At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has analyzed the President's budget request for fiscal year 2006 using its own economic assumptions and estimating techniques, with contributions from the Joint Committee on Taxation (JCT). This report presents CBO's analysis of that budget, which provides more details than the preliminary report released on March 4, 2005.
 

Overview of CBO's Estimates

According to CBO's estimates, carrying out the proposals in the President's budget would result in a deficit of $394 billion in 2005, equal to 3.2 percent of the nation's gross domestic product (GDP). That deficit would be smaller than the one recorded in 2004, which totaled $412 billion, or 3.6 percent of GDP (see Table 1-1). The estimate for 2005 includes outlays of $32 billion resulting from the President's recent request for supplemental appropriations, mainly for military activities in Iraq.

In 2006, the deficit under the President's budgetary proposals would shrink to $332 billion, CBO estimates--but the President's request for that year omits additional funds to continue U.S. operations in Iraq and Afghanistan. Consequently, CBO's estimate of the budget's effects in 2006 reflects only outlays for those operations that would result from the 2005 supplemental request (a total of $82 billion in budget authority) and from appropriations enacted for previous years. Additional funding to keep the operations at roughly the same level as expected for 2005 would add about $40 billion to the 2006 deficit, bringing it to between $370 billion and $375 billion, or 2.9 percent of GDP.⁽¹⁾

Beyond 2006, the deficit would decline further as a percentage of GDP under the President's proposals--to 2.0 percent of GDP in 2007 and then to 1.3 percent of GDP by 2015 (the end of CBO's 10-year projection period). Over the 2006-2015 period, deficits under the President's budget would total $2.6 trillion, or 1.6 percent of GDP, CBO estimates. Federal debt held by the public would grow to 39 percent of GDP in the next few years, up from 37 percent of GDP at the end of 2004; it would then gradually fall back to that level by 2015. However, such figures reflect neither significant spending for military operations in Iraq and Afghanistan nor the potential budgetary impact of the President's proposal to provide individual investment accounts as part of an overhaul of the Social Security program. The President's budget offers no details about other possible changes to Social Security, which makes estimating the impact of individual accounts difficult because such changes would affect participation in the accounts.

The President's budget does not provide year-by-year estimates of spending and revenues after 2010. Rather, for each proposed change to laws that govern revenues or mandatory spending, the budget specifies a total effect through 2015. For discretionary spending, the budget provides details just for 2005 and 2006; for 2007 through 2010, such funding is shown only in the aggregate, by budget function.⁽²⁾ CBO incorporated those aggregate levels in its estimates and calculated discretionary outlays for the 2011-2015 period by projecting the amount of discretionary budget authority recommended by the President for 2010 and adjusting that amount for inflation.

Total outlays under the President's budget would peak at 20 percent of GDP this year, CBO estimates, before declining to around 19 percent of GDP for most of the next 10 years (see Table 1-2). Spending for entitlements and other mandatory programs would grow at an average rate of 5.9 percent a year--faster than nominal GDP, which is projected to grow by 4.9 percent annually--whereas discretionary outlays would increase at an average rate of 1.2 percent a year. Revenues would remain relatively low by historical standards, rising from 16.8 percent of GDP this year to 17.1 percent in 2006 and to 18.0 percent by 2015.

The proposals in the President's budget would add $30 billion to the deficit that CBO now projects for 2005, mainly as a result of the proposed supplemental appropriations. Over the 2006-2010 period, those proposals would increase the cumulative deficit by $104 billion relative to CBO's baseline projections. Lower nondefense spending would largely offset higher defense spending. But proposed changes in tax laws--such as extending the reduced tax rates on dividends and capital gains that were enacted in 2003 and extending the research and experimentation tax credit--would reduce revenues by $100 billion through 2010 (see Table 1-3).⁽³⁾

The impact of the President's proposals on the cumulative deficit would be far greater over 10 years ($1.6 trillion) than over five years ($104 billion). Under the assumption in CBO's baseline that current laws and policies do not change, deficits turn into small surpluses by 2012, whereas under the President's policies, deficits would continue through 2015, CBO projects. Total revenues during the 2006-2015 period would be $1.4 trillion lower under the President's policies than in CBO's baseline, primarily because of the proposal to extend certain expiring tax provisions enacted in 2001 and 2003. Total discretionary spending would be $77 billion lower than the baseline level, but mandatory spending would be $16 billion higher. (Additional spending in the President's budget for refundable tax credits would be mostly offset by higher premiums paid to the Pension Benefit Guaranty Corporation, by reductions in Medicaid spending, and by other savings in mandatory programs.) Net interest costs on additional borrowing would add another $237 billion to the 10-year deficit.

The estimates described above--and presented in detail later in this chapter--come from an analysis of the President's budgetary proposals that does not account for the proposals' potential impact on the economy. Because any such impact could in turn influence how the proposals would affect the deficit, CBO has prepared a macroeconomic analysis of the President's budget, which is discussed in Chapter 2. That assessment uses a variety of models to indicate the range of potential economic and budgetary effects of the President's proposed policies. CBO has concluded that the macroeconomic effects and their resulting budgetary impact would most likely be modest.

Overall, CBO's estimates of the President's budget are similar to the Administration's estimates (see Table 1-4). Both CBO and the Administration expect the deficit to peak in 2005: CBO projects a deficit of $394 billion under the President's budget; the Administration expects a shortfall of $427 billion. For 2006, CBO estimates that the deficit would total $332 billion under the President's proposals, $58 billion less than the Administration's estimate of $390 billion. (Neither figure includes additional funding after 2005 for operations in Iraq and Afghanistan.) For the 2006-2010 period, CBO's total deficit projection of $1.34 trillion is only $57 billion less than the Administration's projection. (As noted above, the Administration did not provide estimates beyond 2010.)

