Key Themes of the FY 2018 Trump Budget
ACA Repeal-and-Replace
Shifting Spending Priorities from Non-Defense to Defense
Tax Reform: Corporate and Individual
Infrastructure Investment
Raising the Debt Ceiling
Charles S. Konigsberg
Publisher, FedWeb.com
Assistant OMB Director, Clinton Administration
General Counsel & Chief Health Counsel, U.S. Senate Finance Committee
Counsel, Senate Budget and Rules Committees
March 20, 2017
• Key Priority of Trump Administration and GOP
congressional leaders
Repeal and
Replace the
Affordable
Care Act
• Repeal-and-Replace Plan has 3 Stages:
1. Filibuster-Proof Budget Reconciliation Bill
2. Administrative Action at HHS
3. Broader Repeal Bill for Non-Budgetary
Provisions (subject to filibuster)
• Currently in Stage 1:
Ways & Means and Energy & Commerce
Committees reported legislation on March 9
• Packaged into a single Reconciliation Bill by the
Budget Committee last week (March 16) where
it lost 3 GOP votes
Reconciliation
Bill Repeals
Medicaid
Expansion and
Overhauls the
Entire Program
Medicaid is a jointly-funded (federal-state) and
state-administered program that pays for health
care services for over 70 million Low-Income
Americans.
Prior to the ACA: Medicaid covered only certain
categories of care: comprehensive care for
children; mental health services; and long-term
care for the elderly and disabled. But individual
adults outside of these categories were generally
not covered.
Current Law: Federal government guarantees
matching payments for all covered services.
(average federal match: 57% -- depends on average
State income)
Recon. Bill Repeals Medicaid Expansion
ACA offers States a
Medicaid expansion,
with 100% federal
funding, for all people up
to 138% of federal
poverty level.
32 States accepted.
Recon. Bill phases out
the expanded Medicaid
coverage by 2020
• Recon. Bill goes further than repealing the
expansion; includes a major overhaul
Recon. Bill
also
Overhauls
Entire
Medicaid
Program
• Under Current Law: States are entitled to
receive Federal Matching Payments for all
covered health services
• Recon. Bill: States would be limited to
capped annual Medicaid payments tied to the
number of eligible enrollees – regardless of
actual healthcare expenses
• CBO estimates total Medicaid spending would
be reduced over 10 years by $880 billion (from
the expansion of Medicaid and capping the
underlying program).
• Recon. Bill repeals Affordable Care Act subsidies
for purchase of private health insurance.
• Current Law: subsidies are provided up to 400%
of FPL and are tied to insurance costs in the area.
Rollback of
ACA Subsidies
• Recon. Bill replaces subsidies with flat tax credits
tied to age instead of income ($2000 for young
adults; up to $4000 for older adults); and would
no longer be tied to actual health insurance costs.
• Points of contention: would the credits be
sufficient to afford private insurance, particularly
for older adults?
Repeal of
Medicaid
Expansion &
Insurance
Subsidies is
accompanied by
repeal of ACA’s
new taxes
• 3.8% Net Investment Tax
• 0.9% Payroll Tax Surcharge on high-income
taxpayers
• Medical device excise tax
• Delay until 2025 the “Cadillac Tax” on
expensive employer-provided insurance
plans
• Revenue Losses: $883 billion over 10
years (nearly equal to the $880 billion in
Medicaid cuts being called for)
Other
Key
Components
of the
Recon. Bill
• Retains the ACA’s bar on denying coverage due
to Pre-existing Conditions
• Retains the bar on Lifetime Insurance Caps
(protecting people with chronic conditions)
• Retains coverage on parents’ insurance plans
for children up to Age 26
• Substitutes for Employer and Individual
Mandates, a “Continuous Coverage”
requirement allowing a heavy premium penalty
(30%) for letting insurance lapse
CBO / JCT
Scoring
of the
Recon. Bill
• Increase in Uninsured: 14 million by 2018;
24 million by 2026 due to:
• Medicaid Cuts
• Elimination of Subsidies based on income,
area costs
• Repealing the Mandates
• Increased premiums for Older Americans due
to repeal of the ACA “3x” limit on premiums.
