Letter to the Honorable Chris Van Hollen Regarding a Proposed Amendment to the Sequester Replacement Reconciliation Act of 2012

Cost Estimate
May 9, 2012

The Congressional Budget Office (CBO) has reviewed your proposed amendment to Rules Committee print 112-21, the Sequester Replacement Reconciliation Act of 2012. The two enclosed tables present estimates of the legislation’s effects on direct spending and revenues under alternative assumptions about the date of enactment. Table 1 provides estimates assuming enactment around October 1, 2012, while Table 2 provides estimates assuming enactment by July 1, 2012, as directed by the Chairman of the House Committee on the Budget for the Sequester Replacement Reconciliation Act.

The amendment would replace the provisions of the Sequester Replacement Reconciliation Act with the following policies:

  • Eliminate automatic spending reductions for both discretionary and mandatory programs scheduled for fiscal year 2013;
  • End the direct payment program for agricultural producers;
  • Raise premiums paid by certain policyholders covered by the National Flood Insurance Program (NFIP);
  • Increase tax liabilities of some taxpayers with an adjusted gross income greater than $1 million by creating a new minimum tax amount; and
  • Implement other changes to the tax code and increase retirement contributions paid by Members of Congress.

Assuming enactment around October 1, 2012, CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the Rules Committee Print 112-21, as amended, would yield net deficit reduction of nearly $30 billion over the 2012-2022 period. (That amount roughly equals the proposal’s estimated budgetary effect assuming enactment by July 1, 2012; thus, the different enactment dates would not have a significant impact on the cumulative estimate over the 2012-2022 period.)

Eliminate Automatic Spending Reductions. The legislation would eliminate the automatic spending reductions in both discretionary and mandatory programs scheduled to take effect in January 2013. CBO estimates those  provisions would increase direct spending by about $82 billion over the 2012-2022 period, relative to the current baseline projections that assume automatic spending reductions under the Budget Control Act of 2011 go into effect as currently scheduled.

The above total reflects the cost of avoiding sequestration (cancellation of budgetary resources) from unobligated balances for defense programs, from advance appropriations for 2013 for nondefense programs other than those under the Department of Veterans Affairs, and for certain mandatory programs. At this point in time, no other appropriations have been provided for fiscal year 2013. If additional discretionary appropriations are enacted for 2013, more resources would be available to be sequestered, and reversing the automatic reductions would result in an increase of up to $106 billion in direct spending over the 2013-2022 period, CBO estimates.

End Direct Payment Program for Agriculture Producers. The amendment would eliminate direct payments to agricultural producers (payments based on historical acres and yields not tied to market prices), beginning with the 2013 crop, resulting in higher participation and outlays in the remaining agricultural programs, for a net savings of $26.5 billion over the 2013-2022 period.

National Flood Insurance Program. The legislation would make a number of changes to the NFIP, including raising the premium paid by certain subsidized flood insurance policies. Those changes would increase net income to the program by about $4.9 billion over the 2014-2022 period, CBO estimates. However, because many policies would continue to be subsidized and the program is expected incur significant interest costs for borrowing from the past decade, we expect that additional receipts collected under this legislation would be spent to cover program shortfalls. As such, CBO estimates that provision of the amendment affecting the NFIP would not affect net deficit reduction over the 2012-2022 period.

Revenue Changes. The legislation would make several changes to the Internal Revenue Code that would result in higher tax revenue. The largest effect stems from the provision to increase tax liabilities of some higher-income taxpayers, which JCT estimates would increase revenues by about $47 billion over the 2013-2022 period. In addition, the legislation would limit certain deductions and credits used by oil and gas companies, which JCT estimates would increase revenues by an additional $38 billion over the 2013-2022 period.

If you wish further details on this estimate, we will be pleased to provide them.