CBO’s Estimates of the President’s Budget for Fiscal Year 2009

At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has analyzed the President’s budget request for fiscal year 2009. The analysis is based on CBO’s own economic assumptions and estimating techniques, incorporating the Joint Committee on Taxation’s (JCT’s) estimates for provisions that affect the tax code. This document provides more detail about the President’s budgetary proposals and about CBO’s updated baseline budget projections than did the preliminary report that CBO released on March 3.¹

If the President’s proposals were enacted, the government would record a deficit of $396 billion in 2008, equal to 2.8 percent of gross domestic product (GDP). By comparison, the deficit in 2007, which totaled $162 billion, was 1.2 percent of GDP (see Table 1-1). Relative to CBO’s baseline budget projections, the proposals in the President’s budget request would reduce revenues in 2008 by $9 billion and boost outlays by $30 billion (mostly for military operations in Iraq and Afghanistan). As a result, the deficit for this year would be $39 billion larger than the deficit CBO anticipates under current law.

		Actual 2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018


		CBO’s Estimate of the President’s Budget for 2009

On-Budget Deficit		-343	-592	-525	-375	-346	-236	-269	-252	-243	-263	-201	-121	-1,751	-2,830
Off-Budget Surplus^a		181	197	183	193	218	236	248	232	214	200	198	194	1,076	2,114

	Total Deficit (-) or Surplus	-162	-396	-342	-182	-129	*	-21	-20	-29	-64	-3	73	-674	-717

		CBO’s Baseline

On-Budget Deficit		-343	-553	-403	-421	-320	-133	-174	-158	-147	-172	-116	-44	-1,451	-2,088
Off-Budget Surplus^a		181	197	196	208	227	238	244	249	251	251	250	246	1,112	2,358

	Total Deficit (-) or Surplus	-162	-357	-207	-213	-93	105	70	90	104	79	134	202	-339	270

		Difference (President’s budget minus baseline)^b

On-Budget Deficit		n.a.	-39	-122	46	-26	-102	-95	-93	-96	-91	-85	-77	-300	-743
Off-Budget Surplus^a		n.a.	0	-13	-15	-9	-2	4	-16	-37	-52	-52	-52	-35	-244

	Total Deficit (-) or Surplus	n.a.	-39	-136	31	-35	-105	-91	-110	-133	-143	-136	-129	-336	-987

Memorandum:
Total Deficit (-) or Surplus as a Percentage of GDP
	CBO’s estimate of the President’s budget	-1.2	-2.8	-2.3	-1.2	-0.8	**	-0.1	-0.1	-0.1	-0.3	**	0.3	-0.8	-0.4
	CBO’s baseline	-1.2	-2.5	-1.4	-1.4	-0.6	0.6	0.4	0.5	0.5	0.4	0.6	0.9	-0.4	0.1

Debt Held by the Public as a Percentage of GDP
	CBO’s estimate of the President’s budget	36.8	38.0	39.0	38.3	37.1	35.5	34.1	32.8	31.7	30.7	29.5	28.1	n.a.	n.a.
	CBO’s baseline	36.8	37.7	37.8	37.3	36.0	33.8	32.0	30.3	28.5	27.0	25.4	23.5	n.a.	n.a.

Probability of a Budget Deficit (Percent)
	CBO’s estimate of the President’s budget	n.a.	100	95	73	64	50	52	c	c	c	c	c	n.a.	n.a.
	CBO’s baseline	n.a.	100	84	76	60	41	45	c	c	c	c	c	n.a.	n.a.

Note: * = between -$500 million and zero; ** = between -0.05 percent and zero; GDP = gross domestic product; n.a. = not applicable.

In 2009, the deficit under the President’s budget would fall to 2.3 percent of GDP, or $342 billion, CBO estimates—$136 billion more than the baseline deficit of $207 billion that CBO projects under current laws and policies. That difference is largely attributable to proposals that would affect revenues and defense spending.

In 2009, the President’s policies would raise discretionary spending for national defense by $50 billion above the amount in CBO’s baseline. That increase stems primarily from additional appropriations—mostly for military operations in Iraq and Afghanistan and for other activities related to the war on terrorism—that the President is requesting for later this year, much of which would be spent in 2009 and beyond.² Other spending under the President’s proposals would be $9 billion below the amount in the baseline (largely as a result of proposed savings in the Medicare program).

Under the President’s budget, revenues would be $94 billion lower in 2009 than the amount projected in the baseline. The President is proposing to extend higher exemption levels for the alternative minimum tax (AMT) through the end of 2008. That change would mitigate some of the effects of the tax and thus reduce revenues by an estimated $70 billion in 2009. Other proposed changes in tax policies would reduce revenues, on net, by another $24 billion.

For years after 2009, the President’s budget is presented in less detail. For discretionary spending, the request for 2010 through 2013 is provided only in aggregate terms (which CBO used to calculate funding totals for defense and nondefense spending), and the budget does not contain year-by-year estimates of spending and revenues after 2013. It does, however, specify the total effect of proposed changes in laws affecting taxes and mandatory spending for the 10-year period through 2018. To determine the impact of the President’s proposals, CBO, with assistance from JCT, developed its own estimates for policies affecting revenues and mandatory spending. It estimated discretionary outlays for the 2014–2018 period by projecting the amount of discretionary budget authority that the President recommended for 2013 and adjusting that amount for inflation.

Under the President’s proposals, the deficit would steadily decline from 2009 through 2012; by CBO’s estimates, the budget would be balanced in that latter year and remain relatively close to balance through 2018 (see Figure 1-1). The cumulative deficit between 2009 and 2018 (the current 10-year projection period) would total $717 billion (0.4 percent of GDP). CBO’s estimates reflect the President’s proposal for $70 billion in funding for military operations in Iraq and Afghanistan in 2009 but no additional funding thereafter, combined with a substantial decline in discretionary spending relative to the size of the economy. The estimates also reflect the absence of any changes to the AMT beyond the proposed one-year extension of higher exemption levels. Under the President’s policies, debt held by the public would rise from 37 percent of GDP in 2007 to 39 percent in 2009, and then gradually fall to 28 percent of GDP by 2018.

