The Budget And Economic Outlook

Published Date: 02 Nov 2017

Statement of Constitutional and Legal Authority.............................................

Introduction.......................................................................................................

Summary............................................................................................................

The Debt Crisis Ahead.....................................................................................

13

Opportunity Expanded....................................................................................

19

Safety Net Strengthened.................................................................................

27

Retirement Secured.........................................................................................

37

Fairness Restored............................................................................................

47

A Nation Protected.........................................................................................

61

A Budget Process Reformed...........................................................................

65

A Responsible, Balanced Budget.....................................................................

71

Appendix I: Summary Tables...........................................................................

75

Appendix II: Economic Benefits of Deficit Reduction......................................

85

Appendix III: Reconciliation.............................................................................

91

House Budget Committee | March 2013

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STATEMENT OF CONSTITUTIONAL AND LEGAL AUTHORITY

Article I of the Constitution grants Congress the power to raise money for the Treasury, to pay the

country’s obligations, and to publish regular statements of all financial transactions.

In addition, the Congressional Budget Act of 1974 requires Congress to write a budget each year. The

law instructs the President to submit a proposal for Congress’s consideration by the first Monday of

February. It also directs Congress to draft its own proposal in a timely manner. Both houses of

Congress must agree to a budget resolution by April 15.

The budget resolution is the only legislation that views the federal government as a whole. As such, it

serves many functions: It resolves conflicting judgments about our national priorities. And it reconciles

divergent views of our country’s future. Ultimately, the budget is more than a list of numbers. It’s an

expression of our governing philosophy.

This budget—for fiscal year 2014 and beyond—builds on the last two budgets passed by the House of

Representatives. It recommits our country to the principles enshrined in the Constitution: liberty,

limited government, and equality under the law. And it frees the country from the crushing burden of

debt that threatens our future.

Unfortunately, the President is shirking his duty. He has missed his budget deadline four times in five

years. His blatant disregard for the law has upended the budget process. Today, Washington budgets

by crisis. This budget restores regular order—because the people deserve an honest account of our

challenges and what’s needed to confront them.

The Committee on the Budget will again complete its budget on time—in recognition of the need for

transparent government. And it will do so with great purpose: to provide for the orderly execution of

Congress’s duties and to restore the promise of this exceptional nation.

House Budget Committee | March 2013

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INTRODUCTION

The United States faces many challenges. This year, unemployment will hover around 8 percent,

according to the Congressional Budget Office.1 Economic growth will remain tepid. The national debt

recently eclipsed the size of our economy. Millions of families are stuck in foreclosure. Student loans

are piling up. Gas prices are at historic highs. And soon, families will struggle with a new health-care

bureaucracy, while medical costs further erode their paychecks.

It’s no surprise, then, that most Americans think we’re on the wrong track.2 By living beyond our

means, we’re stealing from the next generation. By promising a higher standard of living today, the

federal government is guaranteeing a lower standard of living tomorrow. So it’s troubling to consider

where this track will lead. Unless we act, by 2023, we will add another $8.2 trillion to our national debt.

That debt will weigh down our country like an anchor.

Unless we change course, we will have a debt crisis. Pressed for cash, the government will take the

easy way out: It will crank up the printing presses. The final stage of this intergenerational theft will be

the debasement of our currency. Government will cheat us of our just rewards. Our finances will

collapse. The economy will stall. The safety net will unravel. And the most vulnerable will suffer.

But it’s not too late. This budget provides an exit ramp from the current mess—and an entry ramp to a

better future. Unlike the President’s last budget, which never balanced, this budget achieves balance

within ten years. In the next decade, it spends $4.6 trillion less than will be provided under the current

path. The fact is, we owe the American people a balanced budget. The less we owe to foreign

creditors, the more of our future we will control.

And we balance the budget for an important reason: An unbalanced budget is a sign of overreach.

When government does too much, it doesn’t do anything well. So our budget makes room for

community—for the vast middle ground between government and the person. It recognizes that

people do not find happiness in grim isolation or by government fiat. They find it through friendship—

through free, vibrant exchange with the people around them. They find it through achievement. They

find it in their families and neighborhoods, their places of worship and youth groups. They find it in a

healthy mix of self-fulfillment and belonging.

While we belong to one country, we also belong to thousands of communities—each of them rich in

tradition. And these communities don’t obstruct our personal growth. They encourage it. So the duty

of government is not to displace these communities, but to support them. It isn’t to blunt their

differences or to flatten their character—to mash them all together into a dull conformity. It’s to secure

our individual rights and to protect that diversity.

House Budget Committee | March 2013

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1 Congressional Budget Office. "The Budget and Economic Outlook: Fiscal Years 2013 to 2023." February 2013.

2 Rasmussen Reports. "Right Direction or Wrong Track." 6 March 2013.

We are a self-governing people. Yet, if we can’t manage our own affairs, we can hardly govern a

nation. It’s in the assembly hall and the boardroom—in the town meeting and the state legislature—

that we learn how to govern. And that’s where we forge our common bonds. Yes, government is one

of those bonds. But it can’t unite 300 million people—not on its own. It needs our communities to tie

us together.

Today, our communities—our families, in particular—face many dangers: rising health-care costs, a

stagnant economy, a massive debt, an uncertain world. These dangers require a lean, dynamic

government—one that can protect its people and keep its word. They also require government to

respect its limits—to understand it plays a role in our lives, but not the leading one.

This budget seeks to revive our communities with an emphasis on six areas. It expands opportunity by

growing our economy. It strengthens the safety net by retooling federal aid. It secures seniors’

retirement by reforming entitlements. It restores fair play to the marketplace by ending cronyism. It

keeps our country safe by rebuilding our military. And it ends Washington’s culture of reckless

spending.

None of these priorities can be met if a debt crisis hits. This budget gets government spending under

control. Balancing the budget is a sensible goal—a commitment that both parties should share. And

because our debt has grown with greater speed, the Committee on the Budget has tackled it with

greater urgency. But our aim isn’t merely a balanced ledger. It’s the well-being of our people. We need

government to focus on the people’s priorities—not its own. And so our budget returns the federal

government to its proper limits and focus.