Table 1-4.

CBO's estimates of outlays under the President's budget are smaller than those of the Administration--by $28 billion for 2005 and by a total of $110 billion (or 0.8 percent) for the 2006-2010 period. Those differences result mainly from differing estimates of Medicare spending under current law. CBO's projections of revenues under the President's budgetary proposals are also similar to the Administration's. CBO's revenue estimate is $4 billion higher than the Administration's for 2005 but $53 billion (or 0.4 percent) lower than the Administration's for the 2006-2010 period, mostly because of differing estimates of revenues under current law.

In conjunction with its analysis of the President's budget, CBO has updated its baseline projections to take into account new information from the budget and other sources. Nearly all of the changes to the updated baseline are technical, in that they do not result from new legislation or from changes to CBO's economic forecast. (Legislative changes have been minimal since January, when CBO published its previous baseline, and CBO has not updated its economic assumptions.)

CBO now projects that if current tax and spending policies remained the same, the cumulative deficit for the 2006-2015 period would total $980 billion--an increase of $125 billion from the January baseline projection. Much of that change stems from a rise of $70 billion in CBO's estimate of Medicare spending over the 2006-2015 period. The rise is primarily attributable to revised estimates of the cost of the prescription drug program (Part D of Medicare), which CBO has increased by $54 billion for the 2006-2015 period. (About $36 billion of that amount is expected through 2013, the period covered by CBO's original estimate of the cost of the Medicare Modernization Act.)⁽⁴⁾ Changes in the estimated net cost of the basic Part D benefit account for more than half of the total revision, and changes in the cost of the low-income subsidy account for the rest. Those changes reflect both a refinement of CBO's estimating methods and provisions in the final rules governing formulary requirements and eligibility for the low-income subsidy that differ from what CBO had anticipated on the basis of legislative language.
 

Policy Proposals That Affect Mandatory Spending

Overall, CBO estimates that the policies proposed in the President's budget would generate net savings of $26 billion in mandatory spending over the 2006-2010 period (see Table 1-3). Savings totaling $73 billion from various mandatory proposals would be partly offset by $25 billion in increased outlays for refundable tax credits and $22 billion in added spending for certain mandatory programs.

Over the entire 2006-2015 period, however, the Administration's proposals would produce a net increase of $16 billion in mandatory spending, CBO estimates. Higher spending for refundable tax credits would be largely offset by higher premium payments to the Pension Benefit Guaranty Corporation (PBGC) and by savings in Medicaid and other mandatory programs.

After issuing its budget request, the Administration released a general description of a plan to create personal investment accounts as part of an overhaul of the Social Security system (which did not appear in the President's budget). However, that plan is not sufficiently detailed or complete for CBO to estimate its budgetary impact at this time. (For a discussion of the proposal to create individual accounts, see Appendix B.)

Refundable Tax Credits

CBO and JCT estimate that the Administration's tax proposals--primarily those involving refundable tax credits--would add roughly $120 billion to mandatory outlays over the 2006-2015 period. The largest such change involves making permanent the recent expansion of the child tax credit. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was enacted, the maximum child tax credit per qualifying child was $500. The credit was refundable only for families with three or more qualifying children and had other limitations. If EGTRRA expires as currently scheduled at the end of calendar year 2010, the child credit will revert to its previous form in 2011. Instead, the President's budget proposes to permanently extend the tax credit in its current form--at $1,000 per child, with refundability not contingent on the number of qualifying children but limited to 15 percent of the amount of earned income in excess of $10,000 (indexed for inflation after 2001). That proposal, combined with proposed changes to tax brackets and tax rates that also affect refundable tax credits, would increase outlays by $62 billion over the 2006-2015 period, CBO and JCT estimate.⁽⁵⁾ The President also suggests creating a refundable tax credit for the cost of health insurance and for certain contributions to health savings accounts. Together, those credits would add $57 billion to outlays over the 10-year period, according to CBO's and JCT's estimates. (The proposal for a refundable health insurance credit is described in more detail on page 15 in the section about revenue proposals.)

Pension Benefit Guaranty Corporation

The President's budget proposes changing the way in which liabilities for defined-benefit pension plans are measured--and consequently the extent to which plans are considered underfunded--and altering the premiums charged to underfunded plans. One change would be to discount pension obligations using interest rates that were based on the rates on corporate bonds instead of the rates on 30-year Treasury bonds. (That part of the proposal would also affect federal tax receipts.) In addition, the PBGC's board of directors would be given the authority to alter the premium rate charged to underfunded plans, which is currently set by statute at $9 per $1,000 of underfunding.

The Administration's proposal for the PBGC would also increase the flat-rate premiums charged to all sponsors of defined-benefit pension plans. The current premiums, which are based on the number of participants in each plan, would rise from $19 to $30 per participant in 2006 and be indexed to the growth of wages thereafter. Those flat-rate premiums were last increased in 1991, although the PBGC's insured liabilities have generally risen with wages.

In all, the proposal for the PBGC would increase the agency's premium collections by a total of $18 billion over the 2006-2010 period and $29 billion over the 2006-2015 period, CBO estimates.

Medicaid and SCHIP

The budget includes a series of proposals that, according to the Administration, would reduce federal spending for Medicaid by a total of $60 billion between 2006 and 2015. However, the Administration has not provided enough details for CBO to prepare its own estimates for some of the proposals that deal with restrictions on certain types of above-cost payments by states to health care providers and on payments for various social and rehabilitative services. (By the Administration's estimate, those proposals would save $23 billion over 10 years.)