On the basis of previous differences between projections and budget outcomes, CBO calculated the likelihood that the budget would be balanced under two sets of conditions: the assumptions embodied in its baseline projections (that current laws and policies remain in place) and its estimates of revenues and outlays under the President’s proposals. Using the assumptions underlying its baseline, CBO calculates that the probability that the budget will record a deficit in 2012 is roughly 40 percent and the probability that it will be balanced (or show a surplus) in that year is 60 percent. If the President’s policies were enacted in their entirety and no other legislation affecting spending or revenues was enacted in the next five years, the chances of either a deficit or a surplus emerging in 2012 would each be 50 percent.

Under the President’s proposals, revenues as a share of GDP would total 17.8 percent this year and 18.3 percent in 2009, CBO estimates (see Table 1-2). That share would climb to 18.6 percent of GDP in 2010 and remain near that level through 2015, gradually increasing thereafter and reaching 19.2 percent of GDP in 2018. At that level, revenues would be about 1 percentage point above their average share of GDP for the past 40 years. The projected future growth of revenues as a percentage of GDP reflects multiple factors: an increase in effective tax rates stemming from the progressive structure of the tax code combined with increases in real (inflation-adjusted) income; the withdrawal of tax-deferred retirement savings as workers with 401(k) plans and traditional individual retirement accounts begin to retire in increasing numbers; and the fact that the AMT is not indexed for inflation. According to estimates by JCT, the President’s proposal to change the tax treatment of health insurance premiums and out-of-pocket spending for health care would also contribute to the growth of revenues as a share of GDP.

				Actual 2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018


				In Billions of Dollars
Revenues
	On-budget			1,933	1,870	2,017	2,182	2,278	2,409	2,495	2,617	2,750	2,901	3,062	3,234	11,380	25,945
	Off-budget			635	667	682	718	762	806	847	885	926	970	1,016	1,063	3,815	8,674

		Total		2,568	2,537	2,699	2,900	3,040	3,215	3,342	3,503	3,676	3,871	4,077	4,297	15,195	34,619

Outlays
	Mandatory spending			1,451	1,578	1,653	1,712	1,810	1,862	1,997	2,132	2,286	2,481	2,603	2,727	9,034	21,262
	Discretionary spending			1,042	1,121	1,171	1,121	1,082	1,061	1,069	1,086	1,110	1,141	1,163	1,185	5,504	11,189
	Net interest			237	234	217	249	277	293	297	304	310	314	314	312	1,332	2,885

		Total		2,730	2,933	3,041	3,082	3,169	3,215	3,363	3,522	3,705	3,935	4,080	4,224	15,870	35,336
			On-budget	2,277	2,463	2,542	2,557	2,624	2,645	2,763	2,869	2,993	3,165	3,262	3,355	13,131	28,775
			Off-budget	454	470	499	525	545	570	600	653	712	770	818	869	2,739	6,560

Deficit (-) or Surplus				-162	-396	-342	-182	-129	*	-21	-20	-29	-64	-3	73	-674	-717
	On-budget			-343	-592	-525	-375	-346	-236	-269	-252	-243	-263	-201	-121	-1,751	-2,830
	Off-budget			181	197	183	193	218	236	248	232	214	200	198	194	1,076	2,114

Debt Held by the Public				5,035	5,406	5,765	5,965	6,112	6,128	6,166	6,202	6,245	6,323	6,340	6,280	n.a.	n.a.

Memorandum:
Gross Domestic Product				13,671	14,242	14,773	15,589	16,490	17,284	18,077	18,885	19,713	20,569	21,457	22,386	82,213	185,223

				As a Percentage of Gross Domestic Product
Revenues
	On-budget			14.1	13.1	13.7	14.0	13.8	13.9	13.8	13.9	14.0	14.1	14.3	14.4	13.8	14.0
	Off-budget			4.6	4.7	4.6	4.6	4.6	4.7	4.7	4.7	4.7	4.7	4.7	4.7	4.6	4.7

		Total		18.8	17.8	18.3	18.6	18.4	18.6	18.5	18.5	18.6	18.8	19.0	19.2	18.5	18.7

Outlays
	Mandatory spending			10.6	11.1	11.2	11.0	11.0	10.8	11.0	11.3	11.6	12.1	12.1	12.2	11.0	11.5
	Discretionary spending			7.6	7.9	7.9	7.2	6.6	6.1	5.9	5.8	5.6	5.5	5.4	5.3	6.7	6.0
	Net interest			1.7	1.6	1.5	1.6	1.7	1.7	1.6	1.6	1.6	1.5	1.5	1.4	1.6	1.6

		Total		20.0	20.6	20.6	19.8	19.2	18.6	18.6	18.7	18.8	19.1	19.0	18.9	19.3	19.1
			On-budget	16.7	17.3	17.2	16.4	15.9	15.3	15.3	15.2	15.2	15.4	15.2	15.0	16.0	15.5
			Off-budget	3.3	3.3	3.4	3.4	3.3	3.3	3.3	3.5	3.6	3.7	3.8	3.9	3.3	3.5

Deficit (-) or Surplus				-1.2	-2.8	-2.3	-1.2	-0.8	**	-0.1	-0.1	-0.1	-0.3	**	0.3	-0.8	-0.4
	On-budget			-2.5	-4.2	-3.6	-2.4	-2.1	-1.4	-1.5	-1.3	-1.2	-1.3	-0.9	-0.5	-2.1	-1.5
	Off-budget			1.3	1.4	1.2	1.2	1.3	1.4	1.4	1.2	1.1	1.0	0.9	0.9	1.3	1.1

Debt Held by the Public				36.8	38.0	39.0	38.3	37.1	35.5	34.1	32.8	31.7	30.7	29.5	28.1	n.a.	n.a.

Note: * = between -$500 million and zero; ** = between -0.05 percent and zero; n.a. = not applicable.

Outlays under the President’s policies would reach 20.6 percent of GDP this year and remain at that level next year, equal to their average over the past 40 years. Total outlays would fall to about 19 percent of GDP over the latter part of the projection period. Spending for mandatory programs would grow by an average of 5.7 percent annually through 2018, faster than the projected 4.7 percent average annual growth of nominal GDP over that period. By contrast, discretionary outlays would decline by $52 billion over the next five years; measured as a percentage of GDP, they would fall from 7.9 percent in 2009 to 5.9 percent in 2013 (a figure lower than any recorded for such spending over the past four decades).

