March 02,2000

Roth Releases Senate Finance Committee Views and Estimates Letter for Fiscal Year 2001

WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) today released the Senate Finance Committee's fiscal year 2001 views and estimates letter to Senator Domenici as required by the Congressional Budget Act.

A copy of the letter is attached.

# # #

March 2, 2000
The Honorable Pete Domenici
Committee on the Budget
United States Senate
Washington, D.C. 20510

Dear Mr. Chairman:

Pursuant to Section 310(d) of the Congressional Budget Act of 1974, I am submitting my views and estimates with respect to federal spending, revenues, and debt within the jurisdiction of the Senate Committee on Finance for fiscal year 2001.

While I was pleased that the PresidentÕs latest budget embraced principles that I feel allow us to work together, I believe that the budget resolution to be prepared by Congress and your committee should go further still toward implementing these principles Ñ particularly in regards to reducing the tax and debt burden on AmericaÕs families and future generations.

We must also look seriously at reform of entitlement programs such as Medicare and Social Security at the same time that we look to alleviating beneficiariesÕ difficulties in areas such as prescription drugs and the limitation on earnings they can receive without seeing a reduction in Social Security benefits. As you will recall, we have been extremely successful in regards to reforming both the welfare and Medicaid programs. AmericaÕs taxpayers as well as these particular programsÕ participants have benefitted. We should not stop there, particularly in light of the coming Òbaby boomÓ retirees who will soon be entering the Social Security and Medicare programs.

Finally, we must craft a budget that looks at AmericaÕs international concerns as well. For my committeeÕs jurisdiction this means further opening international markets to American products.

Economic Outlook
Our economy continues to progress at a remarkable pace. America is in the midst of what is an essentially 17-year economic expansion. This economic expansion spans both Republican and Democrat administrations. Since 1981, the U.S. economy has performed spectacularly. It has created 39 million new jobs. We have seen unemployment cut roughly in half Ñ from 7.5 percent to 4.0 percent today. We have seen inflation fall from 12 percent to 2 percent and interest rates fall from a staggering 21.5 percent in 1980 to just 6.1 percent today. Over this period, the economy has averaged 3.2 percent growth and the stock market is 13 times higher. Just last year the economy grew at a real 4.1 percent rate Ñ the third consecutive year of better-than-4 percent real growth.

Both the Office of Management and Budget (OMB) and the latest Congressional Budget Office (CBO) estimate that this prosperity will continue throughout the next ten years. Just last week, Federal Reserve Board Chairman Alan Greenspan indicated, at least in the near-term, that these projections might be conservative. He expects the economy to experience real growth of from 3.5 percent to 3.75 percent. In contrast, both CBO and OMB project real growth of 2.9 percent.

Together these forecasts all project a climate of solid economic growth, low unemployment, and low inflation that is virtually a mirror opposite of what prevailed just a generation ago when America was wracked by ÒstagflationÕsÓ low growth, high unemployment, and high inflation.
As we prepare next yearÕs budget we should remember the mistakes of the past in order to insure that the prosperity of the present extends into the future. Foremost in our view should be the fact that we owe the economyÕs strength to just one person: the American taxpayer.

Protecting the Social Security Surplus
In 1999, we recorded the first non-Social Security budget surplus since 1960. In 2000, we are projected to do the same. We should likewise commit ourselves that Social SecurityÕs payroll revenues will be used only for Social Security Ñ its current benefits and future reform. I regret that the President did not choose to submit a real, fundamental reform plan in his latest budget. Such reform cannot proceed without sustained and significant presidential leadership.

However in the absence of such a presidential reform plan, Congress should still reserve the Social Security surplus Ñ which both OMB and CBO estimate will be greater than $2.1 trillion over the next decade Ñ as it has over the last two years: for Social Security alone. By continuing our fiscal restraint and leaving this surplus reserved for Social SecurityÕs reform, we will not only strengthen working AmericansÕ and Social Security beneficiariesÕ faith in the nationÕs retirement system, but it will also pay real economic dividends in the form of a reduction in the publicly held federal debt.