CBO estimates that the rest of the proposals would lower federal Medicaid spending by a total of $37 billion over the 2006-2015 period--$16 billion from restricting the taxes that states impose on health care providers, $14 billion from reducing payments to pharmacies, $4 billion from cutting the federal matching rate for certain social services, and $3 billion from restricting eligibility for coverage of nursing home care. CBO estimates that the proposal to set a limit on the federal matching payments that could be available for administrative costs would generate no savings, because the proposed limits are higher than CBO's baseline projection for administrative costs.

The Medicaid savings proposed in the President's budget would be offset by an estimated $10 billion increase in spending over the 2006-2015 period--including additional outlays for efforts to enroll more children in Medicaid and in the State Children's Health Insurance Program (SCHIP). Overall, CBO estimates that the proposals that are detailed enough to analyze would reduce federal spending for Medicaid and SCHIP by a total of $27 billion through 2015.

Commodity Credit Corporation

The President's budget includes several proposals that, on net, would lower spending for the Department of Agriculture's Commodity Credit Corporation by a total of $16 billion over the 2006-2015 period. Most of those savings come from a proposal to limit the benefits that are available to producers through commodity loan programs. The Administration also proposes lowering crop and dairy payments to farmers for all commodity programs by 5 percent, requiring the dairy price-support program to minimize expenditures, and imposing marketing assessments to be paid by sugar processors on all domestically produced sugar. In addition, the budget includes a proposal that would increase spending by extending the Milk Income Loss Compensation program for two years.

Education Programs

The President's 2006 budget contains a number of proposals that together would reduce spending for federal education programs by $3 billion over five years but increase spending by roughly $4 billion over 10 years, CBO estimates. The effects of those proposals on outstanding student loans would save an additional $3.4 billion in 2005, CBO estimates.⁽⁶⁾

The Administration's proposals would affect most of the parties to the student loan programs: borrowers, lenders, guaranty agencies, and the federal government. Proposals affecting borrowers--which would change eligibility criteria for loans as well as the terms, amounts, fees, and interest rates on those loans--would increase federal costs by $8.7 billion over the 2006-2015 period. However, proposals that would affect the returns to lenders would save $10.1 billion over that period. Those policies include imposing a fee of 25 basis points on nonconsolidated loans, increasing the fee on consolidated loans by 50 basis points, reducing the insured percentage for guaranteed loans, and permanently extending restrictions on special payments to lenders for loans based on the proceeds of certain tax-exempt bonds. The remaining proposals, which would affect guaranty agencies, would have small federal savings (about $1.4 billion) through 2015. The interactions between the provisions that would increase loan volumes and those that would reduce subsidies to lenders and guaranty agencies would boost savings by $5.3 billion over the 2006-2015 period--for total savings of more than $8 billion from the changes to student loan programs, CBO estimates.

In addition, the President's budget proposes recalling a portion of the Perkins loan revolving funds held by postsecondary institutions beginning in 2006. Under that proposal, as Perkins loans were repaid each year, schools would give the federal government a share of the repayments. CBO's baseline projects that under current law, the recall would begin to appear in the budget in 2012. As a result, the net effect on federal collections of the proposed recall would be diminished beginning in 2012 and turn negative beginning in 2013. CBO estimates that the proposal would save a total of $3.3 billion over the 2006-2010 period and $3.5 billion through 2015.

The Administration proposes using a portion of the savings from student loans and the Perkins loan recall to pay for raising the maximum Pell grant by $100 (to $4,150) for the 2006-2007 academic year and by another $100 annually for each of the following four years. That additional funding would be available only if the $4,050 maximum was funded through appropriations for 2006 and subsequent years. In addition to the increased maximum, the minimum grant would be raised each year, beginning with the 2007-2008 academic year, and would reach $600 by the 2010-2011 academic year. The proposal for Pell grants would increase outlays by $4.6 billion through 2010 and by $14.8 billion through 2015, CBO estimates.

Other Mandatory Spending Proposals

The President's budget also includes proposals that would affect receipts from the Federal Communications Commission's (FCC's) auctions of licenses to use parts of the electromagnetic spectrum. Those proposals include imposing new fees on licenses used for analog television broadcasts and on licenses awarded by methods other than auctions as well as extending the FCC's authority to conduct auctions beyond 2007. Overall, CBO estimates, implementing those proposals would increase offsetting receipts from fees and auctions (which are recorded in the budget as negative mandatory spending) by $12.7 billion over the 10-year projection period.

The President's budget request for veterans' health care includes proposals that would increase offsetting receipts and decrease mandatory spending by a total of $2.5 billion over five years and $5.3 billion over 10 years, CBO estimates. The Administration seeks to charge veterans with income above certain thresholds an annual enrollment fee of $250 and raise their copayment for a 30-day prescription from $7 to $15. Under current law, similar receipts--such as those from third-party insurance payments and the current $7 copayment for prescriptions--are classified as discretionary offsetting collections. (The President's budget proposes increasing discretionary appropriations for veterans' health care by the amount of the new mandatory receipts.)

The President's budget also includes a proposal to repeal the Continued Dumping and Subsidy Offset Act (CDSOA), which requires the federal government to disburse collections of antidumping and countervailing duties to the U.S. industries whose petitions for relief resulted in the imposition of the duties. In the past, those collections have averaged about $300 million per year. However, the United States and Canada are in the midst of a dispute about duties collected from exporters of Canadian softwood lumber. The assessments in question are much larger--approaching $4 billion--than previous duties and outlays under the CDSOA. Because CBO cannot predict the outcome of that dispute, its baseline assumes an equal probability that Canada or the United States will prevail. If the CDSOA was repealed at the beginning of fiscal year 2006, the savings relative to CBO's baseline would total $4.2 billion through 2015.