CBO measures the potential budgetary effects of proposed changes in policy against its baseline projections, which—in keeping with long-standing procedures—are constructed under the assumption that present laws and policies remain unchanged. Specifically, the baseline reflects the assumption that various tax provisions (including those affecting the AMT) will expire as scheduled, that most mandatory programs will continue to operate as they do under current law, and that all discretionary funding for the current year (including any supplemental appropriations) will grow at the rate of inflation in future years.

From 2009 to 2013, the cumulative deficit under the President’s policies would be $336 billion larger than the deficit projected under the current-law assumptions embodied in CBO’s baseline (see Table 1-3). Over the five-year period, proposed tax policies—such as extending the expiring provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)—would reduce revenues relative to the baseline by an estimated $777 billion, mostly from 2011 through 2013.³ In addition, spending under the President’s proposals would be $442 billion lower: Discretionary spending would be $340 billion below CBO’s baseline projection—a reduction about equally divided between defense and nondefense programs—and mandatory spending would be $143 billion below the baseline amount. (The impact of the President’s policies on discretionary spending arises in part because the budget includes only $70 billion in funding for military operations in Iraq and Afghanistan for 2009 and no funding for subsequent years, whereas the baseline projections assume annual funding of about $90 billion, adjusted for inflation.) Overall, as a result of a larger cumulative deficit under the President’s proposals, net interest from 2009 to 2013 would be $41 billion higher than CBO’s baseline projection.

									2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009- 2013	Total, 2009- 2018



Total Deficit (-) or Surplus as Projected in CBO’s March 2008 Baseline									-357	-207	-213	-93	105	70	90	104	79	134	202	-339	270

Effect of the President’s Proposals
	Revenues
		Extension of expiring EGTRRA and JGTRRA provisions
				General tax rates, child tax credit, and tax brackets^a					0	0	0	-96	-152	-155	-158	-162	-167	-171	-176	-403	-1,237
				Estate and gift taxes					0	-1	-2	-31	-69	-77	-84	-91	-97	-105	-112	-181	-670
				Tax rates on dividends and capital gains					0	*	-2	-18	-21	-42	-43	-45	-47	-49	-51	-82	-318
				Expensing for small businesses					0	0	0	-3	-6	-4	-3	-2	-2	-1	-1	-13	-23
				Education, retirement, and other provisions					0	0	0	-1	-2	-2	-2	-3	-3	-3	-3	-5	-18

						Subtotal, proposed extensions			0	-1	-4	-148	-250	-280	-291	-303	-316	-330	-344	-683	-2,266

		Health insurance taxation and standard deduction^a							0	-17	-13	5	24	45	46	56	75	94	115	43	429
		Research and experimentation tax credit							-3	-5	-6	-8	-9	-10	-11	-12	-13	-15	-16	-38	-105
		Air transportation taxes							0	0	-7	-8	-9	-9	-10	-10	-11	-11	-12	-33	-87
		AMT extension							-6	-70	15	0	0	0	0	0	0	0	0	-55	-55
		Other proposals^a							*	-1	-1	-1	-5	-3	-1	-1	-2	-2	-2	-12	-21

								Total Effect on Revenues	-9	-94	-16	-161	-248	-258	-268	-271	-267	-263	-258	-777	-2,105
	Outlays
		Mandatory
				Medicare					*	-9	-23	-34	-40	-46	-52	-58	-65	-73	-81	-151	-481
				Social Security individual accounts					0	0	0	0	1	1	23	47	67	72	78	2	287
				Earned income and child tax credits					0	3	1	*	20	19	18	17	17	16	16	42	126
				Medicaid and SCHIP					*	-2	-1	-2	-3	-3	-3	-3	-2	-2	-2	-11	-24
				PBGC premiums					0	*	-2	-2	-2	-2	-2	-2	-2	-2	-2	-9	-19
				Social Services Block Grant program					0	0	-1	-2	-2	-2	-2	-2	-2	-2	-2	-7	-15
				Other proposals					1	-1	-1	-3	-1	-1	-2	*	-1	-3	-4	-8	-18

						Subtotal, mandatory			1	-11	-28	-43	-27	-34	-20	*	11	6	2	-143	-143

		Discretionary
			Defense						28	50	-2	-48	-71	-81	-85	-88	-90	-92	-94	-151	-599
			Nondefense						1	-1	-23	-41	-56	-68	-74	-76	-79	-82	-84	-189	-583

					Subtotal, discretionary				29	49	-25	-89	-127	-148	-159	-164	-169	-173	-178	-340	-1,183

		Net interest							*	3	5	7	11	15	21	27	33	40	46	41	207

							Total Effect on Outlays		30	41	-48	-125	-143	-167	-158	-138	-125	-127	-129	-442	-1,119

Total Impact on the Deficit or Surplus^b									-39	-136	31	-35	-105	-91	-110	-133	-143	-136	-129	-336	-987

Total Deficit (-) or Surplus
Under the President’s Proposals									-396	-342	-182	-129	*	-21	-20	-29	-64	-3	73	-674	-717

Memorandum:
Total Deficit (-) or Surplus Under the President’s Proposals as Estimated by OMB									-410	-407	-160	-95	48	29	n.a.	n.a.	n.a.	n.a.	n.a.	-585	n.a.

Note: * = between -$500 million and $500 million; EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA = Jobs and Growth Tax Relief Reconciliation Act of 2003; AMT = alternative minimum tax; SCHIP = State Children’s Health Insurance Program; PBGC = Pension Benefit Guaranty Corporation; n.a. = not applicable; OMB = Office of Management and Budget.

Under the tax and spending assumptions embodied in the baseline, deficits would be followed by surpluses in the vicinity of 0.5 percent of GDP from 2012 on, CBO projects. By comparison, under the President’s policies, the budget would be close to balance for most of those years. Between 2009 and 2018, the President’s proposals would reduce revenues by more than $2.1 trillion (6 percent) from baseline levels, CBO and JCT estimate, mainly by extending tax provisions that are scheduled to expire by the end of December 2010. Over the 10-year period, proposals in the President’s budget, if enacted, would lower mandatory spending relative to the baseline by a total of $143 billion (0.7 percent) and lower discretionary spending by $1.2 trillion (9.6 percent). The deficits that would result under the President’s policies would require additional federal borrowing; debt-service costs on that borrowing would add another $207 billion to the cumulative deficit between 2009 and 2018. On balance, the President’s proposals would reduce outlays over the 10-year period by $1.1 trillion relative to CBO’s baseline projections.

