Budget Conference Committee Continues
After passage of the Continuing Resolution (CR) on October 16, 2013, Chair and Ranking Members of both the House and Senate Budget Committees began to discuss a resolution between the chambers’ budgets for fiscal year 2014. A final budget agreed to by both the House and Senate will allow lawmakers on each Appropriations Committee to move forward with appropriations bills for government departments rather than last minute deals to maintain current spending levels. The Budget Conference Committee has set a deadline of December 13 to produce a final agreement because the CR that was passed on October 16 will expire on January 15, 2014, and if the appropriations bills necessary to fund departments are not finalized by then, another CR will be required. However, if Congressional members again cannot agree to a CR to fund government operations, another federal shutdown would occur.
An objective for some members of both parties is to eliminate or find a replacement for the automatic spending cuts that were brought by sequestration. Overall, both parties would still like to see deficit reduction but they disagree over the proper method to do so. Republicans would like to see reduced federal spending, and are adamantly against any tax increases. Democrats have argued that numerous tax loopholes should be closed in order to increase revenues for the federal government.
On Wednesday November 13, the Conference Committee held an open hearing to discuss the efforts towards compromise and what obstacles lay ahead. The Committee invited Congressional Budget Office (CBO) Director Douglas Elmendorf to discuss
specific estimations for the future and consequences of continued inaction by Congress. Elmendorf noted that non-defense discretionary spending is on track to be a sharply shrinking share of U.S. Gross Domestic Product (GDP) in part due to the discretionary caps set under the Budget Control Act of 2011. In fact, by 2017, discretionary spending will be at its lowest point than ever before in our nation’s history.
Earlier this week, the CBO released a report that covered options for reducing the deficit, and this report was the object of focus for this hearing. The report cited that reduced deficits over the next decade would be a benefit to the economy, a point highlighted by Senate Budget Committee member Jeff Sessions (R-AL). Mr. Elmendorf agreed that reduced deficits would benefit the economy, but that the current method for reducing the deficit (i.e. sequestration) has actually been a “headwind” on the economy and has actually slowed growth. He stated that this was due to the reductions in demand for goods and services.
This report listed 103 options for reducing the deficit, including 36 ideas to increase revenues by changing the tax code. One option that was examined by the report is the repeal of the Low-Income Housing Tax Credit, an idea that similar reports have addressed in the past. Repealing the LIHTC would increase revenues by $41 billion from 2014 through 2023, according to estimates by the staff of the Joint Committee on Taxation. The report does mention that the “LIHTC supports the construction of new buildings and the substantial rehabilitation of existing buildings, which can help turn around blighted neighborhoods.” Again, this is only an option and is not an explicit recommendation. The Senate Finance Committee is currently addressing the issue of tax reform, and little action has been taken to repeal the LIHTC.
The report also listed an option that would require higher income contributions from tenants living in federally assisted housing, including project-based programs and the Housing Choice Voucher program. Under this option, tenants’ rental contributions would gradually increase from 30 percent of adjusted gross family income to 35 percent over the 2015–2019 period and then remain at the higher rate. Provided that federal appropriations were reduced accordingly, those higher rent contributions would reduce outlays by a total of $22 billion from 2015 through 2023, the CBO estimates. The report acknowledges that implementing this option would cause housing costs for most renters who receive assistance to rise, a difficult circumstance to manage for households with very low income. In addition, by increasing the proportion of income that tenants are required to pay in rent, the option would reduce the incentive for some participants to boost their income by working more.
Another option presented to the Conference Committee and in the report is to reduce the subsidies given to the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. By CBO’s projections under current law, the mortgage guarantees that the GSEs issue from 2015 through 2023 will cost the federal government $22 billion. That estimate reflects the subsidies inherent in the guarantees at the time they are made. The federal government could increase the average guarantee fee that Fannie Mae and Freddie Mac assess on loans they include in their mortgage-backed securities (MBSs) by 10 basis points. The increased collections of fees, which the GSEs would be required to pass through to the Treasury, would reduce net federal spending by $19 billion from 2015 through 2023, the CBO estimates. However, decreased subsidies could weaken the housing market, which is only beginning to recover from the 2008 crash.
Furthermore, the report examines the option to convert the Mortgage Interest Deduction to a 15 percent credit. This option would gradually convert the tax deduction for mortgage interest to a 15 percent non-refundable tax credit. The option would be phased in over six years, beginning in 2014. From 2014 through 2018, the deduction would still be available, but the maximum amount of the mortgage deduction would be reduced by $100,000 each year, until $600,000 is reached by 2018. The option would raise $52 billion from 2014 through 2023, according to estimates by the staff of the Joint Committee on Taxation. This would provide a larger tax benefit to lower and middle income Americans – but it could also encourage people to buy more expensive homes and increase their risk of default.
The Budget Conference Committee will continue meeting to resolve differences and introduce a final budget that will serve as a blueprint for federal spending. These meetings have taken place behind closed doors, and it is hard to predict when or if a final negotiation will be reached. Mr. Elmendorf noted that political uncertainty (such as this) is harmful to markets and that economic growth would improve if lawmakers could produce a consistent budget. Hopefully this Committee will reach an agreement before their own December 13 deadline.
To view an archived broadcast of this hearing, please follow
this link.
Click
here to view the CBO Report on options to reduce the federal deficit.
