Congress just started work on the 2006 federal budget, and the sound you hear coming from Washington is the other shoe dropping.
The first shoe was the large tax cuts Congress and President Bush enacted in 2001 and 2003, which helped push federal revenues down to their lowest level since the 1950s when measured as a share of the economy. The second shoe is the large cuts in domestic programs Congress is considering making this year — cuts potentially broad and deep enough to weaken public education, damage the environment, and cause hundreds of thousands of low-income Americans to lose much-needed help paying for necessities like housing and child care.
The link between the two? The tax cuts were a prime cause of the large budget deficits we face today, yet the Bush administration and congressional leaders are using those deficits to justify significant cuts in spending, even as they call for still more tax cuts. And because the tax cuts primarily benefit high-income households, while the proposed spending cuts would primarily harm low- and middle-income households, the net effect of using spending cuts to pay for the tax cuts would be to transfer substantial resources from the rest of the country to the people with the highest incomes.
In 2001 and 2003, Congress and the president enacted large cuts in personal income taxes and a phase-out of the federal estate tax. In 2001, supporters of the tax cuts argued that they were affordable because the government enjoyed large budget surpluses and was expecting ongoing surpluses over the coming decade. In 2003, supporters argued that the tax cuts were necessary because the economy was weak and needed to be stimulated.
Critics of the tax cuts warned that they might well prove unaffordable, since there was no guarantee that the promised surpluses would actually materialize. Critics also noted that the bulk of the tax cuts went to those who least needed help: higher-income families, whose incomes had been growing far more quickly than those of lower- and middle-income families. (This year the 20% of Americans with the highest incomes will receive about 70% of the tax cuts.)
And if the goal of the 2003 tax cuts was to stimulate the weak economy, they were very poorly designed to accomplish this. For example, much of the money from the tax cuts didn’t make its way into taxpayers’ pockets until months or even years after the tax cuts were enacted. Also, much of the tax-cut money went to higher-income taxpayers, who are less likely than people with lower incomes to spend it immediately and thereby stimulate the economy.
Despite these criticisms, the tax cuts became law.
Since 2000 the nation has undergone the largest budgetary deterioration since World War II, from an annual surplus of more than $200 billion to annual deficits that are far larger. Policymakers are beginning to acknowledge that these deficits are a serious problem. But the Bush administration and congressional leaders want to address them entirely by cutting spending. They have rejected the idea of reconsidering the recent tax cuts; in fact, they’re calling for more.
This, despite the fact that the tax cuts are easily the single-largest cause of the budgetary decline since 2001 that was caused by new legislation. (Deficits re-emerged not only because of the tax cuts and spending increases Congress passed in recent years at the behest of the president, but also because of factors outside Congress’s control, like the economic downturn. Here we’re just focusing on the amount of the decline caused by Congress.) Tax cuts caused nearly half, 48%, of the budgetary decline caused by new legislation, while spending increases for defense and homeland security caused 37% and spending increases for domestic programs caused only 15%.
The president’s budget, released last month, calls for increasingly deep cuts over the next five years in domestic “discretionary” programs — that is, programs whose funding level is set each year by Congress. If these cuts are approved, we estimate that by 2010:
• 670,000 fewer low-income women, infants and young children will receive supplemental nutrition assistance;
• 370,000 fewer low-income families, elderly people and people with disabilities will receive vouchers that help them rent modest apartments;
• 360,000 fewer low-income families, elderly individuals and other low-income households will receive help paying their heating bills;
• 300,000 fewer children in low-income working families will receive child care assistance;
• 118,000 fewer low-income children will be served by the Head Start childhood development program;
• K-12 education funding will be cut by 12% below its current level adjusted for inflation;
• funding to support state and local efforts to ensure clean drinking water, reduce air pollution and upgrade sewage treatment facilities will be cut by more than a quarter;
• funding for community and economic development programs, primarily in distressed and disadvantaged communities, will be cut by more than a third.
Again, these figures are estimates. In a break with tradition, the Bush administration didn’t show how its proposed cuts to the parts of the budget that include discretionary programs would affect individual programs after 2006. The Center on Budget and Policy Priorities estimated, on the basis of administration data and the administration’s funding priorities for 2006, how much these programs would be cut. We then estimated how many people would be affected if the cuts were implemented by reducing the number of beneficiaries rather than the size of benefits.
If these numbers aren’t disturbing enough, the administration’s budget proposes more tax cuts in addition to the large cuts in domestic spending. It would make the 2001 and 2003 tax cuts permanent — they are currently scheduled to expire by the end of 2010 — and add new tax cuts on top.
These tax cuts, plus proposed increases in defense spending, would more than outweigh the proposed cuts in domestic spending. As a result, the Bush administration’s budget would cause the total deficit over the next decade to be $1.6 trillion larger than it would be if no policy changes were made, according to the Congressional Budget Office.
Budget committees in the House and Senate adopted their budget plans last week, and while these plans differ somewhat from the president’s, they, too, include large cuts in domestic programs that are more than outweighed by tax cuts and increases in defense spending.
What’s missing from all three documents is the concept of shared sacrifice, which was the central ingredient of the successful deficit-reduction efforts of the early 1990s. Both in 1990 and in 1993, Congress adopted plans that reduced the deficit through a combination of higher revenues and lower spending.
That approach could work again this year. First, though, the Bush administration and congressional leaders will have to acknowledge that unaffordable tax cuts have helped create our budgetary mess, and that new revenues need to be part of the solution.
Isaac Shapiro is associate director of the Center on Budget and Policy Priorities. John Springer is a senior writer at the center.