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December 4, 2002

Honorable George V. Voinovich
United States Senate
Washington, DC 20510

Dear Senator:

In response to your recent request, CBO has prepared five alternative budget projections that modify our current baseline (released in August 2002) according to assumptions that you specified. Table 1 summarizes the results of that analysis, and Tables 2 through 6 show the detailed, year-by-year estimates. As you requested, for all five scenarios we assume that discretionary budget authority in 2003 will total $759 billion and that all revenue provisions scheduled to expire in the next ten years will be extended. The third assumption, which varied for each scenario, specified different rates of growth or decline of discretionary budget authority.

You asked us to determine, under those assumptions, what rate of change in discretionary appropriations would be necessary to produce on-budget balance by 2007 or by 2012. (The on-budget deficit in 2002 was $318 billion.) Under the specified assumptions, discretionary budget authority would have to decline by about 8 percent a year in order to reach on-budget balance in 2007 (see Table 5); a small rate of growth--0.4 percent per year--would yield on-budget balance in 2012 (see Table 6).

You should note that the revenue adjustments in all the scenarios include--as you specified in your request--all expiring tax provisions. Some of those provisions are from the stimulus bill enacted earlier this year and were generally not intended or expected to be extended; extension of those provisions accounts for an estimated $264 billion in revenues over the 2003-2012 period. Box 1-1 from The Budget and Economic Outlook: An Update (August 2002) discussed the estimated impact of extending expiring revenue provisions. A copy of that box is attached.

If you would like further details about these calculations, we would be pleased to provide them. The CBO staff contact is Felix LoStracco.

Sincerely,

Dan L. Crippen
Director
 

Attachments
 
cc:      Honorable Kent Conrad
Chairman
Senate Committee on the Budget
 
  Honorable Pete V. Domenici
Ranking Member
 
  Honorable Jim Nussle
Chairman
House Committee on the Budget
 
  Honorable John M. Spratt Jr.
Ranking Member
 
Identical letter sent to Honorable Russell D. Feingold

 

           
Table 1.
Summary of Budgetary Impact of Alternative Scenarios
(In trillions of dollars)
  Total Surplus or Deficit (-)
   Difference from Baseline
  2003-2007 2003-2012   2003-2007 2003-2012
Baseline Surplus or Deficit (-) -0.2 1.0   -- --
 
Surplus or deficit (-) assuming extension of expiring revenue provisions, fiscal year 2003 discretionary budget authority of $759 billion, and:          
 
(1) Discretionary budget authority inflated from the 2003 level using inflators specified in the Deficit Control Act -0.5 -0.2   -0.2 -1.2
 
(2) Discretionary outlays remain at the 2003 level as a percentage of gross domestic product (7.3 percent) -0.7 -1.5   -0.5 -2.5
 
(3) Discretionary budget authority grows by 8.5 percent per year -0.9 -2.9   -0.6 -3.9
 
(4) Discretionary budget authority declines by 8.2 percent per year (on-budget balance by 2007) 0.2 n.a.   0.4 n.a.
 
(5) Discretionary budget authority increases by 0.4 percent per year (on-budget balance by 2012) -0.3 0.7   -0.1 -0.4
SOURCE: Congressional Budget Office.
Table 2.
Comparison of CBO's August 2002 Baseline and Alternative Scenarios Specified by Senators Voinovich and Feingold
(In billions of dollars)
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
CBO August 2002 Baseline
                           
Revenues 1,962 2,083 2,244 2,381 2,513 2,658 2,809 2,965 3,243 3,521 11,184 26,379
Discretionary Outlays 782 803 827 845 864 889 912 936 965 983 4,121 8,807
Mandatory Outlays and Net Interest 1,325 1,391 1,456 1,522 1,598 1,680 1,763 1,851 1,954 2,016 7,292 16,557
 
Total Deficit (-) or Surplus -145 -111 -39 15 52 88 133 177 323 522 -229 1,015
  On-Budget -315 -299 -246 -209 -190 -173 -147 -122 4 185 -1,259 -1,513
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Scenario Assuming that All Revenue Provisions Scheduled to Expire in the Next 10 Years are Extended, that Discretionary Budget Authority Equals the President's Request of $759 billion for 2003, and that Such Spending Grows at the Rates of Inflation After 2003
 
