Defense spending for the war on terrorism is reclassified as Overseas Contingency Operations (OCO) which is exempt from spending caps. Disaster relief is exempt. However, it is limited by a formula using disaster spending from the last 10 years. While this sounds reasonable, it allows you to move money subject to the discretionary spending caps to money that is exempt. Rather than fund disaster relief each year and include it in the budget, Congress will eventually pretend that we will have no disasters in the following year to allow them to spend the money elsewhere. Then when a hurricane hits, they will be able to get more funding that is exempt from the caps to pay for the recovery.
Finally, any spending that the president and Congress agree is an “emergency” is also exempt from the caps. This is the largest loophole of all. This gimmick was used repeatedly over the past few decades to evade spending caps imposed by the old Gramm-Rudman-Hollings Act.
These are just a few of the problems in the Budget Control Act. You also have to look at all of the spending that is not yet included. The BCA assumes that in January, the Alternative Minimum Tax (AMT) will be allowed to increase. This is a provision of the Tax Code created in 1969 to ensure that the very rich pay at least some income tax. It was to affect only about 200 people originally.
Unfortunately, it was not indexed for inflation. Over time it has grown to impact millions of people who would not be considered to be rich even under President Obama’s standards. Consequently, Congress has passed a series of short-term corrections over the past four decades to prevent the full impact of the AMT. The BCA assumes that no more corrections will be made and the full impact of the AMT will be allowed to hit several million unsuspecting taxpayers beginning in 2012. This allows Congress to assume over $650 billion in deficit reduction under the BCA
That isn’t the only expiring provision of that Tax Code that the BCA has already counted as reducing the deficit. There is more than $4 trillion in additional deficit reduction from many other expiring tax provisions that the BCA assumes will not continue over the next ten years in order to achieve its $2.1 trillion in deficit reduction.
On the spending side of the ledger, the BCA has also booked savings from payments to physicians from Medicare. This gimmick has been used by Congress for more than a decade. Congress always claims to get savings by canceling inflation adjustments for Medicare reimbursements in the future. But when the future arrives, the inflation adjustments are restored with a promise to cut them even further in the future.
The future has arrived again and in January current law says doctors will have all of these inflation adjustments erased and their payments cut by about 30 percent for treating Medicare patients. Since many doctors are already treating Medicare patients at a loss to their practice, they won’t absorb this cut and would stop treating Medicare patients. Every year since 2003, this cut has been put off.
If we assume that there will be no 30 percent cut and no increases in payments due to inflation over the next 10 years, that will cost about $300 billion. A more realistic assumption would be that payments to doctors will need to keep pace with inflation which would push the cost north of $450 billion.
All of this means that the $2.1 trillion in deficit reduction assumed in the Budget Control Act is about as realistic as the accounting Enron officials used.
These costs need to be addressed in a realistic manner. The paltry figures being bandied about by the super committee of possible deals they might agree to are just silly. They are avoiding the major policy decisions that need to be made and are continuing to book phantom savings.
That is why the Budget Control Act and its Frankenstein creation, the super committee, are a failure. Every penny of increased debt will be spent before the federal government has to make cuts to programs in 2013.
It is precisely this deal that came out of Washington that the financial markets deemed a failure. It is precisely why Standard & Poor’s downgraded this nation’s credit rating after the passage of the BCA.