Understanding the Gang of Six plan

Understanding the Gang of Six plan

In this post I will try to describe and explain the Gang of Six plan. In a separate post (coming soon) I will describe my views on the plan. I can’t explain the plan without incorporating some judgment, but I’ll try to separate most of my personal policy views into the follow-up post.

The Original Gang of Six consists of Democratic Senators Conrad (ND), Durbin (IL), and Mark Warner (VA), and Republican Senators Chambliss (GA), Coburn (OK), and Crapo (ID). Senator Conrad is Chairman of the Senate Budget Committee. Senator Durbin is the #2 Senate Democrat, the Whip.

Press coverage of the Gang’s plan has been substantively weak. Most of it covers only the Gang’s top line substantive message and the political back-and-forth surrounding it. I’m going to try to supplement that by putting some meat on the bone.

Friendly warning: this is somewhat of a monster post. It is both longer and more detailed than I would like it to be, but I’m aiming it primarily at policy insiders who I think want that additional detail and analysis. Lay readers may find a few parts of it to be tough sledding. The mainstream press is giving you not enough detail. Here I’m erring on the other side. I will, in my follow-up post, provide a shorter and far more judgmental summary of what’s going on in this plan.

To their credit, the Gang of Six (G6) released three documents that provide significant descriptive detail and numbers. I will therefore begin by giving you what the Washington insiders already have: the Gang of Six’s documents, so you can see for yourself.

  1. Gang of Six summary;
  2. Gang of Six slides; and
  3. Gang of Six charts.

The Gang of Six plan is designed in three legislative parts. Part 1 is “a $500 B down payment” that would presumably be implemented quickly/immediately through a bill. Part 2 contains the bulk of the plan’s deficit reduction, and would require enactment of at least two more pieces of legislation, a budget resolution followed by a reconciliation bill. Part 3 is a process for considering Social Security legislation that would, if successful, be combined with the reconciliation bill from Part 2 after both had passed the Senate.

The Gang’s plan says nothing about increasing the debt limit. It would be natural to package Part 1 with a debt limit increase, but they stay silent on that point. I think that ambiguity is reasonable in the current legislative context — it allows them flexibility and keeps the issues somewhat separate. This is a deficit reduction plan, not a debt limit increase plan.

Part 1 of the Gang’s plan consists of several components:

  • Caps on discretionary spending at unspecified levels through FY15 (that’s for four fiscal years, FY12-FY15, but without any actual numbers);
  • A significant technical correction to the way inflation is measured through the Consumer Price Index;
  • Two Social Security spending increases to partially mitigate the effects of the CPI change on low-income beneficiaries;
  • repeal of the CLASS Act, a new long-term health care benefit created in the Affordable Care Act (aka it’s part of “ObamaCare”);
  • some knicks and knacks like freezing Congressional pay and selling some government assets; and
  • unspecified budget process reforms.

As I describe in further detail below, the absence of numbers for proposed discretionary spending is a huge gaping hole. It’s impossible to evaluate a budget plan if you don’t know what it’s proposing for spending that comprises 30% of the federal budget.

The CPI correction is a big deal — it would result in slower spending growth, mostly with reduced Social Security Cost of Living Adjustments (COLAs), as well as higher taxes, resulting from a slower indexation of income tax brackets. CBO says the technical change (moving to “a chained CPI”) would on average reduce measured inflation by about 0.25 percentage points. There’s a debate about whether the higher revenues constitute a “tax increase” or not. I fall on the “not” side as long as the technical correction is applied to everything, but this is a judgment call.

The Social Security spending increases are clearly a legislative bargain with someone on the Left who was concerned about the effects the correction would have on lower-income Social Security recipients.

Repeal of the CLASS act is a big deal. This is the little-discussed but hotly disputed new long-term care insurance benefit in the Affordable Care Act. Spending hawks are concerned the cost of this benefit will explode in the long run. Repeal is a big deal fiscally, as a health policy matter, and politically.