• Net Reduction in Federal Deficits ($337b):
• Net reduction in federal spending: $1.2
trillion (Medicaid and scaled back credits)
• Reduce Federal Tax Revenues: $883 billion
• Governors, Senators object to Medicaid cuts
• Mounting Pressure from Doctors, Hospitals,
Nurses, AARP to number of Uninsured
Outlook
for the
Reconciliation
Bill
• Outlook: GOP leaders and Trump Admin. will
attempt to make whatever changes are required to
secure passage -- may end up w/ ACA-lite:
•
•
•
•
Tax credits closer to ACA Subsidies
Continue Medicaid expansion for States that opted-in
No major overhaul of Medicaid payments to States
10-year expiration of subsidies and Medicaid expansion
• Next Procedural Steps: House Floor, Senate
Committees (Finance and HELP), Senate Floor (no
filibuster-only 50 votes needed), Conference, Final
Passage
• A subsequent non-budgetary bill (Ryan’s “next
stage”) could be filibustered
Shifting
Priorities from
Non-Defense
Programs
into Defense
• President Trump’s discretionary spending budget,
released on March 16, calls for a dramatic shift in
federal spending from non-defense discretionary
spending to defense discretionary spending.
• The President’s request would shift $54 billion from
non-defense into defense spending.
• The funding levels are the President's requested
funding. Congress writes the appropriations
bills (following adoption of a Congressional Budget
Resolution) and can accept, ignore, or change the
requested funding for each program.
• Appropriations bills effectively need 60 votes in the
Senate (to overcome a potential filibuster),
requiring bipartisan agreement (unlike the ACA
repeal-and-replace legislation which needs only 50
votes due to the fast-track Budget Reconciliation
process).
Two types of federal spending:
• Discretionary spending
• Mandatory spending
“Discretionary spending” – about 30% of the
budget – is set by Congress in detailed annual
appropriations bills.
Non-defense discretionary includes broad
spectrum of govt. functions: law enforcement,
veterans health care, homeland security,
education, prisons, NASA, disease and epidemic
control, highways & bridges, food and drug
inspection, disaster relief, airports, health
research, housing assistance, and environmental
protection.
“Mandatory spending,” the other 70% of the
budget, is principally entitlement programs that
spend out according to benefit formulas and
eligibility requirements in federal law.
Largest entitlements are Social Security,
Medicare, and Medicaid; others are veterans
benefits, military & civilian retirement, food
stamps, EITC, unemployment benefits, SSI, TANF,
child nutrition, and farm programs.
• In order to reduce projected deficits, the Budget
Control Act of 2011 placed caps on total defense and
non-defense discretionary spending for each year
through 2021.
History of the
Discretionary
Spending
Caps
• Discretionary Caps were automatically reduced much
further when Congress’ special Joint Committee failed
to address entitlement and tax reform.
• However, in 2013 and again in 2015, Congress eased
the defense and non-defense caps.
• The caps for FY 2018 remain at very tight levels (lower
than 2017 and no accommodations for inflation, a
growing & aging population, security or infrastructure
needs):
Defense Discretionary Cap: $549 b
Non-Defense Discretionary Cap: $515 b
• 10% increase in current defense cap: $549 billion
Trump
Budget
would shift
$54 billion
into
Defense
Programs
• Advocates point to a general downward trend in defense
expenditures as a percent of the economy: currently 3.3% of GDP
(Gross Domestic Product) compared to 4.7% in 2010, 4.5% in 2011,
4.2% in 2012, 3.8% in 2013, and 3.5% in 2014.
• Opponents point out in dollar terms, the U.S. spends more than onethird of global defense spending
Most Striking
about the
Administration
Budget Plan
1. The decision to fund massive increases in defense
spending through major cuts in domestic and other
non-defense spending, rather than new revenues or
entitlement reforms.
2. Reduction in foreign aid and development assistance
(sometimes called "soft power") in favor of defense
spending ("hard power").
