Follow-up to soda tax

I want to revisit my last post to try to help people understand my dilemma in considering a new tax. You see, like most people, I do not want to pay higher taxes than I already pay, nor do I want to pay taxes I do not already pay. However, unlike most people, I am aware of the unsustainable path of the federal budget due to future social security, medicaid, and medicare liabilities (see my reference to p.31 of the CBO's long-term budget outlook in my last post). Hopefully, as a reader of this blog, you are learning a thing or two about this topic as well.

Unfortunately, the notion that we are on an unsustainable path is proffered by many to be attributable to recent events (think TARP under President Bush and ARRA under President Obama). Those people are wrong. Remember, the federal budget comprises two distinct pieces - discretionary and mandatory spending. The split between the two right now is roughly 60% mandatory / 40% discretionary.

Mandatory spending is mostly social security, medicaid, medicare, and interest on the national debt. Mandatory spending does not require annual authorizations or appropriations from Congress.

Discretionary spending is everything else. The Departments of Defense, Agriculture, Interior, Transportation, Health and Human Services, Treasury, etc. receive annual appropriations from Congress. That means if spending is very high one year, it need not necessarily be high the next. TARP and ARRA fit into the discretionary category. The key is that $1 of discretionary funding appropriated today does not put the government on the hook for spending that $1 every year, plus inflation and other cost of living adjustments.

So in terms of a long-term outlook, the spending categories on the mandatory side should be of great interest to most people. Those are the liabilities that, projected out over the next 80 years by our friends at CBO, will eventually keep this country from functioning properly. Liabilities associated with Medicare comprise the largest chunk of the upward curve.

So where does that put us? We can all get on our soap boxes and high horses and argue over the wisdom of putting $787 billion of public funds into the economy. But that's like shushing a talker at the movies when the theater is on fire. It feels good to talk politics, wasteful spending, earmarks, and such, but when someone throws out the present value liability of almost $60 trillion due to mandatory spending programs, nobody is really sure what to say.

Hopefully this post gives you a little more insight into my thought process. I don't want to cause panic, but is it a crime to yell fire! if the theater really is on fire? The way to help the country's finances back onto a sustainable path is to at least honor the elephant in the room with a passing mention. We must either get social security and (especially) medicare spending onto a sustainable projected path by reworking benefits or finding ways to raise money to pay for them. The answer is likely some combination of the two. My last post offered an idea that is tough to swallow. I'll keep working to find other solutions.

Obesity: A Taxing Problem

The New England Journal of Medicine published a Health Policy Report a couple of weeks ago that examines the health and economic benefits of levying a tax on "sugar-sweetened beverages" (SSBs - think non-diet sodas and energy drinks). The authors document the trend of increased SSB consumption and note the links to increased body weight; the article is generally well-written and cross-referenced, with numerous citations to other peer-reviewed journal articles.

One point of interest is the assertion that SSB consumers do not bear the full costs of their consumption decisions. Why is that? Let's consider it step-by-step:

1) Can we agree that a statistical link exists between SSB consumption and weight gain? If not, then you are free to exit with no hard feelings. As with any serious research question, you are likely to find rigorous research that comes to an opposing conclusion. By considering the breadth of research that has examined the question, I think the link exists. If you're still with me, let's move on.

2) Weight gain poses health risks to individuals. This can be in the form of heart disease, high blood pressure, and diabetes, just to name a few.

3) The cost of managing and treating the health risks of overweight individuals is wrapped up in the overall cost to provide health care to the population at large.

4) In 2007, government spending (state and federal) on health care comprised 40% of national health expenditures (as reported by the Department of Health and Human Services).

5) Some amount of the government spending goes toward managing and treating the health risks of overweight individuals. A July 2009 article in Health Affairs estimates that medical costs of obesity have risen to $147 billion per year.

6) Public funds (i.e., taxpayer dollars) are used to partially subsidize the cost of SSB consumption.

The average consumer is likely not aware of these costs, much less including them in his or her decision to spend $1.39 on a 20oz bottle of soda. I am not aware of any research that attempts to include the present value cost of health care in the price of a soda, but there's an interesting research topic for you go-getters.

