Molly F. Sherlock
Analyst in Economics
Tax reform and deficit reduction are two issues being considered by the 112th Congress. It may be possible to design tax reform policies that complement deficit reduction goals. In recent months, a number of groups have published various plans for tackling the nation’s growing deficits. This report analyzes various revenue options for deficit reduction, highlighting proposals made by the President’s Fiscal Commission and the Debt Reduction Task Force.
Large budget deficits, rising national debt, and the growth of entitlement spending have raised questions regarding fiscal sustainability in the United States. The Congressional Budget Office (CBO) predicts a FY2011 budget deficit of nearly $1.5 trillion, or 9.8% of gross domestic product (GDP). Over the past three decades, budget deficits have averaged 3% of GDP. Large budget deficits have contributed to an increased level of federal debt, relative to the size of the economy. Increased debt levels are expected to lead to increased federal interest payments. If not addressed, the current fiscal situation could undermine economic growth.
Reducing federal deficits will likely require reductions in spending, increased federal revenues, or some combination of spending cuts and revenue increases. Federal revenues in 2009 and 2010, relative to the size of the economy, were low by historical standards. Reduced federal collections may be partially attributable to the weak economy and the fiscal policy response. Historically low individual income tax collections may also be partially explained by the 2001 and 2003 tax cuts. Spending through the tax code, via tax expenditures, also reduces federal revenues. The use of tax expenditures may undermine economic efficiency and equity in the tax code.
The primary sources of federal revenues are individual income taxes, payroll taxes, corporate income taxes, and excise taxes. Additional income tax revenues could be raised with a broader tax base, which could be achieved by eliminating various exemptions, credits, and deductions. A broader tax base could also allow for lower tax rates, without a loss in federal revenues. Broadening the tax base could enhance the economic efficiency of the tax system.
There are other options for generating additional revenues outside of the current tax system. The federal government could raise revenues through additional consumption taxes, excise taxes, or by imposing a tax on carbon.
The President’s Fiscal Commission and the Debt Reduction Task Force took different approaches in the tax reform components of their fiscal sustainability plans. The President’s Fiscal Commission raised additional tax revenues primarily through comprehensive income tax reform. The Fiscal Commission chose to broaden the tax base, allowing for both lower tax rates and increased federal revenues. The Debt Reduction Task Force’s proposal also recommended individual income tax reform. The individual income tax reforms recommended by the Debt Reduction Task Force were designed to enhance efficiency and increase progressivity in the income tax system. Additional revenues in the Debt Reduction Task Force’s plan originate from the proposed 6.5% debt-reduction sales tax.
Date of Report: February 18, 2011
Number of Pages: 35
Order Number: R41641
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Oscar R. Gonzales
Analyst in Economic Development Policy
Donald J. Marples
Section Research Manager
Empowerment Zones (EZs), Enterprise Communities (ECs), and Renewal Communities (RCs) are federally designated geographic areas characterized by high levels of poverty and economic distress, where businesses and local governments may be eligible to receive federal grants and tax incentives. Congress remains interested in these programs to revitalize selected areas affected by unemployment and a decline in economic activity, despite increased concern over the size and sustainability of the long-term budget outlook.
The objective of this report is to provide a comparative overview of the similarities and differences between the EZ, EC, and RC programs, and a review of congressional policy choices to target and provide federal incentives to economically distressed zones. The report also examines studies that have evaluated the impact of EZs, ECs, and RCs, and provides information on their current status. Finally, the report discusses recent legislative activity and congressional issues and options.
Since 1993, Congress has authorized three rounds of EZs (1993, 1997, 1999), two rounds of ECs (1993, 1997), and one round of RCs (2000) with the objective of revitalizing selected economically distressed communities. The three programs have different benefits and eligibility criteria. For example, the nine initial EZs each received tax incentives and grants of $100 million (urban) and $40 million (rural), whereas the 95 initial ECs each received tax benefits and smaller grants of $2.95 million for smaller urban counties and rural communities. RCs did not receive grants, but benefitted from wage credits, and tax investment incentives. Eligibility varied depending on levels of population, unemployment, and poverty. In its FY2010 and FY2011 budgets, the Administration requested that Congress extend tax incentives for EZs and RCs until December 31, 2010 and 2011. EZ and RC tax incentives were extended in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343), through December 31, 2009.
Currently, the estimated $1.8 billion in grant incentives provided to EZs and ECs since 1993 have mostly been expended. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) enacted on December 17, 2010, extended EZ tax benefits, but not RCs, until the end of 2011. In addition, legislation such as the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) provided broadband education, training, and equipment for selected facilities located within EZs and ECs, and recovery zone bonds for EZs. In 2009, P.L. 111-8 and P.L. 111-80 provided $3 million in funding for EZs and ECs. While a short-term extension of EZ tax incentives was enacted in the 111th Congress, a similar extension of the RC tax incentives might continue to be an issue in the 112th Congress.