We can overcome these challenges—and we must. It’s our duty to leave the next generation a better

country than the one we inherited. We know what the problem is: We have to fix our entitlements and

to grow the economy. We understand that not everyone shares our view. And we respect that

difference of opinion. Last year, the American people chose divided government. So this year, we have

to make it work. We offer this budget in recognition of that need—and in a spirit of good will.

Paul Ryan

Chairman of the House Budget Committee

Member of Congress, First District of Wisconsin

March 12, 2013

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SUMMARY

Washington owes the American people a responsible, balanced budget. This is a plan to

balance the budget in ten years. It invites President Obama and Senate Democrats to commit

to the same common-sense goal. This budget will achieve the following:

- Stop spending money we don’t have by cutting wasteful spending.

- Fix our broken tax code to create jobs and increase wages.

- Protect and strengthen important priorities like Medicare and national security.

- Reform welfare programs like Medicaid so they can deliver on their promise.

Balance the Budget. Grow the Economy.

The House Republican budget reduces deficits by $4.6 trillion over the next ten years. It

targets wasteful Washington

spending and reforms the

drivers of the debt.

This budget stops spending

money we don’t have. It

achieves the common-sense

goal of a balanced budget in

ten years. A balanced budget

will foster a healthier economy

and help create jobs.

By tackling the debt, this

budget will help grow our

economy today and ensure the

next generation inherits a

stronger, more prosperous

America.

The Human Scale

Our budget will help improve the lives of American families.

Provide economic security for workers and parents.

Ensure a secure retirement for the elderly.

Expand opportunity for the young.

Repair the safety net for the poor.

House Budget Committee | March 2013

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Key Components of the House Republican Budget:

Opportunity Expanded

This budget offers a plan to expand opportunity. While not sufficient by themselves, policy reforms at

the federal level can help foster an environment that promotes economic growth. This budget seeks to

equip Americans with the skills to succeed in a 21st-century economy and to grow that economy

through long-overdue tax reform. Both reforms work off the same principle: The American people

know their needs better than bureaucrats thousands of miles away. And government has a

responsibility to support their efforts.

A Safety Net Strengthened

This budget applies the lessons of welfare reform to other federal aid programs. It gives states more

flexibility to tailor programs to their people’s needs. It gives those closest to the people better tools so

they can root out waste, fraud, and abuse. Finally, it empowers recipients to get off the aid rolls and

back on the payroll. By enlisting states in the fight against poverty, this budget builds a partnership

between the federal government and our communities.

Retirement Secured

This budget protects and strengthens Medicare for current and future generations. It also requires the

President and Congress to work together to forge a solution for Social Security. This budget

recognizes that the federal government must keep its word to current and future seniors. And to do

that, it must reform these programs.

Fairness Restored

The administration’s uncontrolled, wasteful spending in combination with an overzealous regulatory

agenda has weakened an anemic economy and created barriers to job creation, especially for small

businesses. To restore fairness—and vitality—to our economy, this budget ends cronyism; eliminates

waste, fraud, and abuse; and returns the federal government to its proper sphere of activity.

A Nation Protected

The first job of the federal government is to secure the safety of its citizens from threats at home and

abroad. Whether defeating the terrorists who attacked this country on September 11, 2001, deterring

the proliferation of weapons of mass destruction, or battling insurgents who would harbor terrorist

networks that threaten Americans’ lives, the men and women of the United States’ military have

performed superbly. This budget provides the best equipment, training, and compensation for their

continued success. It also keeps faith with the veterans who have served and protected the nation.

A Budget Process Reformed

When it comes to fixing the broken budget process, the choice facing Americans could not be clearer:

The President and his party’s leaders have failed to take their budgetary responsibilities seriously. By

contrast, the Republican majority in the House has met its legal and moral obligation by passing a

bold budget that tackles America’s most pressing fiscal challenges. Last Congress, the House Budget

Committee authored and advanced several statutory reforms to bring more accountability to the

federal budget process. This budget continues in the spirit of those proposed reforms, which the

Committee will again pursue after this resolution has been adopted by the House.

House Budget Committee | March 2013

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THE DEBT CRISIS AHEAD

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House Budget Committee | March 2013

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THE DEBT CRISIS AHEAD

Five years ago, we had a financial

crisis. It flared up suddenly, though

the tinder had been building up

over time. And the damage was

severe. Four million families lost

their homes.3 Nine million people

lost their jobs.4 In some ways,

Washington helped put out the

flames. But much of what the

government tried—more

regulations, more spending—

didn’t work. In fact, it may have

delayed the recovery.

Today, we face a crisis of another

sort—one more predictable than

the last and more dangerous than

ever. We face the threat of a debt

crisis.

Our national debt is growing

faster than our economy. In

other words, our obligations

are growing faster than our

ability to pay them. Debt

held by the public is 73

percent of our economy. By

2023, the Congressional

Budget Office [CBO]

expects it to hit 77 percent.

In fact, under an alternative

scenario that assumes

plausible policy choices, it

will hit 87 percent by 2023.

And total national debt is

already bigger than our

economy.

House Budget Committee | March 2013

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3 Steele, Tara. "Nearly Four Million Foreclosures Completed since Housing Crash." AGBeat. 3 December 2012.

4 Goodman, Christopher J., and Steven M. Mance. "Employment Loss and the 2007–09 Recession: An Overview." Monthly Labor Review.

April 2011.

Federal spending is the problem. In 2023, the CBO expects revenue to be nearly double last year’s

total. Yet they also expect the deficit to be nearly $1 trillion. As 80 million baby boomers retire and the

country gets older, our entitlement programs will start to burst at the seams. In the next decade, Social

Security will grow at an annual average of 5.8 percent. Medicare will grow at 6.2 percent. And

Medicaid—thanks in part to its expansion under the health-care law—will grow at an astounding 9.9

percent. All of these programs are growing substantially faster than the economy, which CBO expects

to grow in nominal terms at only 4.8 percent on average.