3. Heavy emphasis on eliminating ineffective programs in
the domestic budget but the absence of similar scrutiny
on the defense side.
4. Scaling back federal support for health research,
environmental protection, job training, education, rural
programs, low-income energy and housing assistance.
5. No indication of how the infrastructure initiative or the
border wall will be financed without increasing the
debt.
6. Elimination of numerous programs with small budgets
but high-impact results including Appalachian Regional
Commission; AmeriCorps; the Corporation for Public
Broadcasting; the Legal Services Corporation; the
Overseas Private Investment Corporation; and the
United States Interagency Council on Homelessness.
Increases Requested for:
Largest Decreases Proposed for:
• Defense: 10%, $54 b
• Homeland Security: 7%, $3b
• Veterans: 6%, $4.4b
• EPA: 31%, $2.6b
• State Dept-USAID: 28%, $10b
• Agriculture: 21%, $4.7b
• Labor: 21%, $2.5b
• HHS: 18%, $15b
• Energy (non-nuclear): 18%, $3b
• Education: 13.5%, $9b
• Transportation: 13%, $2.4b
• Interior: 12%, $1.5b
• Proposes cuts in federal workforce,
although it is already smallest since
1966
Tax Reform is more likely to succeed than in
previous Congresses:
Tax Reform:
Corporate
and
Individual
1. One-party (GOP) control of the White
House and Congress;
2. The intention of the President and GOP
congressional leaders to use the filibusterproof FY 2018 Budget Reconciliation
process to enact tax reform (after the ACA
Reconciliation Bill is completed); and
3. Similar tax reform goals:
• House GOP Tax Reform Blueprint released
on June 24, 2016; and
• Trump proposal laid out in three speeches
last year (August 8, September 13,
and September 15, 2016).
House GOP Tax Plan (individual)
Trump Tax Plan (individual)
• Reduce brackets from 7 to 3
• Reduce top rate from 39.6% to
33%
• Allow individuals to deduct 50%
of capital gain, dividends, and
interest income reducing tax
rate to 16.5%
• Eliminate the AMT
• ¾ of cuts would benefit top 1%
• Estate/Gift Tax repealed
(benefits only the top 0.2%)
• n/a
• Same
• Same
• n/a
• Same
• ½ of cuts would benefit top 1%
• Same
• Eliminate carried interest (treats
investment income as cap gains)
House GOP Tax Plan (individual)
Trump Tax Plan (individual)
• Increase Standard Deduction
and Repeal Personal Exemptions
• Repeal all itemized deductions
(except Charitable, Mortgage)
• Increase Child Tax Credit; add
new credit for Dependents
• n/a
• Same
• n/a
• Caps Itemized Deductions
• n/a
• New Credit for Child and
Dependent Care
• Increase EITC
Corporate Taxes: U.S. generally taxes corporations headquartered in U.S. on worldwide profits at 35%, with
a credit for foreign taxes & indefinite deferral of taxes on income invested offshore; many advanced
economies have a territorial tax which taxes domestic, but not foreign income, although most have hybrids.
House GOP Tax Plan (Corporate)
• Reduce corp tax rate to 20%
• 25% tax rate for pass-throughs
• Destination-based, border-adjusted cashflow tax: regardless of where a corp. is
headquartered, goods destined for
domestic consumption are taxed (no tax
advantage by off-shoring); goods
produced for foreign consumption not
taxed; controversial and raises WTO
issues; retailers and importers are
opposed; some economists argue it
would strengthen the dollar
Trump Tax Plan (Corporate)
• Reduce corp tax rate to 15%
• 15% tax rate for pass-throughs
• Trump has hinted at support for the
BAT
Senate’s Byrd Rule: Prohibits long-term deficit increases; therefore, Bush 2001 tax cuts
were drafted to expire after 10 years (to prevent outyear deficits)
House GOP Tax Plan
• Speaker Ryan does not want his tax
reform to expire
• Says he will find offsets to pay for his tax
cuts
• However, very difficult to repeal enough
existing deductions and credits to pay for
the proposed individual and corporate
tax cuts
• Tax Policy Center says House tax cuts will
cost $3 Trillion in first decade
Trump Tax Plan
• Administration silent on this
• TPC says Trump tax cuts will cost $7
Trillion in first decade
Infrastructure
Investment
• March 9, 2017: Quadrennial 2017
Infrastructure Report Card released by
American Society of Civil Engineers giving the
U.S. a cumulative grade of D+ (poor, strong
risk of failure)
• “We can no longer afford to defer investment
in our nation’s infrastructure. To close the
$2.0 trillion 10-year investment gap, meet
future needs, and restore our global
competitive advantage, we must increase
investment from all levels of government and
the private sector from 2.5% to 3.5% of U.S.
