U.S. National Security and Ukraine:
A Bipartisan Conversation with Reps. Don Bacon and Chrissy Houlahan
Friday, December 1, 2023
9:00 to 9:45 a.m.
Hudson Institute
1201 Pennsylvania Avenue NW #400
Washington, DC 20004
Or watch the event via Livestream!
President Joe Biden has stated that Ukraine’s success in defending itself against Russian aggression is “vital for America’s national security.” Seventieth Secretary of State Mike Pompeo has argued that “the outcome of this war will have a direct impact on U.S. national security.” Yet despite significant bipartisan support for Kyiv, the prospect of continued United States aid to Ukraine remains uncertain.
What is the path forward for Ukraine aid in Congress? Can a bipartisan coalition hold in the face of a determined effort to cut off U.S. aid? What would happen if the U.S. ended military support for Ukraine? What policy changes are needed to help Ukrainian forces prevail, and what would success look like?
Please join the Hudson Institute and the Progressive Policy Institute (PPI) for a discussion with Representatives Chrissy Houlahan (D-PA) and Don Bacon (R-NE) on these critical questions. The event will be moderated by Hudson Senior FellowLuke Coffey and Tamar Jacoby, who directs PPI’sNew Ukraine Project, with brief opening remarks from Hudson PresidentJohn Walters. The full schedule and speaker lineup is below. This event is taking place both in-person and online via livestream.
In the past two presidential elections, working-class voters have proven to be a decisive swing vote in the pivotal states that determine the winner. A new comprehensive survey of working-class voters from the Progressive Policy Institute reveals how and why these voters, who once formed the backbone of the Democratic Party, have become estranged from it. The poll also points to the serious reorientation of both policy and messaging that will be necessary to build durable majorities.
In partnership with YouGov, PPI surveyed a representative national sample of voters without a four-year college degree and oversampled in seven key battleground states. The poll found these voters see the Democratic Party as out of sync with not only their cultural values but also their economic priorities.
When asked what the greatest economic challenge is facing the United States today, a whopping 69% of respondents said the high cost of living and inflation outpacing economic growth. Among these voters, 55% believe recent inflation is primarily driven by excessive stimulus spending rather than the COVID pandemic or supply chain bottlenecks. Notably, another 11% said high deficits and debt are the greatest challenge, while all other potential challenges registered single digits.
PPI’s Ben Ritz joins C-SPAN’s Washington Journal to discuss the upcoming government funding deadline, the Speaker’s proposed solution, and the need for a fiscal commission to address the nation’s ballooning debt while taking questions from callers on their fiscal policy concerns.
The federal government is in desperate need of a fiscal correction. In just the last year, the annual budget deficit more than doubled from $933 billion to $2 trillion. Such explosive growth in federal borrowing might be warranted to combat an economic emergency such as the COVID pandemic, when the unemployment rate soared to 13%. But unemployment in both 2022 and 2023 has consistently been under 4% — a level not seen for such a prolonged period since the 1950s. Among economists, it’s axiomatic that in boom times such as these the government should be paying down its debts, not running them up.
The problem is only set to get worse in the coming years as deficits continue to grow with no end in sight. This borrowing comes at an enormous cost: annual interest payments on the national debt are at their highest level as percent of economic output since they peaked in the 1990s. By 2028, the government is projected to spend more than $1 trillion each year just to service our ballooning debts — more than it spends on national defense. The United States is potentially entering a vicious cycle whereby higher deficits lead to both a larger stock of debt and higher inflation, which the Federal Reserve must combat by raising the rate of interest paid on both public and private debts. These skyrocketing borrowing costs threaten to crowd out other critical public investments and slow economic growth.
Today, Ben Ritz, Director of the Progressive Policy Institute’s (PPI) Center for Funding America’s Future, released the following statement in support of the bipartisan Fiscal Stability Act introduced in the Senate today:
“PPI commends Senators Manchin and Romney for leading 8 of their colleagues to introduce another pragmatic proposal for creating a bipartisan fiscal commission. Over the past year, the federal government’s real annual budget deficit more than doubled, from $933 billion to $2 trillion, despite our economy experiencing the lowest sustained period of unemployment since the 1950s. Boom times such as these are when we should be reducing our debt, not blowing it up.
“Creating a fiscal commission to tackle the problem now has bipartisan, bicameral support in Congress, as well as support from 90% of voters in both parties. Congressional leaders and the Biden administration should make the establishment of such a commission before the end of the year a top priority.”