The President also proposes leasing the coastal plain of the Arctic National Wildlife Refuge for oil and gas development. Under that proposal, the state of Alaska would receive half of the proceeds from bonus bids, rents, and royalties. CBO anticipates that those leases would be offered in two phases (as specified in recent legislative proposals), with the first sale likely to occur in 2008 and the second in 2010. Proceeds to the federal government from the bonuses, rents, and royalties would total $5.2 billion over the 2006-2015 period, CBO estimates, and half of that sum would be paid to the state of Alaska.
 

Policy Proposals That Affect Discretionary Spending

Discretionary budget authority for the current year totals $840 billion, including $11.5 billion in supplemental appropriations for disaster relief enacted in October 2004. That total will rise to $922 billion if the supplemental budget authority of $82 billion that was recently requested, chiefly for military operations in Iraq, is enacted.

The President's budget proposes $843 billion in discretionary budget authority for 2006, CBO estimates--$439 billion for national defense and $404 billion for nondefense programs (see Table 1-5).⁽⁷⁾ However, those totals include no additional appropriations in 2006 for operations in Iraq or Afghanistan.

Table 1-5.

With proposed and enacted supplemental appropriations for 2005 excluded, discretionary budget authority would grow by 1.7 percent, or roughly $14 billion, between 2005 and 2006 under the President's budget, CBO estimates. Defense funding would increase by about 4.4 percent, but nondefense funding would fall by 1.0 percent.

Discretionary outlays would total $962 billion in 2005 and shrink to $947 billion in 2006, CBO estimates--assuming that no additional funding was provided for operations in Iraq and Afghanistan beyond the amount proposed for 2005 in the President's budget (see Table 1-6). Additional funding to maintain those operations in 2006 at about the level expected for 2005 would add some $40 billion to 2006 outlays, raising them to about $990 billion, CBO projects.

Proposals for Defense Spending

CBO estimates that the President's proposals for defense would increase outlays by $31 billion in 2005, $139 billion over the 2006-2010 period, and $336 billion over the 2006-2015 period relative to CBO's baseline projections. Those increases would result both from supplemental funding requested for 2005 and from increases in regular funding (relative to the baseline) requested for 2006 and later years.

Defense outlays would rise in 2005 because the Administration has requested $75 billion in supplemental budget authority for that year (most of the $82 billion supplemental appropriation mentioned above), primarily for costs associated with military activities in Iraq. If that supplemental funding is enacted, it will also add about $28 billion to defense outlays in 2006 and smaller amounts in subsequent years.

The Administration's proposals for defense spending for 2006 through 2010 exceed the amounts in CBO's baseline, even though they do not include any further funding for operations in Iraq and Afghanistan.⁽⁸⁾ The amount of budget authority requested for 2006, $439 billion, is $7 billion higher than CBO's baseline level. That difference grows in subsequent years, reaching $36 billion, or 7.0 percent, by 2010. Consequently, outlays from the President's proposals would exceed baseline levels by a total of $139 billion through 2010. With the Administration's request for 2010 funding extrapolated through 2015, outlays from those proposals would total $336 billion more than the baseline over the 2006-2015 period.

Proposals for Nondefense Discretionary Spending

The President's budget proposes cutting budget authority for nondefense discretionary activities by 1.0 percent in 2006 from this year's level (not counting supplemental appropriations). For 2007 through 2010, the President's budget would essentially freeze nondefense discretionary spending other than that for homeland security.

Although most homeland security activities would receive increases in budget authority, total homeland security funding would drop by $1.5 billion (4.9 percent) from the 2005 level because of two changes. First, Project BioShield, which received appropriations of $2.5 billion for 2005, would not receive additional funding in 2006 under the President's budget. Second, a proposed increase in fees charged by the Transportation Security Administration would boost offsetting collections by about $1.7 billion in 2006.

In all, nondefense discretionary budget authority would decline by roughly $4 billion in 2006 from the 2005 level (excluding supplemental appropriations) under the President's budget, with reductions occurring in several budget functions (see Table 1-7). For example, appropriations for natural resource and environmental programs would drop by $2.5 billion, reflecting cuts in aid to states and Native American tribes and cuts in programs to prevent or fight fires on public and private lands. Discretionary health programs would have their funding reduced by about $3.4 billion in 2006. Much of that decline results from the absence of funding for Project BioShield in 2006, although reductions for the Health Resources and Services Administration (a $767 million cut) and the Centers for Disease Control and Prevention (a $556 million cut) have also been requested.

Some areas of the budget would receive funding increases in 2006 under the President's proposals. International affairs would see the largest rise--$3.8 billion (12.8 percent), with roughly $1.5 billion of that increase allocated to the Millennium Challenge Corporation. Medicare would receive an increase of $1.1 billion in discretionary funding in 2006, mainly for the costs of administering the new Part D prescription drug program.
 

Policy Proposals That Affect Revenues

The President's budget proposes several changes to tax law that would reduce revenues significantly over the next decade relative to the amounts that CBO and JCT estimate would be collected under current law. Such proposals include the extension of a number of expiring tax provisions and a variety of new tax incentives. The most significant changes include those involving provisions of EGTRRA and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), the research and experimentation tax credit, deductions for certain premiums paid for health care plans with high deductibles, tax-free savings accounts, and tax credits for developers of affordable housing. CBO and JCT estimate that, as a whole, the Administration's proposals would reduce revenues by $3 billion in 2006 and by $1.4 trillion over the 2006-2015 period (see Table 1-3). As discussed above, the proposals' effects on refundable tax credits would also increase outlays by roughly $120 billion over those 10 years.

