N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |1

AnalysisofthePeterG.PetersonFoundationSolutionsInitiativeIII

Thepurposeofthisreportistoanalyzelong-termdebtsolutionscreatedbyfivemajorthinktanks:theAmericanActionForum,theAmericanEnterpriseInstitute,theBipartisanPolicyCenter,theCenterforAmericanProgress,andtheEconomicPolicyInstitute.Thisgroupwasassembledforthe2015PeterPetersonFiscalSummit:OpportunityforAmerica.

Ifgovernmentspendingcontinuesatitscurrentrate,theCongressionalBudgetOfficeestimatesthatspendingwillincreasetonearlydoubletheGrossDomesticProduct(GDP)by2040.Thefollowingplanslayoutavarietyofspendingandrevenuegeneratingcombinationstonotonlyreducethenationaldeficit,butalsocreateamoremanageablespendingandrevenueplanforthenationandestablishasustainablefiscalpath.Long-termeffectsofaneverincreasingnationaldeficitinclude:highertaxescoupledwithlowerspending,higherinterestrates,higherinflationandgeneralmarketuncertaintywhichcouldleadtoanothermarketcollapse.Therewasgeneralconsensusaboutthemajorareasofthebudgetthatneededrenovation.However,eachplanreworkstheminadifferentway.Theareasexaminedarediscretionaryspending,taxreform,healthcare,socialsecurity,and“otherspending.”1Additionally,eachthinktankprovidedthetopthreepolicyissuestheyfeelshouldbeaddressedfirstbythenextadministration,citedbelow.

Simplyput,thenationiscareeningdownafinancialpaththatgrowsmoretumultuouswitheachshort-termextensionorincreaseinthedebtceiling.Ifspendingcontinuesatthisrate,statesmaynotbeabletodependonthefederalgovernmentforgrantsandprogramsrangingfromeducationtoinfrastructure.Whilethereisnoeasyfix,thereishopeforamoresustainablegovernmentintheyearstocome.

PolicyGoalsAmericanAction

ForumAmericanEnterprise

InstituteBipartisanPolicy

CenterCenterforAmerican

ProgressEconomicPolicy

InstituteTaxReform HealthcareEfficiency TaxReform ExpandMiddleClass IncreaseSpendingfor

PublicInvestmentEntitlementReform SocialSecurity HealthcareCosts HealthcareCosts StrengthenSocial

WelfareImmigrationReform SwitchtoConsumption

TaxGreaterPublicInvestment

IncreaseFederalRevenue

RaiseAdditionalRevenue

1ThePeterG.PetersonFoundationSolutionsInitiativeIII listsacategoryofspendingreferredtoas“Non-InterestSpending”(NIS)thatcoversawidevarietyofmiscellaneousspendingmeasuresthatwillbereferredtoas“OtherSpending”inthisreport.

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |2

AmericanActionForum(AAF)DiscretionarySpending TheAAF’splanwouldincreasedefensespendingby$377billionfrom2017-2026.By2040,theplancallsfordefensespendingtocomprise2.7%oftheGDP.Nondefensespendingwouldalsoincrease$289billionfrom2017-2026butwouldthenstayat2.6%oftheGDPin2040.TaxReform

AAFproposesusingtheBradfordXTaxplan.2Taxbracketswouldbetaxedat15%,25%,and35%withnohouseholdtaxesoninvestmentincome.ItadditionallyprovidestaxcreditsforcharitabledonationsandfirsttimehomebuyersaswellasreplacingtheEITCwithanequaldollarspendingprogram.ItphasesoutthemortgageinterestdeductionsandrepealstheAlternativeMinimumTax(AMT).Thisplanrepealscorporateincometaxes,andreplacesthemwitha35%flattax,withnomarginaltaxonnewinvestments,whichisdesignedtoencouragesavingandinvestment.Italsoeliminatesallcorporatetaxexpenditures.AAF’splanistheonlyplanoutofthefivethatdoesnotsuggestanincreaseofthegastax.

Healthcare TheAAFproposesrepealingtheAffordableCareAct(ACA)aswellasnewtaxesinstitutedinitsenactment.Itadvocatesfortheuseofcompetitivebiddinginthehealthcaremarket,coupledwithlimitedgrowthoffederalcontributions.TheplancallsforashifttopremiumsupportforfutureMedicarerecipients,whichisstructuredtoprovidesubsidiestocitizenswhopurchaseprivatehealthinsurance.CurrentMedicareconditionswouldremainineffectforthosewhoarecurrentlyreceivingbenefits.Italsosuggestsmedicalliabilityreformtoreducethecostandmisuseoffunding.SocialSecurity

Thisplanraisesthenormalretirementageto70aswellasminimaleligibilitychangesfortheSocialSecurityDisabilityInsurancebenefits.PaymentswouldbedecidedusingachainedConsumerPriceIndex(CPI)toaccountforcostoflivingadjustmentsandinflation.Thisplanalsoreducesthegrowthofbenefitsforbeneficiaries.OtherSpending AAFsuggestsmaintainingcurrentotherspendinglevels.Theirplanalsoreformsagriculturalsubsidies,federalcivilianandmilitaryretirementlevels,eliminatesstudentloansubsidiesforgraduatestudents,andredirectsfederalPellGrantstotheneedieststudents.