The authors go on to propose a small excise tax on SSBs (approximately 1 cent per oz), based on research findings that consumption tends to decrease as costs increase. So not only would the tax shape behavior that would benefit peoples' health, it would open a revenue stream that could benefit child nutrition and other anti-obesity programs. This in turn could help shape other behaviors that add to the cost of health care in the United States.

How does the beverage industry view such proposals? Not surprisingly, it is generally opposed to the tax idea, establishing a de facto unified front for the stance that a small tax would indeed reduce consumption (if that were not the prevailing belief, why would the industry oppose the tax? - it is merely passed on to the consumer, keeping the manufacturing and distribution costs flat).

As a strong supporter of establishing healthy habits for nutrition and physical activity, particularly early in life, I generally support sensible initiatives that help shape healthy behavior. Not only can a healthier population reduce some of the staggering pressure on the country's health care system, but healthier individuals are more likely to live long, active lives without many of the complications that accompany obesity. However, the proposal to tax SSBs has some pitfalls that must be addressed.

The biggest drawback I see is an inability to agree on which SSBs to target. Some would suggest traditional sodas only; others say energy drinks should be included; still others would include fruit juices, which often can be linked to weight gain for the same reasons as SSBs. Based on what I know today, I would oppose a tax on orange juice, and thus could not vote for a measure that imposed an excise tax on fruit juices. However, I do think that a clear link between SSB consumption and weight gain exists and that by limiting a tax proposal to beverages with less than a certain amount of natural fruit juice (say, 50%), we could target those whose consumption is most directly linked to weight gain.

Next, as with any new revenues, the stream created by the SSB tax would be fresh meat for anyone with a new spending proposal, tax reduction, or tax exclusion (all actions that have the same net result on the deficit). If indeed the goal is to expand child nutrition or other obesity-prevention programs, the revenues created by the tax would need to be fenced from competing priorities. Further, the revenue should not replace current funding for obesity prevention, as has been known to occur in other sectors (e.g., lottery revenue promised for education that end up offsetting cuts to state education budgets).

If, like me, you have the eminently reasonable position that no new tax should be enacted without great deliberation, I suggest that you consider the as-yet undetermined cost of that bottle of soda today. As someone concerned about the crisis in health care spending related to projected Medicare and Medicaid liabilities (p.31), I think this proposal might actually carry some weight.

Blueprint to reduce deficit?

The Congressional Budget Office (CBO) published their annual review of Budget Options last month. This paper proposes numerous policy options and estimates their effects over five and ten year windows. Some view the document as a veritable treasure trove of ideas to reduce federal spending; indeed I imagine most everyone would find at least a few agreeable proposals among the hundreds of spending and revenue measures. However, in the world of federal budgeting, let's not lose sight of the unfortunate reality that many things are easier said than done.

I've been thinking about this since I set aside a newspaper editorial a few weeks ago. The authors selected six of the options as a way to reduce the federal budget deficit by $100 billion over five years. This approach sends the message that easy answers are out there and that legislators are just too obtuse (or lazy, or beholden to other interests) to see the light and take action. I submit that answers are indeed out there, but that enacting many of them would be viewed as a direct attack on a particular constituency. Any move to increase revenues (primarily achieved through levying taxes) or decrease spending will be accompanied by a vocal opposition. The issue turns bipolar when viewed as a liberal or conservative initiative, at which point constructive debate often ceases.

Consider one of the solutions presented in the editorial - the federal excise tax on motor fuels, which is 18.4 cents per gallon of gasoline. That rate has not changed since it was adopted on October 1, 1993. Adjusting the tax for inflation (adjusting the 1993 amount to equal spending power in 2009) would require an increase of 9 cents per gallon, which would increase revenues (and thus decrease the deficit) by an estimated $45 billion over the next five years. Raising a tax - must be a liberal initiative, right? Indeed, a number of Democrats support this idea. But many on the left also oppose it based on the notion that fuel taxes tend to be viewed as regressive; that is, they disproportionately affect lower-income consumers. As towns and cities further invest in capital projects to create urban centers marketed to young professionals with disposable income who can "live, work, and play" in one area, a tax on fuel will be even less burdensome on individuals in higher tax brackets. Conservatives generally oppose increasing the federal excise tax on gasoline as well. You can see how thorny this issue could become during debate.

