November 15, 2017

How GOP tax reform could trigger $25B in Medicare cuts in FY 2018

Daily Briefing

    Republicans' tax reform efforts could trigger $136 billion in automatic spending cuts in fiscal year (FY) 2018, including $25 billion in cuts to Medicare spending, according to a Congressional Budget Office (CBO) analysis released Tuesday.

    CBO conducted the analysis in response to a request for information from Rep. Steny Hoyer (R-Md.) about the effects of a bill that would add approximately $1.5 trillion to the federal deficit over 10 years—roughly the expected budgetary effect of the House GOP's tax reform proposal. In particular, CBO analyzed how such a bill would interact with the requirements of the Statutory Pay-As-You-Go Act of 2010, commonly known as "pay-go."

    "The (pay-go) law," CBO explained, "requires that new legislation enacted during a term of Congress does not collectively increase estimated deficits." If new legislation does collectively increased deficits, the White House Office of Management and Budget (OMB) must automatically cut mandatory spending to offset the overage, The Hill reports.  

    Analysis details

    For the estimates in the analysis, CBO assumed that the $1.5 trillion in estimated deficit increases would be evenly distributed as a $150 billion increase in each of the next 10 years.

    CBO in the analysis stated that if Congress were to pass such a bill without passing separate legislation to offset the deficit increase or waiving the pay-go law, "OMB would be required to issue a sequestration order within 15 days of the end of the session of Congress to reduce spending in fiscal year 2018 by … $136 billion"—which is equal to the $150 billion deficit increase minus $14 billion in savings accrued from other legislation passed by Congress during this term.

    But according to CBO, OMB likely would be unable to make the full $136 billion in cuts, as many mandatory spending accounts are exempt from pay-go cuts.

    In particular, pay-go allows OMB to cut Medicare spending by no more than 4%, or about $25 billion in FY 2018. Other accounts available for mandatory cuts total only about $85 billion to $90 billion per year, which CBO notes is "significantly less than the amount that would be required to be sequestered."

    As such, CBO wrote, "OMB would be unable to implement the full extent of outlay reductions required by the (pay-go) law."

    Because the tax reform bill would increase deficits throughout the 10-year budget window, cuts would continue in future years, CBO estimated. Among the programs that could be eliminated under the pay-go cuts are health funds created under the Affordable Care Act, The Hill reports.

    Legislation to avoid the cuts would need Democratic support

    According to The Hill, any legislation to offset or waive the cuts would need support from Democratic lawmakers to pass through the Senate. A Senate GOP aide said if OMB "determines that the final bill increases deficits, Senate Republicans will seek to waive application of those cuts, which has been done in the past for major legislation like this." The aide added, "It will then be up to the Democrats to join us in preventing those cuts."

    However, Hoyer said Republicans should not rely on Democrats to vote for any potential fixes to avoid the cuts. "While it is possible to avoid the [pay-go] enforcement cuts triggered by their added deficits, Republicans would need Democratic votes to do it, requiring them to abandon their go-it-alone partisan strategy, which is only leading them on a path to failure and to putting our country in danger," Hoyer said (Elis, The Hill, 11/14; Mejdrich, Roll Call, 11/14; Scott, Vox, 11/8).

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