The estimates presented in this chapter do not take into consideration any impact that the President’s budgetary proposals might have on the economy. Yet such an impact could influence how the policy changes would affect spending and revenues. Therefore, CBO has also prepared a macroeconomic analysis of the President’s budget, which is described in Chapter 2. That assessment uses various models to indicate the range of possible economic and budgetary effects of the President’s proposals. On the basis of that analysis, CBO has concluded that if the President’s proposals were enacted, the macroeconomic effects—and their resulting budgetary impact—would be relatively modest when measured against the size of the federal budget and the U.S. economy over the next 10 years.

CBO’s estimate of how the President’s budget would affect the deficit in 2008 is similar to the Administration’s, differing by $14 billion (see Table 1-4). Whereas CBO anticipates a deficit of $396 billion for this year, the Administration predicts a shortfall of $410 billion; nearly all of the discrepancy results from differing projections of revenues. In 2008, CBO estimates, total revenues under the President’s policies would be $16 billion higher than the Administration projects. (That difference is partially offset by an estimate of outlays that is $2 billion above that of the Administration.)

					2008	2009	2010	2011	2012	2013	Total, 2009- 2013


					Administration’s Estimate

Deficit (-) or Surplus Under the President’s Proposals					-410	-407	-160	-95	48	29	-585

					Sources of Differences Between CBO and the Administration
Revenue Differences
	Economic				-13	-63	-63	-66	-62	-76	-331
	Technical				29	62	32	30	7	-10	120

				Total Revenue Differences	16	-1	-31	-37	-55	-86	-210

Outlay Differences
	Mandatory
		Economic			1	7	*	-4	-6	-11	-15
		Technical			26	10	1	-4	2	-26	-17

			Subtotal, mandatory		27	17	1	-8	-5	-37	-31

	Discretionary (Technical)				-15	-41	21	22	5	7	15

	Net interest
		Economic			-13	-41	-26	-16	-6	-6	-96
		Technical			3	-2	-5	-1	-1	*	-9

			Subtotal, net interest		-10	-43	-31	-17	-7	-6	-104

				Total Outlay Differences	2	-67	-9	-3	-7	-36	-121

All Differences^a					14	65	-22	-34	-48	-51	-90

					CBO’s Estimate

Deficit Under the President’s Proposals					-396	-342	-182	-129	*	-21	-674

Memorandum:
Total Economic Differences^a					-1	-29	-37	-46	-49	-59	-221
Total Technical Differences^a					16	94	15	12	1	8	131

Notes: Technical differences are those that are not related to legislation or economic assumptions. The Administration did not provide budget estimates beyond 2013.

For 2009, CBO’s and the Administration’s estimates of the deficit are $65 billion apart. CBO calculates a deficit of $342 billion under the President’s budget for next year, whereas the Administration expects a deficit of $407 billion. The difference arises in part because CBO’s estimate of discretionary spending for 2009 is $41 billion below that of the Administration. About three-quarters of that difference stems from CBO’s lower estimate of defense outlays. In addition, CBO’s estimate of net interest costs is $43 billion less than the Administration’s, largely because CBO forecasts lower interest rates. In the other direction, CBO’s estimate of mandatory outlays for 2009 is $17 billion above the Administration’s; about $10 billion of that amount stems from CBO’s higher estimate of unemployment insurance benefits.

Although the two sets of estimates continue to differ after 2009, the variations are relatively small; over the 2009–2013 period, differences in deficit estimates average about $40 billion a year in absolute terms, equivalent to about 1.4 percent of spending. From 2010 through 2013, the Administration anticipates either surpluses or smaller deficits than CBO foresees. In total, CBO’s estimate of the cumulative deficit over the 2009–2013 period is $90 billion above that of the Administration, a difference equal to about 0.1 percent of GDP. (The Administration did not provide budget estimates beyond 2013.) CBO’s estimate of revenues for the five-year period is $210 billion, or 1.4 percent, lower than the Administration’s estimate, and its estimate of outlays is $121 billion, or 0.8 percent, lower. (For a more detailed discussion of the differences between CBO’s and the Administration’s projections, see the later section titled "Differences Between CBO’s and the Administration’s Economic Forecasts and Budget Estimates.")

In conjunction with its analysis of the President’s budget, CBO routinely updates its baseline budget projections, which incorporate the assumption that current tax and spending policies remain the same for the next 10 years. Those revisions to the baseline take into account new information gleaned from the President’s budget and other sources (CBO refers to such changes as technical revisions) as well as legislation enacted since the completion of the previous baseline, in January.⁴ In addition, CBO has updated its economic forecast, which also affects its projections of revenues and outlays.

CBO now estimates that the deficit for 2008—in the absence of further legislation affecting spending or revenues—will reach $357 billion, up from the $219 billion it projected in January. (Additional funding expected this year for military operations in Iraq and Afghanistan would add to that total.) The increase in the estimated deficit results primarily from enactment of the Economic Stimulus Act of 2008 (Public Law 110-185), which gives tax rebates to individual tax filers who satisfy specific income requirements and provides special depreciation allowances to businesses. CBO, on the basis of JCT’s estimates, expects that the stimulus legislation will add $152 billion to the deficit for 2008 and $16 billion to the deficit for 2009.

CBO’s current baseline projections of the deficit for 2009 and the cumulative surplus for the 2009–2018 period are virtually unchanged from its January projections. Under the assumption that current policies continue over the next 10 years, CBO projects a total baseline surplus of $270 billion from 2009 through 2018, down slightly from its previous projection of $274 billion. (For more information about recent revisions to CBO’s baseline, see Appendix A.)

