As President Obama lays out his priorities in his budget and his first State of the Union address, our researchers look ahead to the nation’s most pressing needs over the next 10 years.
We asked our Urban Institute experts: based on Urban Institute research, what should policymakers tackle over the next decade?
Three Priorities for the New Decade
Gene Steuerle, Institute Fellow
The early 21st century faces fiscal changes as large and important as those faced at the end of the 18th and 19th centuries—when we had to make fundamental institutional changes to meet the needs of the time. Today, public finance confronts three major dilemmas. First, we must end the battle between the major political parties over determining how all future revenues will be spent—before that future has arrived. We must jettison revenue reductions not covered by spending cuts and the automatic growth portion of expenditure programs designed to grow forever, sometimes even faster than revenues. For the first time in our nation's history, in 2009 all revenues were committed to mandatory programs—programs adopted in the past, with eternal life spans, and with no need for any congressional action to continue operating. If we stay on this path, soon all of Congress's discretionary actions will have to be paid for by borrowing.
Second, we must simplify and streamline a bureaucracy where programs conflict and confuse, tax rates compound, and navigation can take a lifetime to master. Programs with little evidence that they are solving problems must either be jettisoned or allowed to wane. Third, we must figure out how to prevent too large a share of benefits of well-intentioned programs from accruing to providers—witness the cost growth in health care, the administrative costs of managing tax breaks for saving, and hundreds of other examples.
Although hard, these reforms require fundamental institutional change, not just legislative tweaking. Even so, they lay at the heart of public finance reform at the beginning of the 21st century.
Stimulate Job Growth and Develop Workforce Skill
Harry Holzer, Institute Fellow
Over the next few years, the federal government should focus on two distinct but interrelated policy goals regarding the job market. With unemployment in double digits overall and as high as 40 percent for some disadvantaged groups (like black teens) and with low levels of education and earnings plaguing many groups even in good times, we need to do more to stimulate job growth and help our workforce develop needed job skills. Short-term options for the next two to three years include aid to states and localities, additional spending on infrastructure, a carefully targeted tax credit for net new job creation at firms (above some base level we think would occur anyway), and direct public service employment for disadvantaged workers.
Over the longer term, we need to invest more in and improve the effectiveness of our workforce development system for adults (especially when Congress reauthorizes the Workforce Investment Act). Also, we need to expand high-quality career and technical education options (like Career Academies) for disadvantaged youth and experiment with and evaluate new efforts to reduce their high school dropout rates.
Strengthen the Safety Net
Sheila Zedlewski, Center Director
The federal government will need to strengthen the safety net over the next few years to offset increased poverty's ravages. The poverty rate went up from 12.5 percent in 2007 to 13.2 percent in 2008, and continued increases in unemployment will boost poverty rates in 2009 and beyond. History shows that poverty will not yield until job growth is robust. Meanwhile, more families will exhaust unemployment insurance benefits and turn to the safety net for support.
Congress must shore up the Temporary Assistance for Needy Families (TANF) program during the act's reauthorization in 2010. The fixed TANF block grant has declined significantly in real value because it isn't adjusted for inflation. And state policies concentrated on reducing welfare caseloads discourage enrollment, meaning that this source of cash support is no longer available for many families. Now the federal government must fortify state efforts to modernize the Supplemental Nutrition Assistance Program to reach more poor families.
Finally, the federal government should take a fresh look at the Supplemental Income Program, the source of cash assistance for poor disabled individuals, and assess whether it's reaching the most vulnerable families. Ultimately, only good jobs can reduce poverty so approaches to shore up the safety net must also incorporate innovative strategies to get people back to work.
Transform our Long-Term Care System
Howard Gleckman, Resident Fellow
The next decade will offer a critical opportunity to transform the long-term care of the frail elderly and disabled adults from a largely welfare-based scheme to an insurance system. Today, more than 43 percent of long-term care costs are paid by Medicaid. But this system costs more than $100 billion a year, impoverishes millions of middle-class families, and puts enormous financial pressure on federal and state governments. Without dramatic change, by mid-century the federal government will be spending 16 percent of all expected tax dollars on Medicaid—nearly all of it on the elderly and disabled. A national long-term care insurance program would allow people to save for their own future needs and design the care they want, and would reduce fiscal burdens on government.
