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One year ago, Bill Clinton promised to "save every penny" of the budget surplus for Social Security. Today, with budget surpluses projected well into the next century, Clinton’s FY 2000 budget proposes to grab nearly half of any future surpluses for new spending. Just as remarkable, Clinton calls for a net tax increase, not a tax cut, even though his budget assumes that Americans will pay war-era levels of tax revenues for at least the next decade.
If enacted, the president’s FY 2000 budget plan would mean:
Tax revenues will total nearly $1.9 trillion in FY 2000, or 20.7 percent of gross domestic product (GDP), and $22 trillion over the next decade. In addition, the budget proposes a tax and fee hike of roughly $104 billion over the next five years –three times greater than the proposed tax cut of $32 billion;
Spending will total $1.76 trillion in FY 2000. Also, the budget proposes roughly $235 billion in new spending (mostly discretionary spending) over the next five years; and,
The budget surplus will top $117 billion in FY 2000. Over the next ten years, the administration projects taxpayers will send $2.4 trillion more to Washington than it needs to pay its bills – an overpayment equal to more than $27,000 for every taxpaying household in America.
The Tax Picture
Tax revenues swell to war-era levels. The budget proposes $1.88 trillion in tax revenues in FY 2000. This marks a 4.2 percent increase above FY 1999 levels, 80 percent greater than the rate of inflation. Moreover, this is $161 billion higher than FY 1998 collections, a two year increase of 9.4 percent. Over the next decade, Clinton’s budget projects federal tax revenues will total more than $22 trillion.
One of the most troubling aspects of the Clinton budget plan is not only that it fails to give Americans a net tax cut, but it requires them to send more than 20 percent of gross domestic product (GDP) in tax revenues to Washington for the next decade. In FY 1998, the growing economy and the progressive tax code pushed total federal tax revenues to 20.5 percent of GDP. This marked the first time since the war years of 1944 and 1945 that Washington has consumed so much of the economy in taxes.
Yet, as Chart #1 (above) shows, the administration now estimates that tax revenues will hit 20.6 percent of GDP in FY 1999, 20.7 percent in FY 2000, and remain above 20 percent for at least the next decade. Rather than return some of these revenues in tax cuts, Clinton proposes a net tax hike of $71 billion over the next five years.
As Table #1 displays, the budget does propose about $32 billion in various tax breaks over the next five years. But this small amount is overwhelmed by more than $104 billion in tax hikes, "loophole closures," and fee increases.
Revenue Proposal Five-Year Total in $Billions
User Fees $25.8
"Loophole" Closures $33.4
Other Tax Hikes $45.0
Total New Revenues = $104.2
Minus Tax Cuts $32.6
Equals Net Tax & Fee Hike = $71.6
Source: Budget of the U.S. FY 2000
These new taxes include: a 55 cents per pack increase in the federal cigarette tax (raising roughly $34.5 billion); a reinstatement of the expired "Superfund" excise tax and the corporate environmental income tax (raising $6.45 billion); and, a new tax on airlines and their passengers (raising $5.3 billion).
This means that over the course of the next five years, Clinton would raise $3 in new revenues for every $1 he cuts in taxes – a rotten deal for taxpayers suffering the highest prolonged tax burden in U.S. history.
Spending is Also on the Rise
Under Clinton, domestic discretionary spending will soar above Jimmy Carter-era levels. Clinton’s proposed 2.2 percent, or $38 billion, increase in total spending is actually even greater than it appears. The administration is proposing nearly $24 billion in additional spending for FY 2000 ($17.2 billion for discretionary programs and $6.5 billion for mandatory programs), but wants to "offset" this spending with equivalent increases in new taxes and fees. Rather than record these new taxes in the revenue column of the federal ledger, the administration wants to record them on the spending side of the ledger as "offsetting receipts." This gimmick allows the administration to keep within the discretionary spending limits enacted in the Balanced Budget Act of 1997 because the "offset" spending would not technically exceed the caps.
