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Appendix
AChanges in CBO’s Baseline Since August 2007
The Congressional Budget Office (CBO) projects that—absent further changes to legislation affecting spending and revenues—the deficit for fiscal year 2008 will reach $219 billion, $64 billion more than the shortfall of $155 billion that the agency projected last August (see Table A-1).1 Relative to its previous estimates, CBO has reduced projected revenues for 2008 by $116 billion; however, that reduction is partially offset by a drop of $52 billion in projected outlays. (Because CBO’s budget projections generally do not include the effects of prospective legislation, the current baseline omits some spending that is likely to occur in 2008 to finance ongoing military operations in Iraq and Afghanistan. As a result, the decrease in outlays that is currently projected will probably be offset by additional spending later this year. Other potential legislative changes, such as the passage of an economic stimulus package, also could increase the 2008 deficit.)
Changes in CBO’s Baseline Projections of the Deficit or Surplus Since August 2007
Source: Congressional Budget Office.
Note: * = between -$500 million and $500 million.
a. Positive numbers indicate a decrease in the deficit or an increase in the surplus.
For the 2009–2017 period, CBO has lowered the cumulative deficit projected in its budget baseline. The major contributor to that apparent improvement in the budgetary outlook is the use of partial-year funding for military operations in Iraq and Afghanistan rather than changes in the underlying budgetary and economic environment. If the changes in outlays for activities in Iraq and Afghanistan and for the war on terrorism were excluded, CBO’s current baseline would show an increase in the cumulative deficit for 2008 through 2017 of more than $850 billion.
When CBO updates its 10-year baseline projections, it divides the changes into three categories: enacted legislation; changes to CBO’s economic forecast; and other, so‑called technical factors.2 The largest change in CBO’s baseline for 2008 results from the enactment of new legislation, which has added an estimated $59 billion to the deficit projection for this year; that total reflects an estimated decline in revenues of $69 billion, which is offset by a projected decrease in outlays of $10 billion. Within the 5- and 10-year budget windows, the greatest adjustments to CBO’s baseline projections comprise legislative and economic changes, but with opposite effects on the deficit. The impact attributable to recent legislation improves the 10-year bottom line by $502 billion, but less-favorable economic projections offset most of that improvement, increasing the cumulative deficit by $486 billion. Technical adjustments (those not directly related to changes in law or in CBO’s economic outlook) have a comparatively small impact on the bottom line, decreasing the projected deficit by $12 billion in 2008 and by $159 billion over the 2008–2017 period.
Changes in the Budgetary Outlook for Fiscal Year 2008
CBO’s projection of the baseline deficit for 2008 has risen from the $155 billion estimated last August to $219 billion, primarily because of legislative actions. The Tax Increase Prevention Act of 2007 (Public Law 110-166) modified certain provisions of the alternative minimum tax (AMT) in an effort to reduce the number of people who would otherwise be subject to that tax. Those modifications added $70 billion to the deficit and represent the largest factor in the deficit increase for this year. The enacted appropriations for 2008 also changed the budgetary outlook. CBO’s previous baseline projections were based on appropriations for 2007, as adjusted for inflation in subsequent years. Appropriations for 2008 (other than those for activities in Iraq and Afghanistan and for the war on terrorism) are projected to be about 3 percent higher than the amount indicated in the previous baseline, adding $16 billion to outlays for 2008. However, funding for activities in Iraq and Afghanistan and for the war on terrorism has been provided for only part of the year, so estimated outlays for those activities are currently $31 billion less than the amounts shown in the August baseline. (Assuming that additional funding for those activities is provided later in the year, the difference in estimated outlays will decline or disappear.) Other legislation boosted the estimated deficit for 2008 by about $4 billion.
The revised economic outlook added $33 billion to the projected deficit because tax revenues are likely to be lower than CBO previously anticipated; savings in outlays resulting from lower interest rates offset about half of the revenue loss. By contrast, technical changes in CBO’s estimates reduced the projected deficit by $12 billion, mostly because CBO now estimates lower outlays for Medicare and a number of discretionary programs.