Part 2 of the Gang’s plan describes a budget resolution. This is unsurprising given that Gang member Conrad is Senate Budget Committee Chairman. Minor note: all three documents use the same language and presentation formats as Chairman Conrad’s traditional presentations, strongly suggesting that he controlled the paper. Like a budget resolution, the Gang’s plan sets numeric targets for categories of spending and sets up legislative processes that would govern the development of legislation dealing with specific policy details. In this respect, the Gang’s outline is traditional and fits within the normal confines of the regular budget process, albeit 4-5 months later than normal. If there were a broad consensus supporting the Gang’s plan, it would be normal process to turn it into a budget resolution and then a reconciliation bill.

I think of Part 2 in three subparts: numbers, recommended tax policies, and process changes.

Part 2A: Numbers

  • Mandatory spending would be cut by either $328 B over 10 years, or $445 B over the same timeframe. The $117 B difference is confusing — the document provides two different numbers for savings from Medicare and Medicaid that differ by that much. Sen. Coburn has been quoted as saying the Gang “added another $115 B in health savings” in recent days. I think that’s this figure, but the document includes both numbers. That suggests to me the document is trying to have it both ways — include the higher figure that Sen. Coburn likes, and the lower figure that I presume Democrats prefer. One of the graphs shows the additional $117 B in health savings, but lightly shaded, again allowing the Gang to sell it both ways to different constituencies. This ambiguity detracts from the plan’s credibility and is important.
  • A significant policy detail is that the Judiciary Committee would have to get savings from medical malpractice reform.
  • Revenues would be set at a level that over the next ten years is $1.5 trillion lower than current law, but $2.3 trillion higher than current policy. I will explain this in further detail below.

There are a couple of significant little phrases in the document: Medicare and Medicaid would be reformed “while maintaining the basic structure of these critical programs,” and the plan “would maintain the essential health care services the poor and elderly rely upon.” The first is a rejection of structural reforms like those proposed in the House Budget plan or in Ryan/Rivlin, as well as a rejection of block granting Medicaid or converting it into a low-income voucher program. The second is vague and could be interpreted to mean almost anything. Since Democrats are in the Senate majority, they would be the ones interpreting both sets of language as legislation implementing the Gang’s plan is drafted.

In effect, you should think of this language as meaning the Gang’s plan commits to achieving Medicare and Medicaid savings through incremental programmatic changes rather than structural reforms.

You can compare the $328 B or $445 B of proposed mandatory savings to the Biden group’s $423 B figure. Democrats in the Biden group were willing to go higher if taxes were increased, as they are in the Gang’s plan.

Part 2B: Recommended tax policies

The plan would require the Senate Finance Committee to report tax reform legislation within six months. That tax reform legislation would have to hit the revenue levels described above, and would also have the following tax reform policy parameters (with a caveat):

  • Individual rates would be in three brackets: 8-12%, 14-22%, and 23-29%;
  • AMT would be repealed
  • “Reform, not eliminate, tax expenditures for health, charitable giving, homeownership and retirement, and retain support for low-income workers and families;”
  • “Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries;”
  • Corporate income would be taxed at a single rate between 23 and 29%;
  • Corporate income earned overseas would operate under a “competitive territorial tax system.”

There’s an important process point here. It’s pretty clear to me that the Gang’s plan is written to be implemented through a traditional budget resolution process. If I’m right, then the above tax reform parameters are non-biding and close to meaningless. A budget resolution cannot constrain the Senate Finance Committee and force it to change taxes in a particular way. Its only power is to set the numeric total for how much revenue is collected. A budget resolution could include all the above conditions, but the Finance Committee could ignore them without consequence (and traditionally has). Procedurally the Senate would first commit to the new revenue levels, and then later work on the details of tax reform.

