On March 7, the Congressional Budget Office (CBO) released its annual report analyzing the effects on revenue and spending of the President’s budget proposals. The report was yet another blow to the President’s proposals for additional tax cuts.

On March 7, the Congressional Budget Office (CBO) released its annual report analyzing the effects on revenue and spending of the President’s budget proposals. The report was yet another blow to the President’s proposals for additional tax cuts.

The report, entitled, “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004: An Interim Report,” is important because it deviates from CBO’s usual reporting policy of projecting revenue and deficit/surplus totals based only on current law, and incorporates the President’s budget proposals into its projections. This process provides a welcomed “reality check” on the President’s own projections, though in many cases CBO reports that its numbers coincide with the White House’s Office of Management and Budget’s (OMB) estimates.

CBO incorporates the effects of the President’s tax cut and other spending proposals into its projection of the deficits through 2013, for a $338 billion deficit in 2004 (OMB predicted a deficit of $307 billion) and a cumulative 10-year deficit of $1.8 trillion (an average 2 percent, annually, of the total economy). Without the tax cuts and other proposals, CBO estimates a cumulative $900 billion surplus for the same period and the report notes that, the “projected surplus relies heavily on the assumed expiration at the end of 2010 of the tax cuts enacted” in June 2001; “that assumption, which is required by law, contributes about $600 billion to the projection of the cumulative surplus.”

In fact, according the Joint Committee on Taxation estimates, which CBO used, making these expiring tax cut provisions permanent would cost approximately $624 billion through 2013. In all, CBO projects that the President’s tax cut proposals, excluding the additional costs resulting from increased interest payments on the debt) would result in a $1.5 trillion drop in revenue from 2004 to 2013. Of this $1.5 trillion total, 40 percent would occur in just the last 3 years (2011-13) from the extension of the expiring tax cut provisions. An additional 15 percent of this total would arise in 2004 and 2005 as a result of the President’s new tax cut proposals and the acceleration of the phase-in of existing tax cuts. The President’s proposal to eliminate the dividend tax comprises 27 percent of the total 10-year revenue reduction. The report provides a closer look at these and other tax cuts proposed by the President.

By comparison, the President’s proposals for other additional spending only total $725 billion for the 10-year period 2004-2013, most of which comes in the form of changes to mandatory spending, specifically the President’s Medicare prescription drug plan, the details of which remain unclear. CBO estimates that the President’s discretionary spending proposals will increase defense spending by an annual rate of 4.7 percent through 2008, and non-defense discretionary spending (basically everything outside of Social Security, Medicare, and the military) by only 2.3 percent. For more on the President’s spending proposals, see the full CBO report.

It is important to note, as the CBO report does, that this additional program spending does not include the costs of any action in Iraq, about which CBO expressed much uncertainty. Though it did include an estimate of a few basic costs ($14 billion to move a “heavy ground force” to the Persian Gulf;” $10 billion for the first month of combat; $8 billion for each additional month; $9 billion to return troops their home bases; and $1 billion to $4 billion for each month of occupation), CBO warns that it cannot possibly estimate a total cost of a war for which there is so much uncertainty as to duration, chemical and biological decontamination and other clean-up costs, and subsequent re-building and foreign aid.

Finally, the CBO report mentions that while this analysis does not incorporate certain possible “macroeconomic” effects of the President’s proposals, it is in the process of preparing an analysis of the “dynamic” macroeconomic effects that will be included in the final version of this current “interim” report. According to CBO, this final report will use “various models and assumptions to indicate the range of potential economic and budgetary impacts of the President’s proposals.” For a closer look at the use of “dynamic scoring,” see this recent OMB Watcher article.

For the full report go to http://www.cbo.gov/showdoc.cfm?index=4080&sequence=0. This new report follows a recent report from the Committee for Economic Development (CED), a group of business leaders, that opposed the proposed Bush tax cuts. The CED report was based on an earlier CBO report and in light of this new CBO estimate becomes even more compelling -- for more on the CED report, see this OMB Watcher article.