The Fiscal Stability Act’s introduction builds on an effort that has picked up significant momentum in recent months. In September, a group of independent experts across the political spectrum — including Ritz — urged the creation of a bipartisan fiscal commission. Reps. Scott Peters and Bill Huizenga then introduced the Fiscal Commission Act of 2023, a bill similar to the Fiscal Stability Act which 198 House Republicans subsequently voted for as part of a government funding proposal. Upon being elected Speaker of the House, Mike Johnson listed the creation of a bipartisan debt commission as one of his top priorities.
This week, Ritz published a column in Wall Street Journal offering five reasons why Democratic leaders in Congress and the Biden administration should join the push, which recent polling shows 90% of Democratic voters already support:
• Deficits are undermining support for the Biden economy.
• Debt-service costs crowd out progressive priorities.
• Republicans must be challenged to accept tax increases.
• Social Security and Medicare face automatic cuts under current law.
• A financial fix would boost confidence in government.
PPI’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. It tackles issues of public finance in the United States and offers innovative proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
After his election as House speaker, Mike Johnson said one of his top priorities was the creation of a bipartisan commission to tackle the national debt. It’s a good idea that nearly 70% of voters in both parties support. In September, Reps. Scott Peters (D., Calif.) and Bill Huizenga (R., Mich.) introduced the Fiscal Commission Act of 2023, and 198 House Republicans voted for it as part of a government funding bill. Here’s why Democratic congressional leaders and the Biden administration should join the push:
Deficits are undermining the Biden economy. In the past year, the real federal budget deficit more than doubled, from $933 billion to $2 trillion. Democrats rightly argued that spending borrowed money was a critical economic support during the Covid pandemic. But the unemployment rate the over past year has been consistently lower than any point since the 1950s.
Economists, even those on the far left who subscribe to “modern monetary theory,” agree that increasing deficits in a tight labor market fuels inflation. Voters’ frustrations with inflation and the interest-rate hikes implemented to bring it under control exceed their appreciation for low unemployment, fueling disapproval of President Biden’s economic record. Deficit reduction is more important than it has been at any other time in the 21st century.
Debt-service costs crowd out progressive priorities. Annual interest payments are already at their highest level as a percentage of gross domestic product since the 1990s. By 2028 the government is projected to spend more than $1 trillion on interest payments each year—more than it spends on Medicaid or national defense. Worse, the U.S. may be entering a vicious circle whereby higher deficits increase debt and fuel inflation, which the Federal Reserve must combat by raising interest rates, causing debt-service costs to balloon further.
Ben Ritz, Director of the Progressive Policy Institute’s (PPI) Center for Funding America’s Future, released the following statement in support of the bipartisan Fiscal Commission Act of 2023 but in opposition to the partisan government funding bill House Speaker Kevin McCarthy has attached it to:
“PPI commends Reps. Scott Peters, Bill Huizenga, and their 13 co-sponsors for introducing a strong fiscal commission proposal today. Establishing a commission will not, by itself, fix our fundamental fiscal challenges, but this thoughtful legislation would create a bipartisan, bicameral venue to have a serious discussion and craft real solutions.
“If policymakers continue to do nothing, annual interest payments on the debt will exceed defense spending within the next decade and will surpass Social Security as the largest item in the federal budget by 2050. We cannot let the costs of inaction crowd out critical public investments in our economy like education, infrastructure, and scientific research. Moreover, benefits for Social Security and Medicare will be cut across the board automatically by as much as 23% when their trust funds are exhausted between now and 2034.
“The goals this bill sets for the commission to prevent these catastrophic consequences are ambitious but achievable. PPI previously published a comprehensive budget blueprint that would satisfy every requirement in the Fiscal Commission Act while also reinvigorating domestic public investment and transforming our tax code to reward work over wealth. Should this bill or another like it become law, we hope the commission draws from these recommendations.
“However, we do not support Speaker McCarthy’s plan to move the commission forward as part of a partisan government funding bill that cuts discretionary spending deeply below the levels he and a majority of his conference agreed to just four months ago. Passing this package today all but guarantees a pointless government shutdown that will cost taxpayers more than a billion dollars each week. President Biden, House Democrats, Senate Democrats, and Senate Republicans are united behind averting a shutdown by sticking to this summer’s debt-limit agreement. The fiscal commission should come after House Republicans wake up and realize they need to do the same.”
