CBO – Page 2 – Donald Marron

Why Taxes Are Going Up

It’s hard to imagine that spending restraint alone can solve America’s long-run fiscal woes. Facing an aging population and rising health care costs, the federal government will continue to expand even if policymakers take serious steps to trim spending. That’s why policy wonks are working so hard to evaluate ways to raise more revenue. Cutting back on loopholes and other tax expenditures, taxing carbon emissions, introducing a value-added tax – all of these deserve attention in case America decides that it wants to finance a substantially larger federal government.

However, that focus sometimes overshadows a key fact about our tax system: Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy.

The Congressional Budget Office estimates that tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 if current law remains in place (the “extended baseline” scenario in pink):

To put those figures in context, note that federal revenues have averaged about 18.2% of GDP over the past forty years. Tax revenues today are thus remarkably low. Indeed, they are the lowest they’ve been since 1950. But that will quickly reverse under existing law. By 2020, revenues would near their all-time record (20.9% of GDP in 1944) and by 2035, revenues would be more than 25% higher than historical levels.

That rapid growth reflects six factors. First, the economy will recover, lifting revenues from currently depressed levels. Second, the 2001 and 2003 tax cuts will expire, as will tax cuts enacted in the 2009 stimulus. Third, the Alternative Minimum Tax, which is not indexed for inflation, will boost taxes for millions more taxpayers. Fourth, the new taxes that helped pay for the recent health legislation will go into effect. Fifth, retiring baby boomers will make more taxable withdrawals from tax-deferred retirement accounts. Finally, in a phenomenon known as bracket creep, growing incomes will push taxpayers into higher brackets and reduce their eligibility for various credits.

Together, those six factors will increase tax revenues by 8.4 percentage points of GDP over the next 25 years, according to CBO. About a third of that increase (2.7 percentage points) comes from expiring individual income tax provisions and the expansion of the AMT. Another third (2.6 percentage points) is due to real bracket creep and reduced credits. And about one-seventh (1.2 percentage points) results from the tax increases in the health legislation. The other factors account for the remainder.

We clearly have sizeable tax increases built into our revenue system. The trillion-dollar question, however, is whether policymakers will allow them to happen. That’s why CBO considers a second scenario in which Congress gives in to the temptation to cut taxes. Under that “alternative fiscal” scenario (blue), Congress would permanently extend most of the 2001 and 2003 tax cuts and would limit the growth of the AMT. That would slow the growth of tax revenues but they would still reach 19.3% of GDP by the end of the decade, well above the forty-year average. CBO assumes that policymakers would then enact a series of unspecified future tax cuts to hold revenues at that level rather than letting structural factors lift them higher.

CBO’s bottom line is thus simple: tax revenues will rise faster than the economy even if Congress does nothing new. Indeed, revenues may rise faster than the economy even if Congress enacts substantial tax cuts. Our long-run fiscal dilemma exists because the scheduled growth in future spending is even larger than the scheduled growth in future revenues.

This post first appeared on TaxVox, the blog of the Urban-Brookings Tax Policy Center.

How Bad is the Budget Outlook?

The Congressional Budget Office offers two visions of the future in its new long-run budget outlook.

The first imagines a world in which lawmakers take pay-as-you-go budgeting really seriously. The budget baseline assumes that existing laws execute exactly as written: all the 2001 and 2003 tax cuts expire, the alternative minimum tax hits millions more families, real bracket creep drives taxes far above historical norms, Medicare payments to doctors are cut by more than 20%, discretionary spending grows only with inflation, and all the offsets in the recent health legislation – taxes on “Cadillac” health plans, cuts in provider payments, etc. – happen as scheduled. If Congress tries to avoid any of those changes, it would have to pay for them through offsetting spending cuts or tax increases.

In that strict—and unrealistic—PAYGO world, our debt would continue to increase faster than the economy, rising from about 60% of gross domestic product today to about 80% in 2035. That’s far above where we want to be. PAYGO policymaking cannot fix the budget pressures of an aging population and rising health costs. But you have to give PAYGO some credit. If Congress really acted that way on every future budget decision, it’s unlikely that we would have a fiscal crisis in the next decade or more.

Of course, no one believes that Congress will really be that disciplined. That’s why CBO offers a second vision, in which lawmakers give in to temptation. They extend most of the tax cuts, patch the AMT, limit bracket creep, increase payments to Medicare docs, allow discretionary spending to rise with GDP, and turn off some of the health legislation offsets after 2020.