Without reform, entitlement

programs will overwhelm all

other items in the federal

budget. And the resulting

national debt will overwhelm

our economy. At some point,

lenders might question our

ability to pay our obligations.

They might demand higher

interest rates. If they did, we

would have a debt crisis, and

the pain would be intense. This

budget offers a way out of this

fix. And it does so with an

appreciation of what a debt

crisis would mean to the

country—and the average

person.

Impact on the Country

Today, we’re enjoying historically low interest rates because the Federal Reserve is buying large

amounts of our debt, and investors have retreated to U.S. securities amid global turmoil. But our

growing obligations may shake their confidence. In return, they might demand compensation for that

higher risk. Foreigners own almost half of our publicly held debt. So we’re particularly vulnerable to a

sudden shift in foreign-investor sentiment. In addition, over one-third of our total marketable debt will

mature over the next 24 months. So we will have to roll over much of our debt in the next two years—

when interest rates might be higher.

House Budget Committee | March 2013

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When interest rates rose, debt payments would crowd out other parts of the budget. Today, if interest

rates returned to the levels that prevailed before the Great Recession, interest payments would be

$420 billion higher in 2014—and $700 billion higher in 2020.5 At some point, rates would reach

prohibitive highs. Unable to borrow more money, the federal government would have to resort to

austerity: big tax hikes and big spending cuts. To put that into perspective, Bill Gross, bond-fund

manager at PIMCO, estimates that we would need to cut spending or raise taxes by 11 percent of

GDP (or $1.6 trillion) over the next five to ten years to keep our debt below a crisis level.

If we waited until a debt crisis broke out, the pain would be worse. Treasury bonds are the lynchpin of

global debt markets. Virtually all financial institutions consider them safe, liquid assets. If interest rates

rose, bond prices would drop, tearing up these firms’ balance sheets. Len Burman, former director of

the Tax Policy Center, warns that such an event would be "disastrous."6 The federal government would

be unable to borrow money to support private enterprise, as it did during the financial crisis. As a

result, he estimates that the economy would shrink by 25 to 30 percent—a contraction rivaling the

Great Depression in size.7 He writes that "it could easily take the nation a generation or longer to

recover from [such a] disaster."8

Impact on the Individual

The effects of a debt crisis would cascade through the economy—all the way down to the individual.

Nearly all consumer-borrowing rates are linked to long-term Treasury rates. As Treasury rates

increased, rates on mortgages, credit cards, and car

loans would follow.

Roughly half of all household debt consists of

variable-interest-rate loans, so a spike in Treasury

rates would lead to higher borrowing costs for

families. One estimate suggests that an interestrate

increase of just one percentage point would

increase annual interest payments for the average

family by $400.9 In fact, the added costs could

easily exceed $1,000 per year. To a new

homebuyer, a one-percentage-point increase in

mortgage rates would add as much as 19 percent

to the total cost of their mortgage.10

House Budget Committee | March 2013

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5 Lindsey, Lawrence. "The Deficit Is Worse Than We Think." Wall Street Journal. 28 June 2011.

6 Burman, Len et al. "Catastrophic Budget Failure." Presented at Joint TPC-USC Conference. 15 January 2010.

7 Ibid.

8 Ibid.

9 Center for American Progress. "Payment Due: The Effects of Higher Interest Rates on Consumers and the Economy." 20 September 2004.

10 Schwartz, Nelson. "Interest Rates Have Nowhere to Go but Up." New York Times. 10 April 2010.

A 1% INCREASE IN

INTEREST RATES

WOULD MEAN AN

EXTRA $400 IN

INTEREST PAYMENTS

EACH YEAR FOR THE

AVERAGE FAMILY

A debt crisis would not only mean higher interest

payments. It would also cost jobs and slow wage

growth. The corporate sector has roughly $11.5

trillion in loans that will mature over the next five

years.11 A sharp rise in interest rates would force

businesses to curb investment. They would cut

the amount they spent on equipment and plant

development—which workers need to earn higher

wages. Over time, lower investment would

depress wage growth, as productivity slowed.

A debt crisis would also mean higher taxes. If

current federal interest payments were allotted to

taxpayers, they would equal about $255 per

month, according to Deloitte LLP. Under an

alternative scenario—in which growth is slightly

lower than expected, interest rates are slightly

higher than expected, and current tax and spending policies are extended—that amount is expected

to jump to $424 per month for each taxpayer over the next decade.12

Finally, a debt crisis would hurt the most vulnerable worst of all. During the financial crisis, the federal

government was able to borrow money to provide assistance to these families. In a debt crisis,

however, the government would be unable to provide that assistance.

We don’t need to look far for examples of a debt crisis in action. There are

examples in the United States, where municipalities have gone bankrupt and

been unable to provide basic services. In Central Falls, Rhode Island, for

instance, retirees’ pensions have been slashed by up to 55 percent. In

Stockton, California, the city has laid off 25 percent of its police force in the

face of increasing pension costs.

Millions of Americans—the elderly, the poor—depend on assistance from

the federal government. If we had a debt crisis, we wouldn’t be able to keep

our promises to these families. We can’t let that happen. We still have time

to avert this crisis, but we need to get serious about spending—now. That’s

why this budget achieves balance within the next ten years. It protects and

strengthens the safety net and our entitlement programs, so we can keep

our word to the most vulnerable. And most importantly, it expands

opportunity, because the strongest safety net is a vibrant economy.

There is no reason why we can’t succeed. If Congress and the President collaborate in good will, we

can leave the country with a far brighter future.

House Budget Committee | March 2013

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11 Deloitte LLP. "The Untold Story of America’s Debt." June 2012.

12 Ibid.

U.S.