2The Bradford X Tax plan is a two tiered consumption tax based on the Hall-Rabushka (1995) flat tax. The proposed tax base is

comprised of individuals and businesses. In this model individuals are taxed under the “compensation tax.” The tax is levied at graduated rates beginning at zero percent and climbing to the corporation tax level at the highest tax bracket. This system also allows for various tax credits including the Earned Income Tax Credit (EITC). Geared towards saving and investing, The Bradford X Tax plan excludes all financial transactions in the tax base. Excluded transactions include, but are not limited to: borrowing, lending, issue and repurchase of stock, as well as payment and receipt of dividends.

Corporate taxes are levied on all businesses, regardless of legal form. They are “liable for a tax at a single rate based on the difference between proceeds from sales and purchases.” Payments of wages to workers are also nontaxable. The system uses the “invoice and credit method” of deductions. “The selling firm pays a tax on all sales, noting the amount on the invoice.” The taxable firm is allowed a credit against tax liability of the amount shown on the invoice, therefore, a “simultaneous payment of tax by the seller and an equal credit for the buyer offset one another” and there is no net tax paid to the government until the point of sale to the public.

22.3 17.84.5

15.9

Revenues Spending Deficit(-)Suprlus(+)

DebtHeldbythePublic

*

AmericanActionForum*asa%ofGDP

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |3

AmericanEnterpriseInstitute(AEI)DiscretionarySpending Underthisplan,defensediscretionaryspendingincreasesby$1.4trillionfrom2017-2026,comprising3.8%oftheGDPin2040.AEInotesthatdefensespending“shouldbebasedonthesecurityneedsofthecountry,ratherthanarbitrarybudgettargets.”AEIdoesnotrecommendanychangestothenondefensediscretionaryspending,settingspendinglevelsat2.6%oftheGDPin2040,andmaintainingthislevelthrough“deepreductionsincommunityandregionaldevelopment.”TaxReform AEIreplacesthecurrenttaxsystemwiththeBradfordXTaxplan,taxingindividuals15%,25%,and35%withnohousehold-levelincometaxes.Thistaxplanallowsforseveralindividualtaxcreditsincluding:charitablecontributions,mortgageinterest,children,healthinsuranceandanexpandedEITC.Additionally,AEI’splanincreasesthegastaxandrepealsstateandgifttaxes.AEI’splantaxescorporationsat37%withnomarginaltaxonnewinvestments.Additionally,theyproposeasmallcarbontax.Healthcare TheAEIandAAFplansforhealthcarereformareverysimilar.Bothplanswanttoshifttowardsubsidiesprovidedforindividualswhopurchaseprivatehealthcareandprovidecompetitivebiddingandmarketforcesaswaystokeephealthcarecostslow.AEIproposesfundingbothMedicareandMedicaidthroughblockgrantsgiventothestates.Thiswouldalloweachstatemorecontroloverhowtofundtheprograms.AEIalsomodestlyraisestheMedicareageto67.TheplanlaidoutbyAEIalsorepealstheACAandACAtaxesandadvocatesformedicalliabilityreform.SocialSecurity AEIgraduallyraisestheearlyretirementagefrom62to65andremovestheSocialSecuritypayrolltaxafterage62.“Thecoreelementofthereformisaflatdollarbenefitthatwouldbepaidtoallretirees,disabledpersons,andsurvivors,regardlessoftheirearningshistoryorlaborforceattachment.”ThislevelwouldinitiallybesetattheelderlypovertythresholdbutwouldshiftwithwagegrowthratherthantheCPI.Thisplanprovidesincentivestohirethosewhoaredisabledthroughtheuseofan“experiencerating,”therebyreducingthenumberofindividualscollectingbenefitsforSocialSecurityDisabilityInsurance.OtherSpending AEIadvocatesforasignificantdecreaseinotherspendingcoupledwithfederalcivilianandmilitaryretirementreformaswellaseliminatingagriculturalsubsidies.