If policymakers give in to all those temptations, the debt skyrockets, rising from about 60% of GDP today to 185% by 2035. And that’s assuming no negative effects on the economy. As my colleagues Len Burman, Jeff Rohaly, Joe Rosenberg, and Katie Lim have pointed out, out-of-control deficits would weaken the economy by crowding out investment and driving up interest rates, so the debt-to-GDP ratio would actually grow even faster.

CBO doesn’t include those economic effects in its official long-run projections. However, it does separately examine what would happen to the economy because of reduced investment. The results aren’t pretty. When CBO runs the giving-in-to-temptation world through its model, it discovers that the U.S. economy ceases to exist after 2027.

OK, maybe that’s a bit strong. What happens is that crowding out gets so severe that CBO’s model breaks down, overwhelmed by the debt explosion.

These findings provide ammunition to both sides of the great deficit debate. Budget hawks will point to the temptation scenario as further evidence that we are on a reckless fiscal path that threatens our economic well-being. Budget doves will emphasize the PAYGO scenario as evidence that we can muddle along for years without needing to fear an economic backlash.

I think the hawks have the better of this argument. Even under perfect PAYGO, our fiscal condition would deteriorate in coming years. Moreover, the odds that lawmakers will show that much discipline in the near term are nil. For example, the PAYGO law enacted earlier this year allows Congress to extend most of the 2001 and 2003 tax cuts and to avoid cuts to Medicare doctor payments without finding any offsets. Real life PAYGO doesn’t come close to the rigorous standards of CBO’s PAYGO scenario.

Nevertheless, I don’t really think that the U.S. economy will blink out of existence in 2027. We will find a way a muddle through. But to do so, we need to face up to CBO’s bleak vision of our fiscal future and the temptations that lawmakers will face. Now is not the time for sudden austerity—the G-20 bandwagon non-withstanding—but it is the time to develop a plausible plan to bring taxes and spending into long-run balance.

This post first appeared on TaxVox, the blog of the Urban-Brookings Tax Policy Center.

Edited (7/6/10): Added “most of” in fourth paragraph (CBO’s alternative fiscal scenario extends most of the 2001 and 2003 tax cuts, but it allows the rates reductions for high-income taxpayers to expire).

One Last (?) Health Cost Estimate

On Saturday, the Congressional Budget Office released its complete cost estimate for the health/revenue/education legislative package that the House is expected to vote on later today.

The good news: The combined package would reduce the deficit by slightly more over the next ten years ($143 billion) than previously estimated ($138 billion). And nothing has changed about the projected increase in insurance coverage. CBO still expects that the legislation would increase the number of people with health coverage by 32 million in 2019.

The interesting news: A few months ago, CBO invented a particularly useful measure of the federal government’s commitment to health care. This measure combines federal spending on health care and federal tax subsidies for health care. If you view many tax subsidies as close equivalents to spending (as I do), this is a very important metric. It would indicate, for example, that if you increase health spending, but decrease tax subsidies by the same amount, that the federal commitment to health care is not increasing, even though both spending and taxes would be rising. I think that’s a useful way to look at things.

So how does the legislative package line up on this measure?

CBO estimated that H.R. 3590, as passed by the Senate, would increase the federal budgetary commitment to health care over the 2010–2019 period; the net increase in that commitment would be about $210 billion over that 10-year period. The combined effect of enacting H.R. 3590 and the reconciliation proposal would be to increase that commitment by about $390 billion over 10 years. Thus, the incremental effect of the reconciliation proposal (if H.R. 3590 had been enacted) would be to increase the federal budgetary commitment to health care by about $180 billion over the 2010–2019 period.

In subsequent years, the effects of the provisions of the two bills combined that would tend to decrease the federal budgetary commitment to health care would grow faster than the effects of the provisions that would increase it. As a result, CBO expects that enacting both proposals would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window—which is the same conclusion that CBO reached about H.R. 3590, as passed by the Senate.

In short, the reconciliation package increases the federal commitment to health care over the next decade (e.g., by rolling back the excise tax on expensive insurance plans that’s in the Senate bill) but then brings it down in the future (e.g., by ramping up the excise tax beyond the ten year window).