The Effects of Recent Legislation Over the 2008–2017 Period
CBO’s baseline projections have been greatly affected by funding provided in 2007 and 2008 for operations in Iraq and Afghanistan. The extrapolation of such spending—and of differences in regular appropriations—accounts for most of the $502 billion in cumulative improvement in the baseline deficit projection that is attributable to legislation. By contrast, legislation involving revenues and mandatory spending has had comparatively smaller effects on CBO’s updated projections for the 2008–2017 period.
Since August, CBO’s baseline projection of discretionary spending has declined by $15 billion for 2008 and by $470 billion over the 2008–2017 period as a result of legislative changes. The guidelines for projecting discretionary spending state that all appropriations provided in the most recent year should be extended and inflated throughout the 10-year baseline-projection period. Thus, the current estimates of discretionary spending through 2017 are based on funding provided to date for 2008.
Defense. The $470 billion reduction in discretionary outlays consists of two offsetting components: a large decrease in defense discretionary spending ($521 billion) and a modest increase in nondefense discretionary spending ($51 billion). The decrease in defense discretionary outlays is largely a result of the current partial-year funding for military operations in Iraq and Afghanistan. So far this year, the Congress and the President have provided $87 billion for military operations in those countries and for other defense activities related to the war on terrorism; last year, lawmakers provided $165 billion for such purposes, most of which went to the Department of Defense (DoD). Extrapolating the lower funding appropriated thus far in 2008 for such activities reduces projected outlays in the baseline by $30 billion in the current fiscal year and by an average of $85 billion a year from 2009 to 2017 (see Table A-2). (Additional appropriations for that purpose are expected later this year, which would eliminate some or all of the difference in subsequent baselines.)
Changes in CBO’s Baseline Projections of Discretionary Outlays Since August 2007
Source: Congressional Budget Office.
Note: * = between -$500 million and $500 million.
Defense appropriations for 2008, other than those related to activities in Iraq and Afghanistan and for the war on terrorism, total $500 billion, which is about $29 billion—or about 6 percent—more than the amount projected in CBO’s August baseline. When extrapolated to future years, that increase adds $275 billion in outlays for defense during the 10-year period (see Table A-2).
Nondefense. As a result of recently enacted legislation, nondefense discretionary spending is showing a net increase over the previous baseline projection. Extrapolating the lower amount of funding provided for nondefense activities in Iraq and Afghanistan and for the war on terrorism reduces projected nondefense outlays by $38 billion between 2008 and 2017; however, extrapolating higher levels of funding for other nondefense appropriations provided in 2008 boosts outlays by $89 billion over the 10-year period.
The increase in other nondefense appropriations for 2008 totals about $3 billion. Among the areas that received more funding in this year’s appropriations than was projected in CBO’s August baseline were the Department of Veterans Affairs ($4 billion for veterans’ programs, primarily for medical care); the Department of Housing and Urban Development’s Community Development Fund ($3 billion for the Louisiana Road Home program, which provides grants for homeowners affected by the 2005 Gulf Coast hurricanes); federal law enforcement ($2 billion); and energy efficiency and renewable energy programs ($1 billion).
Other sources of discretionary funding also increased. Transportation funding (which is subject to obligation limitations set in appropriation acts) has increased by $1.5 billion for 2008 relative to the August 2007 projection.3 Further, additional advance appropriations for 2009 were provided for certain programs; those programs received $2 billion above the amount projected in the August baseline for that year.
Agencies receiving less funding in 2008 include the Army Corps of Engineers ($1 billion less because of a reduction in funding for Gulf Coast hurricane relief and recovery) and the Federal Housing Administration ($1 billion less because of lower estimated subsidy costs). In addition, across-the-board cuts totaling $3 billion were specified in the Consolidated Appropriations Act of 2008 (P.L. 110-161) and have been extrapolated throughout the baseline period.
Recent legislative changes that affect mandatory spending—funding determined by laws other than annual appropriation acts—have had a small net effect on CBO’s baseline projections, increasing estimated spending during the years 2008 to 2017 by $6 billion. Most of that change is seen in the terrorism risk insurance and Medicare programs.