PPI’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. It tackles issues of public finance in the United States and offers innovative proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Although workers in 94% of American jobs pay into Social Security, a small segment of the population — most of whom work for state and local governments — do not. Since workers in these jobs do not pay Social Security payroll taxes, those who contribute to Social Security for a portion of their career end up getting a greater return on the taxes they do contribute to the program than other Americans with similar lifetime earnings. To address this issue, Congress passed the Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) in the late 1970s and early 1980s as an attempt to provide comparable benefits to these workers.
Now, a bipartisan coalition in the House is pushing to repeal these provisions. While it is true the WEP and GPO are imperfect solutions that can unfairly punish some low-income public workers, Congress would be throwing the baby out with the bathwater if they repealed the provisions altogether. Instead of overcorrecting and providing excessively generous benefits to a small cohort of Americans, Congress should consider a proportional benefits system that reduces benefits based on the individual’s contributions to the Social Security program. Not only is this reform the most equitable solution to an important problem, but it remains more in line with the intention of the WEP and GPO.
Why are the WEP and GPO necessary?
Social Security benefits are designed to be progressive, meaning that low-income individuals will receive a greater benefit for each dollar they paid into the program through payroll taxes than higher-income individuals. To determine one’s benefit, the average of an individual’s highest 35 years of covered earnings is used to calculate their average indexed monthly earnings (AIME). Individuals receive a benefit equal to 90% of their AIME up to the threshold of $1,115. This percentage decreases as lifetime earnings increase, with beneficiaries receiving 32% of each dollar of their AIME between $1,115 and $6,721, and 15% of each dollar of their AIME that exceeds $6,721 up to a maximum of $13,584.86.
Importantly, the AIME formula only incorporates earnings on which employees and their employers pay payroll taxes. Many state and local government jobs are considered uncovered since their employees do not pay Social Security payroll taxes. Instead, these employees contribute to pension plans. Since these employees don’t contribute to Social Security through taxes, their annual covered earnings are zero for each year that they work at an uncovered job. As a result, a high-income worker with many years of uncovered employment would appear to have the same AIME as a worker with a lifetime of low-income employment.
Here’s an example: Worker A makes a steady, inflation-adjusted salary of $100,000 during his 35 years of employment, 10 of which were spent in the private sector. Worker B is a low-income worker in the private sector who makes $30,000 annually. The following graph shows their total lifetime earnings, split between covered and uncovered earnings.
Despite Worker A making nearly four times as much as Worker B, most of Worker A’s earnings are uncovered, meaning that the Social Security benefit formula treats them both as low-income earners and would provide them roughly the same level of benefits.
This formula also results in Worker A getting better treatment than workers with comparable earnings in the private sector. Worker A’s Social Security benefits would replace roughly 59% of his AIME, a relatively high replacement rate meant to assist low-income workers. In comparison, a worker who had the same average salary as Worker A in the private sector would only have a replacement rate of 36%. Without adjustments to the benefits formulas, the high-income public sector workers would be receiving a significantly higher return for each dollar of income on which they paid payroll taxes, representing an unjustified windfall.
The WEP and GPO remain imperfect solutions that disproportionately harm low-income government workers.
The WEP reduces the replacement rate that qualifying individuals receive for their first $1,115 of covered earnings. Rather than receiving 90% of the $1,115 in benefits, the replacement rate for government workers is as low as 40% depending on how many years of covered employment they have. The GPO applies complementary adjustments to spousal and survivor benefits.
This formula leads to proportionally larger benefit reductions for government workers with low AIMEs, leading critics to argue that it is regressive. Since the provisions only affect the earnings made up to the $1,115 of covered earnings, qualifying individuals who have a lower AIME lose a greater share of their total potential Social Security benefit because of these provisions than those who have an AIME over $1,115. For instance, a high-income worker who consistently makes an annual salary of $120,000 over 35 years and spent 10 of those years in the private sector would have their benefits reduced by 36%. On the other hand, a lower-income worker who spent 25 years paying payroll taxes and makes $45,000 a year would have their benefits reduced by 42% under the current law, despite paying into the Social Security program for a longer period.
Additionally, the current wage reduction is not an accurate method of adjusting benefits fairly. WEP and GPO were designed to adjust Social Security benefits so that they are relatively proportional to the length of time they paid into the program. A worker who worked in the private sector for 40% of their career should receive about 40% of the benefits that a worker with similar earnings would receive if they worked their full career in the private sector. However, when these provisions were passed in the 1970s and 80s, the SSA lacked adequate data to make precise adjustments. Instead, the provisions relied upon a roughly approximated formula that has led to benefits being over- or under-adjusted, depending on an individual’s distribution of covered and noncovered earnings.