From a budget point of view, the basic structure of the legislative package is thus: Expand the commitment to health care in the next decade, pay for that expansion using other revenue sources, and then reduce the overall health commitment in later years. It’s that structure that leads to disagreement among budget experts about the long-run effects of the legislation. If the legislation executes as written, it will reduce future deficits substantially. If future Congresses flinch on the future budget savings (without flinching on the continued new spending), it will increase future deficits.

The shout-out: Long-term readers of CBO cost estimates know that they traditionally end with a sentence identifying the one or two people most responsible for the analysis. Given the importance of this cost estimate, however, the letter takes a different approach, identifying several dozen dedicated analysts who have been doing their best to provide Congress (and the American people) with as much information as possible about the legislation. They all deserve our thanks:

David Auerbach, Colin Baker, Reagan Baughman, James Baumgardner, Tom Bradley, Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, Noelia Duchovny, Sean Dunbar, Philip Ellis, Peter Fontaine, April Grady, Stuart Hagen, Holly Harvey, Tamara Hayford, Jean Hearne, Janet Holtzblatt, Lori Housman, Justin Humphrey, Paul Jacobs, Deborah Kalcevic, Daniel Kao, Jamease Kowalczyk, Julie Lee, Kate Massey, Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, Andrea Noda, Sam Papenfuss, Lisa Ramirez-Branum, Lara Robillard, Robert Stewart, Robert Sunshine, Bruce Vavrichek, Ellen Werble, Chapin White, and Rebecca Yip.

How Much Does Health Reform Cost?

It figures that CBO would release its much-awaited score just as I was boarding a plane to go to a conference. So apologies for being slow to the party.

The headlines are reporting that CBO scored the health reform effort as costing $940 billion over the next ten years. Readers of this blog know that isn’t correct. The $940 billion figure refers only to the coverage expansions in the legislative package. There are also many other health reform initiatives–e.g., filling the “doughnut hole” in Medicare’s prescription drug benefit and increasing funding for community health centers and prevention efforts–in the legislation. Add it all up and the ten-year cost of health reform is about $1,072 billion.

Bonus question: How much does health reform reduce the budget deficit?

The headline claim is that CBO says the health reform package will reduce the deficit by $138 billion over the next ten years. That’s not right either. First of all, the health reform has now been stapled together with student loan reform in order to deal with some of the specifics of reconciliation. The student loan package accounts for $19 billion of the ten-year savings. So at best health reform should get credit for $119 billion in deficit reduction. But then there’s the CLASS Act gimmick. Lop that off and health reform really should be credited with $49 billion in deficit reduction. And even then it isn’t really health reform that’s creating those reductions. The health policy changes are actually expanding the deficit over the next ten years; other, non-health tax increases offset those increases and provide some deficit reduction.

Lest I be viewed as relentlessly beating on the package, let me offer a second bonus question:

Does the package generate budget savings only because it’s using ten years of taxes to pay for six years of benefits?

This appears to be a common refrain among opponents of the package. But it doesn’t hold up either. It is true that the new health benefits don’t start in earnest until 2014; that helps keep the ten-year sticker price down. But those six years of costs are offset by a combination of spending cuts and tax increases during those years, even if you strip out the CLASS Act gimmick. And in the second decade, CBO tells us that the bill reduces the deficit significantly more if–and this is a huge if–it executes as written.

How Much Does the Senate Health Bill Cost?

Earlier today the Congressional Budget Office released an updated analysis of the Senate health bill. The update reflects all the amendments that were adopted during Senate consideration of the bill, some technical adjustments, and the assumption that the bill would be enacted in the spring of 2010 (rather than December 2009, as previously assumed).

The bottom line is that not much has changed. The near-term costs of the bill have increased somewhat, but the budget story remains essentially the same.

The health care debate seems to have moved on from budget issues. For example, the big news today was that the Senate Parliamentarian announced that the legislative strategy of using reconciliation to pass a second health care bill will work–at least as far as he is concerned–only if the Senate bill is first passed by the House and signed into law by the President.