Terrorism Risk Insurance. A seven-year extension of the terrorism risk insurance program—which was originally slated to expire on December 31, 2007—was signed into law on December 26, 2007 (in the Terrorism Risk Insurance Program Reauthorization Act of 2007, P.L. 110- 160). That extension resulted in a projected increase of $7 billion in spending over the 2008–2017 period. However, this program will also generate an estimated $7 billion in revenues over the same period (for further discussion of this topic, see the Revenues section below).
Medicare and SCHIP. The Transitional Medical Assistance, Abstinence Education, and Qualifying Individuals Programs Extension Act of 2007 (P.L. 110-90), as well as the Medicare, Medicaid, and SCHIP [State Children’s Health Insurance Program] Extension Act of 2007 (P.L. 110-173), modified Medicare’s payment systems for various providers, including inpatient hospitals, physicians, and Medicare Advantage plans. Those two laws added $4 billion to CBO’s estimate of Medicare outlays in 2008 and reduced projected outlays by $6 billion from 2009 through 2017, for a total 10-year decrease in outlays of $2 billion. By extending SCHIP, Public Law 110-173 also added $1 billion in outlays for that program in 2008.
Education Programs. The College Cost Reduction and Access Act of 2007 (P.L. 110-84) made significant changes to federal financial assistance programs related to postsecondary education. It reduced the government’s payments to lenders in the Federal Family Education Loan Program and to guaranty agencies and modified fees for lenders; much of those savings were used to reduce the cost of federal loans for certain types of borrowers and to increase funding for the Pell Grant Program. As a result, the overall net impact of those changes on the federal budget was minimal over the 10-year period.
Legislation enacted since August has had a modest effect on CBO’s revenue projection—reducing receipts by $44 billion from 2008 through 2017. That change is dominated by a $69 billion decline in revenues in 2008 that is partially offset by a $20 billion increase in 2009. Nearly all of that adjustment—about $50 billion, in the estimation of CBO and the Joint Committee on Taxation—derives from the enactment of the Tax Increase Prevention Act of 2007. That act raised the amount of income exempted from the AMT in 2007. CBO estimates that, as a result, individual income tax receipts will decline by $70 billion in 2008 and increase by almost $19 billion in 2009.4
The Terrorism Risk Insurance Program Reauthorization Act of 2007 increased revenues by an estimated $7 billion between 2008 and 2017. In addition to extending the program, that act increased receipts expected over the next 10 years by raising the assessments to be paid in the event of a covered act of terrorism and accelerating the payment of those premiums to the government.
On net, the Energy Independence and Security Act of 2007 (P.L. 110-140) had a negligible impact on revenues—reducing excise tax receipts by an estimated $2 billion and increasing receipts from unemployment taxes by an estimated $2 billion between 2008 and 2017. The decline in excise tax receipts is attributable primarily to lower revenues from the gasoline tax, a result of increased Corporate Average Fuel Economy standards. In addition, the act’s requirement for the use of renewable fuels will reduce revenues for the first few years because of higher excise tax credits for producers of ethanol; CBO estimates, however, that the requirement will cause revenues to increase after 2011 because the lower energy content of ethanol relative to gasoline will result in the sale of more fuel. The legislation also increased projected receipts from unemployment taxes, mainly in 2008, by extending the Federal Unemployment Tax Act surtax of 0.2 percent through 2008.
In all, legislative changes reduced CBO’s projection of the cumulative deficit for the 2008–2017 period by an estimated $420 billion. That decrease, in turn, shrinks projected debt-service costs over the 10-year period by $82 billion.
The Effects of Economic Changes Over the 2008–2017 Period
Changes to CBO’s economic assumptions increase the estimated deficit for 2008 by $17 billion relative to the previous baseline and boost the cumulative deficit for 2008 through 2017 by $486 billion. Those changes are largely attributable to reductions in projected revenues.