21.2 22.5

-1.4

62.7

Revenues Spending Deficit(-)Surplus(+)

DebtHeldbyPublic

AmericanEnterpriseInstitute*asa%ofGDP

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |4

BipartisanPolicyCenter(BPC)

DiscretionarySpending BPCcallsfor$122billionreductionindefensediscretionaryspendingover10yearsand“proposestoremovehalfoftheimpactofsequestrationforbothdefenseandnon-defensediscretionaryspendingbyfiscalyear2021”followedbygrowthwithGDPafter.ItalsoadvocatesforareductionintheOverseasContingencyOperations(OCO)fund.By2040defensediscretionaryspendingwouldmakeup2.5%ofGDP.Conversely,theBPCsuggestsincreasingnon-defensediscretionaryspendingby$115billionfrom2017-2026,withspendingmakingup2.6%oftheGDPby2040.TaxReform BPCsuggestsbroadeningthetaxbase,reducingthenumberoftaxbrackets,andreducingtaxratesto15%and30%.Theycombinethiswithhighertaxesondividendsandcapitalgainsandfewtaxcreditsincluding:mortgage,interest,charity,childrenandtheelderly.BPCreplacestheEITCwithanexpandedcreditforlowearningsandeliminatemostcorporatetaxeswhileretainingtheResearchandDevelopment(R&E)taxcredit.Allcorporationswouldbetaxedataflatrateof30%.Theyproposeincluding100%ofSocialSecuritybenefitsintaxableincomewhichwouldbeoffsetbya15%SocialSecuritycredit.Additionallytheyadvocatefora15centincreaseofthegastax,whichwouldthenbesettokeepupwithinflation.Inaddition,BPCwouldincreasealcoholandtobaccotaxesandplaceanadditionaltaxonsweetenedbeverages.BPCproposesimmigrationreformasawaytobroadenthetaxbase.Healthcare BPCadvocatesforreformingthecurrentMedicaresystemandcombiningMedicarepartsAandBtoreducecost.Theyproposea“MedicareNetworks”combinedwithotherreformstargetedatcostcontainmentandagreateruseofgenericmedicationstoassistinreducingcosts.WhileBPCnotedtheneedtoreworkMedicaid,theydidnotofferanychangesorreforms.TheysupporttheACAbutwouldrepealtheACAtaxesonnetinvestmentincome,high-incomewagesandhighcost“Cadillac”healthplans,whilestrengtheningcostcontrols.SocialSecurity BPCsuggestsseveralreformsforSocialSecurity.Theyproposegivingbenefitsinaslidingscalewithfewerbenefitsfornewbeneficiariesandmorebenefitsforoldermembersbutwouldraisetheminimumbenefit.Tokeepupwithcosts,theywouldimplementachainedCPIandincreasethemaximumtaxableearnings.OtherSpending Otherspendingwouldbereducedunderthisplanwithabulkofreformfallingunderagriculturalsubsidiesandfederalcivilianandmilitaryretirement.

21.3 24.3 -3

75.5

Revenues Spending Deficit(-)Surplus(+)

DebtHeldbyPublic

BipartisanPolicyCenter*asa%ofGDP

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |5

CenterforAmericanProgress(CAP)

DiscretionarySpending Thisplansuggestsreducingdefensediscretionaryspendingby$258billionfrom2017-2026,withdefensespendingonlyconstituting2.2%ofGDPby2040.CAPproposesa$1.6trillionincreaseinnondefensediscretionaryspendingfrom2017-2026,comprising3.1%oftotalGDPin2040.Increasednondefensediscretionaryspendingtargetseducationandinfrastructure.TaxReform CAPprovidesanumberoftaxreformoptions.Theysuggestbroadeningthetaxbase,increasingtaxratesonhigherincomes,andintroducinga5%“millionairesurtax”onincomeoveronemilliondollars.Theyproposehighertaxesondividendsandcapitalgains,increasedestateandgifttaxes,carbontaxes,alcoholandtobaccotaxes,anincreaseofthegastax(eventuallyreplacedwithavehiclemilestraveledtax)andafinancialtransactiontax.CAPwouldallowdoesallowforseveraltaxbreaksincludingtheEITC,charitablecontributions,mortgageinterest,savings,atemporarymiddleclasstaxcut,andchild/childcare.Corporationswouldfaceafinancialcrisisresponsibilityfeemainlyforlargebanksandfinancialinstitutionsdeemed“toobigtofail,”thoughtaxrateswouldremainthesame.Healthcare CAPadvocatesforreforminalldivisionsofthehealthcaresector.BeginningwithMedicare,thisplancallsforenhancedprotectionsforlowincomeindividuals,andseekstoreformtraditionalMedicareandlowerdrugpricesthroughaprogramtitled“AccountableCareStates.”TheCAPplanmaintainstheACAandretainsallofitstaxesandwouldlimittheexclusionofemployer-sponsoredhealthinsurance.SocialSecurity CAPoffersrelativelyfewchangestothecurrentSocialSecuritysystem.Theyproposeraisingtheminimumbenefitandeliminatingthecapontheemployershareofpayrolltaxes.OtherSpending Likethepreviouslymentionedplans,CAPsuggestsreformingagriculturalsubsidies.Differingfromotherplans,itadvocatesforincreasedspendingonincomesupportprograms,infrastructure,highereducation,pre-schoolandadditionalfundsforpaidfamilyleave.

