Congressional Budget Office
Director's Blog

A new study out yesterday provides yet more evidence of substantially widening inequality in life expectancy by education and socio-economic status. As the study notes, “The inequalities in all cause death rates between Americans with less than high school education and college graduates increased rapidly from 1993 to 2001 due to both significant decreases in mortality from all causes, heart disease, cancer, stroke, and other conditions in the most educated and lack of change or increases among the least educated.” For a recent CBO publication on the topic, see here.

For those who haven’t seen it, the Joint Committee on Taxation earlier this week released an interesting report delineating a new approach to analyzing and estimating tax expenditures (that is, targeted tax provisions that reduce revenue through special credits, preferential tax rates, exclusions, exemptions, deductions, etc.). Ed Kleinbard, the chief of staff at the JCT, has made tax expenditure analysis a high priority, and the report released earlier this week is the first of many that JCT will be publishing in coming months.

CBO has issued a cost estimate for H.R. 2419, the Food, Conservation, and Energy Act of 2008. Under the legislation, most of the policies would extend only through 2012; following baseline construction rules for mandatory programs, however, we assume that expiring programs are continued indefinitely. (Note to those who favor including all expiring tax provisions “in the baseline”: this example demonstrates how the baseline is intended to work in conjunction with the budget scoring process.  Programs that are assumed to continue in the baseline, despite their official expiration, are also treated that way in the budget scoring process.)

Relative to CBO’s March 2008 baseline projections, we estimate that enacting H.R. 2419 would increase direct spending by about $3.6 billion over the 2008-2018 period, assuming that the legislation would remain in effect throughout that period. JCT and CBO estimate that revenues would increase under the legislation by $0.7 billion over the same period. On balance, those changes would produce net costs (increases in deficits or reductions in surpluses) of about $2.9 billion over the 11-year period, relative to CBO’s most recent baseline projections.  Over the 2008-2012 period when the act would be in effect, spending on the programs it covers would total about $307 billion. Of that sum, $209 billion is for nutrition programs, $35 billion is for agricultural commodity programs, and $25 billion is for conservation programs.

Relative to CBO’s March 2007 baseline assumptions, enactment of H.R. 2419 would increase direct spending by $0.5 billion over the 2008-2017 period. (Fiscal year 2017 is currently the last year used for budget enforcement in the Senate under S. Con. Res. 21, the Concurrent Resolution on the Budget for Fiscal Year 2008.) JCT and CBO estimate that revenues would increase under the legislation by $0.7 billion over the same period. On balance, those changes would produce net savings (reductions in deficits or increases in surpluses) of about $0.1 billion over the 10-year period, relative to CBO’s March 2007 baseline projections

In addition, enactment of H.R. 2419 would affect spending subject to appropriation action. However, CBO has not completed an estimate of the potential discretionary costs of the act.

Finally, let me publicly thank the CBO staff who have been working on the farm bill. They have been doing yeoman’s work under extremely demanding conditions.

CBO released a new report this morning, prepared at the request of the Chairman of the House Committee on the Budget, analyzing the advantages and disadvantages of adopting a capital budget at the federal level. In addition, I am testifying on infrastructure spending this morning before a joint hearing of the House Committee on the Budget and the Committee on Transportation and Infrastructure. That testimony covers a broader array of topics related to infrastructure spending; a short summary is available here.

The capital budgeting report makes the following key points:

• The federal budget, which presents the government’s expenditures and revenues for each fiscal year, serves many purposes. It enables policymakers to allocate resources to serve national objectives, provides the basis for agencies’ management of federal programs, gives the Treasury needed information for its management of cash and the public debt, and provides businesses and individuals with information to make an informed assessment about the government’s stewardship of the public’s money and resources. Inflows and outflows are recorded mostly on a cash basis because those transactions are readily verifiable and they provide policymakers and the public with a close approximation of the government’s annual cash deficit or surplus.
• Some observers have proposed modifying the budgeting system by implementing a capital budget for the federal government, which would distinguish certain types of investments from other expenditures in the budget. One commonly discussed approach would segregate cash spending on capital projects in a capital budget and report in the regular budget the depreciation on federal capital assets, thus allocating current costs to future time periods. Such an approach—which would move from the current, primarily cash-based budgeting system to one that relies more on accrual-based accounting—would be similar to private-sector accounting in that it would spread capital costs over the period when benefits are accruing from the investment.
• Proponents of capital budgeting assert that the current budgetary treatment of capital investment creates a bias against capital spending and that additional spending would benefit the economy by boosting productivity. They note that capital budgeting could better match budgetary costs with benefit flows and eliminate some of the spikes in programs’ budgets from new investments. The existence and extent of any such bias, however, depends on how differently policymakers would behave with a capital budget instead of the existing budgetary treatment of capital investments. Furthermore, although evidence suggests that additional capital spending could have larger economic benefits than costs, the economic benefits of increasing capital spending by the federal government would partly depend on how well the additional funds were targeted to high-value projects and on the extent to which they would displace spending that would otherwise be undertaken by the private sector or other levels of government.
• Moving to a budget that is more reliant on accrual-based accounting could increase complexity, diminish transparency, and make the federal budget process more sensitive to small changes in assumed parameters, such as depreciation rates. (Indeed, other nations have considered adopting capital budgets, but generally decided against it for those same reasons.) Adopting an accrual approach to only one aspect of the budget could raise concerns as to whether the budgeting system would provide a fair basis for allocating the government’s resources among competing priorities. In addition, providing special treatment to certain areas of the budget, such as capital spending, could make the process more prone to manipulation. For example, arriving at a definition of capital for budgeting purposes could be a significant challenge. Concerns about such issues largely explain why previous groups charged with exploring budgetary concept issues—including the 1967 President’s Commission on Budget Concepts and the 1999 President’s Commission to Study Capital Budgeting—have rejected the idea of a separate capital budget for the federal government.
• More limited changes to the current process might still accomplish the goal of focusing on capital investment but be simpler to implement than a capital budget as traditionally defined. One approach would be to create a category for capital spending as part of a restoration of the statutory budget enforcement procedures that expired in 2002. Such a category within overall discretionary spending limits could help to highlight important policy goals. By carving out separate limits for certain programs, however, lawmakers could forgo flexibility to make budgetary trade-offs as needs change in the future. Another alternative, which would address concerns about the management of assets rather than their reporting in the budget, might be to attribute a portion of the cost of assets each year (in the form of depreciation) to the programs that use them. Requiring users to pay the costs might improve incentives for agencies to sell assets that are no longer appropriate to their needs.

The paper was written by Jeffrey Holland and David Torregrosa, with contributions from Sheila Campbell, Kathy Gramp, Amber Marcellino, Nathan Musick, and David Newman. Elizabeth Cove wrote the appendix. Robert Dennis, Peter Fontaine, Theresa Gullo, Kim Kowalewski, and Leo Lex directed the research.

I am testifying this morning before a joint hearing of the House Committee on the Budget and the Committee on Transportation and Infrastructure. To view the hearing click here.

The testimony defines “infrastructure” as including transportation, utilities, and some other public facilities. The United States currently invests more than $400 billion per year in infrastructure defined this way, and about $60 billion of that amount—mostly for highways and other transportation networks—is financed by the federal government each year.

The testimony makes the following key points, among others:

