The Heritage Foundation

Executive Memorandum on Federal Budget

June 15, 1984

June 15, 1984 | Executive Memorandum on Federal Budget

The Rose Garden Budget: A Taxing Thorn in Reagan's Side


(Archived document, may contain errors)

6/15/84 56

.THE:. ROSE GARDEN BUDGET: A TAXING THORN IN REAGAN'S SIDE

Congressional. conferees are struggling to reach a compromise on the complicated deficit reduction plan before Congress adjourns for the July 4 recess. If they fail before then, the plan may die. Given the-way the discussions are headed, this may be best f or the American people. While the tax boosting provisions of the bill are sailing through the Senate-House conference with ease, the critical Problems on the spending side have not been resolved. If the House votes down Senate planned "caps" on spending, it will transform the President's deficit "down pay- ment" initiative into little more than yet another tax increase, a grim replay of what happened with the 1982 "deficit reduction" package.

The Senate/Rose Garden version of the current plan (H.R. 4170) c alls for $50 bill.ion in tax increases, $40 billion in defense cuts, and $50 billion in non-defense cuts over the next three years. The House plan mandates nearly $100 billion in defense cuts, with a $40 billion non-defense reduction and $50 billion in ta x hikes. Because it is dif- ficult for the whole Congress to preempt the jurisdiction of its appro- pXiations committees, specific program cuts are not made in either the House or Senate versions of the bill. Nor is there any guarantee they will materializ e. The tax increases, on the other hand, are spelled out in detail, and wi3L1 occur automatically once the bill is passed.

The House wants to rely on the traditional method of enforcing the spending cuts by writing the ceilings into the first concurrent re solu- tion on the budget, in the hope that the appropriations committees will then make cuts in specific program's commensurate with these targets. History teaches, however, that such promises are generally empty politi- cal rhetoric. In fact, the FY 1985 HUD Appropriations bill currently before the House would break these very targets. To bind the appropria- tions committees to these targets, the Senate voted to include the speci- fic budget ceilings, or caps, in the deficit reduction legislation. Unlike a budget resolution, this would make the caps legally binding.

The House is balking at the "cap" concept. Representative Jamie Whitten (D-MS), chairman of the House Appropriations Committee, maintains "you can't tie the Congress down or the country down fo r the future." Yet Whitten and others clearly feel that each Congress has the right to bind its successors to spend money on entitlement programs. If Whitten's logic is to be applied fully, future Congresses should not be required

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to accept the spending decisions of a past Congress, and all spending programs should have mandatory sunset provisions, so that they would not outlive any Congress.

Not only is the tax and spending package likely to be very one- sided, but there is scant evidence that it wil l have any significant beneficial effect on the deficit or the economy. The financial markets may already have discounted the effects of the present deficit reduction plan. Passage will not have a significantly positive effect on interest rates or stock p r ices. Unless Congress suddenly slashes a significant amount in FY 1985 non-defense spending from the Senate proposal, the package is unlikely to have any impact. The markets have caught onto the tax and spend game being played in Congress. Many analysts n o w be- lieve that the market would react as negatively to the House sponsored "tax-only" bill as it would to no bill. Rigid and enforceable caps are a necessary signal. that Congress is serious about its proposed spending cuts. The measure is toothless wit hout them.

The House already has whittled down the Senate's $13.4 billion non- defense reductions; to $9 billion. Clearly Senate conferees must insist on preserving the spending caps in the final legislation, or they must find another effective means of en forcement mechanism--such as the line item Veto. If the: conferees fail to do this, the momentum in Congress will carry to the President's desk a bill deserving presidential veto.

A veto, however, could destroy any prospect of significant spending reducti ons in the foreseeable future, and it would signal the failure of the political system to meet the task of slashing the deficit. To pre- vent this crisis, the Senate conferees must make enforceable spending caps a non-negotiable demand.

John M. Palffy Walker Fellow in Economics

F or further information:

John M. Palffy, "Line-Item Veto: Trimming the Pork," Heritage Foundation Backgrounder No. 343, April 3, 1984. John M. Palffy, "Dangers of the Deficit Reduction Plan," Heritage Foundation Back- grounder No. 341, March.26, 1984. Michael J. Solon, "1985 Budget Resolution: Same Ole Song," House Republican Study Committee, June 9, 1984. Letter from Albert D. Bourland, Vice President, U.S. Chamber of Commerce, to Congres- sional Budget Conferees, June 12, 1984.

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