The president’s proposal to finance new discretionary spending with tax hikes is, however, in clear violation of the budget enforcement rules. These rules require new discretionary spending to be offset by equal reductions in other discretionary programs, unless the new spending is declared "emergency." Ironically, the same rules the president wants to violate in order to boost spending, also prohibit cuts in discretionary spending to finance tax cuts.
Over the next five years, Clinton’s budget proposes nearly $250 billion in new spending, $151 billion of which is to be spent from budget surpluses. (The president’s proposal to "shore up" Medicare with $124 billion of surplus funds is not included in the new spending proposals, nor does the budget document explain how the administration intends to save the program.) As Table #2 shows, the largest share of this new spending is planned for discretionary programs.
Proposed Spending Five-Year Total in $Billions
Discretionary $ 74.7
Mandatory $ 21.8
Discretionary Spending Contingent upon Social Security Reform $137.7
Debt Service $ 13.6
Total Proposed Spending $247.8
Source: Budget of the U.S. FY 2000
During Clinton’s two terms in office, domestic discretionary spending has soared to record levels. In fact, as Chart #2 shows, the average level of domestic discretionary spending for both Clinton terms is now well above the amounts spent during Carter’s administration, after adjusting for inflation.
Without adjusting for inflation, domestic discretionary spending has jumped $70 billion, a 30 percent increase, since George Bush’s last budget in FY 1993.
To be sure, a substantial portion of this new spending is dedicated to the Department of Defense over the next five years. Many lawmakers will, no doubt, enthusiastically embrace this new defense spending. After all, since Clinton came into office, defense spending has fallen by 16 percent in real dollar terms, the only meaningful portion of the federal budget to see any cuts – real or nominal. As a percentage of GDP, defense has fallen to just 3.0 percent, the lowest level since before World War II.
But the defense budget’s loss has been the domestic budget’s gain. For every $1 that Clinton has cut in defense spending – not adjusting for inflation – he has increased domestic discretionary spending by $4.
Surplus Smoke and Mirrors
Over the next ten years, budget surpluses mean huge tax overpayments for every household in America. The administration projects $828 billion in surplus tax revenue over the next five years. Over ten years, the administration estimates that budget surpluses will total a staggering $2.4 trillion – equal to a $27,000 tax overpayment for every taxpaying household in America.
During the next five years, as Table #3 shows, Clinton’s "Framework for Social Security Reform" would devote $445 billion of the surplus to "saving" Social Security. The remainder of the surplus would be devoted to new spending, new Universal Savings Accounts, and to "strengthening" Medicare – though the budget document fails to explain how the administration intends to do this.
Table #3: Clinton’s "Framework for Social Security Reform"
Projected Surpluses Through 2004 $828 Billion
Reserved for Social Security $445 billion
Reserved for Medicare $124 billion
Universal Savings Accounts $ 96 billion
Spending on defense and domestic programs $ 138 billion
Source: Budget of the U.S. FY 2000
Contrary to his own words, however, Clinton’s plan would actually spend a portion of Social Security’s so-called "off-budget" surplus.1 According to the administration’s own projections, the program’s off-budget surplus will total $714 billion over the next five years. Yet the president’s reform plan would "save" only $445 billion for Social Security. The difference, $269 billion, disappears into more spending.
Conclusion. Clinton’s FY 2000 budget is living proof that reports of Big Government’s death are greatly exaggerated. After years of giving lip service to fiscal responsibility, the administration has given up any pretense of fiscal restraint. Clinton’s budget plan would require Americans to pay wartime levels of taxes for at least the next decade in order to finance Clinton’s record-setting expansion of the size and scope of the federal government. Taxpayers should reject this bargain and demand their money back.
1For a discussion of "on-budget" and "off-budget" accounting, see: Scott A. Hodge, "Opportunity for the 106th Congress #3: Turning Social Security’s Liability Into Real Assets," Issue Analysis #81, January 20, 1999.