Congress seems determined to blow a once-in-a-generation opportunity. After a decade of fiscal paralysis, the surging economy is about to hand Washington billions of dollars it could use to tackle two looming and vital projects: a long-delayed tax-code overhaul and the reform of Social Security. Converting to new systems will be expensive--at least at first. So now's the time when Washington should bank any budget surplus to help pay for those dramatic reforms.
But alas, politicians on both sides of the aisle are working overtime to spend the dough on new programs and tax cuts. In a couple of weeks, the Congressional Budget Office is expected to estimate an impressive $65 billion surplus for fiscal 1998. Even that's not enough for Washington. Already, House Speaker Newt Gingrich (R-Ga.) has been putting heavy pressure on the CBO to come up with even larger surpluses.
Despite warnings from budget experts, most pols assume the bucks will be there, thanks to a huge influx of tax dollars. Of course, that includes payroll-tax revenues, which are supposed to be reserved in the Social Security Trust Fund. Exclude that, and the feds will end the fiscal year on Sept. 30 with roughly a balanced budget. Says ex-CBO director Robert D. Reischauer: "There really isn't a surplus."
BULGING COFFERS. Nonetheless, budget accounting, Capitol-style, is quite different. With visions of ribbons to cut and tax loopholes to open, lawmakers are spending the money even before it arrives (table). So far this year, Congress has enacted a $200 billion, six-year highway-and-mass-transit bill. Sure, the nation's roads and bridges need work. But Washington is boosting highway funding to the states by a staggering 20%. The states hardly need more cash: Their coffers are so bloated that they've cut taxes by $1.5 billion in the past six months.
That's nothing compared to what Washington still has in mind to give away. Republicans have resisted Clinton's efforts to spend an additional $65 billion over five years for education and health care. Not out of fiscal restraint, mind you. They prefer giving $12 billion over 10 years in tax credits to parents with kids in private schools. The GOP's reform of the Internal Revenue Service will cost a further $13 billion.
And Congress hasn't even written a tax bill yet. When it goes to work on that in September, the centerpiece will be marriage-penalty relief for two-earner couples. The 10-year price tag for this voter-friendly measure: up to $150 billion.
Why spend that much for one more Band-Aid on the existing tax code at a time when an overheated economy hardly needs stimulus? Marriage-penalty relief won't make the code less complex, or much fairer. And it won't encourage savings. Real tax reform that lowers rates and closes loopholes would. To do this in a politically palatable way, Congress will probably have to ease any transition by phasing out rather than killing popular tax breaks. And that will cost.
SLAB OF PORK. It's the same with Social Security. One popular idea is to let individuals divert nearly a quarter of their payroll taxes into personal savings accounts. But if Congress adopts such a system, it will have to make up for the lost revenues now used to support current retirees. Where will Congress get it? Conveniently, the shift to a new Social Security plan would cost about $65 billion a year for at least five years--close to the windfall Congress expects from the booming economy. "We could use the surplus to ease the transition," says former CBO Director Rudolph G. Penner.
It would be simple to reserve the short-term surpluses to finance these anticipated shifts. Failing that, Congress could pay down a bit of the $5.5 trillion national debt. That would ease pressure on Social Security in the decades to come by reducing interest costs. Other rates might fall as well, benefiting everyone.
Sure, it's election time. But polls show that voters are happy with the economy. And they're not clamoring for another nickel-and-dime tax cut or slab of hometown pork. They do want a better tax code and a secure Social Security system. This could be one of those rare years when sound policy is good politics.