The federal stimulus bill’s impact on the federal deficit is being overblown, according a new analysis by the national Center on Budget and Policy Priorities.
“[T]he tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years,” according to the Center’s analysis, published December 16.
The report analyzes American Recovery and Reinvestment Act spending and how it contributes to annual federal budget deficits from FY 2009 to FY 2019. It also estimates the deficit contributions of:
- the economic downturn
- the TARP/Freddie Mac/Fannie Mae bailout
- Bush-era tax cuts
- the Iraq/Afghanistan war costs
Here’s what it found. In each of the Recovery Act’s three peak spending years, FY 2009 to 2011, the biggest contributors to the deficit are the economic downturn and Bush-era tax cuts. It also finds that the Recovery Act’s impact on federal deficits is largely limited to those three peak spending years, while the impact of the economic downturn and the Bush-era tax cuts continue to be significant out into the future.
To quantify the economic downturn’s impact on the deficit, the Center used 2009 analysis by the Congressional Budget Office.
The recession began in late 2007. Housing foreclosures and unemployment rose while the stock market fell. Credit tightened. People had less money to spend. In early January, before the new administration took office, the projected FY 2009 federal deficit already topped $1 trillion.
The Recovery Act spent significant sums to preserve and create jobs, help states avoid damaging cuts to health care and other critical services, and revive the economy. Still, it accounts for only 17 percent of the annual deficit for its three peak spending years. Over a 10-year span, the Recovery Act contributes to less than 10 percent of the annual deficits.
The Center’s analysis raises an interesting if less discussed aspect of the Recovery Act: the significant share of the total cost that went to a short-term fix for the Alternative Minimum Tax (AMT). The total Recovery Act tab is $787 billion, and $70 billion or 9 percent is for a one-year AMT “patch.”
A short digression: The AMT was passed 40 years ago to keep top income earners from escaping all taxes by using multiple deductions and loopholes. AMT creates a parallel tax structure, with a broader income definition and fewer deductions. It also has a lower tax rate. Taxpayers pay the AMT amount if it is larger than their traditional tax calculation.
The AMT is not indexed for inflation. More importantly, the 2001 and 2003 federal tax cuts substantially lowered the taxes owed under traditional tax calculations without adjusting the AMT. Therefore, without a “patch,” more upper-middle-income taxpayers would pay the AMT.
In its deficit analysis, the Center on Budget excluded the $70 billion AMT patch from the Recovery Act’s price tag (lowering it to $717 billion). The Center reasoned that the patch would have passed regardless — patches have been passed each year since 2001 — and the Recovery Act was simply an easy legislative vehicle.
Instead, the AMT patch costs are included with the deficit costs of the Bush-era tax cuts. Leaders understood the future AMT problem at the time they passed the tax cuts, but they chose to expand the AMT’s reach in an effort to lower the costs of the tax cut bill. These costs are now showing up in the form of the AMT patch.
For more on the AMT issue, see the Minnesota Budget Project’s 2008 candidate briefing paper.