Funding Growing Programs with Declining or Finite Revenue Sources

 
 
April 10, 2013

My colleague Will McBride takes the larger look at President Obama's proposed 2014 budget, but I wanted to highlight one aspect of it: claiming "budget neutrality" for items that will actually increase the budget deficit over time.

For example, President Obama proposes funding a universal pre-K program with a 93 percent increase in the federal tobacco excise tax. Over ten years, these two policy ideas indeed balance out: $78 billion in tax revenue paying for $77 billion in spending.

But they only balance in the aggregate. The actual trend is a growing spending program financed by a shrinking revenue source (tobacco consumption is declining), as you can see when the numbers are broken out year-by-year.

 

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Total, 2014-2018

Total, 2014-2023

Early childhood investments

….

*

1

3

6

8

10

11

12

12

12

19

77

Tobacco tax financing

….

-8

-10

-9

-9

-8

-8

-7

-7

-6

-6

-44

-78

Source: White House Office of Management & Budget, Fiscal Year 2014 Budget of the U.S. Government, Table S-2.

So while the two programs would reduce the deficit by $1 billion over the 2014-23 period, it actually increases the deficit starting in 2019 and growing thereafter.  By 2023, the program will cost $12 billion each year but the tax will only be bringing in $6 billion, increasing the deficit by $6 billion a year.

The same thing occurs with his proposed $104 billion in addition surface transportation spending and $62 billion in job creation incentives, paid for by savings from the early end to the Iraq and Afghanistan conflicts. While over the ten-year window, this is $166 billion in spending offset by $167 billion in savings, it actually increases the deficit every year beginning in 2020 because ending those conflicts early are only one-time savings. 

A better approach, for programs we like and want to have, is to fund it with revenue sources that we all pay. President Obama obviously tries his best to avoid that, focusing on smokers, high-income individuals, savers, corporations, and a few others to pay for programs we all use and enjoy. While that might be in someone's political interest, it's a bad way to fund growing programs that we all ought to be willing to chip in for.

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