CBO Head: Something's Got to Give in Federal Budget

(April 8) -- Fresh off its stint in the crossfire of health care reform, the Congressional Budget Office is gearing up to study another potential major change in Americans' lives: the creation of a value-added tax.

Speaking at a breakfast with reporters in Washington today, CBO Director Douglas Elmendorf said his job doesn't involve deciding whether the tax -- or any other budget change -- is a good idea. But he did say members of Congress have begun asking questions about it.

The CBO spent much of the past year in the middle of the partisan debate over health care reform, since the agency provided analysis of how that measure would affect the deficit and the economy. A VAT proposal could be equally contentious: Some conservatives worry a VAT -- or national sales tax -- would start low but then be increased over time; some liberals worry it would fall too hard on the poor.

In any case, Elmendorf said, the federal budget will need some sort of reduction in spending or increase in taxes in coming years to keep it from going vastly out of balance.

"U.S. fiscal policy is unsustainable, and is unsustainable to an extent that can't be solved with minor tinkering," he said at the breakfast, which was organized by the Christian Science Monitor.

Elmendorf's warning echoes one earlier this by Federal Reserve Chairman Ben Bernanke, who said that to avoid serious budget deficits, "the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, [and] less spending on everything else from education to defense."

White House adviser and former Federal Reserve chief Paul Volcker also stirred the pot this week by suggesting a VAT, which would be in addition to state and local sales tax, but could replace other federal levies.

Many European countries have a VAT, which can be imposed on both goods and services and often is levied on each stage of a product's development. Those levies likely would be passed along to consumers in the prices they pay.

Elmendorf said the CBO will look at how the tax would affect people at different income levels, how it would affect the economy and what issues would surround implementing it.

He warned that any VAT would be prone to the same political decisions to make exceptions that have made the income tax complicated. The income tax, for instance, has breaks for home mortgage interest payments. Some experts believe a VAT might exempt food and some other necessities.

No member of Congress has yet formally requested a VAT study, but many have asked the CBO for information. Elmendorf noted that the CBO geared up for several years to study health care reform.

The CBO estimated that the reform measure that became law recently would lower the deficit. But Republicans have complained bitterly the bill will instead add to the deficit over the long term and that the CBO figures mask some of the true costs.

Michael Steel, spokesman for House Republican Leader John Boehner, said he doesn't blame CBO but believes the estimates don't reflect reality. For instance, the bill includes tax increases for the entire first 10 years but benefits don't begin for four years, underestimating the long-term impact on the nation's bottom line. "The folks that wrote the bill did it in a way that minimized the appearance of cost but actually doesn't lower costs," Steel said.

Elmendorf said his biggest fear about the health care estimates is getting wrong the inflation rate for health care costs, which have been higher than the overall inflation rate. That health care inflation rate, along with the coming retirement of baby boomers, has budget experts worried about increases in costs for Social Security, Medicare and Medicaid.

Elmendorf said those programs, added to defense spending and interest on the national debt, will total more than all federal revenues 10 years from now. That means taxes will have to rise or those big programs will be cut. If no changes are made, the nation will spend more than it takes in by 25 percent or even a third, he said.

Like a family with its budget out of whack, he said, "you have to make fundamental changes in your lifestyle."