Permanent Extensions of EGTRRA and JGTRRA Provisions

The Administration proposes to permanently extend various provisions of EGTRRA and JGTRRA that are scheduled to expire in coming years. Those provisions include changes in income tax rates, relief from the so-called marriage penalty, an increase in the child tax credit, provisions related to education and retirement, and repeal of the estate tax. The implementation of those provisions was accelerated by JGTRRA, which directed that they take effect earlier than they would have done under EGTRRA. Extending those provisions rather than letting them expire as scheduled would reduce revenues by just over $1 trillion through 2015.

The President's budget also proposes extending the lower rates on capital gains and dividends that are scheduled under JGTRRA to rise at the end of 2008. Making those rates permanent would reduce revenues by an additional $148 billion between 2006 and 2015, CBO and JCT project.

Another provision of JGTRRA and the American Jobs Creation Act of 2004 liberalized the rules governing depreciation for small businesses from 2003 through 2007, mainly by increasing the amount of investment that such businesses could expense (that is, deduct from their taxable income immediately rather than over time) from $25,000 to $100,000. The President's budget would make those expensing changes permanent, at a cost of about $19 billion between 2006 and 2015.

In total, the proposals in the 2006 budget to make permanent various extensions and accelerations of tax provisions would reduce revenues by an estimated $1.2 trillion (and increase outlays by $62 billion) through 2015.

Research and Experimentation Tax Credit

Under current law, corporations can obtain a tax credit of 20 percent on certain research expenditures above a base amount. The credit is scheduled to expire on December 31, 2005, but the President's budget proposes to make it permanent. That proposal would reduce projected revenues by a total of $78 billion over the next 10 years, according to CBO and JCT.

"Above-the-Line" Deduction for High-Deductible Health Insurance

Currently, people who buy individual (not employment-based) health insurance plans with a high deductible that must be met before reimbursement will occur can contribute to health savings accounts, which can be used to pay their and their dependents' health care costs. The Administration proposes allowing people who contribute to health savings accounts to deduct from their taxable income the premiums they pay for individually purchased, high-deductible plans.⁽⁹⁾ The deduction would be used in calculating adjusted gross income (AGI) and would be allowed even if taxpayers did not itemize deductions. (Taxpayers who itemize deductions can deduct medical expenses exceeding 7.5 percent of AGI from their taxable income.) If that proposal took effect on January 1, 2006, as envisioned, it would cost an estimated $33 billion over the 2006-2015 period.

Refundable Tax Credit for Health Insurance

Another of the President's proposed policies for 2006 is the creation of a refundable income tax credit for the cost of health insurance. The credit, which would also take effect on January 1, 2006, would be worth as much as $1,000 per adult and $500 per child (for up to two children). It could cover a maximum of 90 percent of the cost of insurance for single taxpayers with a maximum modified AGI of $15,000; those with higher income would receive less, and the credit would phase out completely for single taxpayers with a modified AGI of $30,000. (The maximum AGI would be higher for families.) That credit would reduce revenues by a total of $12 billion and raise outlays by $52 billion over the 2006-2015 period.

Expansion of Tax-Free Savings Accounts

The tax code contains a variety of tax-favored savings plans, which are used primarily for retirement but also for other purposes, such as education. The President proposes to unify many of those accounts into two tax-favored savings vehicles--retirement savings accounts (RSAs) and lifetime savings accounts (LSAs)--and to expand their scope. For RSAs, individuals could contribute up to $5,000 annually, and no income limits would apply. Contributions would not be deductible, but all earnings on the accounts would accumulate tax-free. Tax- and penalty-free withdrawals could occur after age 58 or because of death or disability. Accounts currently held as Roth individual retirement accounts (IRAs) would become RSAs. No further contributions to traditional IRAs would be allowed, but such accounts could be converted into RSAs in the same way that they can now be converted into Roth IRAs.

In addition, individuals could contribute up to $5,000 annually to lifetime savings accounts, which would face the same tax treatment as RSAs and, like them, have no income restrictions on participation. In contrast to the treatment that applies to IRA withdrawals, however, withdrawals from LSAs could be made for any purpose and at any age. Balances currently held in Coverdell education savings accounts and qualified state tuition plans could be converted into balances in LSAs.

On net, those proposals would reduce revenues by $2 billion over the 2006-2015 period, CBO and JCT estimate. Revenues would increase from 2006 to 2010 as new contributions were directed away from current savings plans that receive an immediate tax deduction and toward the new vehicles, which would not. In addition, some taxpayers would convert their existing traditional IRAs to RSAs, generating more revenue in the first four years. As a result, the proposals would increase federal revenues when the contributions were made and the balances converted but would reduce revenues later (from 2011 to 2015) when withdrawals went untaxed.

Tax Credit for Developers of Affordable Housing

Another proposal in the President's budget would provide a tax credit to developers of affordable single-family housing sold to buyers with income below a certain level. Starting in 2006, state and local housing credit agencies would be given authority to award credits to developers of some single-family housing in places with median income that was no more than 80 percent of the area's median income or in places with chronic economic problems. Developers would receive the credit only if a home's buyer had an income no higher than 80 percent of median family income. The credit would lower revenues by an estimated $17 billion over 10 years.