The CBO report considers cases in which the federal excise tax on gasoline is increased by 50 cents and 25 cents, increasing revenues over 5 years by $291 billion and $146 billion, respectively. Given the considerable resistance expected to any initiative to raise the tax, are either of the CBO's proposals worth considering? Would either proposal pass? Note that this particular measure would not result in a real reduction to the deficit, as the increased revenue would be used to fund transportation infrastructure projects around the country. However, the newspaper editorial devotes one paragraph to this measure, focusing on the positive effects it would have on the deficit. The fact that it would not likely see outside a House subcommittee chamber is conveniently omitted.

I do firmly believe that we should revisit the current rate, if for no other reason than to assess the level of federal highway deterioration we are willing to accept as the Highway Trust Fund cracks under the pressure of maintaining current roads and bridges. The National Surface Transportation Infrastructure Finance Commission released a report in February 2009 that notes that current Highway Trust Fund revenues represent approximately 41 percent of federal spending needed to maintain the nation's highways and transit systems and only 33 percent needed to make improvements (p. 53). That is a scary statistic, especially considering the tragedy that can occur with neglect (e.g., the August 2007 bridge collapse in Minnesota). It is interesting to further note that the items that make it on the U.S. Department of Transportation's list of needed improvements (the list against which the current level of funding is applied to arrive at the 33 percent metric) must represent a benefit to cost ratio of 1.2. That is, the projected benefit of a proposed improvement must be valued at $1.20 or more for the DOT to invest $1.00. That actually eliminates from consideration any improvements that would just barely break even for taxpayers. On the upside, the shortfall in the Highway Trust Fund looks a little better with this approach.

Politics aside, my point is to show how complex one proposal can be. Now multiply that a couple of hundred times and you can see how easy it might be to cherry pick a few sensible-sounding proposals, but how difficult it might be to get a bill for any one of them signed into law. That is why a newspaper editorial that purports to "easily" identify $100 billion in savings is misleading the public into wondering why our elected representatives cannot do the same thing. My parting recommendation is that you get into the CBO's report and find some policy options that you think make good fiscal sense. Make sure you consider the pros and cons, some of which are addressed in the report. Let me know what you think.

Service(s) provided by U.S. Postal

The United States Postal Service (USPS) sponsored six trips to the podium in the Tour de France (albeit on the back of the same rider), so who's to say they can't provide us with reliable mobile phone service?

The United States Postmaster General, John E. Potter, gave his annual state of the business address yesterday. The state has not changed much in recent years - the post office continues to bleed red ink despite spending cuts that have saved the office $6 billion in 2009 alone. The agency was also ranked the third Most Trusted Company for Privacy in 2009 by the Ponemon Institute, led only by eBay and Verizon.

The General notes that USPS does not receive tax dollars for its operating expenses, relying instead on its sales of - well we all know what the post office sells.

The interesting thing here was his reference (again) to other products the post office could offer. While he did not expound on the idea this time around, we could read a bit into his statement to a Senate subcommittee a few weeks ago: "Other national postal administrations complement their traditional offerings with banking, cellphone, logistics and other services to generate the income necessary to offset the costs of their universal service obligation -- costs that cannot be met solely by the price of postage."

So we could end up sending a letter, making a deposit, and shopping for smartphone data plans all at the same place! If there's a General in charge, I'm willing to give it a shot.

And a side note as we head into the waning days of summer: Bogle Vineyards is a winery in Clarksburg, California, just south of Sacramento. They make a number of high-value wines, particularly ancient vine zinfandels. I recommend you head out within the next month or so to get a bottle or two of their annual Phantom offering, a knock-your-socks-off blend of zinfandel and petite sirah (with a little mourvedre for added spice and structure). While they produce thousands of cases each year (with a September release), it quickly becomes difficult to find. You'll thank me as you enjoy it with hearty soups this fall.

Let's back it up

Ok folks. I feel like I came on a little strong on that last one. Kind of like opening an '82 Lafite when you're just sitting down to appetizers with new friends. My goal here is to help make sense of some of the nuances of two of my favorite subjects, and I might have missed the mark. So let's back up a bit.

I'm going to introduce you to one of my favorite places to get interesting analysis on a wide range of topics - the Congressional Budget Office, or CBO. I want to make sure you are familiar with them because I will reference them from time to time.