Revenues 1,961 2,075 2,199 2,315 2,441 2,581 2,730 2,881 3,035 3,204 10,991 25,422
Discretionary Outlays 785 807 831 849 869 894 917 941 971 988 4,141 8,853
Mandatory Outlays and Net Interest 1,325 1,392 1,459 1,527 1,608 1,695 1,784 1,877 1,990 2,068 7,311 16,725
 
Total Deficit (-) or Surplus -149 -124 -91 -62 -35 -8 29 63 74 147 -461 -156
  On-Budget -319 -312 -298 -285 -277 -270 -251 -237 -244 -189 -1,491 -2,683
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Differences from CBO Baseline
 
Revenues -1 -8 -45 -67 -72 -77 -79 -83 -208 -317 -194 -956
Discretionary Outlays 3 4 4 5 5 5 5 5 5 5 20 46
Mandatory Outlays and Net Interest * 1 2 6 10 15 20 26 36 52 19 167
 
Total Deficit (-) or Surplus -4 -13 -52 -77 -87 -96 -104 -114 -249 -374 -232 -1,170
  On-Budget -4 -13 -52 -77 -87 -96 -104 -114 -249 -374 -232 -1,170
  Off-Budget * * * * * * * * * * * *
SOURCE: Congressional Budget Office.
NOTE: * = between -$500 million and $500 million.
                           
Table 3.
Comparison of CBO's August 2002 Baseline and Alternative Scenarios Specified by Senators Voinovich and Feingold
(In billions of dollars)
    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
CBO August 2002 Baseline
 
Revenues 1,962 2,083 2,244 2,381 2,513 2,658 2,809 2,965 3,243 3,521 11,184 26,379
Discretionary Outlays 782 803 827 845 864 889 912 936 965 983 4,121 8,807
Mandatory Outlays and Net Interest 1,325 1,391 1,456 1,522 1,598 1,680 1,763 1,851 1,954 2,016 7,292 16,557
 
Total Deficit (-) or Surplus -145 -111 -39 15 52 88 133 177 323 522 -229 1,015
  On-Budget -315 -299 -246 -209 -190 -173 -147 -122 4 185 -1,259 -1,513
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Scenario Assuming that All Revenue Provisions Scheduled to Expire in the Next 10 Years are Extended, that Discretionary Budget Authority Equals the President's Request of $759 billion for 2003, and that Outlays Remain at the 2003 Level as a Percentage of Gross Domestic Product (7.3 percent)
 
Revenues 1,961 2,075 2,199 2,315 2,441 2,581 2,730 2,881 3,035 3,204 10,991 25,422
Discretionary Outlays 785 826 869 915 964 1,016 1,071 1,127 1,186 1,248 4,359 10,008
Mandatory Outlays and Net Interest 1,325 1,392 1,461 1,532 1,617 1,711 1,808 1,913 2,038 2,132 7,328 16,930
 
Total Deficit (-) or Surplus -149 -144 -131 -132 -140 -146 -149 -158 -189 -176 -696 -1,515
  On-Budget -319 -331 -337 -356 -382 -407 -428 -457 -507 -511 -1,725 -4,035
  Off-Budget 170 188 206 223 242 261 279 298 318 335 1,029 2,520
 
Differences from CBO Baseline
 
Revenues -1 -8 -45 -67 -72 -77 -79 -83 -208 -317 -194 -956
Discretionary Outlays 3 23 42 70 100 127 159 191 221 265 238 1,201
Mandatory Outlays and Net Interest * 1 4 11 20 31 45 61 84 116 36 372
 
Total Deficit (-) or Surplus -4 -32 -91 -147 -192 -235 -282 -335 -512 -698 -467 -2,529
  On-Budget -4 -32 -91 -147 -191 -234 -281 -334 -511 -696 -466 -2,523
  Off-Budget * * * * -1 -1 -1 -1 -1 -1 -2 -7
SOURCE: Congressional Budget Office.
NOTE: * = between -$500 million and $500 million.
                           
