NEW YORK | GOP Passes "Decimating" Budget

October 26, 2017 – This morning, the House of Representatives passed a budget that the bi-partisan Committee for a Responsible Federal Budget describes as using "gimmicks", increasing debt and exercising "Zero Fiscal Restraint".

For New York State residents, the bill is especially threatening because it eliminates the deductibility of State and Local Taxes (SALT) from taxable incomes.

When this idea was introduced under President Reagan, it was described as "double taxation". The CEO of American Express predicted that the value of the company's new building would drop by 25 percent, from $1 billion to $750 million. The proposal was defeated.

Under President Trump, the idea was resurrected and has passed both the Senate and the House.

On Long Island, two Republican Congressman opted to vote against the bill:

• One of them, Rep. Peter King, said: "Why should I vote for something that would end up decimating my district?" 
• The other, Lee Zeldin, represents most of Suffolk County. 

The bill has passed by a few votes and now goes back to a House-Senate conference for reconciliation.

New York voters are watching carefully. If King and Zeldin think that they will be forgiven for this "decimating" GOP budget because they voted against it, they may be in for a surprise. 

VIEWS | 370K. Ten Most-Viewed Posts in October

This blog has had 370,000 page views.

Thank you for reading.

The following posts are the ten most read on this blog in the last month.

Post

FSOC | Delisting AIG Oct 5, 2017

THE FED | Who Will Follow Yellen? Sep 20, 2017

HOSPITALS | Outlook Is Worrisome Oct 10, 2017

TAX REFORM | Hatching a Bipartisan Plan? Sep 14, 2017 2 comments

TAXES | Using the Budget to Reform Oct 5, 2017

TAX REFORM | Business Taxes Sep 19, 2017

UNIONS | Oct. 18–First American Trade Unions, 1648... Oct 18, 2013 10 comments

R.I.P. | Sep. 3–Andrew Kay, Kaypro-IBM (Comment) Sep 7, 2014

PORT AUTHORITY | Chris Ward Speaks Out Sep 12, 2008

MALONEY | Dem Electeds in Sag Harbor Jul 8, 2015

TAXES | Using the Budget to Reform

Mike Enzi (R-Wyoming), Chairman
Senate Budget Committee

The following is from Dana Chasin's Update 211, reposted by permission (see last sentence):

Washington, D.C., October 5, 2017 – Today saw two major steps toward Congressional approval of a FY 18 budget resolution. The House passed its 2018 budget resolution providing reconciliation instructions, paving the way for tax reform, on a 219-206 vote, 18 GOP members voting against. And Senate Budget reported out its budget resolution along partisan lines.  

The Senate language allows for a $1.5 trillion deficit increase. The House measure calls for deficit reduction. Reconciliation instructions included in both the House and the Senate resolutions would allow Republican leadership to craft a tax package that adjusts revenues and spending that could be passed with a simple majority in the Senate.  To pass the cuts, Senate Republicans would have to vote in near unison.

The budget resolution's chances of passage and what's at stake are considered below. 

_____________________________________________

In day one of the two-day Senate Budget Committee markup, Senators drilled down tax policy. Republicans attempted to legitimize the Big Six’s policy framework, claiming it was based off bipartisan principles, but Democrats excoriated the proposal for rewarding the wealthy, dramatically increasing the deficit, and increasing taxes for the middle class.  

Stakes: Reconciliation

Senator Bob Corker (R-TN),
Maverick on Senate Budget Committee

Per the House resolution, top lines instructions for 11 House committees require a $213 billion decrease in spending. House Judiciary ($45 billion), Oversight and Government Reform ($32 billion), and Ways and Means ($52 billion) Committees are charged with producing the largest cuts in spending from 2018 to 2027.

Reconciliation instructions now require specific  changes from the Senate. Given debate during the markup session regarding the $470 billion of cuts expected to Medicare, much anxiety revolves around the reconciliation recommendations that will arise from Senate Finance. Sens. Sanders, Harris, and Stabenow led the Committee with the most amendments opposing these cuts. 

FY 18 Spending Top Lines

Today’s Senate budget resolution sets a topline FY18 discretionary spending at $549 billion for defense and at $516 billion for nondefense discretionary. By contrast, the House resolution calls for $621.5 billion for defense and $511 billion for non-defense discretionary spending in FY18  President Trump’s FY18 budget proposed $616 billion in defense, $538 billion non-defense.