Nonetheless, as a public service let me offer a quick summary of the budget impacts of the bill over the next ten years:

There are four things you should take away from this table:

1. The Senate bill costs about $971 billion — not $875 billion — over the next ten years. As long-term readers know, one of my pet peeves is that the media (and many policymakers) use the phrase “cost of the health care bill” when they should be saying “cost of the provisions in the health care bill that expand health insurance coverage.” This distinction is important because all the health bills also contain provisions that have nothing to do with expanding insurance coverage. The Senate bill, for example, would help fill in the doughnut hole in Medicare Part D, fund more community health centers, and fund prevention efforts, among other things. These efforts may be worthy, but they aren’t free. Thus while the media reports that the bill costs $875 billion, I estimate that the real cost is about $971 billion. That figures includes the $875 billion being spent to increase health insurance coverage plus $94 billion in new spending on other health initiatives and $2 billion in new tax cuts.

2. The Senate bill will reduce the deficit by $118 billion over the next ten years. The bill contains more than $1 trillion in offsets, including $251 billion in tax increases related to health insurance coverage (e.g., the tax on “Cadillac” health plans, penalties on some employers, and penalties on some uninsured individuals), $266 billion in tax increases unrelated to health insurance coverage (e.g., higher Medicare payroll taxes on wages above $200,000), and $572 billion in spending reductions (e.g., lower Medicare payment rates for some providers).

3. The near-term budget savings are exaggerated by the inclusion of the CLASS Act; adjusting for that, the ten-year deficit reduction is $48 billion. Another item familiar to long-time readers, the CLASS Act would create an insurance program for long-term care. Premium income, which reduces the reported deficit, would start much faster than benefit payouts, so the program generates surpluses in the near-term. But it won’t in the long-run. So most budgeteers view the inclusion of the CLASS Act here as a gimmick. Netting out the $70 billion in budget savings from the CLASS Act, and you have deficit reduction of $48 billion over the next decade.

4. The bill would increase the Federal commitment to health care over the next ten years. CBO created this metric to reflect the fact that the Federal government supports health care both through spending programs and through tax subsidies, most notably that for employer-provided health insurance. CBO finds that the combination of these efforts will expand during the first ten years of the bill. If the entire bill executes as written, however, CBO expects that the federal commitment to health care will decline in the second decade.

Note: CBO does not calculate a total cost figure for the health bills. The bills include dozens of policy changes, and it would be difficult (perhaps impossible) to allocate all their impacts to specific provisions. Thus, my figures should be considered approximate. I calculated the $94 billion figure for additional spending by adding up all the individual line items in Table 4 of the cost estimate that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there was one policy that led to both spending increases and spending decreases; I included the net spending increase in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill. It’s also worth noting that I have taken as given CBO’s estimate of the gross cost of expanding coverage. There are some nuances in the calculation of that figure (e.g., the treatment of payments in a reinsurance program) that I need to understand better. I made similar calculations for the $2 billion in tax cuts itemized in the JCT analysis of the bill.

A New Price Tag for Stimulus: $862 billion, not $787 billion

Amongst its usual cracker jack budget projections yesterday, the Congressional Budget Office provided a few toy surprises for budget watchers. One is an updated estimate of the direct budget costs of the 2009 stimulus bill, officially known as the American Recovery and Reinvestment Act (ARRA).

CBO originally estimated that ARRA would cost $787 billion from 2009 through 2019. Its new estimate is $862 billion, about $75 billion higher.

Key changes to the estimate:

Food stamps (officially known as the Supplemental Nutrition Assistance Program): $34 billion more than expected

Build America Bond program: $26 billion more

Unemployment compensation: $21 billion more

Medicaid: $3 billion less than expected

Other spending: $3 billion less

(CBO did not make any updates for the tax provisions in ARRA.)

For an earlier discussion of the stimulus being bigger than expected, see this post.

For a discussion of why the $862 billion figure (formerly known as the $787 billion figure) is not really the right measure of stimulus, see this post.

Note: CBO provides many details about ARRA in Appendix A of yesterday’s report.

Deficits As Far as the Eye Can See

Today the Congressional Budget Office released its much-anticipated projections for the budget. As usual, the headline figure is CBO’s estimate of the budget deficit, now projected to be $1.35 trillion for the fiscal year, about 9.2% of GDP.

That’s slightly better than last year–when $1.4 trillion deficits amounted to 9.9% of GDP–but is still the second-worst since World War II. And, as CBO notes, new legislation could easily lift the 2010 figure higher. For example, Congress will likely consider further extensions to unemployment benefits and more war spending, not to mention a possible jobs bill.