A number of studies have evaluated the effectiveness of the EZ, EC, and RC programs. Several government-sponsored studies have failed to link EZ and EC designation with a general improvement in community outcomes. In addition, several academic researchers have evaluated the effectiveness of zone incentives. Overall, these studies have found modest, if any, effects, and call into question the cost-effectiveness of these programs.
There are several options that Congress can consider regarding the EZ, EC, and RC programs. These options may range from permanently extending the programs to allowing them to expire. Other options include a temporary extension, increased oversight, a redesignation of economic development zones, program consolidation, or a combination of these options.
Date of Report: February 14, 2011
Number of Pages: 32
Order Number: R41639
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Dawn Nuschler
Specialist in Income Security
Social Security reform has been an issue of political debate in recent years. Currently, there is renewed congressional interest in reform in part due to the National Commission on Fiscal Responsibility and Reform established by President Obama in February 2010, which was tasked with making recommendations on ways to improve the long-term fiscal outlook. On December 1, 2010, the President’s Fiscal Commission released its final report, which includes a number of proposed changes to the Social Security program. On December 3, 2010, a majority of commission members expressed support for the recommendations (11 out of 18 members), three short of the super-majority needed to require congressional action on the recommendations.
The spectrum of ideas for reform ranges from relatively minor changes to the pay-as-you-go social insurance system enacted in the 1930s to a redesigned, “modernized” program based on personal savings and investments modeled after IRAs and 401(k)s. Proponents of the fundamentally different approaches to reform cite varying policy objectives that go beyond simply restoring long-term financial stability to the Social Security system. They cite objectives that focus on improving the adequacy and equity of benefits, as well as those that reflect different philosophical views about the role of the Social Security program and the federal government in providing retirement income. However, the system’s projected long-range financial outlook provides a backdrop for much of the Social Security reform debate in terms of the timing and degree of recommended program changes.
The Social Security Board of Trustees projects that the trust fund will be exhausted in 2037 and that an estimated 78% of scheduled annual benefits will be payable with incoming receipts at that time (under the intermediate projections). The primary reason is demographics. Between 2010 and 2030, the number of people aged 65 and older is projected to increase by 76%, while the number of workers supporting the system is projected to increase by 8%. In addition, the trustees project that the system will run cash flow deficits in 2010 and 2011, and again in 2015 and each year thereafter through the end of the 75-year projection period. When current Social Security tax revenues are insufficient to pay benefits and administrative costs, federal securities held by the trust fund are redeemed and Treasury makes up the difference with other receipts. When there are no surplus governmental receipts, policymakers have three options: raise taxes or other income, reduce other spending, or borrow from the public (or a combination of these options).
Public opinion polls show that less than 50% of respondents are confident that Social Security can meet its long-term commitments. There is also a public perception that Social Security may not be as good a value for future retirees. These concerns, and a belief that the nation must increase national savings, have led to proposals to redesign the system. At the same time, others suggest that the system’s financial outlook is not a “crisis” in need of immediate action. Supporters of the current program structure point out that the trust fund is projected to have a positive balance until 2037 and that the program continues to have public support and could be affected adversely by the risk associated with some of the reform ideas. They contend that only modest changes are needed to restore long-range solvency to the Social Security system.
During the 111th Congress, four Social Security reform measures were introduced. None of the measures received congressional action. During the 112th Congress to date, one Social Security reform measure has been introduced.
Date of Report: February 14, 2011
Number of Pages: 36
Order Number: RL33544
Price: $29.95
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Karen Spar
Specialist in Domestic Social Policy and Division Research Coordinator
Community Services Block Grants (CSBG) provide federal funds to states, territories, and tribes for distribution to local agencies to support a wide range of community-based activities to reduce poverty. Smaller related programs—Community Economic Development, Rural Community Facilities, Job Opportunities for Low-Income Individuals (JOLI), and Individual Development Accounts (IDAs)—also provide grants for anti-poverty efforts. CSBG and some of these related activities trace their history to the War on Poverty of the 1960s. The programs currently are administered by the Department of Health and Human Services (HHS).
CSBG and related activities are operating at FY2010 levels under the latest in a series of continuing resolutions (CRs) for FY2011. The current CR (P.L. 111-322) expires on March 4. Legislation pending in the House, to extend funding through the end of FY2011 (H.R. 1), would sharply reduce discretionary funding for many government programs, including CSBG. As introduced, H.R. 1 would provide a total of $405 million for programs authorized under the CSBG Act; this would include $395 million for the block grant (compared to the FY2010 level of $700 million) and $10 million for Rural Community Facilities (which is the same as the FY2010 level). No funding would go to Community Economic Development, and it is not clear whether JOLI or IDAs would be funded.