INTEREST

PAYMENTS

FOR

INDIVIDUALS

OVER

DECADE

FEDERAL

INTEREST

PAYMENT

PER

TAXPAYER

PER

MONTH

STOCKTON,

CALIFORNIA

HAD TO

LAY OFF

25% OF ITS

POLICE

FORCE

OPPORTUNITY EXPANDED

House Budget Committee | March 2013

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House Budget Committee | March 2013

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OPPORTUNITY EXPANDED

The central promise of American life is upward mobility. It’s the opportunity to rise. It’s a testament to

this country’s character that upward mobility has long been a fact of life. Today, four-fifths of Americans

have higher incomes than their parents had at the same age. But not everyone has taken part in the

expansion. Two-fifths of the children born in the bottom 20 percent of earners will never know

anything better.13 For millions of people, the American Dream is seemingly out of reach. We still have

much to do if we want to guarantee equality of opportunity to every person in this country.

No economic system in the history of mankind has done more to lift up the poor than America’s

commitment to free enterprise. If the American Idea of earning success through work and enterprise is

to endure through the 21st century, policymakers must urgently enact reforms to get Washington’s

fiscal house in order, spur job creation, and promote sustained economic growth.

Above all, the role of policymakers must be to lift government-imposed barriers to stronger

communities and flourishing lives. Fiscal responsibility and economic opportunity are but means to a

more critical end: the rebuilding of broken communities and the empowerment of families and

citizens. The ever-expansive activism of the federal government drains the vitality and displaces the

primacy of the bedrock institutions that define America.

In pursuit of that goal, this budget offers a plan to expand opportunity. While not sufficient by

themselves, policy reforms at the federal level can help foster an environment that expands

opportunity. This budget seeks to equip Americans with the skills to succeed in a 21st-century

economy and to grow that economy through long-overdue tax reform. Both reforms work off the same

principle: The American people know their needs better than bureaucrats thousands of miles away. But

they need government to support their efforts.

Higher education and job-training in brief:

Encourage policies that promote innovation.

Adopt a sustainable maximum-award level for Pell.

Ensure aid for higher education is targeted to the truly needy.

Update accounting rules to reflect the true cost of federal loan programs.

Eliminate ineffective and duplicative federal education programs.

Consolidate job-training programs, based on reforms in the SKILLS Act, and provide for a

career-scholarship fund.

Tax reform in brief:

Simplify the tax code to make it fairer to American families and businesses.

Reduce the amount of time and resources necessary to comply with tax laws.

Substantially lower tax rates for individuals, with a goal of achieving a top individual rate

of 25 percent.

House Budget Committee | March 2013

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13 Pew Charitable Trusts. "Pursuing the American Dream: Economic Mobility across Generations." July 2012.

Consolidate the current seven individual-income-tax brackets into two brackets

with a first bracket of 10 percent.

Repeal the Alternative Minimum Tax.

Reduce the corporate tax rate to 25 percent.

Transition the tax code to a more competitive system of international taxation.

Higher Education and Job-Training

To keep pace with a technologically advanced and increasingly interconnected world, workers must

develop new skills. One estimate says 90 percent of jobs in a knowledge-based economy will require

postsecondary education.14 Higher education and job-training are crucial to this effort. But the federal

government is hindering workforce development with outmoded aid programs. Instead of increasing

upward mobility, these programs are saddling workers with untenable amounts of debt.

Challenge

Tuition inflation is running rampant. For the past 30 years, college tuition has risen at twice the rate of

inflation. In 2012, the average student-loan debt was $27,253—a 58 percent increase in seven years.

The total amount of student-loan debt now exceeds that of credit-card debt. Our students are

graduating with such large debts—and having such difficulty finding jobs—that they’re unable to make

their payments. Default rates on student loans shot up from 12.4 percent in 2005 to 15.1 percent in

2010.15

The problem breaks down into two categories: First, current federal-aid structures are exacerbating a

crisis in tuition inflation, plunging students and their families into unaffordable levels of debt or

foreclosing the possibility of any higher education at all. Then, these young adults are graduating with

enormous loan repayments and having difficulty finding jobs in our low-growth economic

environment. Instead of solving the problem, schools are deflecting the mounting criticism by citing

the rising cost of health care and employee benefits, the need to compete for students by offering

nicer facilities, and reductions in state budgets and endowments as a result of ongoing economic

stagnation. While there are many contributing factors, there is a core structural challenge in highereducation

financing, driven primarily by the federal government’s policies. Many economists, including

Ohio University’s Richard Vedder, argue that the structure of the federal government’s aid programs

don’t simply chase higher tuition costs, but are in fact a key driver of those costs.16

The federal government’s largest higher-education-financing program is the Pell Grant program. It is

on an unsustainable path, a fact acknowledged by the President’s own fiscal year 2013 budget.17

House Budget Committee | March 2013

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14 Commission on Higher Education. "A Test of Leadership: Charting the Future of U.S. Higher Education." September 2006.

15 Touryalai, Halah. "More Evidence on the Student Debt Crisis." Forbes. 29 January 2013.

16 Vedder, Richard. Testimony before the House Committee on Education and the Workforce. 19 April 2005.

17 Fiscal Year 2013 Budget of the U.S. Government.

The College Cost Reduction and Access Act of 2007 [CCRAA], the Higher Education Opportunity Act

of 2008 [HEOA], the "stimulus" bill, and the Student Aid and Fiscal Responsibility Act of 2010 [SAFRA]

all expanded the Pell Grant program, creating larger liabilities but without the means to fully cover the

new costs. This, along with a dramatic rise in the number of eligible students due to the recession, has

caused program costs to more than double since 2008, from $16.1 billion in 2008 to an estimated

$34.2 billion in fiscal year 2014.18 Moreover, the program is beginning to increasingly rely on

mandatory funding to solve its discretionary shortfalls. For instance, the Department of Education

warned in fiscal year 2012 that without changes to reduce program costs, Pell Grants would have a

shortfall of $20.4 billion.19 And based on current CBO estimates, the program will again face a shortfall

in fiscal year 2015.20

Instead of making necessary, long-term reforms, previous Congresses again resorted to short-term

funding patches—a temporary answer that will not prevent another severe funding cliff for the

program in the future. The President’s past budgets have failed to make the tough choices about the

future of Pell Grants. For instance, his fiscal year 2013 budget increased the maximum Pell award, but

only provided funding for that level of award through the 2014–2015 academic year. These decisions

put the program at greater risk of ultimately being unable to fulfill its promises to students.

