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Democrats’ Reconciliation Bill Instructions Expected to Assume Massive Deficits

The budget blueprint Senate Democrats are preparing to unveil will likely assume, at least on paper, that the eventual reconciliation package to implement the more partisan pieces of President Joe Biden’s fiscal agenda will add hundreds of billions of dollars to deficits over the next decade.

That’s despite top Democrats’ pledge that the entire $3.5 trillion proposal will be offset.

According to sources familiar with the process, the economic growth dividend Democrats are expecting is unlikely to count as actual savings that could be applied to the package under Congressional Budget Office scoring rules. By the same token, CBO guidelines mean they won’t get credit for including beefed up IRS tax enforcement funds to go out and collect more revenue.

To get around that problem, the plan is to simply write reconciliation instructions to various authorizing panels, who will draft the actual implementing legislation this fall, giving them a certain amount of deficit-spending leeway.

The exception, sources said, would be the tax-writing Finance Committee, which is entrusted with most of the “pay-fors” through tax increases and prescription drug savings; that panel is likely to receive an instruction to reduce deficits, while others would get a deficit-increase allowance.

‘A work in progress’

Senate Budget Chairman Bernie Sanders, I-Vt., said Wednesday the blueprint was “still a work in progress” and wouldn’t give specifics on reconciliation instructions, including the Finance panel’s.

“They’re going to have a broad instruction. My own hope is that they will raise money in as progressive a way as possible,” Sanders said.

The net effect could be somewhere in the ballpark of $500 billion to $1 trillion in paper deficits, which would mean a still-hefty $2.5 trillion to $3 trillion worth of necessary offsets for the advertised $3.5 trillion in new spending.

Democrats could still claim that increased IRS enforcement and economic growth will fully close the budget gap, depending on what estimates the CBO and Joint Committee on Taxation come back with. But swallowing more deficit spending, after $5 trillion since March 2020 to combat the COVID-19 pandemic, won’t be a slam dunk in the evenly divided Senate and a House that’s down to a three-vote Democratic margin.

Making that plan go down a little easier with moderates in both chambers could be the fact that Democratic leaders are leaning in the direction of leaving the debt ceiling debate for “regular order,” or outside of the budget reconciliation process. Senate Budget Committee Democrats declined to comment Wednesday, but that’s the current thinking sources described.

That means they wouldn’t have to pass a debt limit increase with only Democratic votes, but it’s risky because it gives the GOP leverage on other matters like fiscal 2022 appropriations bills that will need to be negotiated this fall. And it could put more pressure on the stopgap funding bill needed to get past the Sept. 30 end of the current fiscal year without a partial government shutdown.

Also, assuming the budget plan can get through the Senate — as early as next week —House moderates are already on record backing exemptions from pay-as-you-go budget rules for climate-related spending. Blue Dog Coalition members and others view climate change as an emergency and argue not dealing with it will hurt the economy in the long run, negatively impacting the budget.

Biden’s budget plan proposed nearly $800 billion in climate-related spending, for instance, though some of that is included in the bipartisan infrastructure package. If there’s a similar-sized budget hole in the eventual reconciliation bill, House Democratic leaders could conceivably claim that’s what party moderates agreed to at the beginning of the year when the chamber’s rules were amended.

The reconciliation plan would include trillions of dollars in spending and tax incentives to replace petroleum-based technology and reduce carbon emissions, as well as provide free universal pre-kindergarten and community college, government-paid family and medical leave, subsidized child care and other benefits.

Paying for itself?

Democrats also want to include government negotiation of Medicare drug prices to bring the cost of prescriptions down in both public and private health insurance plans, adding Medicare benefits such as dental, vision and hearing, and a path to citizenship for undocumented immigrants.

“This is a large and unprecedented piece of legislation. But we are living in an unprecedented moment,” Sanders wrote in The Wall Street Journal this week. “Now is the time for bold action.”

Democrats say the plan will pay for itself through large increases in taxes on the wealthy and corporations, more tax enforcement, reducing the price of prescription drugs and economic growth.

Sanders earlier laid out a target of $3 trillion in offsets, to include $2.4 trillion in added tax revenue and over $600 billion in prescription drug-related savings. It’s not clear all of those pharmaceutical cuts will materialize due to objections from Democrats in both chambers, however, and the tax increase number could be too heavy a lift for some.

That makes closing the tax gap between what’s owed and actually paid more attractive, as well as macroeconomic dividends from spending more on education, housing and more.

Tax gap revenues aren’t easily attainable, however. The Biden administration assumes a revenue bump of about $316 billion from providing a higher, steady stream of IRS funding, but the CBO has traditionally been more reticent to attribute such significant savings.

For example, while the administration believes it will see a roughly fourfold return on the investment of about $80 billion in IRS funds, the CBO in the past has estimated similar proposals as producing a revenue boost of about two-and-a-half times the initial funding.

What’s more, CBO scoring guidelines say they actually can’t give lawmakers credit for offsetting legislation through higher agency funding to root out waste, fraud and abuse. So that takes the IRS enforcement “pay-for” off the table for conventional scoring purposes, though they could point to the savings that CBO separately estimates would result.

On the economic growth effects of the plan, Moody’s economist Mark Zandi and others have said it would be a net positive despite tax increases, since wealthy households wouldn’t change their behavior that much as a result.

The CBO and JCT may not give such a positive review, however. And recent work by Penn Wharton Budget Model analysts found Biden’s plan would actually be a long-term drag on growth due to the “crowding out” effect of increased government debt on private investment.

Using dynamic scoring as an offset for a reconciliation bill also hasn’t been tried before, including when Republicans controlled the White House and Congress in 2017 and were trying to pass their sweeping tax overhaul.

The question was discussed with Senate Parliamentarian Elizabeth MacDonough, who ultimately never issued guidance, but former Senate Budget Chairman Michael B. Enzi decided against pushing to credit economic growth effects towards meeting the Finance reconciliation instruction. The Wyoming Republican, who retired at the end of the 116th Congress, died last week after a bicycle accident.

As a result, the fiscal 2018 budget resolution’s $1.5 trillion deficit allowance meant that only “static” offsets would count, and Republicans paid for most of their $5.5 trillion in tax cuts with $4 trillion in revenue-raisers.

Similarly, the gross cost of Democrats’ reconciliation ambitions — $3.5 trillion — won’t show up in the fiscal 2022 budget’s instructions. It would be a much smaller figure overall that reflects substantial offsets, most of which would run through Finance.
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Lindsey McPherson contributed to this report.

Content syndicated from TheLibertyLoft.com with permission.

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