That means that either the Gang would have to find another way to commit the Finance Committee to abiding by these principles, or risk the committee doing different tax policies that would collect the total amount of revenue required by the budget resolution. Several members of the Gang are also Finance Committee members, but if Chairman Baucus decided he wanted higher marginal income tax rates than described above, for instance, I don’t see how this plan could prevent him from doing so.

Another important detail left unspecified is the capital gains & dividend tax rate. Back channel conversations suggest the Gang agreed on 20% for both, up from 15% now, although this is left unspecified in the Gang’s plan.

Part 2C: Process changes

  • Part 1 of the plan would establish discretionary spending caps for four years, through FY15. Part 2 would set caps through the end of the 10-year budget window in FY21, but again the numbers aren’t specified.
  • The Gang’s plan would create an unspecified “trigger” mechanism if debt-to-GDP does not stabilize after 2015. The language makes it sound like a fast-track legislative process rather than an automatic sequester.
  • The plan also creates a process to “require action by the Congress and the President” if total federal health care spending per beneficiary grows faster than GDP + 1%. The details of this process are similarly unspecified.

The triggers are important but not super-strong. If you want to guarantee a fiscal outcome like stable debt-to-GDP or health spending growth slower than some rate, you need to put an automatic mechanism into law that forces that outcome whether or not Congress acts. Creating an expedited legislative process to encourage Congress to fix it still relies on Congress to do the right thing in the future. That’s often an uncertain bet.

This has an important consequence. I understand the “$3.7 trillion in savings” cited by the Gang is based in part on this second health care trigger. In other words, they assume that total federal health care spending per beneficiary will grow no faster than GDP + 1%. But they don’t specify the policies to achieve that goal, and they set up an unspecified legislative process to make hitting that target a little easier but far from certain. This means that a significant share of the $3.7 trillion savings are not real. If you want to claim savings from capping government health spending growth, you either have to make the policy changes now or actually cap it. You can’t just say “We’ll set a goal for Congress to hit in the future.” You don’t get to count that as saving money, and the Gang does.

Part 3: Social Security process

  • The Gang’s plan would “consider Social Security reform, if and only if the comprehensive deficit reduction bill has already received [60 votes].” While the Gang describes this as including Social Security reform in their plan, the “only if” means it is instead a new procedural barrier to reform. In effect, it says that SS reform may not be considered until and unless Part 2 has passed the Senate.
  • It sets “75-year actuarial balance” as the test for measuring Social Security reform. This is a significant policy choice I will describe below.
  • It would set a 60-vote threshold for passing Social Security reform in the Senate. While there is in practice already a 60-vote threshold since a minority could filibuster a Social Security bill they didn’t like, this slightly raises the bar by requiring 60 votes not just to vote to shut down a filibuster, but also to vote aye on final passage. This is therefore another new procedural hurdle to passing Social Security reform.
  • If the Senate completes Part 2 and Part 3, the two bills would be combined and sent to the House as a single bill.

The big question here is what the Gang can legitimately claim on Social Security reform. Unlike both the House-passed budget, the President’s February budget, and the President’s late-Spring budget speech, the Gang’s plan actually talks about Social Security. But they are counting a technical correction to CPI, plus Social Security spending increases, plus the above process, as moving forward on Social Security reform. That is an unusual claim to say the least.

Deficit reduction

The Gang says their plan would reduce deficits by $3.7 trillion (or maybe $3.6 trillion, depending on that ambiguous additional $115 B of health savings) over 10 years “under CBO’s March baseline.” To be blunt, I don’t believe this number. The Gang’s documents use three different baselines as bases for comparison for different elements of the plan. They don’t specify how much they want to spend on 30% of the budget, and they count savings from a weak legislative process change on health care. To me these are flashing red lights suggesting someone is trying to hide the ball. The Gang’s charts purport to compare the Gang’s plan with the Bowles-Simpson recommendations, but they leave out the Social Security portions of Bowles-Simpson, distorting the comparison.