The President is proposing changes to the tax code that in total would reduce revenues over the next decade relative to the amounts projected under current law. Those proposals include the extension of numerous expiring tax provisions and a variety of new tax incentives. The changes that would have the biggest budgetary impact involve provisions originally enacted in EGTRRA and JGTRRA; other proposals that would have significant budgetary effects involve the AMT, the tax treatment of health insurance premiums and medical expenses, the research and experimentation tax credit, and the financing of the Airport and Airway Trust Fund.

Using JCT’s estimates for revenue provisions that affect the tax code, CBO estimates that if all of the President’s proposals were enacted, they would reduce revenues by $9 billion this year, by $94 billion in 2009, and by $2.1 trillion over the 2009–2018 period (see Table 1-3). The tax proposals would also increase mandatory outlays for refundable tax credits by $126 billion through 2018, by JCT’s estimates.⁵

The President proposes to make permanent various provisions that were originally enacted in EGTRRA and JGTRRA and that are currently set to expire at the end of December 2010. The proposals with the largest budgetary impact relate to changes in tax rates on income, an increase in the child tax credit, and changes to income tax brackets designed to provide relief from the so-called marriage penalty. Permanently extending all of those provisions would reduce revenues by $1.2 trillion from 2009 to 2018, JCT estimates, and increase outlays by $145 billion over that period.

The President also proposes to permanently repeal estate and gift taxes after 2010, which JCT estimates would reduce revenues by $670 billion over the 2009–2018 period. The President’s proposal to permanently extend tax rates on capital gains and dividends at 2010 levels would reduce revenues by $318 billion over the 10-year period, JCT estimates. Permanently extending other provisions, including tax provisions related to investments by small businesses and educational expenses would reduce revenues by an additional $41 billion and increase outlays for refundable tax credits by $2 billion between 2009 and 2018, JCT estimates.

In all, the proposals to permanently extend various tax provisions originally enacted in EGTRRA and JGTRRA would lower revenues relative to CBO’s baseline projections by an estimated $2.3 trillion through 2018. They would also increase outlays for refundable tax credits by $147 billion over that period.

The AMT exists alongside the regular income tax but includes a more limited set of exemptions, deductions, and tax credits than normally applies under the regular income tax. The taxpayer must calculate the amount owed under the AMT and under the regular income tax—and pay the higher of the two. The exemption amounts that taxpayers can use for the AMT calculation are set by law and are not indexed for inflation. EGTRRA and JGTRRA reduced income tax liabilities under the regular income tax through the end of 2010 but made adjustments to the AMT for a shorter period.

Since 2001, policymakers have amended the tax code several times to temporarily raise the amount of income that is exempt from the alternative minimum tax. The AMT exemption reverted to pre-EGTRRA levels at the beginning of calendar year 2008, which will cause an estimated 27 million people to be liable for tax under the AMT this year (up from 4 million people in 2007). In addition, the AMT will restrict the use this year of some nonrefundable personal tax credits, such as the higher education credits and the child and dependent care credit. The President’s budget proposes to continue for one year (through the end of 2008) both the unrestricted use of those personal tax credits under the AMT and higher AMT exemption levels. The proposal would reduce revenues by $6 billion in 2008 and by a total of $55 billion in 2009 and 2010, JCT estimates.

Among the President’s budgetary proposals is a plan to change the tax treatment of health insurance premiums and out-of-pocket costs, replacing the current system of exclusions and deductions with new standard deductions of $15,000 for taxpayers who have family coverage and $7,500 for those who have single coverage. Those deductions would apply for both income and payroll taxes and would be available to all taxpayers who purchased insurance that met a minimum standard of coverage. After 2013, Medicare enrollees who were actively employed and receiving health coverage from an employer would be allowed to take the new standard deduction.

Under current law, the payments that employers make for employment-based health insurance (and most payments by employees) are excluded from taxable income in the calculation of income and payroll taxes, whereas income that individuals use to buy non-employment-based health insurance is generally taxed. Current law offers employees another tax advantage as well: The income that funds their spending from employer-sponsored flexible spending accounts and health savings accounts is exempt from both payroll and individual income taxes. A further tax benefit under current law is that people who itemize deductions on their tax returns can deduct medical expenses that exceed 7.5 percent of their adjusted gross income.

The President’s proposal would replace most of those tax exclusions and deductions with a standard health deduction for taxpayers who were not enrolled in Medicare and who purchased qualifying health insurance. The proposed deductions of $15,000 for purchases of family coverage and $7,500 for single coverage would be indexed using the consumer price index. In addition, the proposal would reduce the phase-out rate for the earned income tax credit for taxpayers who had qualifying children, dropping the rate to 15 percent from between 15.98 percent and 21.06 percent. That part of the proposal would lessen the amount of the credit that low-income workers might lose if health insurance premiums were counted as earnings. Although the itemized deduction for medical expenses in excess of 7.5 percent of adjusted gross income would be eliminated for most taxpayers, those covered by Medicare would still be eligible to claim it; after 2013, taxpayers who were not eligible for the standard health deduction would be allowed to claim the itemized deduction.

If the proposal took effect on January 1, 2009, it would increase revenues by $429 billion through 2018, JCT estimates. (Of that amount, $24 billion would be off-budget because the proposal would generate additional payroll taxes.)⁶ The change in policy, through its impact on the earned income and child tax credits, would also reduce outlays by $20 billion over the 2009–2018 period.

This proposal, JCT estimates, would reduce revenues by almost $17 billion in 2009 but would boost them after 2010. Beyond that point, the projected gain in revenues from repealing the current provisions that exclude most health care costs from taxable income exceeds the loss in revenues from allowing a deduction against income for those who purchase qualified health insurance. The net gain in revenues under the proposal increases over time in part because the amount of the new deduction is indexed to a general price index and because, historically, health insurance premiums have increased at a rate faster than overall inflation. As a result of that discrepancy, the real value of the proposed deduction diminishes over time. In 2018, JCT estimates, this proposal would increase revenues by $115 billion.

By CBO’s estimates, the proposal would reduce the number of uninsured people by about 5 million in the first several years after its enactment and cause several hundred thousand people (about 1 percent of enrollees) to switch from Medicaid to private coverage. Spurring such a shift would be those individuals’ realization that private insurance was a more attractive option than public coverage, given the value of the new deduction relative to the private insurance premiums they would have to pay. Those shifts in coverage would be smaller in later years because of the lower value of the deduction relative to health insurance premiums.