The CLASS Act, included in health reform, would create a voluntary long-term care insurance system. But it is only a modest first step. Ideally, by 2020 the United States will adopt a self-funded, universal long-term care insurance program that would not only serve those who need care and their families but also would become a model for future entitlement reform.
Expand the Earned Income Tax Credit for 'Childless' Individuals
Elaine Maag, Research Associate
Multiple studies confirm that the Earned Income Tax Credit (EITC) encourages parents—particularly single parents—to work. The same incentive might also apply to childless individuals and couples, but the current EITC provides them almost no benefit—no more than $457 per year, less than a tenth of the more than $5,000 families with children might get. And even that small benefit disappears entirely when childless workers earn more than $13,460 ($18,470 if married); that's less than a third of what families with children can earn and still benefit.
Increasing the credit percentage for childless workers from its current 7.65 percent to 34 percent and boosting the maximum credit to $3,050 (in line with the EITC available for one-child families) would extend the EITC to an additional 18 million workers. After-tax income for all beneficiaries would increase by an average of $1,802 at a cost to the federal government of about $43 billion a year. Making the credit's assistance for childless people more equivalent to what's available for families with children would expand the work incentive and provide needed resources to struggling low-income workers.
Invest in Older Workers
Richard W. Johnson, Senior Fellow
As aging baby boomers transform the workplace, our labor and employment policies are not keeping pace. The 29 million workers age 55 and older make up nearly a fifth of the workforce—a record high. Not only is the number of older Americans soaring, but many are working longer. Over the past decade and a half, labor force participation rates at age 62 to 74 have increased by 39 percent for men and 66 percent for women as work incentives have increased, health has improved, and concerns about retirement costs have intensified.
The number of workers age 55 and older will likely grow by a third over the coming decade. We're not ready for this rapid graying of the workforce. We need better accommodations for workers with disabilities, more flexible work arrangements—such as part-time employment, variable work schedules, and telecommuting—and better opportunities for occupational downshifting, so older workers can move from high-stress managerial jobs to less demanding positions as their working lives wind down. And we need better training opportunities for older workers. Beyond that, it's important to root out the Biases that many older workers still face.
Repeal the AMT
Roberton Williams, Senior Fellow
Congress enacted a minimum tax in 1969 after the Treasury secretary reported that 155 individuals with income over $200,000 had paid no income tax in 1966 because of favorable tax rules. The next year 20,000 taxpayers paid $100 million in minimum tax. After four decades of subsequent congressional tinkering—and recently, annual "patches"—about 4 million people now pay the alternative minimum tax (AMT) totaling more than $30 billion each year. That's not because they would otherwise have paid no tax but, rather, because they benefit from fairly common deductions, exemptions, and credits. And the number of affected taxpayers will soar to more than 27 million paying more than $100 billion this year if Congress does not once again patch the AMT.
Rather than repeatedly patching a tax that fails to serve its intended purpose, Congress should repeal the AMT and change the regular income tax to replace the lost revenue and to impose desired tax burdens across different taxpayers. Perhaps that will come when Congress addresses the impending expiration of the 2001 and 2003 tax cuts at the end of this year or maybe it will be part of a broader tax reform. What we do know is that the AMT hits taxpayers it never intended to target and yet fails to ensure that all high-income people pay some income tax.
Encourage Retirement Saving
Eric Toder, Institute Fellow
In the past quarter century, private pension coverage has shifted from defined benefit (DB) plans that pay a guaranteed annuity in retirement to defined contribution (DC) plans that let workers accrue wealth in their own accounts. As a result, workers must take more responsibility for their own retirement. But many firms offer neither plan and many workers in firms with a DC plan don't join or save little. Social Security benefits replace most wages of low-income retirees but don't allow middle-income retirees to maintain their former living standards.
Research points to two approaches that may stimulate new retirement saving. One is to provide refundable tax credits to low-income workers, who don't benefit from current tax exemptions and who save little in other accounts. Another is to require employers to enroll workers automatically in retirement saving plans. Workers are free to opt out of the plans, but research shows that DC plan participation increases when workers don't have to apply to join.