The Senate figures represent a decline from the FY17 budget toplines of $616 for defense and $551 for non-defense discretionary spending. The administration and the House are more consistent with last year’s numbers, although the House resolution calls for a slight increase in defense spending matched by a slight decrease in nondefense discretionary spending.

The Senate resolution also calls for $632 billion in nondefense spending cuts between 2018 and 2027. Budget Committee Democrats repeatedly raised concerned that these spending cuts would translate into deep slashes vital social programs. Particularly contentious were proposed cuts to Medicare and Medicaid, Pell grants and Head Start programs, and WIC programming.

Points of Agreement

Today’s markup was anything but bipartisan. Democrats repeatedly introduced amendments to protect social programs, push Republicans towards budget neutrality in tax legislation, and ensure that the CBO analysis of tax proposals. Time and time again, these amendments were either tabled or failed outright – almost always along 12/11 partisan lines... yet another indication that Republicans plan on using a majoritarian route in pursuit of their tax reform agenda.

Sticking Points Going Forward

Yesterday, Sen. Corker indicated an unwillingness to play ball with his fellow Republicans, stating that he would not vote for a tax bill that was not permanent and that added to the deficit. While it is not clear how much he will end up pushing back, his dissent is worth noting – Republicans can only lose two votes on the Senate floor if they want to move their tax plan with reconciliation.

Beyond this, the Senate is unlikely to accept the $203 billion in mandatory cuts to social programs as the House sets out. These differences will have to be addressed in conference for agreement to be reached on a joint budget resolution.

Next Steps and Deadlines

Since the budget resolutions passed on the House floor and through the Senate Budget Committee today, attention turns now to how it will fare on the Senate floor. 

The Senate will address the budget after its return from Columbus Day/Indigenous People's Day recess on October 16. Thereafter, the two houses will conference to hash out differences.  Both the House and Senate Budget Committees are to have their recommendations for tax reform submitted by November 13. The reconciliation process and budget for FY 18 must be completed by December 8 in order to avoid a government shutdown.

ECONOMIC HOTSPOTS | by Dana Chasin

The U.S. Economy at Risk as Washington Debates.

My friend Dana Chasin sent me a summary of economic issues before the Congress at the end of the first quarter of 2017. 

With his permission, I have re-posted it below.

The issues add up to some strong challenges that will not be easy for the GOP to address. 

Having struck out on replacing Obamacare, Trump is facing the likelihood that the First 100 Days may go by without a single significant piece of legislation.

Here is Dana's guest post. I have added only a number to identify each of his five sections:

1. Dodd-Frank Action

One of the subtlest but surprising developments of the year to date is the sense that Wall Street itself (the financial industry) is not as warm to the idea of repealing the law as Trump is.  Several major firms and the Wall Street Journal -- yes, even its masthead editorial page -- have signaled caution when it comes to the president’s actions on Dodd Frank. More and more investors believe that the administration is unlikely to deliver any significant jolt to the economy. 

As Trump vowed again this week to “do a number” on Dodd-Frank, it’s expected that the SEC, under Jay Clayton who will likely be confirmed, will soften enforcement and rules that the 2010 law put in place.  That is not to say that rolling back Obama-era regulations will be easy for the SEC.  Per the Journal:  “The SEC doesn’t have the authority to revoke Dodd-Frank, which is an act of Congress.” 

Given that the vast majority of rules and regulations from the Dodd-Frank Act have already been implemented, the best that the SEC can do is amend them or grant exemptions on a case by case basis.  If legal objections were motioned as a result of the SEC’s actions, it would slow down the already drawn-out process.

2. Tax Reform

It seems that the already difficult tax overhaul process just got a lot more complicated for Trump.  The GOP in Congress are having trouble agreeing on a bill that Democrats won’t filibuster.  This all started when two senior economic officials who served in the Obama administration, David Kamin and Brad Tester, published an article that found that the much talked about Border Adjustment Tax will not produce the kind of revenue the President has suggested. If their report is confirmed by, say, the CBO, then it would throw the whole tax agenda off because they would not be able to produce a bill that wouldn’t add to the debt.

The Trump administration is working hard to ensure a legislative success before the year is up.  There are a lot of opportunities and a lot of road blocks (think Blue Dog Democrats and the Freedom Caucus). Recently, the President’s legislative director met with moderate House Democrats to propose working with them on the tax reform plan. One of the Democratic lawmakers who attended the meeting said that the legislative director declared the border adjustment tax dead on arrival.  If that is the case, then Donald Trump’s protectionist campaign promises will be broken, a prospective trillion dollars in revenue will be lost, and tax reform, lacking a pay-for, will limp forward, or not.  