Beyond 2018, the revenues that the proposal would generate would continue to expand, but they would be partially offset by growing outlays for Social Security benefits. The proposal would affect spending for Social Security to the extent that changes in taxable wages as a result of the proposal altered the covered wages used to calculate Social Security benefits. Over the 10-year period, the effect on Social Security outlays would be less than 1 percent of the total revenues generated by this proposal. Over a longer period, however, the proposal would have the effect of raising taxable wages—and hence outlays for Social Security benefits—by increasingly significant amounts.

Compared with JCT’s estimates, which envision a significant boost in revenues from the President’s proposal over the next decade, the Treasury Department’s estimates suggest more-modest effects. In particular, the Treasury calculates that the proposal will raise revenues by $41 billion over the 2009–2018 period.

In past years, corporations could claim a tax credit of 20 percent on certain expenditures for research activities that exceeded a base amount. That credit expired on December 31, 2007, but the President proposes to reinstate it (retroactive to its expiration) and make it permanent. According to JCT, the proposal would reduce revenues by $105 billion over the next 10 years.

Currently, excise taxes on airline tickets, on domestic air freight transportation, and on aviation fuel finance the Airport and Airway Trust Fund. The President proposes to stop collecting most taxes on air transportation beginning in 2010. A tax on international arrivals and departures would remain in effect, along with aviation fuel taxes, although the rates of those levies would change. JCT estimates that changing air transportation taxes will reduce revenues by $87 billion over the 2009–2018 period.

Under the President’s proposal, those taxes would be replaced with various fees on commercial aviation that would help pay for the use of air traffic control services by that industry. Starting in 2010, those fees would be recorded as offsets to discretionary spending of the Federal Aviation Administration. (In its analysis of the proposal’s effects, CBO assumed that the impact of those fees on discretionary spending was reflected in the aggregate funding levels specified in the President’s budget for such spending over the 2010–2013 period.)

The President’s budget also contains a number of other tax proposals, which include changing the treatment of incentives related to charitable giving, health care, education, the environment, savings, business investment, and tax compliance. Together, those proposals would reduce revenues by $21 billion between 2009 and 2018 and decrease outlays for refundable tax credits by $2 billion over the same period, JCT estimates.

If the proposals in the President’s budget were enacted, they would reduce mandatory spending relative to the amounts in the baseline by $143 billion (0.7 percent) over the next 10 years, CBO estimates. The proposals generating the largest reductions in mandatory spending are those relating to Medicare. The budget also includes proposals that would reduce outlays for Medicaid, the Pension Benefit Guaranty Corporation (PBGC), and the Social Services Block Grant program.

In the other direction, the proposal that would institute individual accounts for Social Security would raise outlays for that program, and the President’s tax proposals would boost spending for refundable tax credits (primarily the earned income and child tax credits). The President also proposes additional spending for the State Children’s Health Insurance Program (SCHIP).

The President’s budget contains many proposals to change the Medicare program. The major provisions would reduce the rates that Medicare pays for a broad range of services covered by the Hospital Insurance (Part A) and Supplementary Medical Insurance (Part B) portions of the program and increase the premiums that higher-income beneficiaries paid for Part B services and the prescription drug benefit (Part D). By CBO’s estimates, the President’s proposals would reduce net federal spending for Medicare by $481 billion (or about 8 percent) over the 2009–2018 period.

The proposals that account for the greatest estimated savings would freeze payment rates for services provided by inpatient hospitals, skilled nursing facilities, hospital outpatient departments, home health agencies, and other providers (except physicians) from 2009 to 2011. After 2011, the President proposes to permanently reduce the automatic annual payment updates for those providers by half the gains expected in productivity, or 0.65 percentage points. (Under current law, payment rates for most providers increase each year with inflation.) Those proposals would reduce outlays for Medicare by $275 billion over the 2009–2018 period (see Table 1-5).

		2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	Total, 2009-2013	Total, 2009-2018


Freeze Payment Rates Through 2011 and Reduce Updates by 0.65 Percentage Points Thereafter		0	-4	-11	-18	-22	-25	-30	-34	-38	-44	-50	-80	-275

Reduce Other Payments to Hospitals		0	-4	-9	-11	-11	-12	-13	-14	-15	-16	-16	-47	-120

Eliminate Payments for Bad Debts^a		0	*	-1	-1	-2	-2	-3	-3	-3	-4	-4	-6	-23

Eliminate Annual Indexing of Thresholds for Part B Income-Related Premiums		0	*	*	-1	-1	-1	-2	-2	-3	-3	-4	-4	-18

Eliminate Annual Indexing of Thresholds for Part D Income-Related Premiums		0	*	*	-1	-1	-1	-1	-1	-2	-2	-3	-3	-12

Other Provisions		*	-1	-2	-3	-3	-3	-4	-4	-4	-4	-5	-12	-33

	Total Changes in Mandatory Spending	*	-9	-23	-34	-40	-46	-52	-58	-65	-73	-81	-151	-481

Notes: These figures include the effects of the policies on payments to Medicare Advantage and on collections of premiums paid by beneficiaries.

Other provisions—to reduce payments to hospitals that treat a disproportionate share of beneficiaries eligible for Medicaid or Supplemental Security Income and payments to hospitals that operate graduate medical education programs—would diminish net outlays over that period by another $120 billion. Proposals to charge higher-income beneficiaries larger premiums for Parts B and D would save about $30 billion over the 10 years, CBO estimates.

In addition, the President proposes to reduce payments that Medicare makes to hospitals and other providers for bad debts, which would save $23 billion over the period. Other changes to Medicare, including reductions in payments for oxygen equipment and competitive bidding for clinical laboratory services, would reduce the program’s outlays by $33 billion between 2009 and 2018.

Those amounts include about $5 billion in estimated savings from a proposal to impose limits on medical malpractice litigation. The limits, which would result in lower premiums for medical malpractice insurance, would reduce Medicare spending because the program’s payment rates for services provided by physicians and hospitals include explicit adjustments for changes in the cost of malpractice premiums.