Federal Debt Reduction
As you are aware, by maintaining the Social Security surplus intact over the last two fiscal years, we have reduced the federal governmentÕs debt held by the public by $180 billion according to the General Accounting Office (GAO) Ñ from a peak of $3.83 trillion in March 1998 to $3.65 trillion as of July 1999. CBO estimates that this level will fall to $3.46 trillion by the end of the current fiscal year. All told, this amounts to the largest such reduction in U.S. history. If we continue this fiscal discipline over the next ten years and reserve the Social Security surplus for Social Security reform, the effect will be to devote this $2.1 trillion to reducing the publicly held debt. This would result in a roughly two-thirds reduction in this debt and put us on track to eliminate it entirely by 2013. As Federal Reserve Chairman Alan Greenspan has repeatedly told Congress, this would have beneficial effects for our economy by lowering the costs of borrowing below what they would otherwise have been. This means more and better jobs and lower home mortgage rates for all Americans.

I would also ask you to consider going further in regards to public debt reduction. I ask you to consider applying any non-Social Security surplus that is not used to bolster AmericaÕs critical entitlement reform needs or to reduce AmericaÕs current tax burden to further lowering our public debt burden.

Lastly, the Committee is cognizant of the many important uses for U.S. Treasury securities other than financing federal deficits. For example, Treasury securities serve as the pricing benchmark for virtually all capital debt markets and are used by the Federal Reserve in managing monetary policy. The Committee is closely monitoring the impact of public debt reduction on the Treasury bond market and its implications for private markets.

Non-Social Security Budget Surplus
According to CBO, if annually appropriated spending were held at this fiscal yearÕs level over the next five years, the result would be a non-Social Security budget surplus of $379 billion. From 1991 to 2000, domestic discretionary spending has grown at an annual above-inflation growth rate of 4.6 percent. In last yearÕs budget, we also included one-time spending for programs such as the 2000 Census. As a result of this recent history, I would like to encourage you that there should be ample resources for the priorities of this Committee listed in this letter.

Tax Reduction
I would encourage the Budget Committee to adopt a budget resolution that provides the maximum amount of resources possible to tax relief in conjunction with preserving the Social Security surplus, reducing the federal public debt level, and maintaining our entitlement programs Ñ including providing the means to add a prescription drug benefit to Medicare as part of our comprehensive modernization of the federal senior health system.

I believe such a commitment to tax reduction is justified not only by the overall tax burden but inequities in the tax code itself. According to the PresidentÕs budget, the ratio of income taxes to the economy is the highest ever (9.9 percent) and the ratio of total taxes to the economy is the highest since World War II (20.4 percent). Since 1992, income taxes as a percentage of AmericaÕs gross domestic product (GDP) have increased from 7.7 percent to 9.9 percent and total receipts have increased from 17.5 percent to 20.4 percent. In fact, had the calculation of the GDP not been revised upwards recently, these current percentages would have been even higher. When you furthermore consider the recent rapid growth in the economy, the level of increase in federal revenues has been huge. Overall, federal receipts have grown 85 percent from 1992 ($1.091 trillion) to 2001 (projected by OMB: $2.019 trillion).

The President promised tax relief in his budget, yet when tax and fee increases and the spending component of his proposals are factored in, the net tax cut disappears. Over the 5-year window of your CommitteeÕs proposed budget resolution, the PresidentÕs tax proposals amount to a tax increase Ñ $3.9 billion by your CommitteeÕs estimations, and even more if increased fees are included. During a period of record surpluses and record tax burdens, I do not believe this is acceptable or fair to the taxpayers who created the surplus.

We have already begun a process that will provide substantial and needed tax relief to over-taxed Americans. The Senate has already passed health care-related tax provisions as part of its Patient Protection Act (HR 2990 as amended) managed care reform legislation. The Senate has also passed small business tax provisions that will help offset these businessesÕ increased costs resulting from a minimum wage hike. Finally, the Finance Committee has passed education savings initiatives and this bill is currently before the Senate. All these will help Americans with areas of prime importance to their lives Ñ health care access, job creation, and saving for their childrenÕs education Ñ and at the same time ensure that our growing economy keeps growing. Your budget resolution should accommodate all these provisions. However, I feel we should do more as well.

While I would like to pursue reductions in the marginal income tax rates and across-the-board tax relief, I believe that we must first address what I feel is one of the most unfair provisions in the current tax code: the marriage penalty. This occurs when two individuals are taxed at a higher rate as a married couple filing jointly than they would be if taxed as two unmarried individuals filing separately. This unfairness strikes tens of millions of Americans simply because they choose to marry. Such discrimination on any other basis would be intolerable. We should not tolerate it here either. The tax code should not discriminate against marriage.

Nor should we tolerate simply solving it for some married couples and denying it to others. The President proposed just $9.4 billion over five years and just $44.8 billion over ten years in very limited marriage penalty relief. I do not believe that fixing the marriage penalty means fixing just part of the marriage penalty. Nor do I believe that marriage penalty relief should be addressed without considering the adverse impact of the alternative minimum tax (AMT).