Repair the Disability Safety Net
Richard W. Johnson, Senior Fellow
Repairing the disability safety net, now in tatters, is a pressing priority. We spend more than $200 billion a year on a patchwork of programs—Social Security Disability Insurance (DI), workers' compensation, Supplemental Security Income (SSI), and veterans' benefits—that provide income supports to more than 15 million Americans who can't work. Yet, poverty rates more than double after disability onset for people in their 50s and early 60s because many get no benefits or get inadequate payments.
Without reforms, unmet need will increase this decade as millions of baby boomers reach their late 50s and early 60s, when work disability rates peak. A quarter of workers develop work-limiting health problems by age 62, when early Social Security retirement benefits become available. We must make sure that benefit award decisions take functional abilities into account and set minimum benefits for DI and SSI to keep beneficiaries out of poverty. We must also shorten this vulnerable group's two-year waiting period for Medicare. These steps would increase program costs, but targeting disability benefits to those unable to work at all will limit budgetary pressures without undermining work effort.
Stabilize the Estate Tax
Roberton Williams, Senior Fellow
Individuals and their financial advisors have struggled to design sensible estate plans over the past decade as the estate tax has changed almost every year. The 2001 tax act gradually raised the estate tax exemption to $3.5 million and lowered the tax rate to 45 percent in 2009, when an estimated 5,500 estates—representing less than one-quarter of one percent of all deaths—owed nearly $14 billion in estate tax. The levy disappears entirely for 2010 but, absent Congressional action, will return in 2011 in its 2001 form—a $1 million exemption and 55-percent top tax rate—and collect a projected $34 billion from 44,200 estates.
In December, the House passed a permanent extension of the tax at the 2009 level—a $3.5 million exemption and a 45 percent rate—but the Senate failed to act in time to stop the 2010 tax hiatus. Senate Finance Committee Chairman Baucus has promised to reimpose the tax retroactively to January 1, but Congress will also consider additional options, including making the 2009 tax permanent with indexation for inflation or raising the exemption to $5 million and dropping the tax rate to 35 percent.
Most important to taxpayers is a stable tax that makes sensible estate planning possible. And, given our growing national debt, we need the revenue the tax collects. Stay tuned to see what happens.
Manage the Influx of Information
Harry Hatry, Senior Fellow
As policymakers work to set and realize their priorities over the next decade, they will be besieged with an ever-increasing amount of input from tweets, from blogs, from emails, from written letters, from written reports and studies, and from who knows what other sources. Data will pour in many formats, in multiple colors, and possibly in three dimensions. On major issues, and even minor ones, viewpoints and data will come in from countless organizations and individuals wanting to have their say. The challenge for policymakers will be how to handle and process all this input without becoming overwhelmed. This new information age will truly test the ability of policymakers to absorb and screen through all this information, stay relatively sane, and make good decisions.
Trim Tax Expenditures and Introduce a VAT
Eric Toder, Institute Fellow
Federal deficits will rise sharply in the latter years of the current decade and beyond as the baby boomers retire. If we cannot cut entitlement spending enough, we may need to call on our tax system for more revenue. But special preferences riddle our current individual and corporate income taxes, and raising rates will only increase the economic costs these loopholes impose. Tax preferences are a form of backdoor spending that provides benefits to selected taxpayers or activities. In 2012, these "tax expenditures" will total $1.1 trillion, about 70 percent more than all domestic discretionary spending. The home mortgage interest deduction alone will cost $131 billion in 2012, while doing little to increase homeownership. Paring back tax expenditures that are not cost-effective or no longer serve a useful purpose should be a first step in budget control on the revenue side.
If the budget saving from controlling entitlements and paring back tax expenditures can't close our budget deficit, we could turn to a value added tax (VAT) to supplement the income tax. A 5-percent VAT on all consumption except education, charitable activities, and public services would raise about $260 billion in 2012 (1.7 percent of GDP) and help close the budget gap. All our major trading partners have a VAT and it works without dampening saving or corporate investment.
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