Table 4.
Comparison of CBO's August 2002 Baseline and Alternative Scenarios Specified by Senators Voinovich and Feingold
(In billions of dollars)
    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
CBO August 2002 Baseline
 
Revenues 1,962 2,083 2,244 2,381 2,513 2,658 2,809 2,965 3,243 3,521 11,184 26,379
Discretionary Outlays 782 803 827 845 864 889 912 936 965 983 4,121 8,807
Mandatory Outlays and Net Interest 1,325 1,391 1,456 1,522 1,598 1,680 1,763 1,851 1,954 2,016 7,292 16,557
 
Total Deficit (-) or Surplus -145 -111 -39 15 52 88 133 177 323 522 -229 1,015
  On-Budget -315 -299 -246 -209 -190 -173 -147 -122 4 185 -1,259 -1,513
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Scenario Assuming that All Revenue Provisions Scheduled to Expire in the Next 10 Years are Extended, that Discretionary Budget Authority Equals the President's Request of $759 billion for 2003, and that Such Spending Grows at the Annual Average Rate Recorded from 1998 through 2002 (8.5 percent)
 
Revenues 1,961 2,075 2,199 2,315 2,441 2,581 2,730 2,881 3,035 3,204 10,991 25,422
Discretionary Outlays 785 834 900 967 1,042 1,130 1,221 1,321 1,433 1,542 4,528 11,174
Mandatory Outlays and Net Interest 1,325 1,392 1,462 1,536 1,625 1,724 1,829 1,944 2,083 2,194 7,340 17,115
 
Total Deficit (-) or Surplus -149 -152 -163 -188 -225 -273 -320 -383 -481 -532 -878 -2,867
  On-Budget -319 -339 -369 -411 -466 -533 -599 -680 -797 -866 -1,905 -5,380
  Off-Budget 170 187 206 223 241 260 279 297 316 334 1,028 2,514
 
Differences from CBO Baseline
 
Revenues -1 -8 -45 -67 -72 -77 -79 -83 -208 -317 -194 -956
Discretionary Outlays 3 31 73 122 178 240 309 384 468 559 407 2,368
Mandatory Outlays and Net Interest * 1 6 14 27 44 66 93 129 178 48 557
 
Total Deficit (-) or Surplus -4 -41 -124 -203 -277 -361 -453 -560 -804 -1,054 -649 -3,881
  On-Budget -4 -40 -123 -202 -276 -360 -452 -558 -801 -1,051 -646 -3,868
  Off-Budget * * * -1 -1 -1 -2 -2 -3 -3 -3 -13
SOURCE: Congressional Budget Office.
NOTE: * = between -$500 million and $500 million.
                           
Table 5.
Comparison of CBO's August 2002 Baseline and Alternative Scenarios Specified by Senators Voinovich and Feingold
(In billions of dollars)
    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
CBO August 2002 Baseline
 
Revenues 1,962 2,083 2,244 2,381 2,513 2,658 2,809 2,965 3,243 3,521 11,184 26,379
Discretionary Outlays 782 803 827 845 864 889 912 936 965 983 4,121 8,807
Mandatory Outlays and Net Interest 1,325 1,391 1,456 1,522 1,598 1,680 1,763 1,851 1,954 2,016 7,292 16,557
 
Total Deficit (-) or Surplus -145 -111 -39 15 52 88 133 177 323 522 -229 1,015
  On-Budget -315 -299 -246 -209 -190 -173 -147 -122 4 185 -1,259 -1,513
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Scenario Assuming that All Revenue Provisions Scheduled to Expire in the Next 10 Years are Extended, that Discretionary Budget Authority Equals the President's Request of $759 billion for 2003, and that Such Spending Declines at an Annual Rate of 8.2 Percent to Achieve On-Budget Balance in 2007
 
Revenues 1,961 2,075 2,199 2,315 2,441 n.a. n.a. n.a. n.a. n.a. 10,991 n.a.
Discretionary Outlays 785 760 718 666 617 n.a. n.a. n.a. n.a. n.a. 3,547 n.a.
Mandatory Outlays and Net Interest 1,325 1,391 1,453 1,513 1,581 n.a. n.a. n.a. n.a. n.a. 7,263 n.a.
 