Americans deserve to keep more of what they earn Ñ especially when there exists a surplus of the revenues they have sent to Washington and the tax burden is so high. I hope that the budget resolution for FY 2001 will give the Senate Finance Committee sufficient means to address the areas I have raised here. Finally, while the four tax cut proposals I have outlined in this section are currently being pursued, if we are unable to proceed on all of these under regular order, it would be helpful to have instructions for a reconciliation tax cut bill. These instructions for a reconciliation tax cut bill should be at a level that would take into account our continued commitment to reduce the public debt and to protect our entitlement priorities as outlined in this letter.

Over the last three years, we have made substantial and needed changes to Medicare, AmericaÕs health program for seniors. In 1997, 1998, and 1999 we took the first significant steps to improve the Medicare program. We have underway now in the Finance Committee a series of hearings to determine the next steps needed.

However these efforts of the last three years were only the first steps toward modernizing Medicare, not the final ones. I regret the President did not choose to submit a new comprehensive reform plan with his budget; it is an opportunity missed. Many members of this Committee are interested in stabilizing the Medicare+Choice program, introducing greater competition and choice in Medicare plans, improving federal management to look more like the health plan used by federal employees, and in creating a Medicare benefit package that looks more like mainstream private coverage. Part of the task of modernizing Medicare is to review its benefits and make sure that beneficiaries get the services they need. Of course, this includes prescription drugs.

The President in his State of the Union address this year spoke in favor of adding a prescription drug benefit to the Medicare program. Members of this Committee on both sides of the aisle have worked hard on this issue, as well as that of overall reform of the Medicare program. We believe the two are part and parcel of the same modernizing process.

Last year, the budget resolution contained language establishing a reserve fund to be used for providing prescription drug coverage as part of a comprehensive modernization. Specifically, the FY 2000 budget resolution conference report created a reserve fund in the event of legislation that:

Òimplements structural medicare reform and significantly extends the solvency of the Medicare Hospital Insurance Trust Fund without the use of transfers of new subsidies from the general fund...[and] if such legislation will not cause an on-budget deficit...Ó In such an event, this reserve fund may be used to Òaddress the cost of the prescription drug benefit.Ó

I would encourage the Budget Committee to again include such language that would allow us to make available prescription drug coverage as part of MedicareÕs modernization.

Finally, I would caution your Committee to not accept the PresidentÕs proposal simply to credit additional balances to the Medicare Part A trust fund without more comprehensive reforms. My reasons are discussed below.

Social Security
The President again this year chose not to include in his budget a real reform proposal for Social Security. I still hold out hope that he may do so because the Committee is committed to achieving bipartisan action on Social SecurityÕs long-term solvency. I believe that such reform to so important a program neither can nor should take place without the PresidentÕs leadership. However, we should not let his budgetÕs omission prevent us from acting where a real opportunity exists to correct a longstanding injustice. I am here referring to the earnings limit whereby seniors lose $1 of benefits for every $3 they earn above $17,000. It is time that we abolished this anachronism of the Depression. The earnings limit is an outdated incentive to stop working, and making the choice to work longer can improve the financial security of seniors. The earnings limit is also expensive and confusing for the Social Security Administration to administer. We need more workers, not just for today's booming economy, but even more in the coming decades.

There is a bipartisan consensus within the Congress and agreement with the White House to make this reform. Whatever the short-term cost of partial or complete repeal, such action, as Social Security Commissioner Kenneth Apfel has pointed out, would have no long-term effect on the trust fundÕs solvency, since the effect of repeal is merely to alter the timing of benefits. I therefore strongly urge you to take this change into account when drafting your budget resolution for the next fiscal year.

I would strongly caution your Committee to not adopt the PresidentÕs proposal simply to credit additional balances to the Social Security trust fund (a similar crediting is proposed for MedicareÕs Part A trust fund) without more comprehensive reforms. The proposal has been rejected by outside experts ranging from Federal Reserve Chairman Alan Greenspan to CBO and GAO.