There have been rumors this week that the White House is considering a carbon tax and a value added tax to make up for the loss of revenue that will be induced by the massive tax cuts Republicans are aiming for, both on the income and corporate side.  If the carbon tax is in the bill, the Freedom Caucus had have reason to vote against it.  

The White House has flip-flopped on the VAT and carbon tax, saying that it was considering them at first and soon after disavowed them completely.  Given the collective lack of experience this administration has, their negotiation efforts are very transparent and their tactics are easy to dodge so far.

This flip-flop shows that the Freedom Caucus should have reason to be cautious of their trust in the House leadership to put forth a plan with their inputs taken into account. This is precisely why the plan is showing signs of ripping apart at the seams.  This and the BAT may get debated extensively over the next few months.  Don't be deceived: they are dead letters in Congress. 

3. Infrastructure

For some reason, the administration decided to pick tax reform as its next big ticket item after the health care debacle, opting for the more difficult and partisan route.  The president may once have had a shot at working with Democrats who have been asking for infrastructure investment for a long time, but it seems that Trump is ditching that train for now.

The president’s infrastructure plan might, accordingly, also be too ambitions.  With a goal of a trillion dollars, Trump aims to pass large tax subsidies to investors willing to pour money into infrastructure investment.  There are many reasons this plan is risky, one of which is that large firms will be getting nothing short of massive government handouts for investments they are probably going to make anyway. 

Last year, Congressman Delaney came up with a plan that could give the president a pass around Democratic obstruction.  His proposed infrastructure bill combines infrastructure investments, which Democrats have been eying for quite some time, and international tax reform, an issue that Republicans have been keen to tackle.  And here’s the catch: it has strong bipartisan support with 40 Democrat and 40 Republican cosponsors. 

By going with tax reform first and seeking more money than Obama's stimulus package, this administration’s legislative agenda and self imposed August deadline suggests remarkable legislative incompetence.  

4. Budget

Despite being able to check off submitting a statutorily required budget to Congress from his to-do list, Trump can hardly consider this any sort of accomplishment at this point.  As it was not even dead on arrival -- Congress will not consider or even hold hearings on it -- and grossly increased the deficit, there is nothing to see here as an accomplishment. 

5. What the GOP Might Do

The biggest obstacle to a sweeping tax reform is the Democrats in the Senate, who could easily filibuster a bill if it adds to the national debt. The reason for that is that tax legislation that adds to the debt cannot be passed by a simple majority vote as per the reconciliation process that passed the budget resolution earlier this year.  That said, there are still ways around the filibuster with a model similar to the Bush Tax Cuts which passed in 2001. 

Per the Washington Post:  “Republicans could avoid Democrats in the Senate altogether by putting forward a plan that would expire after 10 years, the approach they adopted when they reduced taxes under President George W.  Bush. They could also rely on a different set of estimates than those produced by the JCT if that agency's analysis is unfavorable to their plan.” 

The budget resolution passed earlier this year through a reconciliation process could give the GOP some leverage in the legislature. While it may miss on major reforms, the administration could push through several smaller tax reforms that could pave the way for the president’s infrastructure plan.  If Trump were serious about infrastructure, Republicans could look to Congressman Delaney’s plan and set a less ambitious goal than $1 trillion.

In regard to repealing Dodd-Frank, Republicans are having a much harder time than they had anticipated.  As noted, the intricate law has recently picked up an unlikely supporter base: Wall Street itself. The industries main newspaper has cautioned against repealing the law, and several key players have joined the Dodd-Frank chorus.  That won’t stop Republicans, however, from at least seeking to chip away at some parts of the law.  

This is just the beginning of what is going to be a drawn out process, with several wins and many losses.  The question is can the president pull a rabbit out of a hat and pass tax reform or will this administration be legislatively stillborn come August recess?  Money can buy many things and every administration  has a learning curve but it is already beginning run out of the one thing it keeps trying to buy: time.

Related Posts: Banking (Glass-Steagall) Act of 1933 . Dodd-Frank Act .
Hensarling's H2O Bill

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TAXES | Lost NYS Cig Revenue–$2.4 Billion

New York State Packs of Cigarettes Sold, Taxed and Untaxed.
Number of packs in millions and tax in $millions.

The Tax Foundation just put out a report saying that New York State has the biggest cigarette smuggling problem of any state in the USA.