Total Deficit (-) or Surplus -149 -76 27 135 244 n.a. n.a. n.a. n.a. n.a. 181 n.a.
  On-Budget -319 -264 -180 -90 * n.a. n.a. n.a. n.a. n.a. -853 n.a.
  Off-Budget 170 188 207 225 244 n.a. n.a. n.a. n.a. n.a. 1,034 n.a.
 
Differences from CBO Baseline
 
Revenues -1 -8 -45 -67 -72 n.a. n.a. n.a. n.a. n.a. -194 n.a.
Discretionary Outlays 3 -43 -109 -178 -247 n.a. n.a. n.a. n.a. n.a. -574 n.a.
Mandatory Outlays and Net Interest * -1 -3 -8 -17 n.a. n.a. n.a. n.a. n.a. -29 n.a.
 
Total Deficit (-) or Surplus -4 35 67 120 192 n.a. n.a. n.a. n.a. n.a. 410 n.a.
  On-Budget -4 35 66 119 190 n.a. n.a. n.a. n.a. n.a. 406 n.a.
  Off-Budget * * 1 1 1 n.a. n.a. n.a. n.a. n.a. 3 n.a.
SOURCE: Congressional Budget Office.
NOTE: * = between $500 million and $500 million.
                           
Table 6.
Comparison of CBO's August 2002 Baseline and Alternative Scenarios Specified by Senators Voinovich and Feingold
(In billions of dollars)
    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
CBO August 2002 Baseline
 
Revenues 1,962 2,083 2,244 2,381 2,513 2,658 2,809 2,965 3,243 3,521 11,184 26,379
Discretionary Outlays 782 803 827 845 864 889 912 936 965 983 4,121 8,807
Mandatory Outlays and Net Interest 1,325 1,391 1,456 1,522 1,598 1,680 1,763 1,851 1,954 2,016 7,292 16,557
 
Total Deficit (-) or Surplus -145 -111 -39 15 52 88 133 177 323 522 -229 1,015
  On-Budget -315 -299 -246 -209 -190 -173 -147 -122 4 185 -1,259 -1,513
  Off-Budget 170 188 207 224 242 262 280 299 319 337 1,031 2,527
 
Scenario Assuming that All Revenue Provisions Scheduled to Expire in the Next 10 Years are Extended, that Discretionary Budget Authority Equals the President's Request of $759 billion for 2003, and that Such Spending Grows at an Annual Rate of 0.4 Percent to Achieve On-Budget Balance in 2012
 
Revenues 1,961 2,075 2,199 2,315 2,441 2,581 2,730 2,881 3,035 3,204 10,991 25,422
Discretionary Outlays 785 799 809 811 813 821 825 830 839 836 4,017 8,168
Mandatory Outlays and Net Interest 1,325 1,392 1,457 1,524 1,602 1,685 1,769 1,857 1,961 2,031 7,301 16,605
 
Total Deficit (-) or Surplus -149 -115 -68 -21 26 75 135 195 234 337 -327 650
  On-Budget -319 -303 -275 -245 -216 -187 -145 -105 -85 * -1,358 -1,881
  Off-Budget 170 188 207 224 243 262 281 300 320 337 1,031 2,531
 
Differences from CBO Baseline
 
Revenues -1 -8 -45 -67 -72 -77 -79 -83 -208 -317 -194 -956
Discretionary Outlays 3 -5 -18 -34 -51 -68 -87 -106 -126 -147 -104 -639
Mandatory Outlays and Net Interest * * 1 3 5 6 6 5 7 14 9 47
 
Total Deficit (-) or Surplus -4 -4 -28 -36 -26 -14 2 18 -89 -184 -98 -365
  On-Budget -4 -4 -29 -36 -26 -14 2 17 -89 -185 -99 -368
  Off-Budget * * * * * * * 1 1 1 1 3
SOURCE: Congressional Budget Office.
NOTE: * = between $500 million and $500 million.
 