The President proposes to establish voluntary individual accounts for workers, which would replace some of the Social Security benefits provided under current law. For people who chose to participate, the government would deposit into an individual account an amount equivalent to as much as 4 percentage points of the current 12.4 percent tax on covered earnings. The account holder would direct—within a limited number of investment options—how the money should be invested. (The options would be similar to those available under the Thrift Savings Plan for federal employees.) When account holders eventually began to draw Social Security benefits, the amount of their defined benefit would be reduced according to a formula based on the amount deposited in their individual accounts.

Net outlays from establishing individual accounts would total $287 billion between 2012 and 2018, in CBO’s estimation. The Administration projects a much larger amount—$647 billion over that period—chiefly because it estimates that two-thirds of eligible workers would participate, whereas CBO estimates that about one-third would sign up. In addition, CBO assumes that, initially, a lag will occur between the time when the taxes are collected and the point at which the appropriate portion is transferred to workers’ individual accounts and recorded as outlays. Therefore, most outlays resulting from the establishment of such accounts would first be recorded in 2014, CBO anticipates, rather than in 2013, as the Administration foresees. (The President’s budget also includes several other proposals that would affect Social Security. Those proposals are discussed below, in the section titled "Other Mandatory Spending Proposals.")

The President’s tax proposals, JCT estimates, would add about $126 billion to mandatory outlays for the refundable portions of the earned income and child tax credits over the 2009–2018 period. The change with the biggest impact would make the 2001 expansion of the child tax credit permanent.⁷ If the credit and the other provisions originally enacted in EGTRRA and JGTRRA were permanently extended at their 2010 levels, outlays would increase by $147 billion through 2018. The President’s proposals to change the tax treatment of health insurance premiums and health care expenses would lower outlays—by about $20 billion over the next 10 years. Other proposals related to refundable tax credits would have little effect on outlays.

The President’s proposals for SCHIP and Medicaid would raise SCHIP spending by $35 billion and lower net Medicaid spending by a total of $59 billion over the 2009–2018 period, CBO estimates. Together, those changes would reduce mandatory outlays by $24 billion over the 10-year period.

The President is proposing to reauthorize SCHIP for five years and to increase the program’s funding by a total of close to $20 billion from 2009 through 2013, relative to CBO’s projection of $25 billion under baseline assumptions. (The program is currently authorized until March 2009 but in the baseline is assumed to continue.) Consistent with statutory guidelines, CBO assumed in its estimate of the proposal that annual funding for the program after 2013 would continue at its proposed level for that year—$10.5 billion. In contrast, CBO’s baseline projection for the program incorporates funding of $5 billion a year. The President’s proposal would also make several changes to SCHIP, primarily eliminating the redistribution of unspent funds, setting limits on eligibility for the program, and moving parents and childless adults from SCHIP to Medicaid. On net, the President’s proposals would increase spending for SCHIP by an estimated $35 billion over the 10-year projection period.

The proposed changes to SCHIP would also affect spending for Medicaid. Under the baseline funding assumption of $5 billion per year, SCHIP would not have sufficient resources, by CBO’s estimates, to cover the costs of all those who would qualify for coverage. Some of those individuals would instead enroll in Medicaid, raising the cost of that program. Under the President’s proposal, however, higher funding levels for SCHIP would allow some of the children who would otherwise have enrolled in Medicaid to remain enrolled in SCHIP.

The savings for Medicaid from that effect would be more than offset by two other interactions with the SCHIP proposal. First, costs would rise with the transfer of adults from SCHIP to Medicaid. Second, higher funding for SCHIP as well as outreach grants (provided elsewhere within the Department of Health and Human Services) would increase outlays for Medicaid because states would respond to the new funding, CBO expects, by expanding their SCHIP programs; moreover, the publicity and outreach efforts would have the effect of attracting additional children who were eligible to enroll in Medicaid. On net, the SCHIP proposals would increase spending for Medicaid by $8 billion over the 2009–2018 period, CBO estimates. As a result, combined spending related to those proposals would total $43 billion.

The President is also proposing changes to Medicaid that would reduce the federal government’s spending for the program by an estimated $67 billion over the projection period. Most of the proposals would reduce outlays (by a total of $70 billion), and a few would increase costs (by nearly $4 billion).

In particular, lowering the federal matching rate for certain services would lower federal Medicaid outlays by $35 billion from 2009 to 2018. Other savings over that period would include $8 billion from a proposal to reduce spending on prescription drugs; $4 billion from a cut in payments to states for program administration; $2 billion from a proposal that would allow states to enroll dual eligibles (people who are eligible for both Medicaid and Medicare) in managed care programs; and $6 billion from a set of proposals to reduce the number of improper payments.

The President’s proposals to create a standard deduction for health insurance and to change the medical malpractice laws would also reduce spending for Medicaid. Some Medicaid enrollees who are eligible for private insurance but do not enroll because of the cost of premiums would, under the President’s proposals, switch to private plans and use the standard deduction for health insurance, CBO anticipates. That shift, if it occurred, would reduce Medicaid’s costs by $12 billion over the 2009–2018 period, in CBO’s estimation. If the President’s proposal to change malpractice laws was enacted, Medicaid’s costs would drop by an additional $1 billion during that time.

In addition, the President’s proposal related to improper payments in the Supplemental Security Income (SSI) program would affect Medicaid spending. Under that proposal, SSI would receive additional funding to increase the number of reviews it conducts to determine whether an individual continues to meet the eligibility requirements of the program. As a result of those reviews, some individuals would lose their eligibility for SSI, and some, in turn, would also lose their eligibility for Medicaid. Consequently, Medicaid spending would fall by $2 billion, CBO estimates.

The President proposes to allow the board of the Pension Benefit Guaranty Corporation to increase both flat- and variable-rate premiums to meet current and future claims. The board would seek to meet current claims, CBO and the Administration both assume, by increasing flat-rate premiums for single-employer insurance plans in 2009 from $34 to $48 per participant. In addition, CBO expects, the board would increase variable-rate insurance premiums, which some companies pay to PBGC on behalf of underfunded plans, to cover anticipated future claims related to such plans. Currently, variable-rate premiums are set by statute at $9 per $1,000 of underfunding. CBO and the Administration expect that if this proposal was enacted, the board would raise the rate to $16 per $1,000 of underfunding, causing premiums (which are recorded in the budget as offsetting collections) to rise, CBO estimates, by a total of $19 billion from 2009 to 2018.