It blames the high $4.35/pack cigarette tax. However, a cigarette tax is a Pigovian tax, saving money on NY State health-care costs if smokers are discouraged from smoking by the higher cost.

On the other hand, if there are easy ways to bring in untaxed cigarettes (e.g., by car from a neighboring state), then New York State benefits neither from the Pigou Effect (lower consumption of goods with high negative externalities) nor from the higher revenue it should have earned on the untaxed cigarettes.

What's the impact of the counterfeit on the budget? I have been doing this kind of work long enough to know that these calculations are complex. I have also been around enough to know that reasonable first approximations - if not distorted by subsequent misuse - usually provide pretty good policy guidance.

With that in mind, the chart above suggests that based on the Tax Foundation numbers and the amount actually collected in cigarette taxes in the latest fiscal year, New York State is losing $2.4 billion in uncollected cigarette-tax revenue. Now there's a budget gap-closer. 

The nature of Pigovian taxes is that counterfeiting will always be with us. The snake in the Garden of Eden smuggled an illegal fruit into the diet of Adam and Eve. But the attempt to collect more revenue will either generate more income for NY State or it will reduce smoking. Either way, the State is ahead.

Avoiding U.S. Fiscal Ruin - David Romer in 2007

Washington’s Out-of-Control Budgets - Notes on a Lecture by Prof. David Romer. (The following report is abbreviated with his permission from notes on the lecture taken by Bill Batt, staff political scientist in the New York State Assembly's Legislative Tax Study Commission, 1982-1992.)

On October 25, 2007, Scranton University held its 22nd Annual Henry George Lecture  and Romer was the Lecturer. [Henry George was a self-taught, widely read economist who favored taxing land rather than labor; he ran with labor support for the mayoralty of New York City in 1886, coming in second, ahead of Theodore Roosevelt, and again in 1897, dying at the height of the campaign. - JTM] The city of Scranton, Pa. itself was wild that day, as it played host to fans of the NBC hit serial, "The Office", set in Scranton. 

David H. Romer is the Herman Royer Professor of Political Economy at the University of California, Berkeley. He is a member of the American Economic Association Executive Committee, co-director of the Program in Monetary Economics at the National Bureau of Economic Research, and a member of the NBER Business Cycle Dating Committee – the so-called “wise men” who decide when national business cycles begin and end.

The lecture title was "Avoiding Fiscal Ruin: Failed Strategies and New Approaches to US Budget Policies." Professor Romer posed three questions: (1) How did we get here? (2) What are the likely consequences? and (3) What are some possible solutions? He showed simple PowerPoint bullets and graphics describing the past history and looming fiscal crises the nation faces in the next few decades:

History of the U.S. Budget

• The United States ran a small budget surplus throughout the years 1791-1929, except for support of the Civil War and World War I.
• The U.S. budget had an annual surplus in the early 1950s, and a deficit every year since then except for the final years of the Clinton administration.
• We are now running a $200 billion deficit, some 2 percent of GDP, which will grow enormously in the next two decades if most assumptions are borne out about health care, social security and other demographic trends. (He did not comment on the budgetary impact of the wars in Afghanistan and Iraq.)

The nation got into this position because we have in recent years stopped thinking of taxes and spending as going hand-in-hand. Moreover, beliefs about appropriate budget policy have changed. The prevailing view in the 1950s was that budgets should be in balance, at least averaged over a few years. Truman, in this regard, was a fiscal conservative, even though he favored government support of services. In the 1960s, a view took hold that balancing the budget was less important than maintaining economic growth. Hence deficits were sometimes necessary as a stimulus at certain points in the economic cycle. Nixon remarked, in 1971 [quoting Milton Friedman in 1965 - JTM], "we are all Keynesians now."

Reagan, in the 1980s, wanted to shrink government, as he believed that "government is the problem." It was possible, he argued, to do so according to a strategy of cutting back on domestic programs, called "starving the beast" [the original use of the term is attributed to David Stockman, Reagan's first budget director - JTM]. It followed to his adherents that cutting taxes would lead to a fall in government spending.

Cutting taxes doesn't have much impact on expenditure levels. Revenues, he argues, change for many reasons, and by tracing the history and motivation for tax changes, he has shown that the cause and effect relationships are very complex, and that correlation and causation should not be confused. He has looked at speeches, news conferences, reports, votes, and events such as wars and recessions, and concluded that it might even be that invoking "starve the beast" rhetoric actually leads to increases in tax and expenditure. Moreover, so many factors are involved in tax policy changes that there is typically shared fiscal responsibility – blame and credit for any policies are quite diffuse.