CBO’s current outlook for the economy incorporates a slowdown in economic growth in the final quarter of 2007 and in 2008 and a slight reduction in the economy’s potential rate of growth over the next 10 years. The revised economic outlook reduces revenue projections in 2008 and 2009 by $33 billion and $60 billion, respectively, and lowers revenue projections between 2010 and 2017 by $385 billion. Over the entire 10-year budget period, the net result of changes in the economic outlook is a reduction of $479 billion in projected receipts, most of which stems from lower projections of corporate income tax receipts.
Corporate Income Taxes. Changes in CBO’s projections of corporate profits account for most of the $313 billion change in CBO’s projection of corporate income tax receipts over the 2008–2017 period. Currently, CBO projects lower economic profits than it projected in August, which has the effect of lowering taxable profits. Taxable profits also decline because CBO increased its projection of the share of profits that U.S. firms earn abroad—often termed "rest-of-world profits"—which are taxed at a very low effective U.S. tax rate. The effects of lower taxable profits on receipts were only partially offset by a reduction in CBO’s projection of profits earned by S corporations (which are subject to the individual income tax) and lower corporate tax payments to state and local governments (which are deducted from profits before taxes are calculated).5
Individual Income Taxes. For 2008 and beyond, CBO’s projected pattern of revenues from the individual income tax reflects steady growth in personal income, punctuated by scheduled changes to tax law in specific years. Lower anticipated wages and salaries in the near term continue to cause estimated receipts to be lower in 2009. Beyond 2009, wages and salaries in CBO’s forecast continue to be below levels projected in August, but interest income is higher. Those factors result in a $39 billion decline in receipts from individual income taxes over the 2008–2017 period, virtually all of which occurs between 2008 and 2011. (After 2011, the effects largely offset one another).
Social Insurance Taxes. As a result of lowered projections for wages and salaries over the 10-year budget window, CBO now projects $84 billion less in social insurance tax receipts than it did in the August baseline.
Excise Taxes. According to CBO’s estimates, changes to economic projections that have been made since the August baseline reduce excise tax revenues by $14 billion between 2008 and 2017. A rise in energy prices as well as a lower forecast of gross domestic product (GDP) result in a drop in the projections of motor fuel consumption and excise taxes on that fuel.
Estate and Gift Taxes. Slowing growth in wealth that is attributable largely to slower economic growth over the next few years reduces CBO’s estimate of receipts from estate and gift taxes by about $10 billion over the 10-year period.
Other Receipts. Because of changes to CBO’s economic forecast, the agency lowered its projection of profits earned by the Federal Reserve System by almost $25 billion over the 2008–2017 period as compared with its August baseline. That change stems from CBO’s projection of less currency in circulation, relative to GDP, in 2009 (which reduces the value of the Federal Reserve’s portfolio of securities) and lower interest rates (which reduce the return on the Federal Reserve’s portfolio of Treasury securities). Projections of customs duties are about $6 billion higher for the 2008–2017 period compared with CBO’s August projections. That change is largely attributable to anticipated increases in non-petroleum-based imports and partially offset by a decrease in CBO’s projection of oil imports (which are taxed on the basis of volume rather than price).
On balance, changes to CBO’s economic outlook have had a relatively small effect on its current projections of mandatory spending. Such changes—consisting of several offsetting adjustments—reduce projected spending by a net of $25 billion over the 2008–2017 period.
Medicare. A decrease in the projected growth in wages and other labor costs has led to a reduction of $58 billion in projected spending for Medicare relative to the August baseline. Growth in wages and other labor costs affects the formulas used to calculate payments under Medicare’s fee schedules for physicians and inpatient hospitals, among other payment systems. As a result, lower growth in labor costs translates directly into lower fees paid to providers and thus less spending on Medicare.
Social Security. Economic changes increase projected spending for Social Security by $15 billion from 2008 through 2017. The cost-of-living adjustment (COLA) that Social Security beneficiaries received in January 2008 is slightly lower (0.2 percentage points) than the increase CBO projected last August; as a result, CBO expects outlays for 2008 to be nearly $1 billion less than previously projected. However, CBO now anticipates that the COLA in January 2009 will be 0.8 percentage points above its August estimate, which will increase the projected growth of benefit payments in the baseline beginning in 2009. Over the 2009–2017 period, changes in the COLA will raise baseline Social Security outlays by $36 billion, CBO estimates. However, revisions to CBO’s projections of the growth of wages and salaries reduce projected growth in benefit payments from 2008 to 2017, shaving a little more than $20 billion from estimated benefits during that period.