Gross Domestic Product (GDP) by 2025.”
• State Budget Officers: In the 1960s, we spent
3.5% of GDP on infrastructure.
2017 U.S. Infrastructure Grades (Civil Engineers)
A: Fit for the Future
D: Poor, Strong Risk of Failure
B: Adequate for Now
F: Failing, Unfit for Use
C: Mediocre, Requires Attention
• Roads:
• Bridges:
• Ports:
• Dams:
• Wastewater:
• Public Parks:
• Solid Waste:
• Wastewater:
• Levees:
D
C+
C+
D
D+
D+
C+
D+
D
• Schools:
• Drinking Water:
• Transit:
• Energy:
• Hazardous Waste:
• Inland Waterways:
• Rail:
• Aviation:
D+
D
DD+
D+
D
B
D
Compare how Feds and States Budget for Infrastructure
Federal Government
States
• Unified Budget: all expenditures –
immediate, near-term & long-term – are
included in the same budget
• Separate Operating and Capital
Budgets (nearly all States)
• Congress is hyper-focused on balancing
annual budgets that cannot be balanced
because they include long-term
investments
• States are able to balance their annual
operating budgets, because most have
separate capital investment budgets
funded by bonds for roads, schools,
etc.
• Consider running a business w/o
budgeting for long-term investment
• Result: massive under-funding of U.S.
infrastructure
President has
called for a
$1 trillion
investment in
infrastructure
over 10 years
• Roadblock: short-term thinking is focused on
annual budgets subject to tight spending caps
• Result: the unified budget is a fiscal straightjacket
preventing long-term infrastructure investments
• Policymakers are now looking for ways to leverage
private investment in public infrastructure
• This would distort public policy decisions by limiting
new infrastructure to projects that can deliver cash
flow to investors.
• The statutory limit on the public debt, often called
the “debt ceiling,” is a legal limit on the Treasury’s
ability to borrow funds necessary to finance already
incurred obligations of the United States.
March 15,
2017:
The new
federal
Debt Ceiling
• If Congress passes spending measures that exceed
incoming revenues, but prevents the Treasury from
borrowing funds to cover the deficit, the nation
would default on its legal obligations to lenders,
Social Security beneficiaries, veterans, Medicare
providers and all others to whom payments are
legally owed.
• Default has never occurred and would have
catastrophic effects on the ability of the U.S.
Treasury to issue bonds in the future, as well as
destabilizing global financial markets.
• In the Balanced Budget Act of 2015, Congress
suspended the debt ceiling through last week
(March 15, 2017), at which time the statutory limit
was automatically re-set at the current debt level.
• Treasury can take extraordinary measures that allow it to
continue borrowing for several months before hitting the
new debt ceiling, including:
• Suspending investments of the Thrift Savings Plan’s G
Fund.
Extraordinary
Measures
available
to the
Treasury
Department
• Suspending investments of the Exchange Stabilization
Fund.
• Suspend the issuance of new securities to the Civil
Service Retirement and Disability Fund (CSRDF) and
Postal Service Retiree Health Benefits Fund (PSRHBF).
• Redeem, in advance, securities held by the CSRDF and
the PSRHBF in amounts equal in value to benefit
payments due in the near future.
• Suspend the issuance of new State and Local
Government Series (SLGS) securities and savings
bonds.
• Exchange Federal Financing Bank securities, which do
not count against the debt limit, for an equal amount
of Treasury securities held by the CSRDF.