Repealing the WEP/GPO would create new equity problems and threaten the fiscal security of the trust fund.
In response to criticism about the provisions, Members of Congress have proposed repealing both provisions in the Social Security Fairness Act, which has been garnered bipartisan support in both the House and Senate. However, despite the issues with the current formula, a complete repeal of the WEP and GPO would be costly and unfair to other Americans who paid into Social Security throughout their career.
Eliminating these two provisions would increase benefits for the 2 million individuals that have not sufficiently paid into Social Security through payroll taxes. Unlike individuals who have spent their whole careers in covered jobs contributing to the Social Security program, these individuals spent a portion of their career in jobs not subject to Social Security payroll taxes. As previously noted, they pay into pension plans during their time at uncovered jobs and upon retirement, receive pension benefits on top of Social Security benefits.
If these individuals began receiving non-adjusted Social Security benefits on top of the pension benefits, their total retirement benefits would replace a larger percentage of their lifetime earnings than the benefits of those who worked in covered jobs for their entire career. This outcome would run counter to the intention of the Social Security program, which is intended to provide low-income individuals the most support by replacing a higher percentage of their income.
Additionally, repealing the WEP and GPO would worsen the already financially insecure Social Security trust funds, which are slated to be exhausted after 2032. By increasing benefits for 2 million retirees, a complete repeal is estimated to cost $182.8 billion in ten years, pushing up the date of OASI and DI trust fund insolvency — and the 23% across-the-board benefit cut it would trigger for all beneficiaries — by six months to a year.
Proportional Social Security benefits would mitigate current issues with the WEP and GPO without providing uncovered employees an unjustified windfall.
To make the Social Security system more equitable, Congress should adjust the benefit reduction formula for public employees to more accurately account for their covered earnings. Now that the Social Security Administration collects data on non-covered earnings, the GPO and WEP should be reformed to keep in line with the initial intention behind the provisions. Congress should amend the benefit reduction formula to make reductions proportional to the ratio of an individual’s covered earnings to their total earnings, a solution previously proposed by Reps. Brady and Neal in the Equal Treatment of Public Servants Act of 2015. This proposal would apply the current benefits formula to the “Super AIME,” which is calculated with both covered and uncovered earnings. These benefits would, then, be adjusted by multiplying it by the percentage of total earnings that were covered.
Here are three hypothetical workers to demonstrate how the new proposal would work in practice:
The above table shows the hypothetical benefits that these three individuals would receive if a) the WEP and GPO were repealed, b) under current law, and c) under a proportional benefits formula.
Under the current law, the low-income public sector worker sees a larger cut in their Social Security benefits than the high-income public sector worker, reflecting the issue that the current formula has with accurately adjusting benefits. However, if the WEP and GPO are repealed, the high-income public sector worker’s benefits would be roughly the same amount as low-income workers. As discussed above, this means that the high-income public sector worker would be receiving an unjustifiably high replacement rate that similar workers in the private sector do not. In contrast, the proportional formula would adjust their benefits based on their length of covered employment. In this example, the low-income public sector worker, who spent double the time in the private sector paying payroll taxes, will receive more benefits to account for the different lengths spent in covered employment.
Private sector workers would not be affected by this reform. Their benefits, which have not been affected by the existing WEP/GPO provisions, would remain at the same level under the proportional system.
Ultimately, Social Security benefits should be updated to better reflect the original intentions of the WEP and GPO adjustments, as well as maintain its progressivity for public sector retirees. Reforming the program to make Social Security benefits proportional to the length of covered employment would allow all retirees, both covered and noncovered, to receive their fair share of benefits.
Congress is in chaos with just 10 days remaining to avert a partial government shutdown. Over the weekend, negotiators for the center-right Mainstreet Caucus and far-right Freedom Caucus agreed on a bill that would continue government funding at reduced spending levels after the fiscal year ends on September 30th. But nearly a dozen Freedom Caucus members are still refusing to support the deal, denying House Republicans the majority they need to pass their bill.
Counterintuitively, this failure of House Republicans to coalesce around a government funding plan may actually reduce the odds of a government shutdown at the end of the month if it persists. One need only look at previous government shutdowns to understand why this is the case.