23.2 22.6

0.6

45.8

Revenues Spending Deficit(-)Surplus(+)

DebtHeldbyPublic

CenterforAmericanProgress

*asa%ofGDP

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |6

EconomicPolicyInstitute(EPC)

DiscretionarySpending TheEPC’splanfordiscretionaryspendingcallsforthelargestdeductionofdefensediscretionaryspending.Thisplanreducesspendingby$736billionfrom2017-2026beforesettingdefensespendingat2.3%oftheGDPby2040.Itadditionallyadvocatesforanincreaseinnondefensediscretionaryspendingintheamountof$5.1trillionovertenyears.EPCwouldsetthisspendingat4.8%oftheGDPby2040. TaxReform EPCcallsforseveraldifferenttaxreforms.Itbeginsbybroadeningthetaxbase,increasingtaxesonhigherincomesandimplementingamillionairesurtax.EPCalsoproposeshighertaxesondividendsandcapitalgains.Itbalancesthesetaxincreasesbyeliminatingstateandlocaltaxdeductions,phasesoutthemortgageinterestcreditandexpandstheEITC.ItistheonlyplanthatdoesnotsuggestrepealingtheAMT.EPCseekstobroadenthecorporateincometaxbaseandreplacesgraduatedrateswitha35%flattax.TheEPCplanwouldalsoeliminatebusinesstaxpreferencesandimposesafeeon“toobigtofail”corporationsandfinancialinstitutions.Taxreforminthisplanwouldincreasetheestateandgifttaxes,increasethegastax,carbontaxandalcoholtax.Itwouldalsoimplementataxonsweetenedbeveragesandfirearms.Healthcare MostofEPC’shealthcarereformcentersaroundcostcontrol.ThisproposalseeksreformtraditionalMedicarethroughcostcontainmentandlowerdrugprices.EPCsupportsanexpansionoftheIndependentPaymentAdvisoryBoard(IPAB)totheprivatesector.ItwouldmaintaintheACAandtaxesbutwouldalsocreatealarger,publicmarket.SocialSecurity EPCwouldincreasethemaximumtaxableincomeearningsto90%ofincomeandexpandSocialSecuritytonewlyhiredstateandlocalworkers.OtherSpending TheEPCplansupportsincreasedspendingonincomesupportprograms,extendedunemploymentbenefits,andchildnutritionprograms.

23.5 25.4-1.9

54.2

Revenue Spending Deficit(-)Surplus(+)

DebtHeldbyPublic

EconomicPolicyInstitute*asa%ofGDP

N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s |7

Clearly,thereisnoonesizefitsallplantocurethefederalgovernment’sailment.Eachoftheplanslistedaboverepresentstheinterestsofthethinktanksthatcreatedthem,consequentlyfavoringsomeprogramsoverothers.Onethingthatisapparentisageneralconsensusoftheneedtoreducethenation’sdebtandprovideasolutiontoputthecountryonasustainablefiscalpath.EachrepresentativegroupacknowledgesthatimplementinganyoftheseplanswouldrequireCongresstomakesomedifficultdecisionsthatmaymakesomevotingblocsunhappy.Theseplansdidnotfocusonthepotentialpoliticalramifications,butrathertosolveaballooningproblem.InhistestimonyonJune,17th2015,KeithHall,DirectoroftheCongressionalBudgetOfficenotedthat“toputthefederalbudgetonasustainablepath,lawmakerswouldhavetomakemajorchangestopolicies,spendingpoliciesorboth-byreducingspendingforlargebenefitprogramsbelowtheprojectedamounts,lettingrevenuesrisemorethantheywouldundercurrentlaw,oradoptingsomecombinationofapproaches.”Thereareavarietyofwaystoreigninthedebtandcreateamorefiscallyresponsiblegovernmentspendingplanforgenerationstocome.

22.317.8

21.2 22.521.324.323.2 22.623.5 25.4

R EV ENUES SP END ING

PROJECTEDBUDGETLEVELSIN2040*

AAF AEI BPC CAP EPI

*asa%ofGDP