American Taxpayer Relief Act Reduces Deficits by $737 Billion

Earlier today, the Congressional Budget Office (CBO) released its score of H.R. 8, the “American Taxpayer Relief Act of 2012.”  By convention, the score measured the effects of this legislation relative to “current law,” which assumes the expiration of all of the 2001/2003 tax cuts, cuts to Medicare physicians of almost 27 percent, and allowing the across the board cuts from sequestration to take effect.  But that does not provide a realistic perspective on the impact of H.R. 8.  The relevant point of comparison isn't current law, it is “current policy” – those policies that were in place on December 31^st, the day before all of these changes were scheduled to take effect. Different organizations, ranging from the Bowles-Simpson Fiscal Commission to the House Budget Committee, have considered this current policy baseline to be the appropriate reference point, since it measures changes relative to the status quo, rather than the mix of expiring provisions and policy changes that would likely never be implemented.

CBO also recognizes the value in this “current policy” view and routinely publishes their interpretation, known as the Alternative Fiscal Scenario (AFS), which is regularly cited by lawmakers from both parties, including House Budget Committee Chairman Paul Ryan. The CBO current policy baseline assumes that the Bush tax cuts, the AMT patch, and expiring business tax provisions will be extended; that the Sustainable Growth Rate (SGR) cuts in payments to Medicare physicians will not take effect; and that the sequestration will be turned off. 

Compared to “current policy” and based on estimates from the CBO and the Joint Committee on Taxation – Congress’s official score-keeping bodies – we can see that H.R. 8 would reduce the deficit by $737 billion. Within that, it would reduce spending by $107 billion. The deficit reduction is comprised of:

• $618 billion due to higher taxes on the highest-income Americans and the wealthiest estates.
• $22 billion due to reductions in discretionary spending and a change to tax-preferred savings accounts that pay for turning off sequestration for two months.
• $24 billion in various health measures that pay for turning off the SGR for one year.  (Because sequestration and the SGR are turned off in the CBO current policy baseline, these pay-fors reduce deficits relative to that baseline.)
• The above provisions more than offset the $30 billion cost of the measure’s one-year extension of emergency unemployment insurance benefits, resulting in $630 billion of net non-interest deficit reduction.
• Another $104 billion of deficit reduction results from lower interest payments on the federal debt, for a total of $737 billion in deficit reduction.

See this table for a more detailed breakdown.

So H.R. 8 not only keeps taxes low for the middle class, asks the wealthiest to pay their fair share, and helps the economy continue to grow, it also reduces the deficit by $737 billion under this more realistic scenario.

Jeff Zients is the Deputy Director for Management.