Crediting inflated balances to the trust fund does not change the fundamental nature of the Social Security program, which is one of pay-as-you-go. Hence, crediting additional resources to the trust fund does not alter the ultimate problem: in 2014 payroll tax revenues will not be able to meet benefit payments and the federal government will begin to have to finance an increasing shortfall. The PresidentÕs proposal to credit interest savings due to using the Social Security surplus to repay publicly held federal debt will create a $34 billion contingent liability by 2050 with no additional means to pay it. It is not simply a transfer of debt but a compounding of it. This is not the legacy we should bequeath to our grandchildren. Furthermore, I believe that such an action will have a detrimental impact on the real reform Social Security needs. In testimony before the Committee, the GAO Comptroller General David Walker stated, Ò[The President's proposal] does not represent a Social Security reform plan...The changes to the Social Security program will thus be more perceived than real: although the Trust Funds will appear to have more resources as a result of the proposal, in reality nothing about the program has changed.Ó

In last year's letter, the Committee recommended that CBO develop the capacity to provide long-term cost estimates on Social Security and Medicare legislation. Proper evaluation of reform proposals requires estimates longer than the current ten-year practice. I am pleased CBO acted on this recommendation and established a new long-term estimation unit.

The Committee is also concerned about reports of poor public service by the Social Security Administration (SSA). This is not only an important issue today, but even more significant in the coming decades as SSA's workload grows substantially. The Committee intends to examine these complaints and possible remedies, including greater use of Internet technologies.

Medicaid and Welfare
As part of the Balanced Budget Act of 1997, both welfare and Medicaid were fundamentally reformed. These initiatives to give states a greater partnership with the operation of what before had been simply top-down, one--fits-all programs have both been very successful. We intend to continue our oversight of both these programs in order to build on the successes of 1997. The welfare law is subject to reauthorization in the next Congress.

Increased foreign trade has been a prime mover of AmericaÕs prosperity. AmericaÕs exports mean more jobs and higher wages at home, while imports have helped hold down inflationary pressures Ñ thereby keeping interest rates low. We must do all we can to further the benefits arising from greater openness of foreign markets to AmericaÕs products. To encourage this, the Committee will be working on completing the Africa Trade and Caribbean Basin Initiative bills. In addition, several initiatives relating to trade with China Ñ permanent normal trade relations (PNTR) and ChinaÕs accession to the World Trade Organization are also expected to be considered. The Congressional Research Service (CRS) has reported that China PNTR will result in Òacross the boardÓ benefits to American workers and farmers.

According to CBO estimates, the African Growth and Opportunity Act as reported by our Committee increase receipts by $23 million and discretionary spending by $2 million annually over the first five years. The United States-Caribbean Basin Trade Enhancement Act would increase receipts by $511 million over the first five years and direct spending by $16 million in the first year, according to CBO. Pay-as-you-go procedures would apply to both these pieces of legislation.

I must also call to your attention that the Administration has once again refused to provide a proper funding source for the modernization of the U.S. Customs ServiceÕs computer network, the Automated Commercial System (ACS). This 17-year old system handles $20 billion of duties and import fees annually and is vital to the smooth operations of our trading system. For want of funding, Customs Commissioner Raymond Kelly recently was forced to cancel both the planned replacement of the ACS and a modernization prototype operating at three border locations. Rather than seriously budgeting for this needed expense, the Administration is again insisting on a user fee on top of the roughly $1 billion in annual processing fees imposed on the trade system. I urge you when looking at the AdministrationÕs funding requests in this area, to make the necessary savings in order to accommodate this needed modernization.

As we begin preparing the budget for the next fiscal year, I believe that it is important that we keep foremost in our minds to whom we owe the non-Social Security budget surplus, which is now projected to extend from 1999 through at least the next decade at least: the American taxpayers. We must guarantee that the opportunities presented by this economy stay with the American taxpayers who created them. Every cent of the hundreds of billions of dollars that we speak of so casually in these federal budgets comes from men and women who go to work every day.

Mr. Chairman in summation, the Senate Finance CommitteeÕs priorities for the next fiscal year are: continuing to reduce the federal debt, cutting the historically high federal tax burden, continuing efforts to modernize the Medicare program Ñ including having set aside resources for a prescription drug benefit as was done last year Ñ furthering efforts to reform Social Security Ñ including eliminating the unfair earnings limit on seniors Ñ and opening ever wider international markets to American products. These ends would be greatly facilitated by your CommitteeÕs inclusion of instructions for a reconciliation bill to reduce taxes, in the event doing so by regular order is not possible this year, and for a reserve fund providing for a prescription drug benefit as part of MedicareÕs comprehensive modernization, as was done in last yearÕs budget resolution.

I appreciate this opportunity to comment on the programs within the jurisdiction of the Finance Committee. I look forward to working with you as we prepare the fiscal year 2001 budget.