The federal government’s incompetence extends to job-training. In January 2011, the Government

Accountability Office issued a report that found 47 overlapping federal job-training programs spent

approximately $18 billion in 2009.21 Since GAO issued that report, the Education and Workforce

Committee has conducted extensive work in this area and added to the list, identifying more than 50

duplicative and overlapping programs.22 Many of these job-training programs are uncoordinated,

difficult to access, and not accountable for results. In addition, Senators Tom Coburn and John McCain

have highlighted numerous examples of waste, fraud, and abuse in these programs.23

Solutions

Encourage policies that promote innovation.

Federal intervention in higher education should increasingly be focused not solely on financial aid, but

on policies that maximize innovation and ensure a robust menu of institutional options from which

students and their families can choose. Such policies should include reexamining the data made

available to students to make certain they are armed with information that will assist them in making

their postsecondary decisions. Additionally, the federal government should act to remove regulatory

barriers in higher education that restrict flexibility and innovative teaching, particularly as it relates to

non-traditional models such as online coursework.

House Budget Committee | March 2013

21

18 Congressional Budget Office. February 2013 Baseline Projections for the Pell Grant Program.

19Department of Education. Student Financial Assistance Fiscal Year 2012 Budget Request.

20 Delisle, Jason. "New Pell Grant Estimates Buy Time, Long-Term Fix Still Needed." EdMoney. 7 February 2013.

21 Government Accountability Office. "Multiple Employment and Training Programs: Providing Information on Colocating Services and

Consolidating Administrative Structures Could Promote Efficiencies."January 2011.

22 Opening Statement of House Education and Workforce Chairman Kline. 6 March 2013.

23 Coburn, Tom. Help Wanted: How Federal Job Training Programs Are Failing Workers. February 2011.

Adopt a sustainable maximum-award level for Pell.

The Department of Education attributed 25 percent of recent program growth to the $619 increase in

the maximum award enacted in the stimulus bill that took effect in the 2009–10 academic year.24 To

get program costs back to a sustainable level, the budget recommends maintaining the maximum

award for the 2012–2013 award year of $5,645 in each year of the budget window. This award would

be fully funded through discretionary spending.

Ensure aid for higher education is targeted to the truly needy.

The Department of Education attributed 14 percent of program growth between 2008 and 2011 to

recent legislative expansions to the needs-analysis formula.25 The biggest cost drivers come from

changes made in the College Cost Reduction and Access Act of 2007 [CCRAA]. For instance, this law

increased the amount of money students and their families could shield from the needs-analysis

calculation, making it more difficult to ascertain how much families could be expected to contribute to

the cost of their student’s education. This and other expansions in CCRAA are accelerating the

program’s fiscal problems and jeopardizing its ability to make good on its commitments to families

with the greatest need. To ensure limited education resources are directed at those who are truly

needy, these expansions should be returned to pre–CCRAA levels.

Update accounting rules to reflect the true cost of federal-loan programs.

Budget gimmicks have masked the cost of the federal student-loan program for decades. According

to outdated scoring rules, these extremely risky loans are accounted for as profit-making investments,

encouraging more loan expansion without regard for their impact on tuition inflation. This problem

was exacerbated in 2010, when the federal government effectively nationalized student lending.26 To

adequately account for market risk—and to discourage even riskier lending—this budget authorizes

the use of fair-value accounting for any legislation dealing with federal loan and loan-guarantee

programs. Such a method would more fully account for the cost of the risk to the taxpayer of the

direct-loan program.

Eliminate ineffective and duplicative federal education programs.

The current structure for K–12 programs at the Department of Education is fragmented and ineffective.

Moreover, many programs are duplicative and poorly targeted to students with the greatest needs.

This budget calls for reorganization and streamlining of K–12 programs and anticipates major reforms

to the Elementary and Secondary Education Act [ESEA], which was last reauthorized as part of the No

Child Left Behind Act [NCLB]. The budget also recommends that the committees of jurisdiction

terminate and reduce programs that are failing to improve student achievement and address the

duplication among the 82 programs that are designed to improve teacher quality.27

House Budget Committee | March 2013

22

24 Department of Education. Student Financial Assistance Fiscal Year 2012 Budget Request.

25 Department of Education. Student Financial Assistance Fiscal Year 2012 Budget Request.

26 "That Other Government Takeover." Wall Street Journal. 8 March 2010.

27 GAO. "Teacher Quality: Proliferation of Programs Complicates Federal Efforts to Invest Dollars Effectively." March 2011.

Consolidate job-training programs, based on reforms in the SKILLS Act, and provide for a

career-scholarship fund.

This budget builds on work being done by the Education and Workforce Committee under the

leadership of Chairman John Kline of Minnesota, especially the recent SKILLS Act introduced by

Representative Virginia Foxx of North Carolina. It improves accountability by calling for the

consolidation of duplicative federal job-training programs into more targeted career-scholarship

programs. This budget will also improve these programs’ accountability by tracking the type of

training provided, the cost per trainee, employment after training, and whether the trainee secures a

job in his or her preferred field. A streamlined approach with increased oversight and accountability

will not only provide administrative savings, but improve access, choice, and flexibility to enable

workers and job-seekers to respond quickly and effectively to whatever specific career challenges they

face. Moreover, this budget adopts a proposal from President Obama’s fiscal year 2013 budget to

close chronically low-performing Job Corps centers. Such a reform will allow those funds to be better

invested in centers with proven track records.

Tax Reform28

Challenge

America has an economic problem, in large part due to our outdated, broken tax code. While the vast

majority of our foreign competitors have moved aggressively to lower corporate tax rates and update

their international-tax systems, the United States imposes the highest combined federal-state

corporate tax rate in the industrialized world and relies on an outdated international-tax regime

designed more than 50 years ago, when the United States faced virtually no global competition.

