Budget Gimmicks Are Alive and Well in the Payroll Tax Cut

By :: February 21st, 2012

The other day, I criticized the unwillingness of Congress to finance the latest extension of the payroll tax cut. Since that blog, the Congressional Budget Office released its estimates of the cost of the entire mini-stimulus, including the so-called “doc fix” and changes in unemployment compensation. And the games were even worse than I feared.

Congress made no pretense of paying for the payroll tax cut itself. But it did claim it would pay for the rest of the package. Hint: It didn’t.

There are two bits of legerdemain happening here. Both are functions of the 10-year budget window the Congressional Budget Office and the Joint Committee on Taxation use to score legislation.

The first gimmick allows Congress to pretend tax cuts or new spending are temporary, when it is obvious to all they are not.  The second is a sort of congressional lay-away plan. Lawmakers get to buy politically popular policies today but avoid paying for them until years from now.

There is nothing new in all this. Congress has been playing games with the 10-year budget window (or its cousin the 5-year window) for decades. But the mini-stimulus showed business as usual is alive and well on Capitol Hill, despite the best efforts of the tea party caucus.  

The doc fix is a perfect example of Gimmick #1. Even though Congress has been temporarily protecting physicians from scheduled Medicare cuts for a decade, CBO must score only what Congress proposes.

So when lawmakers protect docs for only a year (or in this case 10 months) at a time, CBO has no choice but to score only the one-year cost. Thus, the limited fix appears to add only about $18 billion to the deficit over the 10-year budget window when the true 10-year expense of keeping the doc fix going would far exceed $200 billion.

Perhaps the payroll tax cut, which is supposed to be a stimulus measure, really will be allowed to expire at year’s end (though I doubt it). But the doc fix is not countercyclical economic policy. Like old man river, it just keeps rolling along. A year at a time.  Since 2002, if you can believe it. 

Here's Gimmick #2. Most of the cost of the doc fix comes in fiscal years 2012 and 2013, as you’d expect with a “temporary” extension. But the measures to pay for them—a reduction in Medicare payments for hospitals’ bad debts and a cut in a preventive care program, don’t kick in until 2014 and beyond. One provision--a hike in federal employee retirement contributions for new workers--won’t start raising real money until 2016.

Will any of these pay-fors actually happen? Don’t bet on it. Already, Senate Democratic Leader Harry Reid (D-NV) has promised to restore the preventive care money. That took, what, four days?

In theory, this kind of budgeting makes sense. After all, while the economy seems to be recovering, it remains sluggish. Why not inject additional fiscal stimulus now and arrange to pay for those initiatives in a couple of years when the economy presumably is stronger?

The problem: Many of these pay-fors never quite seem to happen. Instead, Congress just creates more "doc fixes."   Remember, the first fix was aimed at blocking cuts in Medicare physician payments that were included in the Balanced Budget Act of 1997.

Yes, Virginia, Congress promised that cutting reimbursements to docs would help eliminate the deficit. And, as Sarah Palin, might ask, “How’s that workin’ out for ya?”


  1. Michael Bindner  ::  10:46 pm on February 21st, 2012:

    If Congress wants to get rid of the Doc Fix it needs to raise Part B premiums and expand the HI payroll tax into Parts B and D and raise the rates (or turn it into what it already is, a consumption tax – but have businesses collect it, not workers or taxpayers). This will also require a higher Social Security base payment, which means either adjusting bend points and raising caps or lowering the income cap on the employee contribution and turning the employer contribution into a broader and uncapped consumption tax, with every worker getting the same amount.

  2. Steve Bell  ::  10:35 am on February 22nd, 2012:

    The agreement on the extension of UI, payroll tax holiday, and the docs’ fix for Medicare will, as Howard points out, never be paid for. The decision of Congress to reject annual off-sets equal to the new deficit-increasing provisions is one reason that the $16.4 trillion debt ceiling agreed to last August is in danger of being reached this calendar year, instead of the original estimate of May, 2013. Sadly, until citizens begin to feel real pain in the form of higher interest rates they will continue to want what they have and to pay less taxes for it.

  3. Some Guy  ::  6:38 pm on February 22nd, 2012:

    Do you think the increase in pension contributions will get reversed? Because I don’t. Consequently, I think it’ll provide deficit savings even though the meaningful deficit reduction doesn’t kick in until 2016.

    Sure, the deficit reduction may be overstated because presently the 1:1 federal replacement rate appears optimistic, but if net federal jobs are cut, then that instead would provide significant deficit reduction.

    Either way, I don’t think it’s correct to imply that that part of the plan is a gimmick.