The CBO is the non-partisan "scorekeeper" of legislation being considered by Congress. It was established as part of a sweeping 1974 act that reformed much of the Congressional budget process. Its existence as a non-partisan entity is important, as the cost of any piece of legislation, or its effect on the national debt, should be considered through as objective a lens as possible. Until CBO's establishment, the President's cadre of economists and analysts (known today as the Office of Management and Budget (OMB)) published their estimated costs of legislation. You can imagine that OMB's numbers tended to be calculated using slightly more optimistic assumptions than other analysts'.

Let's stop on that for a moment. I recommend that when the cost or effects of a proposed piece of legislation are thrown around (which happens all too often on cable TV and the Sunday talk shows), you should consider two things: 1) who did the calculation? 2) what assumptions were used? I say this because almost any complex bill can touch on so many different areas of the economy. This requires analysts to make myriad assumptions about a number of net effects and how those effects will influence other areas. The bottom line will say $1.2 trillion and you're left wondering how anyone had enough computing power to get there. Well, assumptions are a necessary part of calculating that number, but tweaking a few here and there can produce a vastly different result. Just remember to at least give a passing thought to what that bottom line represents.

The CBO strives to ensure that an objective analysis of costs of legislation is captured for public use. They even score themselves to let you know how they're doing.

In addition to legislation being considered in Congress, CBO performs analyses of the President's budget (the President's budget is required by law to be submitted annually to Congress by the first Monday in February) and responds to requests for analysis from members of Congress. For example, a letter from CBO Director Doug Elmendorf to Rep. George Miller on September 11 responded to a request for a review and estimate of the Student Loan Community proposal.

In conclusion (that's a little formal, isn't it?), I want to put something of a face on the organization that works hard to ensure that the public and our elected representatives have the best information possible to decide whether the fiscal effects of legislation align with our interests. So the next time a legislative debate appears to only have two sides - "it will bankrupt our country"/"it won't cost a nickel" - check with CBO. They probably crunched the numbers last week.

Primer on the Budget Resolution & Reconciliation

I'm going to tackle several issues here pertaining to the federal budget. Most will come across as somewhat simplistic, if for no other reason than because very few topics related to the budget can be given due explanation and analysis in a blog post (or in a newscast or with a poster board on a street corner).

Some have wondered why the President and lawmakers keep referring to several versions of the health care bill in Congress. This relates to this year's Congressional budget resolution for fiscal year 2010 (FY 2010) which begins on October 1. The budget resolution, which is (usually) passed each year after both houses of Congress agree on its provisions, sets a framework for drawing up the various appropriations bills and other budget-related bills for the coming fiscal year, including limits on revenue and spending. As a resolution (not a bill), the document does not go to the President for signature/veto.

This year's Concurrent Resolution on the Budget for FY 2010 (S.Con.Res. 13) is relatively standard as far as budget resolutions go. The tie in here, however, relates to Title II, Reconciliation. Title II includes two sections that address reconciliation in the Senate and House, respectively.

Without digging too deep into the whys and hows of reconciliation, this legislative maneuver originally had noble underpinnings to help reduce the deficit, and thus the national debt. A reconciliation instruction in a budget resolution usually comprises three items: the committee that will introduce a bill, the date by which the bill must be introduced, and the dollar amount by which the bill must reduce the deficit. Go check out this year's budget resolution for FY 2010 at the Government Printing Office website. The takeaway here is that reconciliation, rooted in the language of 1974's Congressional Budget Act, is meant to focus legislators on enacting measures that reduce the budget deficit.

Reconciliation is an important legislative maneuver, particularly in the Senate. A lot of people think that all legislation in the Senate requires a 3/5, or super majority to pass (i.e., 60 senators). In fact, most routine legislation requires only a simple majority to pass. It is the vote to end debate on the measure (or cloture) that requires 60. A bill introduced under reconciliation instructions is automatically subject to limited debate, thus the super majority vote for cloture does not come into play, and the measure can be put to a simple floor vote with 51 votes earning passage.

Now that you have reviewed Title II of the FY 2010 budget resolution, you see the reconciliation instructions. You also see that a total of five congressional committees, two in the Senate (Finance and HELP), and three in the House (Energy & Commerce, Ways & Means, Education & Labor) have instructions to report changes in laws to reduce the deficit by $1 billion for the fiscal years 2009-2014. This is why various versions of health reform have been discussed on the Hill and in the news. The Senate Finance Committee will be the last to bring their version to the party.

