Right- and left-leaning groups are divided on the fate of federal highway spending. But one thing they can agree on is they don’t like the way House Republicans’ bill set to be voted on Tuesday is paid for.
The House GOP’s bill, which was drafted by House Ways and Means Committee Chair Dave Camp, would inject a cash infusion of more than $US10 billion into the Highway Trust Fund. Camp said this money would pay for the infrastructure projects the fund supports through next May. Without congressional action, the trust fund is projected to become insolvent beginning next month, a situation that threatens thousands of projects and construction jobs.
The bill includes “offsets” to counteract the new spending and make the bill revenue-neutral. Camp said the main offset, which would increase revenues by $US6.4 billion over 10 years, is a mechanism known as “pension smoothing.” It permits employers to delay contributions to employee pension plans, thereby increasing taxable corporate income and generating revenue for the Treasury.
But its detractors say that’s nothing more than an accounting gimmick that might not end up raising any revenue and could hurt workers. It’s a large part of the reason there’s so much conservative opposition to the House GOP’s plan.
“It’s a short-term bill full of budget gimmicks and no policy changes,” Daniel Horowitz, a spokesman for the conservative Madison Project, told Business Insider on Monday.
“There’s no innovation. It’s almost like, on the Democratic side, it’s always raise taxes. Whereas on the Republican side, it’s almost like they’re Old MacDonald: ‘And a $US5 million here, and a $US5 trillion there!’ The notion that these are offsets is just preposterous.”
The opposition to “pension smoothing” is not a uniquely conservative idea. Numerous left-leaning policy centres, including the Center on Budget and Policy Priorities, and other bipartisan think tanks oppose the provision.
Pension smoothing has quickly become one of Congress’ favourite ways to offset spending in a bill. It was also included as part of Democrats’ push to revive unemployment insurance earlier this year. And during the federal government shutdown last year, Republicans included it as part of a provision that would repeal the Affordable Care Act’s tax on certain medical devices.
The bipartisan dissent from different groups is predicated on the idea pension smoothing won’t do much to reduce the deficit in the long-term. Instead, it’s the classic Washington move of “kicking the can down the road” — where it would raise some revenues now, it would only exacerbate a problem years from now.
Len Burman, the director of the Tax Policy Center, recently explained how pension smoothing works. And he said it could actually end up adding spending, instead of offsetting it, later on:
“In a nutshell, here’s what it does: Companies can postpone contributions to their pension funds. This means that their tax deductions for pension contributions are lower now, but the actual pension obligations don’t change, so contributions later will have to be higher — by the same amount plus interest. In present value terms (that is, accounting for interest costs), this raises exactly zero revenue over the long run.
Let me say that again using all capital letters to express my frustration.
THIS $US6.4 BILLION REVENUE PROVISION RAISES NO REVENUE OVER THE LONG RUN!!!”
When scoring the Senate’s unemployment-benefits bill, the Congressional Budget Office projected the pension smoothing included in the bill would raise about $17 billion over the first six years. But the gains would decline in subsequent years, to the point where net savings over a 10-year period would be only $US4 billion, as this chart from The Committee for a Responsible Budget explains:
Why doesn’t Congress care about this? Likely because all of their bills are officially “scored” within a 10-year budget window by the Congressional Budget Office. That’s how it becomes revenue-neutral over the 10-year period.
Horowitz said pension smoothing has a “rubber band effect.” Companies contribute less now, but in the end, they’re going to have to make it up.
“It’s ‘garbage in, garbage out.’ To the extent that you ‘get’ that revenue, you would almost certainly lose it again,” Horowitz said.
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