Problem. When the two sides, revenues and expenditures, are not viewed together it becomes difficult to focus policy. All indications are that U.S. taxes will soon need to increase, but little attention is being given to revenue designs.

With baby-boomers retiring, medical expenses increase, debt service increases, infrastructure renewal demands grow, and so on. Some leaders are already calling for such increases. But all the forecasts are necessarily based on existing law, which will need to be changed. The phase-out of tax measures in the year 2010 will lead to new initiatives, and these will call for new assumptions.

Likely Scenarios. Only three scenarios are possible:

1. Lower national saving, which will mean less reinvestment, slower growth and a lower standard of living.
2. A national economic crisis in anticipation of what is in reality a "Ponzi scheme".
3. Pay off the debt, either by raising taxes or printing more dollars. His comparison with past experiences in nations in Latin America was not lost on the audience. Nor did he see the United States abandoning care for its elderly.

Solutions. Professor Romer argues that we need to:

• Educate the public to a level where a solution is politically possible. He said that we need to link taxes and spending together once again as was the case prior to the 1960s. The political appetite for such policies are not presently on the horizon, but he suggested that perhaps some kind of "mutual disarmament pact" could be devised such as was set up earlier to address the Social Security crisis in the 1980s, and as exists now for closing military bases.
• Improve accounting practices by the federal government and for the U.S. economy.
• Introduce strong "pay as you go" rules such as were attempted in the Gramm-Rudman approach two decades ago.
• More radically, introduce a stringently fashioned "balanced-budget amendment."
• In addition, or alternatively, create a separate agency, comparable perhaps to the Federal Reserve System, that would be granted powers to impose fiscal and budgetary requirements.

Professor Romer was not sanguine that any solution was within sight, even though we are on a "potentially ruinous fiscal path." He argued that we need to contemplate major changes to address the problem.

The Mayor's Management Report - Raising the Bar

Glenn Pasanen has a good review on the Gotham Gazette web site of Mayor Bloomberg’s Mayor’s Management Report (MMR). He is critical of the lack of links between numbers and explanatory information. He is right.

I have been so happy to see positives and negatives more even-handedly reported than under Mayor Giuliani (who only stressed the good news) that I have looked no further.

The full potential of the MMR, however, is not being exploited. It should be linked to the budget. We call it the Office of Management and Budget, but the Mayor's Office of Operations (MOO) is not milked (sorry) enough for management information - at least in what is given to the public.

Some years ago when I was Chief Economist at the City Comptroller's Office I worked with the Chief Accountant to see if we could develop a prototype of a budget that would correspond to the categories of the MMR. We did it. So it can be done. I'm sure I can find this prototype if anyone is interested.

NYC Speaker Quinn's Five Fiscal Reforms

The New York State Financial Control Board (FCB), created in 1975 to oversee New York City's finances, sunsets in less than a year. City Council Speaker Christine Quinn this morning addressed the City's fiscal reporting (full text here). She has a five-point fiscal-reform program. All of her points are good ones. She is making one of them effective on her own authority (#4) and is recommending the others to the Mayor, Governor, state legislature and her own City Council colleagues:

1. More accountable independent public entities. The Transit Authority, the Health and Hospitals Corporation, the Economic Development Corporation and the NYC Housing Authority have increased their reporting. Oversight should be even stronger.

2. More accountable budgeting. Short-term debt should be watched because in 1975 the City had $6 billion of it. Oversight over City borrowing should be the responsibility of the City Comptroller. In addition, the city’s tax collection and spending numbers should be reported by the Mayor to the City Council, City Comptroller and the Independent Budget Office.

3. A “rainy day fund.” Surplus revenues can be diverted in good times for use in leaner ones. years. State legislative approval is needed for this. (The averaging of property assessments over five years is in itself a form of rainy day fund. The problem with actual rainy-day funds historically is that they are tempting - they get used up fast at the first sign of morning dew. The criteria for adding to and drawing from the fund need to be automatic.)

4. Disclosure of sponsors of capital projects. Names of council members will now be disclosed along with the capital projects they sponsor. Speaker Quinn is introducing this reform on her own authority.

5. Program budgeting. Department budgets need to be informative and linked to the Mayor's Management Report. This fifth proposal is of particular interest to me. When I was Chief Economist at the NYC Comptroller's Office, I attempted a reorganization of the City's budget - with the help of the Chief Accountant - to conform to the categories of the Mayor's Management Report.