How concerned should policymakers and their constituents be about Fitch Ratings Agency’s decision to downgrade the United States credit rating from AAA to AA+ last week? The White House brushed it off, saying Fitch “defies reality” to downgrade U.S. credit at a time when the country is experiencing “the strongest recovery of any major economy in the world.” Meanwhile, leading Republicans say it’s a “a wake-up call to get our fiscal house in order before it’s too late.” The truth is: they’re both right.
On the fundamentals, this downgrade is perplexing because the federal government is no more likely to miss a bond payment today than it has been for the past decade. As the world’s largest economy and one that borrows in its own currency, there is little doubt the U.S. government has a greater ability to pay back its debts than any other entity on Earth. Both Fitch and Moody’s Analytics reaffirmed the AAA credit rating in 2011 even when formerly unprecedented debt-limit brinkmanship caused S&P to issue the first-ever downgrade of U.S. credit. Little has changed since then from a financial perspective — if anything, the U.S. economy is far stronger than it was 12 years ago, both in absolute terms and relative to other advanced economies.
But in another sense, the lack of any meaningful change in the government’s approach to fiscal policy from 12 years ago is exactly the problem. In 2011, the federal government was running an annual budget deficit equal to 8.4% of gross domestic product. This made sense at a time when the national unemployment rate was roughly 9% and expansionary fiscal policy was needed to support a weakened economy struggling to recover from the 2008 financial crisis. Today, the annual budget deficit is over 6% of GDP — roughly triple what it averaged in the 50 years before the financial crisis, even though unemployment today is lower than it was at any point over that period.
The past two months have made clear that President Biden’s approach to making higher education more affordable isn’t working. First, bipartisan majorities of both the U.S. House and Senate voted to block his debt cancellation policies. Then, shortly after Biden thwarted that effort with his veto pen, the Supreme Court ruled that his attempt to cancel up to $20,000 of student loan debt per borrower was an illegal overreach of executive authority.
Biden responded to the setback by announcing two debt-cancellation schemes shortly after the Supreme Court issued its ruling. The first was the finalization of a new income-driven repayment (IDR) plan known as the SAVE plan. Biden also announced he would start a new process under the Higher Education Act to cancel more debt “for as many borrowers as possible, as fast as possible” through executive action.
Ben Ritz, Director of the Progressive Policy Institute’s Center for Funding America’s Future, released the following statement in reaction to the Supreme Court’s decision to strike down the Biden administration’s attempt to unilaterally cancel up to $20,000 per borrower:
“The Supreme Court has officially ruled what we have known for some time now: U.S. presidents have no constitutional authority to unilaterally spend hundreds of billions of taxpayer dollars without Congressional approval. The Court’s decision comes after bipartisan majorities in both the Republican-controlled House and Democrat-controlled Senate voted to overturn the president’s attempt to unilaterally cancel over $400 billion of student debt.
“The message to the president from his co-equal branches of government couldn’t be clearer: it is time to move on from this misguided effort. Even if the president’s action were constitutional, there is no sound policy justification for asking Americans who don’t get the benefits of a college education to pay for the debts of those who do.
“We hope the White House will work with Congress on comprehensive solutions to ensure pathways to well-paying jobs are affordable and accessible for all. That means making real reforms to curtail the skyrocketing cost of college rather than using taxpayer funds to paper over the problem, expanding skills-based training options for non-degree students, and offering limited debt relief targeted only toward those most in need.”
PPI recently published a data-driven report on why the far left’s obsession with canceling student debt is deeply misguided and worsens the “diploma divide” in America.
PPI’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. It tackles issues of public finance in the United States and offers innovative proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C., with offices in Brussels, Berlin and the United Kingdom. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Earlier this year, 31 House Republicans released a proposal to replace virtually all federal taxes with a 30% national sales tax. As other analysts have noted, a sales tax would be easy for companies to dodge and difficult for the government to enforce — meaning that to avoid revenue losses, the proposal would require a significantly higher tax rate, possibly as high as 60%.
The bill has also been criticized for being regressive. In tax terminology, a tax is “regressive” if it takes a higher share of income from the poor than from the rich; “flat” or “proportional” if it takes the same share of income from everybody; and “progressive” if it takes a higher share from the rich than from the poor.
The Republicans’ overall bill is certainly regressive and should be rejected on that account. But its core idea — taxing consumption rather than income — is not inherently regressive if properly designed. Much public commentary has mistakenly concluded that a national sales tax would fall predominantly on low-income Americans. But as this analysis demonstrates, taxes on spending fall on everyone roughly equally, and certain elements of the Fair Tax — such as its universal child payments — are actually progressive. While the Fair Tax ought to be rejected due to its regressive tax cuts and poor enforceability, two elements of it are worth keeping: its flat per-child cash payments and its emphasis on taxing spending rather than saving.
