GREENSTEIN: Don't make things worse

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By Robert Greenstein

OPINION/ANALYSIS:

We recently updated our long-term projections of federal spending, revenues and deficits, and they confirm what budget experts both inside and outside the government have concluded: The nation is on an unsustainable fiscal course, facing unprecedented deficits that, if left unaddressed, will seriously weaken our economy.

Specifically, we estimate that, under reasonable assumptions about future spending and tax policies, debt held by the public would explode to roughly 300 percent of the Gross Domestic Product (GDP) by 2050 -- nearly three times as large as the then-record at the end of World War II. The annual deficit would total an astonishing 20 percent of GDP that year.

To be sure, the administration and Congress should not pass legislation that would impose -- now -- the spending cuts and revenue increases that a serious deficit-cutting effort would entail. That would reduce demand in the economy at a time when it's still weak, perhaps stalling whatever recovery is under way.

Instead, having enacted an economic recovery law early this year, policymakers should now focus on making sure they do whatever else they must to help revive the economy. This fall, in fact, they should take a handful of additional short-term, targeted steps -- including extending that law's expanded unemployment and health benefits, along with providing more state fiscal relief -- that would be temporary and not increase the deficit over the long term, but that would help those who are suffering the most from the downturn and help prevent the economy from falling back into recession.

But while policymakers hopefully will enact these important temporary measures, they should not take other steps -- wholly unrelated to the current downturn -- that would make the nation's long-term fiscal picture worse.

That imperative comes to mind as Congress focuses on two key issues this fall: how to reform the health care system and whether to further cut the estate tax.

Health care: President Obama pledged to reject any health reform legislation that did not fully offset its costs over the next 10 years and beyond, thus adding to long-term deficits.

At the moment, Congress shows signs of complying with that pledge. The Senate Finance Committee has adopted legislation that, the Congressional Budget Office says, would somewhat reduce long-term deficits by beginning to slow the growth of health care costs.

Lawmakers must hold to this course of action as the full House and Senate address health reform. But if the signs on that front are encouraging, the signals about what may happen with the estate tax are cause for concern.

Estate tax: In 2001, Congress dramatically cut the tax on estates that are passed down from one generation to the next, raising the exemption from $1 million for individuals and $2 million for couples to $3.5 million and $7 million respectively this year, while also reducing the tax rate from 55 to 45 percent.

As a result, only the very top estates in America are subject to the estate tax -- about one of every 500 estates, according to the nonpartisan Tax Policy Center, or just 0.2 percent of all Americans who die. And, due to the exemptions and other features of the estate tax, those who do pay the tax actually pay an average of 20 percent, not 45 percent.

Due to the peculiarities of the 2001 legislation, the estate tax is scheduled to disappear in 2010 and then return to pre-2001 law a year later. So, Congress will likely debate the tax this fall to avert a roller-coaster of changes.

Policymakers could extend the current estate tax parameters (which, compared to reverting to the pre-2001 law, represents a very large tax cut for the nation's wealthiest individuals). That, however, is not good enough for some lawmakers, business groups, and very wealthy individuals who want Congress to provide a still larger tax break.

Their proposal would raise the tax exemption to $5 million for individuals -- $10 million for couples -- and cut the tax rate to 35 percent. Proponents say the 2009 parameters hurt small businesses and family farms.

But, the fact is that small businesses and family farms are, well, small, meaning they will never face the estate tax. Under the 2009 parameters, only about 100 "small farm and business estates" -- those in which at least half their value comes from farm and business assets, with such assets not exceeding $5 million -- would owe any estate tax in 2010, according to the Tax Policy Center.

Thus, the true effect of the proposal would be (1) to ensure that even more of the top estates in America will escape taxation and (2) to swell deficits and debt. It would allocate most of the tax cut to the nation's largest estates. And it would cost the federal government an estimated $150 billion (including associated interest costs) over the first 10 years that it's fully in effect - digging the fiscal hole from which the federal government will have to climb even deeper.

Our long-term deficits are large enough. Congress should reject dubious proposals that would make them worse.

• Robert Greenstein is executive director of the Center on Budget and Policy Priorities.