Other Revenue Proposals

The President's budget contains a number of other tax changes, such as incentives related to charitable giving, health care, education, and the environment. It also includes various changes in tax law related to pensions and other retirement saving, incentives to increase energy production or encourage energy conservation, and extensions of a number of provisions scheduled to expire at the end of 2005. Together, those other proposed changes would reduce revenues by $55 billion and increase outlays by $7 billion over the 2006-2015 period.
 

CBO's and the Administration's Economic Assumptions

CBO and the Administration are forecasting similar values for the underlying economic variables used to estimate revenues and outlays. On the whole, however, the Administration's economic forecast implies higher projections of revenues, slightly higher projections of outlays, and a more favorable outlook for the budget. Those differences in economic assumptions add about $55 billion to CBO's estimate of the cumulative deficit for the 2006-2010 period under the President's budget.

CBO projects slightly higher growth of real (inflation-adjusted) GDP than the Administration does for most of those five years (see Table 1-8). However, CBO's projection of the nominal level of GDP between 2006 and 2010 is lower than the Administration's by roughly $325 billion, or 0.5 percent. That lower projection for nominal GDP is reflected in lower projections for wages and salaries, which reduce projected receipts from individual income and social insurance taxes.

Table 1-8.

In addition, the Administration projects that wages and salaries--the category of income with the largest effect on revenue projections--will make up a larger share of GDP during the 2006-2010 period than CBO does. For later years in that projection period, Administration's slightly higher level of nominal GDP also tends to keep the projected level of wages and salaries above that in CBO's projection.

Compared with CBO, the Administration projects higher inflation through 2010 (as measured by the consumer price index for all urban consumers) and generally lower interest rates (although its projection of rates on 10-year Treasury notes is higher beginning in 2009). The slightly higher inflation projection coupled with the higher projection of 10-year interest rates causes the Administration to estimate greater outlays under the President's budget after 2008 than CBO does. The inflation measures that CBO uses to estimate cost-of-living adjustments for Social Security and other programs are the same as the Administration's in 2006 but slightly lower thereafter. However, CBO projects a higher percentage increase in the consumer price index for food consumed at home--which is used to estimate the maximum Food Stamp benefit--in 2006 (differences are minimal thereafter). The Administration's projections of short- and long-term interest rates are generally lower than CBO's, resulting in lower projected costs for servicing federal debt held by the public.
 

Differences Between CBO's and the Administration's Budget Estimates

Overall, the cumulative deficits projected by CBO and the Administration for the 2006-2010 period under the President's budget differ by only $57 billion--equivalent to 0.4 percent of projected outlays in that period. That difference results because CBO estimates lower outlays from the President's proposals than the Administration does, largely for technical reasons. To a lesser extent, CBO and JCT also estimate lower revenues under the President's budget, mainly because of differences in economic assumptions. Most of the differences between the two projections relate to the baseline estimates.

CBO's Baseline Versus the Administration's Current-Services Baseline

In the current-services baseline published with the President's budget, the Administration projects a deficit of $390 billion for 2005, whereas CBO's baseline projects a deficit of $365 billion (neither of those estimates includes any additional funding for military operations in Iraq and Afghanistan). Thereafter, the Administration projects that the deficit will decline each year from 2006 through 2010, with the cumulative shortfall totaling about $1.35 trillion. CBO's baseline anticipates the same trend and projects a deficit of $1.23 trillion for that five-year period (see Table 1-9).

Table 1-9.

As was the case last year, the two baselines reflect some conceptual differences. CBO constructs its baseline as specified by the Balanced Budget and Emergency Deficit Control Act of 1985. The Administration, however, has deviated from prior practices in three ways. First, its baseline assumes that the major tax-law changes enacted in EGTRRA and JGTRRA will be extended. Second, it has not extrapolated into future years the $11.5 billion in supplemental appropriations provided for disaster relief for 2005. And third, it has adjusted the way in which it accounts for increases in pay when projecting discretionary spending. As a result, some differences between the two baselines can be attributed to conceptual differences as well as to economic and technical factors.

On the spending side of the budget, CBO's estimate of outlays for 2005 is $21 billion below the Administration's. Almost all of that difference ($20 billion) results from differences in estimates of mandatory spending--the largest being a $5 billion difference for Medicaid. In terms of discretionary spending, CBO's and the Administration's estimates for 2005 are within about $0.5 billion of each other.

For the 2006-2010 period, CBO's baseline estimate of total outlays is $125 billion lower than that of the Administration. Virtually all of that difference ($121 billion) involves mandatory outlays (excluding debt service). CBO's estimate of Medicare spending over that period is lower than the Administration's by $79 billion, or 3.9 percent, mostly because the Administration projects higher enrollment in and higher costs for Medicare's new prescription drug benefit. In addition, CBO estimates lower spending on veterans' programs over that period than the Administration does (by about $22 billion, or 11.2 percent), mostly because CBO expects lower participation in the veterans' disability compensation program and a smaller average benefit per enrollee. Similarly, CBO's estimate of 2006-2010 outlays for the Food Stamp program falls short of the Administration's by about $20 billion, or 10.6 percent, because of lower projections of participation. Discretionary outlays in CBO's baseline are $11 billion below the Administration's projection for the 2006-2010 period, with almost all of that difference stemming from differing projections of defense spending.

Overall, revenue projections in CBO's latest baseline are very similar to the Administration's current-services projections. CBO expects $5 billion more in revenues than the Administration does in 2005 but a total of $6 billion less in the 2006-2010 period.