Ben Ritz, Director of the Progressive Policy Institute’s Center for Funding America’s Future, released the following statement on the reported agreement-in-principle to raise the debt ceiling:
“Congress should immediately pass the debt limit increase and budget compromise negotiated by President Biden and Speaker McCarthy.
“On the one hand, this package does not represent our ideal policy. The decision to freeze spending only on domestic discretionary programs is backwards. This part of the budget funds critical long-term public investments in infrastructure, education, and scientific research. Meanwhile, taking both increased revenues and any cuts to other programs that comprise 85% of non-interest spending off the table in negotiations leaves our budget on a clearly unsustainable path. It is, at best, a punt on tackling our fiscal challenges.
“But on the other hand, this compromise is currently the only plausible way to take the threat of defaulting on the national debt off the table for the remainder of President Biden’s first term. Congress must pass it now, and in the future, lawmakers should seek out a better mechanism for encouraging fiscal discipline without calling into question our government’s constitutional obligation to repay its debts.”
PPI has consistently condemned the GOP’s efforts to take the full faith and credit of the United States hostage to extract ideological policy concessions. It has also supported the bipartisan Responsible Budgeting Act to end debt limit brinkmanship and create more sensible mechanisms for encouraging fiscal discipline.
PPI’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. It tackles issues of public finance in the United States and offers innovative proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C., with offices in Brussels, Berlin and the United Kingdom. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Republicans have refused to raise or suspend the debt limit – which multiple independent forecasters have warned could cause the government to default on its debts for the first time in history as soon as June 1st – unless “substantive reforms” to federal spending are made. Biden spent most of this year refusing to indulge in the GOP’s hostage-taking but agreed to negotiate on a broader budget deal once Republicans made an opening offer. After Republicans coalesced around a position by passing the Limit, Save, Grow Act through the House, both sides began negotiations this week in the hopes of striking a deal that Republicans could claim is a precursor to raising the debt limit and Democrats could claim is independent.
Part of the challenge is that Republicans have entered into the negotiation with extreme positions that no Democrat could ever accommodate. The GOP’s bill would raise the debt limit through early next year and pair that increase with $4.5 trillion of spending cuts over the coming decade and other conservative policy changes. Cuts of this magnitude might make sense in the context of a balanced and comprehensive package that addresses all areas of the budget, including raising new revenues – particularly at a time when inflation remains high and our projected long-term debt growth is unsustainable. But the conditions Republicans have imposed to target these cuts are unrealistic at best and economically ruinous at worst.
The federal tax code is riddled with provisions that benefit individuals and businesses working in certain sectors or engaging in specific activities. In 2019, these provisions — known as tax expenditures — cost the federal government 6.6% of gross domestic product (GDP) in lost revenue, which is greater than the amounts spent on Social Security (4.9% of GDP), Medicare (3.7%), national defense (3.2%), and the entire nondefense discretionary budget (3.1%). Although some tax expenditures help working-class people, 24.1% of their overall benefits go to the top 1% of income-earners, and 58.8% go to the top 20%. The regressive and economically inefficient nature of tax expenditures makes them a ripe target for progressive reform.
A few large tax expenditures are already well-known. But most are quite small, and they survive largely by remaining out of sight and out of mind. They also sometimes benefit from lobbying efforts by well-connected industry leaders who prefer that their pet carveouts remain free from public scrutiny. This post, therefore, sheds light on five smaller tax expenditures — the types that don’t normally make the headlines — which ought to be eliminated to boost federal revenues and remove unfair loopholes. Specifically, Congress should:
Eliminate the percentage depletion deduction for certain fossil fuel producers;
Tax employee awards under either the personal income tax or the corporate profits tax;
Remove the special deduction for Blue Cross Blue Shield and certain other health insurance providers;
Eliminate the 5010 credit for wine and flavor additives in distilled spirits; and
Remove automatic partnership classification for companies that derive 90% or more of their income from fossil fuels and other depletable natural resources.
These five changes, if enacted by themselves, would raise just under $31 billion over 10 years. But more importantly, these five arcane loopholes are just the tip of the iceberg — policymakers who are willing to take a deeper dive into the tax code will find even greater savings hidden under the surface.