Unemployment Compensation. Projected outlays for unemployment compensation are up by $10 billion over CBO’s August projections for the 2008–2012 period and up by $4 billion over the entire 10-year projection period. In the short term, an anticipated increase in the unemployment rate leads to higher payments for unemployment compensation. Those increased costs are mitigated somewhat by CBO’s forecast of wage growth, which is lower in the short term than it was in August, thereby resulting in lower average benefits over the entire baseline period.
Other Programs. Average Food Stamp benefits are projected to increase from 2008 to 2017, boosting outlays by $10 billion over the 10-year baseline period. The maximum benefit under the Food Stamp program automatically rises each year, based on the June-over-June increase in the cost of the Department of Agriculture’s Thrifty Food Plan. To estimate that annual change, CBO uses the consumer price index for the cost of food purchased for consumption at home. Relative to its August projections, CBO now projects that the index will be higher over the 2008–2010 period, leading to higher estimated per-person benefits. A small portion of the economic change is also attributable to a forecast of higher unemployment.
In addition, CBO has reduced its projection of spending for Medicaid over the 2008–2017 period by $6 billion for economic reasons. On the basis of lowered projections for wage growth and hospital costs, CBO reduced its projection of Medicaid spending by a total of $20 billion. Those reductions were offset by slightly higher projections for inflation and medical cost growth over the 10-year period, and higher projections of unemployment between 2008 and 2011, which have the effect of increasing projected Medicaid spending by $14 billion.
CBO projects discretionary budget authority by using two measures of inflation: the GDP price index (which covers changes in price for all goods and services that contribute to GDP) and the employment cost index (ECI) for wages and salaries. Since its August baseline was published, CBO has decreased its estimate of the ECI by 0.6 percentage points for 2009 and 0.5 percentage points for 2010. The resulting decreases in projected spending are more than offset by a small increase in the GDP price index and adjustments to certain other calculations used to extrapolate discretionary spending. In total, revisions attributed to economic factors add $7 billion to projected discretionary outlays over the 2008–2017 period.
Economic revisions to CBO’s projections of spending on net interest have two components: the effects of changes in the agency’s economic outlook related to interest rates and inflation and the effects of changes in debt-service costs resulting from the impact of all other economic changes on deficits in the baseline. Although the first factor has reduced projected outlays for net interest, the second factor has increased them—resulting in a net increase of $25 billion between 2008 and 2017.
In CBO’s current economic outlook, the interest rates on 3-month Treasury bills and 10-year Treasury notes are lower in 2008 and 2009 than they were in last August’s forecast. For those years, the rate projected for 3-month Treasury bills has dropped by about 160 basis points and 90 basis points, respectively (a basis point is one one-hundredth of a percentage point). The rate on 10-year notes has fallen by 100 basis points and 50 basis points for those years. As a result, CBO anticipates that net interest will total $41 billion less during those two years than it projected in its previous baseline. In the other direction, CBO has boosted its estimate of inflation by 0.5 percentage points for 2008, which causes projected outlays for the Treasury’s inflation-protected securities to increase by $3 billion that same year. Overall, revisions to interest rates and estimates of inflation reduce outlays for net interest in the baseline by $80 billion over the 2008–2017 period.
Changes in the economic outlook—primarily those leading to estimates of lower revenues—have increased the government’s projected borrowing needs, thereby raising estimated debt-service costs between 2008 and 2017 by $104 billion.
The Effects of Technical Changes Over the 2008–2017 Period
Technical changes cause revisions to the baseline that are not directly attributable to newly enacted laws or changes in CBO’s economic forecast. Since August, such revisions have generally raised projections of revenues and lowered estimates of outlays over the 2008–2017 period, thereby reducing this year’s estimated deficit by $12 billion and the 10-year cumulative deficit by $159 billion.