• Growing delays in air travel and surface transportation, bottlenecks in transmitting electricity, and inadequate school facilities all suggest that some targeted additional infrastructure spending could be economically justifiable.
• Federal spending on infrastructure is dominated by transportation. Although capital spending on transportation infrastructure already exceeds $100 billion annually, studies from the Federal Highway Administration, the Federal Aviation Administration, and elsewhere suggest that it would cost roughly $20 billion more per year to keep transportation services at current levels. Those studies also suggest that substantially more than $20 billion in additional capital spending per year on transportation — and perhaps as much as $80 billion per year or so — would be justified on economic grounds if well targeted (because such spending would generate benefits whose value would exceed its cost).
• In some other types of infrastructure outside transportation, such as systems for wasterwater and drinking water, additional spending is needed to maintain current services or allow modest improvements.
• Although the economic rationale for some additional infrastructure spending is strong, the economic returns on specific projects vary widely. Carefully ranking and funding projects to implement those with the highest net benefits would yield a disproportionate share of the total possible benefits at a fraction of the total spending that is potentially economically justifiable. A related point is that the aggregate estimates do not justify increases of those amounts in infrastructure spending unless such spending is carefully targeted to economically efficient projects. Otherwise, the spending would not generate the same benefits as the estimates suggest—and indeed it could produce costs that exceed the benefits.
• The estimates of infrastructure spending that are needed to maintain current performance or that could generate larger economic benefits than costs, furthermore, can be substantially affected by how existing infrastructure is priced.
  • The estimates for highways, for example, assume no expansion in the use of congestion pricing—that is, tolls that are higher during peak times and lower during off-peak times.
  • The Federal Highway Administration, though, estimates that widespread implementation of congestion pricing would reduce the investment needed to maintain the highway system by $20 billion annually.
• Studies suggesting the need for or benefits of additional infrastructure spending do not provide policy guidance about how such spending should be financed. The “benefits principle” suggests that federal taxpayers are often the least efficient source of financial support for an infrastructure investment — after the direct beneficiaries of the investment and local or state taxpayers. Even when federal support for a given type of infrastructure is justified in principle, implementation problems might make it undesirable in practice. The GAO, for example, found that states offset roughly half of the increases in federal highway grants between 1982 and 2002 by reducing their own spending, and that the rate of substitution increased during the 1980s.
• Although many advocates of additional federal infrastructure spending seem interested in complex and sometimes opaque structures through which to channel such federal support, the fundamental question is how much support the federal government will provide and the efficiency with which such support is provided. On the latter point, the federal government could substantially increase the efficiency with which it subsidizes debt financing of state and local spending.
  • For example, state and local tax-exempt bonds will cost the federal government an average of $31.2 billion per year between 2007 and 2011. Yet in 2006 and 2007, observed yield spreads suggest that any bonds purchased by taxpayers in a marginal tax bracket above 21 percent cost the federal government more in forgone tax revenues than they save state and local governments in reduced interest cost.
  • A more efficient approach could involve tax-credit bonds, which allow bond purchasers to receive credits against federal income tax liability (rather than excluding interest payments from federal income taxation).
  • To illustrate, assume that the inefficiency associated with current tax-exempt financing is between 10 percent and 20 percent, so that 80 percent to 90 percent of the federal tax expenditures actually translates into lower borrowing costs for states and localities. Then, if the outstanding stock of tax-exempt debt during the 2007–2011 period instead took the form of tax-credit bonds designed to deliver the same amount of federal subsidy, the federal government would save between $3 billion and $6 billion per year.
• The federal government can also encourage the use of “asset management” to maximize the benefit from existing and future infrastructure. Asset management relies on monitoring the condition of equipment and the performance of systems and analyzing the discounted costs of different investment and maintenance strategies.
  • As one example, the federal government reduce total investment and operating costs by changing the way it acquires, manages, and disposes of property — a topic explored in a box in the testimony.
• The testimony also discusses capital budgeting, a topic that is the subject of a separate report being published by CBO today. A short summary is available here.

CBO released a new monthly budget review today. During the first seven months of fiscal year 2008, CBO estimates that the federal government ran a deficit of $151 billion — $70 billion more than during the same period in 2007.  Outlays are roughly 7 percent higher than last year, whereas revenue is up by only about 3 percent.  (Corporate income tax revenue is down by more than 13 percent.)

Receipts from tax returns filed by the April 15 deadline were about 6 percent higher than such receipts last year, about what CBO anticipated when it prepared its most recent budget projections in March. 

Last week, the LBJ School at the University of Texas-Austin held a conference on the history and future of Medicare, as part of a series of activities to commemorate Lyndon Johnson’s 100th birthday. (The conference was co-sponsored by the Center for Health and Social Policy at LBJ School, Commonwealth Fund, and the Robert Wood Johnson Foundation.) The conference brought together many of the nation’s leading health policy thinkers, and I was honored to give a lunch-time talk there. The video is posted here.

CBO has released a cost estimate of HR 5830, the FHA Housing Stabilization and Homeownership Retention Act of 2008. We estimate that the legislation would cost about $2.7 billion over the 2008-2013 period, assuming future appropriations consistent with the provisions in the bill. The bulk of that — about $1.7 billion — would be needed for the estimated subsidy cost of insuring mortgages under a new FHA program. (Loan guarantees are scored in the federal budget at their estimated subsidy cost.)