Let's take this a bit further. While the language of the budget resolution made the option available, the House and Senate are not required to introduce the bills related to health care under rules of reconciliation, which we discussed would avoid the need for 60 votes in the Senate to close off debate. Reconciliation is not likely on the minds of many Democratic Senators, anyway, as the rules of reconciliation prohibit measures that are extraneous to the goal of deficit reduction. That means if Senate Democrats want to insert a measure into a bill introduced under reconciliation that requires all American citizens to carry health insurance, the Republicans would call a point of order, as that measure alone does not contribute to deficit reduction. Thus, the legislation is better left to non-reconciliation channels to avoid the inevitable arguments over what constitutes deficit reduction.

Now a couple of interesting side notes about reconciliation. When the reconciliation language was introduced in the FY 2010 budget resolution, Republicans complained loudly about Democrats setting themselves up to "ram through" this legislation. A number of conservative media outlets would have us believe that Republicans would never stoop to such despicable gaming of the system. In fact, both sides of the aisle have used reconciliation to get measures through the Senate since 1980.

During the 2000s, Congress used reconciliation to enact major tax reduction measures. The immediate question you should ask is, "If reconciliation is supposed to lower the deficit, how can it be used to enact tax cuts?" Good question.

One part of the answer relates to sunset provisions. A 1985 amendment to the rules of reconciliation (championed by West Virginia Senator Robert Byrd and thus known as the Byrd Rule) prohibits reconciliation legislation from decreasing revenues or increasing outlays within a particular window. So, if a President and Congress want to enact tax cuts, and want to get the measure through the Senate without threat of a filibuster (i.e., endless debate needing 60 votes to overcome), just introduce the measure under reconciliation and insert a sunset provision that would have the tax cuts go away somewhere down the road. On paper, this has the profile of revenues spike back up in the future, and thus the aggregate of revenue minuses (in the near years) and plusses (in the out years) come out as one, deficit-neutral projection. This keeps the other side of the aisle from raising a point of order against the reconciliation legislation.

What do you think about using reconciliation to help enact revenue-reducing measures today by eliminating, on paper, those measures at some time down the road? Should a Democratic President be vilified for raising taxes if he does nothing but allow sunset provisions, signed into law by the previous Republican President, to take effect? I do not ask this as a politically-loaded question, and I ask you to avoid considering it through a partisan lens. This is a question that you might not otherwise consider while reading your news source of choice.

Finally...Should the Senate introduce its version of health care reform under rules of reconciliation? Do the sweeping measures that will inevitably be considered in any version of health care reform fall within reconciliation's narrow scope, or does reconciliation offer a convenient way to avoid garnering 60 Senate votes? While I think the answer on the Hill to both of these questions is already "no," keep this in the back of your mind as the debate progresses.

And as sunset provisions come into effect in the very near term, remember how reconciliation language got us there.

Let's Talk

Well, here it is folks. After fielding hundreds, if not thousands of requests to start organizing my thoughts and views in a blog, I have taken the plunge.

What can you expect from Wine & Politics? I suppose the name says it all. While I have had the opportunity to dabble in a number of different fields, becoming quite proficient in most of them, these are two that I particularly enjoy discussing. From this blog, you will pick up notes of statistics and behavioral economics before the palate is treated to critical analyses and insight on the workings of Congress and the Executive branch. The lingering finish will no doubt encourage you to raise your glass yet again in recognition of the great contributions that knowledge can offer to any debate.

Yes, I suppose that is what it boils down to - knowledge. I have my views, and I will use this spot to express them. But the greater good I can serve here is not to try to convince anyone my views are correct; rather, I want people to use knowledge to perform their own critical analysis of the topic du jour.

I have the inclination and motivation to scour prodigious volumes of information in search of the stuff that is truly important to understanding complex issues. By distilling that information (did you know that brandy is made by distilling wine?) for you the reader, I hope to make a positive contribution to the debate.

Finally, I hope that you and I disagree from time to time. If you consider the information I present and reach a different conclusion, you will help me prove that more than one sensible conclusion can be drawn from the same set of facts, and that an individual's experiences and principles form the framework for critical thinking.

Let's just all agree not to serve our Chardonnays straight from the refrigerator, okay?