Furthermore, the top U.S. tax rate on small-business income is 44.6 percent, the top tax rate on

individuals’ wages and salaries is 44 percent, and the total tax on investment income (capital gains and

dividends) in the United States is 55 percent.

American families and small businesses must navigate a maze of different statutory tax rates, hidden

rates, confusing deductions, credits, limitations, phase-outs, and the Alternative Minimum Tax. The

trifecta of (1) maddening complexity, (2) high tax rates on business income, and (3) the prevalence of

double taxation of capital and investment, all combine to suppress innovation, job creation, and

economic growth.

American families and businesses spend over $160 billion and 6 billion hours every year trying to

figure out their taxes. Roughly 90 percent of Americans are forced to pay for commercial taxpreparation

software or hire a tax professional just to file their taxes. Even after all that, average

taxpayers are left to wonder whether someone with the resources to hire a better accountant managed

to get a "better deal" out of the tax system.

House Budget Committee | March 2013

23

28 The tax-reform framework outlined in this budget reflects the views of the Republican members of the House Ways and Means Committee,

led by Chairman Dave Camp. As detailed in a letter sent to House Budget Committee Chairman Paul Ryan, their views can be found online

at: http://budget.house.gov/uploadedfiles/fy14budgetletterwm.pdf

Furthermore, American corporations engage in elaborate tax planning because the current tax code

puts them at a competitive disadvantage compared to their foreign competitors. Here too the tax

code is unfair, as some companies are able to use arcane and complex provisions of the tax code to

reduce their tax burden compared to their competitors. Companies engage in complex transactions

purely to reduce their tax burden even when these schemes divert resources from more productive

investments.

Solutions

Simplify the tax code to make it fairer to American families and businesses.

Reduce the amount of time and resources necessary to comply with tax laws.

Substantially lower tax rates for individuals, with a goal of achieving a top individual rate

of 25 percent.

Consolidate the current seven individual-income-tax brackets into two brackets with a

first bracket of 10 percent.

Repeal the Alternative Minimum Tax.

Reduce the corporate tax rate to 25 percent.

Transition the tax code to a more competitive system of international taxation.

This budget accommodates the forthcoming work by House Ways and Means Committee Chairman

Dave Camp of Michigan. It provides for floor consideration of legislation providing for comprehensive

reform of the tax code.

In 1981, President Ronald Reagan inherited a stagnant economy and a tax code that featured 16

brackets, with a top rate of 70 percent. When he left office in 1989, the tax code had been simplified

down to just three brackets, with a top rate of 28 percent. President Reagan’s bipartisan tax reforms

proved to be a cornerstone of the unprecedented economic boom that occurred in the decade during

his presidency and continued in the decade that followed.

It is time to reclaim the Reagan legacy of enacting fundamental tax reform in an era of divided

government. By making the tax code simpler and fairer, we can begin to regain the trust of the

American people that Washington can and is working for them. By making the tax code more

conducive to innovation, investment, and sustained job creation, we can safeguard the American

Dream for generations to come.

House Budget Committee | March 2013

24

SAFETY NET STRENGTHENED

House Budget Committee | March 2013

25

House Budget Committee | March 2013

26

SAFETY NET STRENGTHENED

For years, the federal government has been encroaching on the institutions of civil society. A distant

bureaucracy has been sapping their energy and assuming their role—when it should have been

supporting them. Now, families are suffering the consequences. Government spends roughly $1 trillion

on anti-poverty programs.29 Yet poverty rates are the highest in a generation. Over 46 million

Americans live below the poverty line.30 To keep our commitment to those in need—especially in

health care and nutrition programs—the federal government must take a dramatically different

approach from the failed status quo.

Empowerment is a powerful alternative to dependency, and recent history offers a guide to

policymakers seeking to repair the safety net. Bipartisan efforts in the late 1990s transformed cash

welfare by encouraging work, limiting the duration of benefits, and giving states more control over the

money being spent. Opponents of these policy changes argued that welfare reform would lead to

large increases in poverty and despair.

Instead, the opposite occurred. The Temporary Assistance for Needy Families [TANF] reforms cut

welfare caseloads in half as poverty rates declined. Child poverty in single-female-headed households

fell from 55 to 39 percent by 2001, which was the largest ten-year decline in poverty among such

children since the 1960s. Although this number has increased because of the recession, the nonpartisan

Congressional Research Service says that "progress appears to have been largely sustained in

both reducing welfare dependency and poverty among children in female-headed families, in spite of

the recent recession."31

These reforms worked because the best welfare program is temporary and ends with a job and a

stable, independent life for the beneficiary. At the federal level, the successful welfare-reform

movement of the 1990s was narrowly focused on cash welfare payments. Based on the lessons learned

from welfare reform, now it is time to implement similar reforms across other areas of the safety net,

especially Medicaid (medical care for the poor) and the Supplemental Nutrition Assistance Program

(SNAP, also known as the food stamps).

This budget applies the lessons of welfare reform to federal-aid programs. It gives states more

flexibility to tailor programs to their people’s needs. It gives those closest to the people better tools so

they can root out waste, fraud, and abuse. Finally, it empowers recipients to get off the aid rolls and

back on the payroll. By enlisting states in the fight against poverty, this budget builds a partnership

between the federal government and our communities.

House Budget Committee | March 2013

27

29 Congressional Research Service. "Spending for Federal Benefits and Services for People with Low Income, FY2008–FY2011." 16 October

2012.

30 U.S. Census Bureau. About Poverty: Highlights. Accessed 9 March 2013.

31 Gabe, Thomas. "Welfare, Work, and Poverty Status of Female-Headed Families with Children: 1987–2011." Congressional Research

Service. 9 January 2013.

Health care in brief

Provide states flexibility on Medicaid.

Repeal the health-care law’s expansion of Medicaid.

Repeal the health-care law’s exchange subsidies.

Welfare reform in brief

Allow states to customize SNAP to address the needs unique to their citizens.

Address barriers to upward mobility.

Reinstitute welfare’s work requirements.