The value of the subsidy reflects the value of the insurance provided by the federal government net of the fees charged for that insurance. CBO estimates an estimated average subsidy cost under the new FHA loan-guarantee program of about 2 percent of the loan principal. We also estimate that FHA would insure about 500,000 loans over the 2008-2013 period under the program. The $1.7 billion cost comes from combining the 2 percent subsidy rate with the roughly 500,000 loans and an average loan amount of about $170,000 (after writedown of existing mortgages).

In addition, the legislation establishes an Office of Housing Counseling within the Department of Housing and Urban Development, authorizes appropriation of funds for the Department of Justice to support efforts to combat mortgage fraud, and includes other provisions.

CBO issued a study today examining possible future private investment in new nuclear power plants. The extent of such investment depends not only on possible charges for carbon dioxide (if the Congress adopts climate change legislation) but also on existing incentives provided for such plants in the Energy Policy Act (EPAct) of 2005.

The Energy Information Administration (EIA) projects that demand for electricity in the United States will increase by 20 percent by the end of the next decade. Most of the additional demand would likely be met by conventional fossil-fuel technologies without the incentives in EPAct or the prospects of a market price on carbon emissions.

• Carbon dioxide charges of about $45 per metric ton would probably make nuclear generation competitive with conventional fossil fuel technologies as a source of new capacity and could lead utilities to build new nuclear plants that would eventually replace existing coal power plants. At charges below that threshold, conventional gas technology would probably be a more economic source of baseload capacity than coal technology. Below about $5 per metric ton, conventional coal technology would probably be the lowest cost source of new capacity.
• EPAct incentives would probably make nuclear generation a competitive technology for limited additions to base-load capacity, even in the absence of carbon dioxide charges. However, because some of those incentives are backed by a fixed amount of funding, they would be diluted as the number of nuclear projects increased; consequently, CBO anticipates that only a few of the currently proposed plants would be built if utilities did not expect carbon dioxide charges to be imposed.
• Uncertainties about future construction costs or natural gas prices could deter investment in nuclear power. In particular, if construction costs for new nuclear power plants proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s (adjusted for inflation), or if natural gas prices fell back to the levels seen in the 1990s, then new nuclear capacity would not be competitive, regardless of the incentives provided by EPAct. Such variations in construction or fuel costs would be less likely to deter investment in new nuclear capacity if investors anticipate a carbon dioxide charge, but those charges would probably have to exceed $80 per metric ton in order for nuclear technology to remain competitive under a scenario with high construction costs and low natural gas prices.

The study was written by Justin Falk of our Microeconomic Studies Division.

CBO released a paper today on trends in individual income tax revenue. Such revenue has fluctuated significantly since the early 1990s, increasing by 85 percent between fiscal years 1994 and 2000, then declining by 21 percent between 2000 and 2003, and then increasing by 47 percent between 2003 and 2007.

Income tax revenues generally rise and fall with the economy, but even as a share of gross domestic product (GDP), the recent changes in individual income tax revenue have been dramatic. Between 1994 and 2000, for example, the ratio of income taxes to GDP rose by 2.5 percentage points—from 7.8 percent to just over 10.3 percent, a historic high. In the following four years, that trend reversed, and individual income taxes dropped precipitously, falling to 7.0 percent of GDP by 2004, the lowest level in more than 50 years. Revenues rebounded in the next three years, rising to 8.5 percent of GDP by 2007. The paper explores the causes of these changes in individual income tax revenues relative to the economy. The key factors include:

• A rising and falling income tax base, resulting from growth in wages and capital gains realizations that first exceeded and then lagged behind overall economic growth;
• A rising and falling effective tax rate on adjusted gross income, caused by changes in real (inflation-adjusted) bracket creep (that is, increases in real incomes that shift more taxable income into higher marginal tax brackets) and THE the concentration of income in higher tax brackets
• Tax legislation, which was a major factor in the decline in income taxes relative to GDP from 2000 to 2004, but had little to do with the increase from 1994 to 2000.