

    The Clinton budget assumes that the economy will continue to flood the Treasury with tax revenues, though at a slightly lower rate than has been the case in recent years. Since 1993, federal tax revenues have grown by an average of 7.6 percent per year, far outpacing the growth in the economy and personal incomes. Over the next decade, however, OMB projects revenues to grow by an average of 4.1 percent per year, still 50 percent faster than the rate of inflation. Overall, Washington is expected to collect more than $24 trillion in total tax revenues over the next 10 years.

    By Assuming Higher Spending
    OMB Forecasts a Smaller Surplus Total Estimates
    2001-2010
    (in $Billions) OMB CBO Difference OMB to CBO
    Unified Surplus $2,919 $4,179 - $1,260
    On-Budget $ 746 $1,858 - $1,112
    Off-Budget
    (Social Security) $2,173 $2,320 - $ 147

    Despite these remarkable growth figures, Clinton is not only proposing a paltry tax cut package, he is actually proposing more than 100 new taxes and fees that would raise nearly $220 billion over 10 years. The majority of these tax and fee hikes are used to offset Clinton’s tax cut plan, while the remainder are used to offset spending increases elsewhere in the budget.

    The budget includes about 60 highly targeted tax relief measures, including: a tax cut for college expenses; an expansion of the Earned Income Tax Credit (EITC); a tax credit to encourage pre-seniors to buy into Medicare; and, a tax credit to buy “hybrid” automobiles.

    Although the White House claims that these measures would cut taxes by $102 billion over five years and $351 billion over 10 years, the actual net size of the tax relief is nearly half that amount. First, the budget overstates the gross tax cut figures by some $20 billion by including the refundable portions of the proposed tax credits. (These funds are actually expenditures out of the budget because they are payments to refund money beyond what a person has paid in taxes.)

    Next, the net value of the tax cut plan is further reduced by more than 80 separate tax increases that the administration euphemistically calls eliminating “unwarranted benefits” in the tax code. While many of these proposals effect arcane provisions in the tax code – such as the proposal to “require capitalization of mutual fund commissions” or the one to “clarify recovery period of utility grading costs” – their elimination does constitute a serious tax increase by any measure. Indeed, the administration figures these measures will raise $47 billion in revenues over five years, and $96 billion over 10 years.

    In addition to these measures, the administration wants to raise another $66 billion over 10 years by increasing the 34 cents-per-pack excise tax on cigarettes (which is scheduled to increase to 39 cents) by an additional 25 cents. As well, the administration proposes to levy an “assessment” on tobacco manufacturers if the youth smoking rate is not reduced by 50 percent. This last provision makes as much sense as punishing auto manufacturers for teen speeding.

    All of these new taxes reduce the size of the net tax cut to just $17 billion over five years, and $169 billion over 10 years. Remarkably, as Chart 3 shows, in FY 2001 and FY 2002 the new taxes overwhelm the tax cuts, resulting in a net tax increase in both of those years.

    More Taxes And Fees

    The administration also proposes a variety of other tax increases, tax extensions, and user fee increases to offset increases in spending elsewhere in the budget. For example, the budget would offset $36 billion in higher entitlement spending through such measures as reinstating the Superfund tax that expired in 1995 and extending customs user fees. Also, the budget would offset more than $20 billion in new discretionary spending through such measures as an increase in FAA user fees, the creation of a new harbor services fee, and the creation of an “immigration premium processing fee.”

    Clinton's Bait-and-Switch FY 2001 Budget (Part II)