Debt Ceiling Deal Taxes: Details & Analysis
President Biden and House Speaker McCarthy reached a deal over the weekend to suspend the debt ceiling until January 2025 in exchange for limits on discretionary spending over the next two years, expedited permitting for pipelines and other energy infrastructure, and expanded work requirements for food and income assistance programs. The bill, known as the Fiscal Responsibility Act of 2023, has passed the House Rules Committee and is expected to receive bipartisan support in the House before it goes to the Senate. The Treasury Department estimates the government will be unable to pay its bills after June 5th if the debt ceiling is not raised.
The deal would cap discretionary spending in a manner similar to the Budget Control Act of 2011, amounting to about a $1.3 trillion reduction over the next 10 years relative to baseline levels, according to analysis by the Congressional Budget Office (CBO). Discretionary spending, except for certain funding including emergencies and overseas contingencies, would be capped at $1.59 trillion in FY 2024 and $1.61 trillion in FY 2025, roughly flat relative to this year’s $1.63 trillion. Defense spending would be capped at $886 billion in FY 2024 and $895 billion in FY 2025, while non-defense discretionary spending would be capped at $704 billion in FY 2024 and $711 billion in FY 2025. The deal also contains a mechanism to enforce a better budget process by further reducing the budget caps by 1 percent if Congress fails to enact all 12 appropriations bills by January 2024. Additionally, the deal specifies certain unenforceable spending limits beyond FY 2025.
Beyond these spending caps, the deal also rescinds about $11 billion in unspent pandemic relief funds, confirms the already-expected end of the pause in student loan repayments (effective 60 days from enactment), and claws back about a quarter of the $80 billion in additional IRS funding authorized by last year’s Inflation Reduction Act (IRA). According to the text of the bill, $1.4 billion in unobligated IRS funds will be rescinded, and negotiators have additionally agreed to redirect $20 billion of IRS funding over the next two years ($10 billion in 2024 and $10 billion in 2025) to offset reductions in non-defense discretionary spending. This is not expected to alter short-term spending plans for the IRS but instead will curtail the IRS’s long-term spending plans aimed at ramping up enforcement over the next decade. As a result of less enforcement, CBO anticipates a net reduction in revenues of about $900 million through 2033.
Negotiators also agreed to increase work requirements and tighten eligibility rules, with certain exceptions, for the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance to Needy Families (TANF). CBO estimates the net effect of these changes would result in a small increase in spending of $2.1 billion over the next decade.
Lastly, there are two provisions aimed at speeding up the permitting process and limiting administrative actions. The deal expedites the permitting process for energy and infrastructure projects by imposing a two-year time limit on environmental reviews and limiting duplicative reviews by multiple agencies. Administrative actions, such as the student loan forgiveness program, would be temporarily limited through 2024 by requiring agency heads to estimate the spending effects of administrative actions and propose spending reductions to offset any spending increases.
In total, the CBO estimates the Fiscal Responsibility Act would reduce deficits by $1.5 trillion from 2023 to 2033, including a substantial reduction in interest payments on the debt of $188 billion.
There are a few things to note about this bill and the larger deal on the debt ceiling. First, finding a path forward on raising the debt ceiling is an accomplishment, and negotiators deserve credit for searching for compromise and areas of agreement that should receive wide bipartisan support. There is nothing sufficiently objectionable in the deal to merit further delay in raising the debt ceiling.
Second, the deal rightly focuses on reducing spending, which is where most successful fiscal consolidations have focused.
Third, while the spending reductions are substantial, they pale in comparison to total federal spending of about $6.4 trillion this year and more than $80 trillion over the next decade. Spending this year will be about 24.2 percent of GDP and average 24.1 percent of GDP over the next decade, compared to an average of 21 percent over the last 50 years. To bring spending closer into alignment with historic norms would require spending cuts several times larger than those proposed in this deal. To stabilize the debt as a share of the economy would require about $8 trillion in deficit reduction over the next 10 years.
The challenge Is that lawmakers in both parties have been unwilling to address the roughly two-thirds of the federal budget that is mandatory spending, which is also the fastest growing part of the budget along with interest payments on the debt. Under current law, mandatory spending is set to grow from 14 percent of GDP next year to 15.6 percent in 2033, while discretionary spending will shrink from 6.8 percent to 6.0 percent over the same period. Interest payments will rise from 2.7 percent next year to 3.7 percent of GDP in 2033. This deal leaves mandatory spending on auto-pilot even though the major mandatory spending programs, Social Security and Medicare, are due for a shock when the trust funds that support those programs are depleted over the next decade.
Fourth, lawmakers missed an opportunity to reduce costly tax breaks, such as the IRA’s green energy credits which are now estimated to cost at least $570 billion. There are more than 200 credits, deductions, exclusions, and other special provisions in the tax code, costing upwards of $2 trillion annually. These tax breaks should be reviewed seriously by lawmakers to find potential ways to reduce debt over the long term, as eliminating these is among the least economically damaging ways to raise revenue.
To address the more challenging parts of the budget, especially the unsustainable growth in mandatory spending, lawmakers should follow up on this debt ceiling agreement with a focus on long-term fiscal sustainability. As a meaningful next step, lawmakers should convene a fiscal commission to grapple with long-term budgetary challenges, something that was last tried in 2010 with the Simpson-Bowles Commission. A fiscal commission comprised of budgetary experts selected on a bipartisan basis would provide a space for tough budget decisions outside of the political pressures that make real discussion of budgetary alternatives and trade-offs impossible. The recommendations of the commission should then be put to an up or down vote in Congress.
As noted by Dave Walker and others, for a fiscal commission to be successful, it needs to be statutory, so the administration and members of Congress have buy-in to the process. That, of course, means elected officials need to first acknowledge the scale of the problem and be willing to engage with solutions. Most likely, elected officials will be spurred to action due to pressure from voters, who will become less and less thrilled with the prospect of high and increasing debt levels, “higher for longer” inflation and interest rates which are clearly connected to escalating deficits and debt, and the attendant sluggish economic growth.
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This blog post is the fifth in a series in which our experts explore the issues and potential solutions for America’s growing debt and deficits.