CBO also projected deficits for the next decade. They are large and persistent:

The blue line shows CBO’s official budget baseline. That baseline shows persistent deficits over the next decade. They fall below 3% of GDP by 2014 and then increase somewhat in later years. I would characterize that trajectory as unwelcome but not a crisis.

It’s also completely unrealistic given Washington’s current policy predilections.

The official baseline is built upon two key assumptions: that existing laws execute exactly as written and that discretionary spending increases with inflation in future years. Those assumptions make sense for constructing a baseline that will be used to score the budget impacts of new legislation. But, as CBO itself notes, they are unrealistic if your goal to make predictions of where current policy is leading:

Under current tax law, a remarkable number of tax reductions will expire in the near future. These include the 2001 and 2003 tax cuts (EGTRRA and JGTRRA, often known as the Bush tax cuts), the annual patch to the dreaded alternative minimum tax (which prevent the AMT from hitting more and more families), the Making Work Pay tax credit (enacted as part of the stimulus), expanded net operating loss carrybacks (enacted as part of another, smaller stimulus bill in the summer), and a panoply of other, smaller provisions (e.g., the research and experimentation tax credit). It is unthinkable that Washington will allow all these to expire.

In recent years, discretionary spending has grown faster than inflation. As yet, there is no reason to believe that will stop.

On the other hand, the current baseline assumes that spending on the wars in Afghanistan and Iraq will continue at their 2009 pace, adjusted for inflation, over the next decade. One hopes that assumption is unrealistically high.

To help outside analysts construct alternative baselines that better show existing policy, rather than existing law, CBO provides estimates for several policy alternatives. Analysts differ on which of these alternatives they use to build a policy alternative (and, given more time, they may also use other estimates).

As rough justice I made the following assumptions for the chart above: (1) that regular discretionary spending grows at the same pace as nominal GDP in coming years (closer to recent history than the baseline assumption of growth with inflation), (2) that spending on the wars in Iraq and Afghanistan moderates somewhat in coming years (CBO’s 60,000 troop scenario), (3) that the 2001 and 2003 tax cuts are permanently extended, and (4) that the AMT is indexed for inflation.

Under these assumptions, the budget picture is much scarier: deficits never get lower than 5.5% of GDP and they are 7.5% by 2020.

Bottom line: Current policy is unsustainable.

Note: You should view my adjusted baseline as a quick-and-dirty, back-of-the-envelope of existing policy. For example, it doesn’t include any adjustments for other expiring tax provisions (which are substantial) or the infamous Medicare doctor payment problem; if you made adjustments for those, the deficit outlook would look worse. On the other hand, many political leaders, including President Obama, want to scale back the 2001 and 2003 tax cuts; if you did that, the deficit outlook would look better.

The Budget Deficit Keeps Rising

The federal government racked up a $389 billion deficit during the first three months of the fiscal year (October through December), according to estimates released by the Congressional Budget Office yesterday. That’s $56 billion more than during the first quarter of last year, almost a 17% increase. (A portion of that increase is due to the timing of weekends and holidays, but even controlling for those, the deficit is up 8%.)

Two factors have been driving the increase:

1. Tax revenues continue to plummet. Revenues fell to $489 billion during the quarter, down $58 billion or 11% from last year.

2. Spending continues to grow rapidly in most programs. For example, Medicaid has grown by 25% since the same period last year, Medicare spending has grown by 8%, and Social Security spending has grow by 10%. After declining last year, interest payments are now on the rise, up more than 17%. Excluding the three programs most closely related to the financial crisis (TARP, the GSE bailout, and the FDIC), federal spending is up about 13% over the same period last year. (All these figures have been adjusted to control for timing differences due to weekends and holidays.)

The one piece of good news, budget wise, is that spending on the three financial programs has declined significantly. CBO estimates that TARP spending during the first quarter fell by $85 billion (from $91 billion to $6 billion), and spending on the GSEs fell by $1 billion (from $14 billion to $13 billion). Net spending by the FDIC fell by $45 billion, primarily because FDIC receipts have increased sharply (and are accounted for as a reduction in spending). Together, those three programs have cost $131 billion less than at this point last year.

Bottom line: Tax revenues continue to fall, most types of spending continue to increase, but spending on the financial rescue has declined.

The Coming Budget Battle over TARP and Jobs

The House and Senate appear to be on a collision course about how to pay for a new jobs bill (aka a stimulus bill). The issue? Whether Congress can pay for new jobs programs by cutting back on TARP.

