Democrats have plans, but they’ll need to pay

After being out of power for 12 years, Democrats will take control of Congress next month with a wish list of new programs, including more money for college student aid, the No Child Left Behind schools initiative and Medicare prescription drug benefits -- plus tax relief for middle-income Americans.

But there’s a hitch: The Democrats also have promised to restore fiscal responsibility and not increase the federal deficit.

“The debt is spiraling out of control,” Sen. Kent Conrad (D-N.D.), incoming chairman of the Senate Budget Committee, said last month. “The needs and wants are limitless, but our power to meet them is highly limited.”

Democrats’ expansive vision of the government’s role in American life is on a collision course with budget deficits that are already running about $250 billion a year. The Concord Coalition, a lobby for fiscal responsibility, warns that the deficit could reach $800 billion in 10 years if Congress enacts all the programs its members are talking about.

In the education budget, for example, some leading Democrats have discussed cutting the interest rate on federally subsidized student loans in half -- boosting the federal interest subsidy by an estimated $18 billion over five years -- plus increasing Pell Grants for college students by 25% and raising funding for the No Child Left Behind program by as much as $16 billion.

Among all the spending initiatives being discussed on Capitol Hill, perhaps none would cost so much so soon as closing the “doughnut hole” in the new Medicare prescription drug program. This refers to the fact that after beneficiaries buy $2,250 worth of drugs a year with federal help, they get no more subsidy until they have spent another $2,850 out of their own pockets. Having the federal government pick up those expenses would cost the Treasury an estimated $50 billion a year for the first 10 years.

Lawmakers of both parties want to provide relief to the growing number of middle-income taxpayers subject to the alternative minimum tax, designed in the 1960s to prevent the wealthiest taxpayers from paying next to no income taxes. Raising the income thresholds for the alternative tax would exempt more middle-income taxpayers, but could also cost the Treasury an estimated $40 billion to $80 billion a year over the next 10 years.

“The question is, which will win out -- the people with political agendas or those with budget discipline,” said Robert Bixby, the Concord Coalition’s executive director. “In my experience, fiscal discipline usually comes out second.

“What is different this year,” he added, “is that the Democrats made a big deal out of budget discipline. They’ll look pretty silly if they abandon it.”

Here are some of the options Congress has:

Pay-as-you-go

The foremost money-saver proposed by Rep. Nancy Pelosi of San Francisco, the next Speaker of the House, is a “pay-as-you-go” rule requiring that any legislation to cut taxes or increase spending include offsets that would keep the deficit from growing. “Offsets” is a neutral way of saying tax increases or spending cuts. A form of paygo, as pay-as-you-go is known, was the law from 1990 through 2002. Every year the White House toted up the impact of legislation on the deficit; if the effect had been to make the deficit larger, compensating across-the-board spending cuts would have been ordered.

The drawback: The problem with paygo is that it is easily circumvented, which is exactly what has happened in the past. In the last three years of the Clinton administration -- an era of budget surpluses -- appropriations bills that would have violated paygo carried provisions exempting them. In 2001, when the first round of President Bush’s tax cuts would have required huge spending cuts, Congress again waived paygo’s strictures.

Put a cap on spending

Congress could also impose caps on spending for programs over which it exercises year-to-year control. The Senate used spending caps in concert with paygo until it expired in 2002. The cap was usually a single dollar amount that limited all “discretionary” spending in annual appropriations bills for a host of programs, including abandoned mine reclamation and the Yucca Mountain nuclear waste repository.

Democratic leaders have not decided whether to support such caps, but the moderate-to-conservative Blue Dog Democrats, who hold the balance of power in the House, are in favor of them.

The drawback: Spending caps don’t apply to giant benefit programs such as Social Security and Medicare, and so they cover only about one-third of all federal spending, limiting their impact on the overall budget. Under spending caps, Congress would have to focus its “discipline” on the non-defense, discretionary portion of the budget.

While non-defense discretionary spending has risen by only about 4% a year during the Bush presidency after adjustment for inflation, defense spending has increased by about 10% a year. Outlays for Social Security and Medicare have grown by more than 5% a year and are on course to grow much faster as the baby boom generation reaches retirement age.

Collect taxes owed

One revenue-raising scheme that enjoys bipartisan support is closing the “tax gap” -- the taxes that Americans owe but don’t pay on time, if at all. The IRS estimated this year that the tax gap in 2001 -- even after late payments, many resulting from IRS audits -- was a breathtaking $290 billion, more than the entire federal deficit.

“Closing the tax gap has got to be one of our top priorities,” said Conrad, who plans to hold hearings on how to narrow the budget deficit.

The drawback: Collecting overdue taxes may be easier said than done. For one, some of that money is owed by people who have no resources to pay it.

And a large share -- nearly half -- represents taxes owed on business income, which is difficult for the IRS to identify, much less collect. That’s because, unlike wage income, which is reported to the IRS by the taxpayer’s employer, the government gets no independent confirmation of much business income.

Raise taxes

The more direct way to pay for new programs is simply to raise tax rates or end tax breaks.

Pelosi’s agenda includes scaling back the federal subsidies and tax breaks enjoyed by the big oil companies at a time when the sector’s profits quadrupled between 2002 and 2005. And she would correct an Interior Department oversight in the late 1990s that allows the oil companies to drill for oil offshore without paying royalties to the government no matter how high the price of oil rises.

At the top of Sen. Edward M. Kennedy’s (D-Mass.) list are millionaires, who he says have benefited disproportionately from the Bush tax cuts. When asked by reporters how he would pay for his wish list of social programs, he said he would leave the middle class alone but could support a millionaires’ tax.

The drawback: Any proposed tax increase is both an economic and political risk. Republicans -- and some Democrats -- can be expected to resist mightily; the Bush administration argues that any tax hike would jeopardize the economic growth that began when the 2001 recession ended. More than that, raising taxes could alienate voters.

Save on Medicare drugs

Democrats have called for changes in Medicare that would allow it to negotiate lower prices with the manufacturers of the prescription drugs subsidized by Medicare’s new drug program. Kennedy said Medicare could save $140 billion over 10 years if it negotiated drug prices the way the Veterans Affairs Department does.

The drawback: Some question whether that much savings could be carved out of Medicare drug purchases. The Bush administration notes that the insurance companies that operate the drug program already negotiate low prices with the drug makers.

And the comparison with the VA may not apply because Medicare offers a much greater choice of drugs than the VA does, forcing its costs higher.

joel.havemann@latimes.com