Until more numbers or detail are provided I suggest treating this number as an assertion rather than a fact. A reporter who writes “The Gang of Six plan would reduce the deficit by $3.7 trillion” is being insufficiently skeptical.

The discretionary holes

  • The Gang’s plan proposes $866 B in savings from “security” (aka defense) discretionary spending. They don’t say compared to what. This is a particular challenge right now, because how you measure the savings depends on what you assume as a starting point for expenditures in Iraq and Afghanistan. This baseline measurement question is not particular to the Gang’s plan. Everyone faces it.
  • More importantly, the Gang’s plan specifies neither discretionary spending totals nor how much would be spent (or saved) from nondefense discretionary spending. The traditional battle is that Republicans want to cut nondefense and increase defense, and Democrats the reverse. The Gang’s plan provides some detail on defense (with the above caveat), but says nothing about total discretionary spending or whether the Gang’s plan would increase or cut non defense appropriations.

The first of these could be pretty easily clarified. The second is more of a gaping maw than a hole. It is a critical area of ambiguity in one of the most hotly disputed questions in any budget plan. I don’t see how a Member of Congress could make a judgment about a plan without knowing how much it’s going to spend on appropriations, as well as the defense/nondefense balance.

Tax cut or tax increase?

The “Bush tax rates” have been in effect since 2001. Congress has “patched” the Alternative Minimum Tax every year for a long time so that it doesn’t suddenly hit millions more tax filers. But the Bush tax rates are scheduled to expire January 1, 2013, and the AMT again needs to be patched. This creates a massive difference between current law on taxes and current policy on taxes.

  • Current law: Income tax rates increase January 1, 2013, with significantly higher revenue coming into the government from that point on. The AMT patch expires as well, affecting millions more taxpayers and adding another huge chunk of revenue for the government. The same is true for the estate tax.
  • Current policy: The tax rates now in effect (aka “the Bush tax cuts,” or maybe now “the Bush-Obama tax cuts” since President Obama extended them last December) stay where they are forever, and the AMT continues to be patched. These principal components of tax policy do not change in 2013 or thereafter. Future government revenues collected will be roughly the same as they are this year, accounting for differences in economic growth.

Congressional Republicans have been using a current policy baseline to describe tax policy changes. Congressional Democrats have been using a current law baseline. The White House has used a hybrid (don’t ask).

CBO says the difference between current law taxes and current policy taxes over the next decade is about $3.8 trillion over the next decade. Interest effects are another $750 B more.

The Gang’s plan would result in revenues that would be greater than current policy but less than current law. So whether this is a tax cut or a tax increase depends on your “baseline” (starting point) for comparison.

  • The Gang says “If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.” CBO scores relative to current law, and this phrase is key.
  • That means the Gang’s plan is a $2.3 trillion tax increase relative to current policy.
  • House Budget Chairman Paul Ryan measures current policy a little differently than CBO, I think, so he comes up with a $2.0 trillion tax increase relative to current policy.

This tax baseline question also critically affects the “ratio” measurement commonly used to describe deficit reduction plans. The Gang is claiming most of the deficit reduction comes from spending cuts. That’s using a current law baseline for taxes. If you instead use current policy, the Gang’s plan relies principally on tax increases for its deficit reduction. I can’t tell you that ratio because I don’t believe their aggregate deficit reduction number, nor do I have sufficient detail to understand their discretionary spending numbers.

Social Security measurement

There are two commonly discussed ways to measure a Social Security reform plan. They are called “75-year actuarial balance” and “cash flow balance.” The first test is easier to meet and tilts the reform playing field toward tax increases. The Bowles-Simpson framework said Social Security reform had to meet both tests, including the harder cash flow balance test. The Gang’s plan sets 75-year actuarial balance as the metric for measuring reform.

Congratulations. You made it through a heavy post and now, I hope, understand the Gang of Six’s budget plan. Thanks for reading.

(photo credit: Kinya Hanada)

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