While final action on the FY2011 budget remains uncertain, President Obama released his FY2012 budget proposals on February 14, seeking $350 million for the CSBG next fiscal year (a 50% reduction from FY2010 levels). Coupled with this request is the stated intent to move toward a competitive program; states would award block grant funds among local agencies on a competitive basis, rather than the longstanding mandatory pass-through to designated “eligible entities.” The Administration also requested $20 million for Community Economic Development (down from the FY2010 level of $36 million), $24 million for IDAs (the same as FY2010), and no funding for Rural Community Facilities or JOLI in FY2012. FY2010 levels for these programs are $10 million and $2.6 million, respectively.
When President Obama submitted his FY2011 budget request more than a year ago (on February 1, 2010), he proposed total funding of $760 million for CSBG and related activities ($700 million for the block grant, $36 million for Community Economic Development, and $24 million for IDAs). The Administration requested less in total funding for CSBG and related activities for FY2011 than was provided for FY2010 because both Rural Community Facilities and JOLI would have been eliminated. The Administration also did not seek to continue the $1 billion in funding provided to CSBG under the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5).
According to state-reported data for FY2008 (the latest year for which data are available), the nationwide network of more than 1,000 local CSBG grantees provided services to nearly 16.4 million individuals in 7.1 million low-income families.
Although Congress has continued to fund CSBG and related activities each year through appropriations laws, the legislative authorization of appropriations for these programs expired at the end of FY2003. No reauthorization proposal has been introduced since the 109th Congress.
Date of Report: February 16, 2011
Number of Pages: 26
Order Number: RL32872
Price: $29.95
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Gene Falk
Specialist in Social Policy
The Temporary Assistance for Needy Families (TANF) block grant funds a wide range of benefits and services for low-income families with children. TANF was created in the 1996 welfare reform law (P.L. 104-193). This report responds to some frequently asked questions about TANF; it does not describe TANF rules (see, instead, CRS Report RL32748, The Temporary Assistance for Needy Families (TANF) Block Grant: A Primer on TANF Financing and Federal Requirements, by Gene Falk).
TANF Funding. TANF provides fixed funding to states, the bulk of which is provided in a $16.5 billion-per-year basic block grant. States are required in total to contribute, from their own funds, at least $10.4 billion under a maintenance-of-effort (MOE) requirement. The basic block grant is not adjusted for inflation or changes in the cash welfare caseload (see “Cash Welfare Caseload,” below). It has lost 26% of its value to inflation from FY1997 through FY2010. P.L. 111-291 funds TANF through the end of FY2011. President Obama’s FY2012 budget proposal would continue TANF funding, except contingency funds, at its FY2006 through FY2010 levels through FY2012.
State Spending. Though TANF is best known for funding cash welfare payments for needy families with children, the block grant and MOE funds are used for a wide variety of benefits and activities. In FY2009, expenditures on basic assistance (cash welfare) totaled $9.3 billion—28% of total federal TANF and MOE dollars. TANF also contributes funds for child care and services for children who have been, or are at risk of being, abused and neglected.
Cash Welfare Caseload. In September 2010, the number of families receiving TANF cash welfare was 1.9 million families, consisting of 4.6 million recipients, of which 3.4 million were children. The cash welfare caseload is very heterogeneous. The type of family historically thought of as the “typical” cash welfare family—one with an unemployed adult recipient—accounted for less than half of all families on the rolls in FY2008. Additionally, 15% of cash welfare families had an employed adult, while almost half of all families had no adult recipient. Child-only families include those with disabled adults receiving Supplemental Security Income (SSI), adults who are nonparents (e.g., grandparents, aunts, uncles) caring for children, and families consisting of citizen children and ineligible noncitizen parents.
Cash Welfare Benefits. TANF cash benefits are set by states. In July 2009, the maximum monthly benefit for a family of three ranged from $923 in Alaska to $170 in Mississippi. Benefits in all states represent a fraction of poverty-level income. In the median state (Kansas), the maximum monthly benefit of $429 for a family of three represents 28% of poverty-level income.
Cash Welfare Work Requirements. TANF requires states to engage 50% of all families and 90% of two-parent families in work activities. However, these standards are reduced by caseload reduction from FY2005. Further, states may get an extra credit against these standards by spending more than required under the TANF MOE. In FY2008, states achieved an all-family participation rate of 29.4% and a two-parent rate of 27.6%. That year, nine jurisdictions failed the all-family standard, and six jurisdictions failed the two-parent standard. States that fail to meet work standards are at risk of being penalized by a reduction in their block grant.
Date of Report: February 16, 2011
Number of Pages: 36
Order Number: RL32760
Price: $29.95
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