As noted above, the Administration's baseline assumes that EGTRRA and JGTRRA will be permanently extended beyond their scheduled expirations. In contrast, CBO's baseline does not assume that any of the expiring provisions of those laws will be extended, which increases its revenue projections relative to the Administration's by roughly $53 billion over the five-year period. The expiring provisions whose extension would have the greatest effect on revenues during those years include the amount of expensing allowed for certain small-business investments (which expires at the end of 2007) and the reduced tax rates on capital gains and dividends (which expire at the end of 2008). The revenue effects of extending the provisions in those two laws that are scheduled to expire at the end of 2010 would be quite small over the 2006-2010 period.

That conceptual difference is offset by technical and economic differences between the two baselines--mostly related to assumptions about GDP, inflation, and the amount of tax revenue generated by a given level of income. Those differences lower CBO's revenue projections by $59 billion over the five-year period compared with the Administration's.

Differences Between CBO's and the Administration's Policy Estimates

Overall, CBO's estimates of the impact of the President's proposals on mandatory spending and revenues do not differ much from those of the Administration ($14 billion and $6 billion higher, respectively, for the 2006-2010 period). However, some notable differences exist in estimates of specific proposals.

Differences in Outlays. CBO projects that the President's proposals would decrease mandatory outlays by $26 billion over the 2006-2010 period--roughly $14 billion less than the Administration estimates. Nearly one-third of that difference is attributable to proposals involving Medicaid and the State Children's Health Insurance Program.

The President's budget reports savings of $45 billion through 2015 from legislation that would alter Medicaid and SCHIP. However, CBO estimates that the proposal to enroll more children in Medicaid and SCHIP would be less effective over the 2006-2015 period than the Administration anticipates. In addition, CBO could not estimate savings from several other proposals (dealing with restrictions on certain types of above-cost payments to providers and on payments for various social and rehabilitative services) because the Administration did not provide sufficient details about how the savings would be achieved. (The Administration estimated that those proposals would save $23 billion over the 2006-2015 period). As a result, CBO estimates that the Medicaid and SCHIP proposals in the President's budget would generate only $9 billion in savings between 2006 and 2010--about $4 billion less than the Administration estimates (see Table 1-4). Over 10 years, those proposals would save $27 billion, CBO estimates.

Another difference between the Administration's and CBO's outlay estimates involves the refundable portion of the tax credits for certain health expenditures. JCT and CBO project that those proposals would increase outlays by $2 billion more over the 2006-2010 period and by $12 billion more over the 2006-2015 period than the Administration projects.

CBO's estimates of the effects of the President's proposals for student aid are similar in total to the Administration's estimates for the 2005-2010 period but significantly different for the following five years. CBO estimates that the proposals would produce net savings of $0.2 billion between 2005 and 2015; the Administration concludes that they would save $10.1 billion. Estimating differences for specific proposals result from differences in the baselines or from conceptual differences (in the case of the Perkins loan recall and reinsurance payments to guaranty agencies for defaulted loans), from different modeling techniques (which affect the proposed impact of a cap on borrowers' interest rates), and from other estimating assumptions.

Another proposal for which CBO's estimate differs markedly from the Administration's is a proposal to increase the rates that federal power marketing administrations charge for electricity to reflect "market" prices for the sale of power. CBO's estimate of the net additional receipts from that change is about $2.6 billion less over the 2006-2010 period and $10.5 billion less over the 2006-2015 period than the Administration's estimate. That difference has three sources. First, CBO assumes that the proceeds from any increase in rates collected by the Bonneville Power Administration (BPA) would be spent by that agency, in accordance with current law. BPA's operations are financed by a revolving fund, using the proceeds from the sale of electricity and transmission services. CBO assumes that the agency would continue to operate in that manner. Second, CBO assumes that under current law, the other three power marketing administrations (the Southwestern, Southeastern, and Western) would sell power at a weighted average rate of around $30 per megawatt hour. The Administration assumes a much lower rate under current law. Third, CBO estimates a lower "market" rate than the Administration does.

CBO's estimate of savings to the Commodity Credit Corporation over the 2006-2015 period from the President's agriculture proposals is $10 billion lower than the Administration's estimate. Among the reasons, CBO's forecasts of crop and milk prices tend to be lower than the Administration's, especially for the later years of the projection period. Also, CBO incorporates into its estimates the probability of a range of commodity-price forecasts and the possible cost to the government if prices fall below the projected levels. In addition, CBO assumes that the President's proposals for commodity programs (except those affecting dairy programs) would take effect in 2006 because of contractual commitments that are likely to be entered into this year, whereas the Administration assumes that they would take effect in 2005.

In addition, over the 2006-2010 period, CBO assumes roughly $4 billion less in savings than the Administration does from the proposed repeal of the Continued Dumping and Subsidy Offset Act. That difference results from two sources. First, as noted above, CBO assumes a 50 percent probability that the United States will prevail in its current dispute with Canada about duties on Canadian softwood lumber. Second, CBO does not assume that the United States will continue to collect duties on Canadian lumber following the resolution of the dispute. The Administration, by contrast, assumes that the United States will prevail in the case and continue to collect duties on Canadian lumber thereafter and that all of the duties collected will be distributed to the affected domestic industries.

Finally, CBO's estimate of savings from the President's proposal to change funding rules for pensions and alter the PBGC's premium structure exceeds the Administration's estimate by $2.6 billion over five years and $2.4 billion over 10 years. The reason is that CBO interprets the proposal as being intended to achieve a specific level of total premiums. CBO's baseline estimate of premium income is lower than the Administration's, which means that CBO assumes that in reaching the Administration's target, the proposal would generate a larger increase in premium receipts relative to CBO's baseline.