The President’s budget proposes to reduce funding for the Social Services Block Grant program from $1.7 billion in 2008 to $1.2 billion in 2009 (through appropriation action) and to eliminate it thereafter. Those changes would reduce mandatory outlays by $15 billion from 2009 to 2018, CBO estimates.

If all other proposals that involved mandatory spending programs were enacted, they would, on balance, decrease outlays by $18 billion over the 2009–2018 period, by CBO’s estimates. Some of those other proposals are discussed below.

Other Social Security Provisions. In addition to establishing individual accounts, the President’s budget also includes five proposals that would modestly reduce outlays for Social Security benefits:

Agriculture and Nutrition Programs. The President’s budget includes proposals that would revise and extend expiring provisions of the Farm Security and Rural Investment Act of 2002. (The proposals affect commodity, conservation, trade, rural development, nutrition, and other programs.) The Administration has estimated that the proposals would increase outlays by more than $2 billion over the 2009–2018 period, relative to the spending that would occur if most existing programs were extended indefinitely. CBO estimates that if the proposals were put into place, they would increase spending by $4 billion over the 10-year period, relative to CBO’s baseline projections (which assume the continuation of most current programs and total about $656 billion over that period).

The President’s proposals are intended to shift agriculture spending to programs that are not tied to current farm production. Under the proposals, lower loan rates for the commodity loan program (which compensates farmers for their current production if prices fall below a specified level) would reduce spending, whereas higher payment rates for the direct payment program (which provides fixed prices to farmers for a portion of their historical production) would increase spending. The countercyclical payment program, under which farmers receive payments on a portion of past production if national average prices fall below target prices, would be replaced by a countercyclical program under which farmers would receive payments if national average farm revenues fell below specified targets. (Producers could receive direct and countercyclical payments even if they did not produce a crop in the current year.) In addition, the President proposes to reduce the maximum amount of subsidy payments an individual farmer can receive, reduce spending for the sugar program, and extend dairy payments (under current law, those payments are scheduled to end during 2008).

Other proposals would extend benefits to producers of specialty crops, livestock and forestry enterprises, and other agricultural and rural interests. In addition, the President would reduce subsidies for crop insurance, expand access to Food Stamps among the elderly and working poor, and increase purchases of fruits and vegetables for nutrition assistance programs.

ANWR Leasing. The President proposes to lease a portion of the coastal plain of the Arctic National Wildlife Refuge (ANWR) to companies that want to explore for oil and natural gas. The way those leases would be handled, CBO anticipates, would be similar to current leasing practices in other federal areas, such as the Outer Continental Shelf. If so, the leases would be offered in multiple phases, with the first sale likely to occur in 2011 and subsequent sales to be held every two years thereafter. Proceeds to the federal government from bonuses and rents would total $6 billion between 2011 and 2018, CBO estimates. (Although the federal government would receive income from royalties on production, nearly all of those payments would occur after 2018.) Under the President’s proposal, half of the receipts from leasing would be paid to Alaska, resulting in net federal receipts of $3 billion over the 2009–2018 period.⁸

Veterans’ Benefits. The President’s budget contains several proposed changes to the health care program of the Department of Veterans Affairs:

Temporary Assistance for Needy Families. By CBO’s estimates, the President would boost spending for Temporary Assistance for Needy Families by about $3 billion over the 10-year period. That increase results mostly from proposals to continue an existing supplemental grant, to lower the work participation rate required of two-parent families, and to make the contingency fund available to states that opt to participate in a new block grant program for foster care and then experience an increase in their foster care caseload.

As of early March, lawmakers had enacted $1,045 billion in discretionary budget authority for 2008, including $88 billion for military operations in Iraq and Afghanistan and other activities related to the war on terrorism.⁹ The President has requested another $105 billion in supplemental funding for 2008 for those purposes (as well as an additional $3 billion for other activities). If that supplemental funding request was enacted, total discretionary budget authority for 2008 would rise to $1,153 billion (see Tables 1-6 and 1-7).

						Administration’s Request			Percentage Change
					Actual 2007	2008		2009	2007- 2008		2008- 2009


Budget Authority
	Defense				622	690	^a	608		10.8	-11.9
	Nondefense
		Homeland security^b			32	35	^a	37		7.9	7.8
		Other			418	429	^a	422		2.6	-1.6

			Subtotal, nondefense		450	464	^a	460		3.0	-0.9

				Total	1,073	1,153	^a	1,067		7.5	-7.5


Budget Authority, Excluding Funding for Operations in Iraq and Afghanistan and Other Activities Related to the War on Terrorism^c
	Defense				457	502		538		9.8	7.2
	Nondefense
		Homeland security^b			32	35		37		7.9	7.8
		Other			412	424		422		2.8	-0.5

			Subtotal, nondefense		445	459		460		3.2	0.2

				Total	902	961		997		6.5	3.8

Note: These numbers do not include obligation limitations for certain transportation programs.

b. CBO’s classification of homeland security funding is based on designations established by the Administration. Those designations are not limited to the activities of the Department of Homeland Security. In fact, some of the department’s activities (such as disaster relief) are not included in the Administration’s definition of homeland security, whereas nondepartmental activities (such as some defense-related programs and some funding for the National Institutes of Health) fall within that definition. About 55 percent of all spending considered to be for homeland security is for activities outside the Department of Homeland Security.


		Funding for 2008				Funding for 2009					Change in Regular Funding, 2008–2009
		Regular Enacted	Emergency Enacted^a	Supplemental Requested^a	Total	Regular Requested	Supplemental Requested		Total		Billions of Dollars	Percent


Defense		500.2	87.0	102.6	689.8	537.8		70.0		607.8	37.5		7.5

Nondefense
	International affairs	34.3	2.4	5.4	42.1	39.8		0		39.8	5.5		16.0
	General science, space, and technology	27.3	0	0	27.3	29.4		0		29.4	2.1		7.9
	Energy	5.0	0	0	5.0	4.9		0		4.9	-0.1		-1.5
	Natural resources and environment	30.9	0.8	0	31.7	28.9		5.8		34.7	-2.0		-6.5
	Agriculture	5.9	*	*