Medicaid and Welfare Reform

Challenge

Medicaid is meant to offer affordable health care to those in need. Unfortunately, the program itself is

bursting at the seams. At its inception in 1966, the program cost $900 million. In 2012, it cost $432

billion. And by 2023, the program’s actuary expects costs to reach nearly $800 billion.32 Not

surprisingly, the program is a huge strain on state budgets. What’s more, much of this spending is

wasteful, because the federal bureaucracy can’t provide adequate oversight. Medicaid’s improper

payment rate is 8.1 percent—one of the ten highest among government programs. In 2011, Medicaid

made $21.9 billion in improper payments.33

The main problem with the program is structural. On average, the federal government pays 57 cents

of every dollar spent on Medicaid.34 As a result, this set-up tempts states to expand coverage during

boom times—because they pay less than half the cost. On the flip side—during hard times—states are

reluctant to cut a dollar’s worth of coverage because it saves them only 43 cents.

Governors have asked the federal government to give them more flexibility in offering the program.35

Federal mandates prevent states from developing innovative coverage options. Pressed for money,

states often resort to cutting payments to providers, forcing many doctors to turn away Medicaid

patients. As a result, patients’ health suffers. For example, Medicaid patients are more likely to die

after coronary-artery-bypass surgery, less likely to get standard care for blocked arteries, and more

House Budget Committee | March 2013

28

32 Truffer, Christopher et al. "2012 Actuarial Report on the Financial Outlook for Medicaid." March 2012.

33 GAO. "Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts." 28 March 2012.

34 Department of Health and Human Services. "Financing and Reimbursement." Medicaid.gov.

35 Republican Governors Public Policy Committee: Health Care Task Force. "A New Medicaid: A Flexible, Innovative and Accountable

Future." 30 August 2011.

likely to die from cancer than those with other coverage options.36 Meanwhile, those doctors who

continue to see Medicaid patients end up shifting their extra costs onto other patients.37

The health-care law only exacerbates this problem. It increases eligibility to those families making 133

percent of the poverty line. And it requires states to expand eligibility for the program if they want full

funding for the costs of new beneficiaries. In the end, it puts more people into a broken system.

Medicaid can no longer keep its promise to provide health care to our most vulnerable. Instead, it is

erecting a two-class system that stigmatizes Medicaid enrollees and overwhelms state budgets.

SNAP provides food aid to low-income Americans. But it too is facing a budget crunch. In 2003, the

program cost $25 billion. Today, it costs over $80 billion, representing an increase of 12.5 percent a

year since 2003. Much of the increase is due to the recession, but not all of it. Enrollment has grown

from 17 million recipients in 2001 to over 46 million today. The Department of Agriculture has

observed that "the historical relationship between unemployment and SNAP caseloads diverged in

the middle of the decade. . . . As the unemployment rate fell 1.4 percentage points between 2003 and

2007, SNAP caseloads increased by 22 percent."38

Like Medicaid, SNAP suffers from a flawed structure. States receive more money if they enroll more

people in the program—so their incentive is to get people onto the rolls. They have little incentive to

help people get off the rolls and find work. In fact, these programs make it harder to become

independent.

These programs also have little incentive to root out waste, fraud, and abuse. In Michigan, two lottery

winners received SNAP benefits.39 In New York, city employees created around 1,500 fake SNAP cards

—and stole $8 million in benefits.40 House Oversight Committee Chairman Darrell Issa has uncovered

dozens of other examples, such as recipients trading food stamps for cigarettes and alcohol.41

To remain viable and to deliver on its important mission, SNAP must end this abuse. It must encourage

states to reduce fraud. In so doing, it can help feed the hungry—without lining the pockets of those

who abuse the system.

House Budget Committee | March 2013

29

36 Gottlieb, Scott. "Medicaid Is Worse Than No Coverage at All." Wall Street Journal. 10 March 2011.

37 Rapp, Doug. "Low Medicare, Medicaid Pay Rates Impact Private Costs." American Medical News. 5 January 2009.

38 Andrews, Margaret and David Smallwood. "What’s Behind the Rise in SNAP Participation." Amber Waves. March 2012.

39 White, Ed. "Lottery winner. Food stamps. In Michigan. Again." Associated Press. 9 March 2012.

40 Moynihan, Colin. "Four Charged With Stealing $8 Million in Food Stamp Scam." New York Times. 8 December 2010.

41 Letter from Darrell Issa to Agriculture Secretary Tom Vilsack. 6 February 2012.

Implicit marginal tax rates

On a broader level, the welfare system as a whole is dysfunctional. In the 20th century, the federal

government addressed low-income families’ needs on a case-by-case basis: welfare, food stamps,

children’s health insurance. Because the government created these programs separately, it didn’t

coordinate their efforts. And over the years, policymakers have sought to rein in costs by phasing out

benefits as families move up the income ladder. As a result, recipients face what are called implicit

marginal tax rates. As their incomes rise, they face higher tax burdens and lower benefits. The

confluence of government policies affecting lower-income individuals can often create a powerful

disincentive to get ahead.

In testimony before the House Subcommittee on Human Resources last year, Gene Steuerle of the

Urban Institute illustrated this problem with a hypothetical example. Take a single parent with two

children living in Colorado. If that parent’s income rises from $10,000 to $40,000, how much of the

additional $30,000 does the family keep? How much of it is lost to taxes and benefit cuts? Assuming

the family is enrolled in non-wait-listed programs like SNAP, Medicaid, and SCHIP, Steuerle writes, "the

average effective marginal tax rate could be 55 percent." And "enrolling the family in additional

waitlisted programs, like

housing assistance and

[Temporary Assistance for

Needy Families], ratchets the

rate up above 80 percent."

Steuerle asks "why as a

society we worry about 40

percent tax rates on the rich if

50 or 100 percent tax rates on

the poor have little or no

effect. Are the poor really that

different?"