Differences in Revenues. CBO and JCT estimate that the President's budgetary proposals would reduce revenues by a total of about $100 billion over the 2006-2010 period--$6 billion less than the Administration estimates. Compared with the Administration, CBO and JCT project smaller revenue losses in 2008 and 2009 and larger revenue losses in 2006, 2007, and 2010.

The overall revenue difference for the 2006-2010 period stems in large part from the proposals to extend the current tax rates on capital gains and dividends beyond their scheduled expiration (on December 31, 2008). CBO's and JCT's estimate of the degree to which those extensions would reduce revenues is $11 billion less than the Administration's--about $9 billion for the capital gains provision and $2 billion for the dividend provision--and is concentrated in the 2008-2010 period, around the time of expiration. CBO and JCT also estimate $3 billion less in revenue losses than the Administration does from extending the expensing of certain capital investments by small businesses.

Those differences are partially offset by several cases in which CBO and JCT estimate greater revenue losses than the Administration does: adjusting the funding for single-employer pension plans (a $2 billion greater revenue loss through 2010), extending the repeal of the estate tax and modifying gift taxes (a $2 billion greater revenue loss), and extending the research and experimentation tax credit (a $1 billion greater revenue loss). CBO and JCT also estimate a smaller revenue gain through 2010 (by $2 billion) from the proposals to expand tax-free savings accounts.
 

Changes to CBO's Baseline Since January 2005

In conjunction with its annual analysis of the President's budget, CBO updates the 10-year baseline projections it published in the previous January.⁽¹⁰⁾ Those projections, which are constructed according to rules specified in law, estimate the future path of spending and revenues under the assumption that current laws do not change. As such, the projections are intended to serve as a neutral benchmark against which to measure the budgetary effects of proposed policy changes.

Revisions to CBO's baseline since January have added $125 billion to the cumulative deficit projected for the 2006-2015 period, which now stands at $980 billion (see Table 1-10). The projection of total outlays over that period has increased by $128 billion, offset slightly by an increase of $3 billion in projected revenues (see Table 1-11). Those revisions are almost exclusively technical; legislative changes since January have been minimal, and CBO has not updated its economic assumptions.

Outlays

Much of the change to CBO's outlay projections comes from an increase of $70 billion (or 1.5 percent) in projected spending for Medicare over the 2006-2015 period, partially offset by a decrease of $26 billion (less than 1 percent) in projected spending for Medicaid over that period. CBO has made technical changes to its baseline for Medicare to reflect revised estimates of the cost of the prescription drug program. Those revisions result from changes in CBO's estimating methods and from the fact that various final rules issued for the program differ from what CBO had anticipated on the basis of legislative language. (For more details, see Appendix A.) For those reasons, CBO now expects the prescription drug program to cost $54 billion more through 2015 than it projected in January (with about $36 billion of that increase expected through 2013, the time frame covered by CBO's original estimate of the cost of the Medicare Modernization Act). A little more than half of the increase involves estimates of the net cost of basic benefits; the rest involves estimates of the cost of the program's subsidy for low-income beneficiaries.

For the Medicaid program, revisions to CBO's baseline projections were fueled by a number of factors, such as the continuing efforts of states to control spending for the program, updated data from the Centers for Medicare and Medicaid Services, and slower growth in the number of people receiving Supplemental Security Income benefits (who are automatically eligible for Medicaid). CBO now projects that Medicaid spending will grow at an average annual rate of 7.8 percent from 2006 to 2015, compared with 8.2 percent in the January baseline.

CBO has also increased its estimate of Social Security outlays over the 10-year projection period by $19 billion, chiefly to reflect a change in its projections of retroactive benefits in the Old-Age and Survivors Insurance program. Retroactive benefits, which go primarily to new beneficiaries, reflect a recomputation of benefits to incorporate final earnings or lump-sum payments to compensate for processing time.

CBO has raised its projection of spending for veterans' disability compensation over the 2006-2015 period by $14 billion because of new information from the Department of Veterans Affairs about the average disability rating of veterans who join the disability-compensation rolls. CBO has changed the average disability rating assumed for those new recipients to 40 percent from roughly 30 percent in the previous baseline.

Finally, CBO has added about $1 billion per year to its projection of outlays for student loans, for a total increase of $10 billion over the 2006-2015 period. New data indicate higher loan volumes than CBO anticipated in the January baseline. In addition, CBO now expects lower premiums to be charged to borrowers because it assumes that fewer guaranty agencies will change their premiums to meet minimum reserve requirements.

Revenues

CBO's revenue projections have not changed significantly since January. CBO has raised its baseline projection of revenues for each year of the 2006-2015 period by less than $500 million, for a total increase of about $3 billion over that period. The rise mainly reflects slightly higher projections of receipts from miscellaneous fees and fines, especially the fees that finance the Universal Service Fund (which supports certain telephone and telecommunications services).

In addition to such technical changes, a small legislative change enacted since CBO completed its previous baseline has affected revenue projections. Public Law 109-1 allows taxpayers to deduct from their income in 2004 any charitable cash contributions they made in January 2005 for the relief of victims of the Indian Ocean tsunami. That law will reduce revenues by $11 million in 2005 and raise them by $9 million in 2006, JCT estimates.

Net Interest

As a result of revisions to the baseline that increase projected revenues and outlays, CBO now estimates that the Treasury would need to borrow more if current laws did not change than it would have had to under the January baseline. By CBO's estimate, such additional borrowing and other technical adjustments would raise net interest payments on federal debt by a total of $15 billion over the 2006-2015 period.