The House embraced that approach in the bill it passed before Christmas. That bill–H.R. 2847, the Jobs for Main Street Act–would cut TARP authority by $150 billion. For reasons I’ve discussed before, the Congressional Budget Office scores that cut as generating $75 billion in net budget “savings.” The House bill then uses those “savings” to offset $75 billion in new spending on transportation infrastructure, support to state and local governments, and other measures.

I put “savings” in quotes because no one believes that the TARP reduction would help taxpayers by anything close to $75 billion. Back in December, Treasury Secretary Geithner estimated that TARP would use at most $550 billion of its $699 billion in existing authority. As a result, Congress can cut at least $149 billion from TARP without having any effect whatsoever on the budget. In other words, the House’s TARP rescission would reduce TARP activities by at most $1 billion (and, in practice, probably by $0). So there aren’t any real budget savings here.

But that’s not the only problem with using TARP as an offset. As I noted in another post, the drafters of TARP tried to prohibit future Congresses from using TARP rescissions to pay for new spending. That prohibition is spelled out in Section 204 of the law:

SEC. 204. EMERGENCY TREATMENT.

All provisions of this Act are designated as an emergency requirement and necessary to meet emergency needs pursuant to section 204(a) of S. Con. Res 21 (110th Congress), the concurrent resolution on the budget for fiscal year 2008 and rescissions of any amounts provided in this Act shall not be counted for purposes of budget enforcement.

The House vs. Senate debate comes down to the interpretation of that section. The House apparently does not believe that Section 204 applies. As a result, it believes that TARP rescissions can be used to “pay for” other spending increases. The Senate, however, disagrees. It believes that Section 204 forbids the use of TARP rescissions to pay for other spending.

That conflict hasn’t flared up in public yet, but it is apparent in a carefully-worded footnote in CBO’s cost estimate of the House bill:

The House Committee on the Budget does not consider the original TARP authority to have been designated as an emergency requirement. Persuant [sic] to Sec. 204 of the Emergency Economic Stabilization Act of 2008 (Division A, P.L. 110‐343), the Senate Committee on the Budget does consider the TARP authority to have been designated as an emergency requirement.

Under congressional budget rules, emergency spending gets special treatment: it doesn’t need to be paid for (a fact that the House bill uses, by the way, since it designates about $79 billion as emergency spending that needn’t be offset). To avoid some obvious abuses, the budget rules therefore specify that rescissions of emergency spending can’t be used to pay for increases in regular spending (or regular tax cuts). Based on Section 204, the Senate believes that TARP is emergency spending and therefore can’t be used to pay for new jobs programs. For reasons I don’t yet understand [readers?], the House disagrees.

Don’t Double Count the Medicare Savings in Health Reform

In order to pay for coverage expansions (and other spending increases), the Senate health bill includes a mix of tax increases and spending reductions. Notable among these are several provisions that would reduce future Medicare spending and increase Medicare revenues.

Some opponents of the bill have argued that the spending reductions would eventually drive providers from the program and thus hurt Medicare beneficiaries. In response, some proponents of the bill have made an interesting argument: that the spending reductions and revenue increases would actually strengthen Medicare by extending the life of its Hospital Insurance (HI) trust fund, which pays for Part A of the program.

That argument is interesting for two reasons. First, it is absolutely correct within the narrow confines of trust fund accounting. The Medicare spending reductions and revenue increases in the Patient Protection and Affordable Care Act (PPACA) would indeed extend the life of the HI trust fund, thereby allowing Part A payments to continue further into the future. Second, that logic implies that many of the budget savings from the Senate health bill will eventually be used to pay for further Medicare benefits. As a result, those savings won’t be available to pay for the coverage expansions and other spending increases in the bill. In short, if you believe that the bill will strengthen Medicare, you shouldn’t believe that the Part A spending reductions and revenue increases are helping to pay for health reform.

The Congressional Budget Office makes exactly this point in a helpful note published today. The note explains the mechanics of trust fund accounting and their relation to usual budget accounting and then delivers the money quote:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs.

That conclusion echoes a similar finding by Rick Foster, the Chief Actuary of CMS (the folks who oversee Medicare and Medicaid). Back on December 10, he noted:

In practice, the improved part A financing [resulting from the Senate health bill] cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.

Bottom line: Don’t double count the Medicare spending reductions and revenue increases in the Senate health bill.