Box 1.
The Expiration of Revenue Provisions

The scheduled expiration of various revenue provisions has an important impact on the budget outlook for the next 10 years.1 Three items in last year's tax-cut legislation, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to end on or before December 31, 2006. The rest--which represent the bulk of the law's budgetary cost--expire on December 31, 2010. In addition, the economic stimulus law enacted in March 2002 established several new tax cuts for businesses that, in most cases, end over the next three years. Many other provisions of the tax code, enacted before EGTRRA, are scheduled to expire over the next decade.

By law, the Congressional Budget Office's (CBO's) baseline budget projections must assume that almost all of the expiring tax provisions end as scheduled. (The only exception is for expiring excise taxes dedicated to trust funds.) An alternative measure of the long-term budgetary effects of current policy could assume that all of those expirations do not occur as scheduled but rather that the provisions are immediately and permanently extended. Under those assumptions, the Joint Committee on Taxation (JCT) and CBO estimate that federal revenues would be $956 billion lower during the 2003-2012 period than projected in CBO's baseline (see the table).

Over half ($553 billion) of the estimated decline in revenues from extending all expiring tax provisions would result from extending EGTRRA. About three-quarters of that cost would occur in 2011 and 2012, immediately after most of the provisions of the law are scheduled to expire, although some effects would occur earlier. Extending the changes that the law made to estate and gift taxes could reduce revenues as early as 2003, because if taxpayers knew that those changes would become permanent in 2011, some might postpone making taxable gifts that they would otherwise have made over the decade.

A more limited alternative measure would assume that all expiring tax provisions were extended except the ones created by the economic stimulus law, which were not intended to be permanent. (Those provisions include allowing businesses to take an additional first-year depreciation deduction, expanding the ability of unprofitable firms to receive refunds of past taxes paid, and targeting tax benefits to the area of New York City damaged on September 11, 2001.) If all but those expiring provisions were extended, JCT and CBO project, federal revenues would be $693 billion lower during the 2003-2012 period.
                               
Effects on Revenues of Extending Expiring Tax Provisions (In billions of dollars)
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total,
2003-
2007		 Total,
2003-
2012
Provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001  
  Provisions expiring in 2010 -1 -1 -2 -2 -3 -3 -3 -4 -125 -228 -9 -371
  Provisions expiring before 2010a n.a. n.a. -3 -12 -18 -22 -27 -29 -33 -37 -33 -181
    Subtotal -1 -1 -5 -15 -20 -25 -29 -33 -157 -265 -43 -553
New Provisions in the Economic Stimulus Lawb -1 -6 -35 -43 -38 -34 -30 -28 -26 -25 -122 -264
Other Expiring Tax Provisionsc * -1 -5 -9 -14 -18 -20 -22 -25 -27 -29 -140
      Total Effect on Revenues -1 -8 -45 -67 -72 -77 -79 -83 -208 -317 -194 -956
Memorandum: Total Effect on Revenues Excluding the Economic Stimulus Law -1 -2 -10 -24 -34 -43 -49 -56 -182 -292 -72 -693
Sources: Congressional Budget Office; Joint Committee on Taxation.
Notes: n.a. = not applicable; * = between zero and $500 million.

These estimates assume that the expiring provisions are extended immediately rather than when they are about to expire. The provisions are assumed to be extended at the rates or levels existing at the time of expiration. In addition, the estimates include interactions between provisions, which are most significant in 2011 and 2012. The estimates do not include effects on debt-service costs.
a. Includes the increased exemption amount for the alternative minimum tax (expires in 2004), the deduction for qualified education expenses (expires in 2005), and the credit for individual retirement accounts and 401(k)-type plans (expires in 2006).
b. The Job Creation and Worker Assistance Act of 2002. New provisions in that law that are scheduled to expire include special depreciation-expensing allowances for certain property, a five-year carryback of net operating losses, and tax benefits for the area of New York City damaged in the September 11 terrorist attacks. These estimates do not include provisions in the law that had existed and been extended in previous years. The effects of extending those provisions yet again are included in the line for other expiring tax provisions.
c. Includes numerous provisions, such as the tax credit for research and experimentation.

1.  It can also be expected to affect the economy, but only some of those effects are reflected in the estimates presented here.