The CBO has provided

information on the range of

marginal tax rates that

individuals face. Lowerincome

individuals can face a

marginal tax rate of up to 95

percent, not including phaseouts

from Medicaid.42

While this is not a new problem, recent changes in federal policies exacerbate the trend. The

Affordable Care Act, with exchange subsidies and Medicaid expansions, accelerates the trend of everincreasing

marginal tax rates on lower-income individuals.

House Budget Committee | March 2013

30

42 CBO. "Effective Marginal Tax Rates for Low- and Moderate-Income Workers." 15 November 2012.

Upward mobility

Beyond the urgent need to lift the crushing burden of debt and advance pro-growth reforms that spur

sustained job creation, policymakers must reform public-assistance programs to be more responsive,

sustainable, and empowering to their beneficiaries. Government can play a positive role with policies

that help the less fortunate get back on their feet and offer low-income Americans the opportunity to

gain control over their lives.

The key to the successful welfare reform of the late 1990s was Congress’s decision to focus on the

individual. It granted states the ability to design their own systems. Congress should grant them the

same flexibility with regard to Medicaid.

Above all, the role of policymakers must be to lift government-imposed barriers to stronger

communities and flourishing lives. Fiscal responsibility and economic opportunity are but means to a

more critical end: the rebuilding of broken communities and the empowerment of families and

citizens. The ever-expansive activism of the federal government drains the vitality and displaces the

primacy of the bedrock institutions that define America.

Solutions

Provide states flexibility on Medicaid.

One way to secure the Medicaid benefit is by converting the federal share of Medicaid spending into

an allotment tailored to meet each state’s needs, indexed for inflation and population growth. Such a

reform would end the misguided one-size-fits-all approach that has tied the hands of state

governments. States would no longer be shackled by federally determined program requirements and

enrollment criteria. Instead, each state would have the freedom and flexibility to tailor a Medicaid

program that fit the needs of its population.

The budget resolution proposes to transform Medicaid from an open-ended entitlement into a blockgranted

program like State Children’s Health Insurance Program. These programs would be unified

under the proposal and grown together for population growth and inflation.

This reform also would improve the health-care safety net for low-income Americans by giving states

the ability to offer their Medicaid populations more options and better access to care. Medicaid

recipients, like all other Americans, deserve to choose their own doctors and make their own healthcare

decisions, instead of having Washington make those decisions for them.

There are numerous examples across the country where states have used the existing, but limited

flexibility of Medicaid’s waiver program to introduce innovative reforms that produced cost savings,

quality improvements, and beneficiary satisfaction. The state of Indiana implemented such reforms

through the Healthy Indiana Plan, a patient-centered system that provided health coverage to

uninsured residents who didn’t qualify for Medicaid. Enrollees in this program had access to benefits

such as physician services, prescription drugs, both patient and outpatient hospital care, and disease

House Budget Committee | March 2013

31

management. Unfortunately, the current administration denied Indiana’s request to continue operating

their program under the Medicaid waiver rules.43

The Medicaid reforms proposed in the fiscal year 2014 budget take the opposite approach and

instead provide all states with the necessary flexibility to pursue reforms similar to the Indiana plan.

Repeal the health-care law’s expansion of Medicaid.

The health-care law calls for major expansions in the Medicaid program beginning in 2014. These

expansions will have a significant impact on the federal share of the Medicaid program, and will

dramatically increase spending.

In the face of enormous stress on federal and state budgets and declining quality of care for Medicaid,

the health-care law would increase the eligible population for the program by one-third. This future

fiscal burden will have serious budgetary consequences for both federal and state governments.

Although the health-care law requires the federal government to finance 100 percent of the Medicaid

costs associated with covering new enrollees, this provision begins to phase out in fiscal year 2016. At

that time, state governments will be required to assume a share of this cost. This share increases from

fiscal year 2016 through 2020, when states will be required to finance 10 percent of the health-care

law’s expansion of Medicaid.

Not only does this expansion magnify the challenges to both state and federal budgets, it also binds

the hands of local governments in developing solutions that meet the unique needs of their citizens.

The health-care law would exacerbate the already crippling one-size-fits-all enrollment mandates that

have resulted in below-market reimbursements, poor health-care outcomes, and restrictive services.

The budget calls for repealing the Medicaid expansions contained in the health-care law and removing

the law’s burdensome programmatic mandates on state governments.

Repeal the health-care law’s exchange subsidies.

According to CBO estimates, the health-care law will add more than $1.2 trillion in new spending to

the federal balance sheet, providing eligible individuals with subsidies to purchase governmentapproved

health insurance.44 These subsidies can only be used to purchase plans that meet standards

determined by the new health-care law. In addition to this enormous market distortion, the law also

stipulates a complex maze of eligibility and income tests to determine how much of a subsidy

qualifying individuals may receive.

The new law couples these subsidies with a mandate for individuals to purchase health insurance and

bureaucratic controls on the types of insurance that may legally be offered. Taken together, these

provisions will weaken the private-insurance market. Exchange subsidies take the health-care market in

the wrong direction, breaking what’s working at a time when policymakers need to fix what’s broken.

Government mandates will drive out all but the largest insurance companies. Punitive tax penalties will

House Budget Committee | March 2013

32

43 Roy, Avik. "Obama Administration Denies Waiver for Indiana’s Popular Medicaid Program." Forbes. 11 November 2011.

44 CBO. "Estimate of the Budgetary Effects of the Insurance Coverage Provisions Contained in the Affordable Care Act." February 2013.

force individuals to purchase coverage whether they want it or not. Further, the law does not condone

any policy that would require entities or individuals to finance activities or make health decisions that

violate their religious beliefs.

This budget repeals the President’s onerous health-care law. Instead of putting health-care decisions

into the hands of bureaucrats, Congress should pursue patient-centered health-care reforms that

actually bring down the cost of care by empowering consumers.

Allow states to customize SNAP to address the needs unique to their citizens.

This budget retools federal aid to low-income families in two ways. First, it eliminates the incentive for

states to sign up as many recipients as possible. After employment has recovered, it converts SNAP

into a block grant, indexed for inflation and eligibility. This reform allows states to tailor their programs

to their recipients’ needs.