Technical revisions have reduced CBO’s estimate of mandatory outlays in its current baseline by $7 billion in 2008 and by a total of $12 billion through 2017. The largest changes involve Medicare, Medicaid, and the Food Stamp program.
Medicare. Changes in mandatory spending for Medicare that result from technical adjustments lower outlays by $44 billion (0.8 percent) over the 2008–2017 period as compared with the August 2007 baseline; the largest reduction ($9 billion) occurs in 2008. The most significant technical changes to projected spending for Medicare were made in spending for Part D, the prescription drug program, because bids from private plans to provide the prescription drug benefit came in lower than expected for 2008. Those results translated into reductions in projected spending throughout the baseline period. CBO also lowered its estimate for 2008 to reflect larger-than-expected refunds to such plans for payments made in 2006. (Initial payments to prescription drug plans are based on projected expenses, and adjustments are made to compensate for under- or overpayments; actual costs in 2006 were lower than projected.)
Medicaid. CBO has made technical changes that reduce its projection of Medicaid spending for the 2008–2017 period by $19 billion (or 0.6 percent). On the basis of lower-than-expected outlays in 2007 (about $2 billion lower than anticipated in the August baseline), updated information about the distribution of spending across service categories, and the issuance of final regulations related to Medicaid payment policy for government providers, CBO has reduced its projections of spending for Medicaid by a total of $52 billion over the 10-year period. Those changes were partially offset by projected increases in program enrollment and in payment rates to providers (which raised estimated outlays by $26 billion over the 10-year projection period) and other revisions that increased CBO’s estimate of spending by a total of $7 billion between 2008 and 2017.
Food Stamps. Between 2008 and 2017, projected outlays for the Food Stamp program have grown by $19 billion relative to CBO’s previous projections. That increase stems from a boost in CBO’s estimate of participation in the program, which has been higher than expected for the past several years, despite falling unemployment rates.
Other Revisions. Other technical adjustments have increased CBO’s estimate of mandatory spending in the baseline by $1 billion for 2008 and by a total of $31 billion through 2017. The largest of those increases in projected spending are attributable to the student loan program ($14 billion—largely because of changes to projections of loan volume through 2017) and the Civil Service Retirement Fund ($10 billion—stemming from an increase in the expected number of annuitants as well as an adjustment in the assumed average benefit at retirement).
Technical changes to CBO’s baseline projections for discretionary programs decreased outlays by $53 billion over the 2008–2017 period, with the majority of that reduction occurring in 2008 ($16 billion) and 2009 ($12 billion).
Defense. CBO has lowered its estimate of defense outlays by $7 billion in 2008 and by $30 billion over the 10-year period, reflecting a lower rate of spending in recent months than previously anticipated. That change also reflects smaller accruals for the TRICARE For Life program, offset by slight increases in military construction in 2009 and 2010 that result from adjustments in spending rates for base realignment and closure activities.
Nondefense. Estimated outlays for surface transportation are $18 billion lower over the 10-year baseline period than CBO projected in August; CBO has adjusted its projections because of overestimations of spending in the past several years. The remaining reduction in the nondefense discretionary category reflects smaller adjustments in many other areas of the federal budget.
Adjustments to CBO’s technical assumptions increase projected revenues by $51 billion from 2008 through 2017. Such changes lower projected receipts by almost $14 billion in 2008 but increase receipts by an average of $7 billion a year thereafter. Higher estimates of receipts from individual income, social insurance, and estate and gift taxes are partially offset by lower estimates of corporate and excise taxes.
Individual Income Taxes. Technical changes to CBO’s projection of individual income taxes increase revenues by a total of $18 billion over the 2008–2017 period. Most of the effect of those changes results from CBO’s extending by one year, through 2009, its projection of increases in receipts that are attributable to a recent unexplained strength in collections. CBO assumes that the effect gradually diminishes over the next few years because of trends indicating that, over the long term, most forms of taxable income return to their historical relationship to GDP. Other technical changes, mostly affecting the timing of tax collections, affect receipts in specific years. These changes offset most of the effects of the technical change in 2009 that arises from the adjustment for unexplained collections.
Corporate Income Taxes. Technical changes account for $18 billion of CBO’s projected decline in corporate tax revenues since August. Much of that decrease results from updated data about historical interest payments on back taxes that are lower than CBO had estimated in August. In addition, CBO lowered its projections of receipts from 2008 through 2010 because of unexpectedly low collections in the final quarter of 2007. CBO assumes that the effect gradually diminishes over the subsequent several years. Those factors were partially offset by two other changes: an increase in the projection of profitable firms’ earnings resulting from updated historical data as well as higher estimates of corporate capital gains realizations for 2006. CBO assumes that, over time, the increase will decline gradually as capital gains return to historical norms relative to GDP.
Social Insurance Taxes. Technical changes to CBO’s projection of social insurance taxes increased receipts by almost $26 billion over the 2008–2017 period, mostly because of revised historical data on taxable wages for Social Security and projected increases in the amount of unemployment benefits to be paid. CBO assumes that such higher unemployment benefits would cause states to replenish their trust funds for unemployment insurance (those amounts are considered to be federal revenues).
Estate and Gift Taxes. CBO’s current projection of estate and gift taxes is almost $29 billion higher than that indicated in its August baseline because of technical changes. That revision was caused partly by higher actual collections in 2007 than CBO originally projected. CBO assumes that such higher collections will continue throughout the projection period, adjusted for differences in tax liability arising from changes in rates and exemption levels. CBO also lowered its projection of the value of deductions taken by estates before the tax is calculated, which raised the projection of the value of taxable estates and the resulting tax receipts.
Other Receipts. Technical changes to CBO’s projections of other tax sources lower the collective projection of receipts by $4 billion over the 2008–2017 period. CBO projects that excise taxes will be $6 billion lower than indicated in its August baseline primarily because of lower-than-expected collections of taxes on heavy trucks. Partially offsetting about $2 billion of that reduction are higher customs duties, based on larger-than-expected recent collections.
Because technical revisions increase revenues in the baseline by $51 billion from 2008 to 2017 and lower outlays by $55 billion for the same period, projected debt-service costs decline by $53 billion over those years. Other technical changes to net interest total $10 billion (0.3 percent) over the 10-year period.
In accordance with long-standing procedures, CBO’s projections assume that current laws and policies remain in place. The baseline, therefore, is not intended to predict future budgetary outcomes; instead, it is meant to serve as a neutral benchmark against which lawmakers can measure the effects of proposed changes to spending and taxes. CBO’s previous estimate of the 2008 deficit, as well as other baseline projections, was published in Congressional Budget Office, The Budget and Economic Outlook: An Update (August 2007).
The categorization of such changes should be viewed with caution. For example, legislative changes represent CBO’s best estimates of the future effects of laws enacted since the previous baseline was prepared. If a new law proves to have effects different from those that CBO initially estimated, the difference will appear as a technical change in later versions of the baseline. The distinction between economic and technical changes is similarly imprecise. CBO classifies as economic changes those that result directly from alterations in the components of its economic forecast (including interest rates, inflation, and the growth of gross domestic product). Changes in other factors related to the economy (such as capital gains realizations) are shown as technical adjustments.
An obligation limitation is a provision of a law that restricts the use of budget authority that would otherwise be available for obligation. Typically, an obligation limitation is included in an appropriation act and affects budget authority that has been provided in an authorization act.
In CBO’s baseline, a one-year increase in the AMT exemption causes revenues to rise in the year following the largest downward effect. In the August baseline, taxpayers affected by the AMT were assumed to increase their estimated payments most significantly in 2008 in response to their higher tax liability for 2007. With the higher exemption amount now in effect for tax liabilities in 2007—but not for subsequent years—CBO projects that an increase in estimated payments will occur in 2009.
An S corporation is a domestically owned corporation with no more than 100 owners who have elected to pay taxes under Subchapter S of the Internal Revenue Code. Specifically, an S corporation is taxed like a partnership: It is exempt from the corporate income tax, but its owners pay individual income taxes on all of the firm’s income, even if some of the earnings are retained by the firm.
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