[Congressional Record Volume 144, Number 106 (Friday, July 31, 1998)]
[Senate]
[Pages S9596-S9599]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




        THE CONGRESSIONAL BUDGET OFFICE IMPROVEMENT ACT OF 1998

 Mr. ABRAHAM. Mr. President, I introduce legislation to improve 
the accuracy of Congressional Budget Office estimates.
  Congress places enormous demands on the professionals working in the 
CBO. Day after day, year after year these dedicated men and women are 
asked to provide estimates and projections on which legislators rely in 
carrying out their public responsibilities. Their hard work and 
professionalism are well known and they deserve our gratitude for the 
excellent job they do.
  However, Mr. President, CBO estimates and projections are only as 
good as the assumptions on which they are based. No matter how 
dedicated and hard-working they are, they are limited by the tools at 
their disposal. And recent experience shows that those tools require 
improvement.
  Mr. President, there was a great deal of surprise, both in this 
Chamber and across the country, when the CBO released its latest 
estimates regarding federal budget surpluses. In January of this year 
the CBO had projected a $5 billion deficit for 1998, with surpluses of 
$127 billion for the period 1998-2003 and $655 billion for the period 
1998-2008. But in its July budget update, the CBO projected a $63 
billion surplus for 1998, a $583 billion surplus for the period 1998-
2003, and a $1,611 billion surplus for the period 1998-2008.
  Those are massive discrepancies, Mr. President, and they have a 
significant impact on our ability to legislate. Coming so late in the 
session, these new estimates are not as helpful as they could have been 
in helping shape our fiscal policies. What they mean, in essence, is 
that Congress has been determining its budgets and appropriations with 
inaccurate revenue estimates.
  What is more, Mr. President, it does not appear that the accuracy of 
CBO projections will improve without Congressional action. Current CBO 
policy calls for basing estimates on the assumption that federal 
revenues will grow more slowly than Gross Domestic Product. This 
despite the long-standing trend of revenues outpacing GDP. Thus we can 
look forward to revenue estimates in the future that remain 
significantly lower than actual revenues.
  Without accurate revenue estimates, Mr. President, we cannot properly 
address tax reform and general fiscal policy. Indeed, without knowing 
the level of federal revenues with a significant degree of accuracy we 
cannot properly and responsibly budget for the federal government. We 
must establish a fair and accurate mechanism for estimating federal 
revenue.
  That is why I am introducing the CBO Improvement Act. This 
legislation is based on a bill introduced in the 102nd Congress by 
Representatives Newt Gingrich, Dick Armey and Robert Michel. It would 
provide CBO with the expert, hands-on oversight necessary to improve 
the accuracy of its estimates.
  To begin with, Mr. President, this legislation would establish a 
Congressional Budget Board to provide general oversight of CBO 
operations, oversee studies and publications that may be necessary in 
addition to those CBO is required by law to produce, and provide 
guidance to the CBO Director in the formulation and implementation of 
procedures and policies. This board would be made up of 6 members each 
from the Senate and the House of Representatives, half from each party.
  In addition to its oversight function, the Board will establish an 
Economic Advisory Council. This Council will evaluate CBO research for 
the Board. It will be composed of 12 members, each

[[Page S9597]]

prominent in the fields of public finance, economics of taxation and 
microeconomics and macroeconomics.
  Finally, Mr. Chairman, under this legislation any CBO report to 
Congress or the public that contains an estimate of the effect that 
legislation will have on revenues or expenditures shall be accompanied 
by a written statement fully disclosing the economic, technical, and 
behavioral assumptions that were made in producing the estimate. By 
making these assumptions public, we can provide an opportunity for 
outside experts, whether in business or academia, to evaluate them and 
offer suggestions for improvement.
  By establishing this kind of oversight and accountability, Mr. 
President, we can ensure that in the future the CBO will base its 
revenue estimates on assumptions that better reflect reality. No one is 
questioning the dedication or skill of CBO employees. But we must see 
to it that they are given the appropriate tools to carry out their jobs 
in the best manner possible. Only in this way can Congress fulfill its 
duty to pass legislation in keeping with economic reality as well as 
the best interests of the American people.
  I urge my colleagues to support this important legislation.
  Mr. President, I ask unanimous consent that two articles, one written 
by economist Bruce Bartlett and appearing in the July 6 Washington 
Times, the other a Congressional advisory dated July 22 from the 
Institute for Research on the Economics of Taxation, be printed in the 
Record.
  There being no objection, the articles were ordered to be printed in 
the Record, as follows:

               [From the Washington Times, July 6, 1998]

                      Revenue pitch low and inside

                          (By Bruce Bartlett)

       Many Republicans believe the main barrier to enactment of a 
     large tax cut this year is the Congressional Budget Office 
     (CBO), because it is low-balling its forecast of future 
     federal revenues. They think revenues next year will come in 
     substantially higher than CBO is predicting, allowing for a 
     significantly larger tax cut than Congress is currently 
     contemplating, without endangering the balanced budget. They 
     note that last year CBO underestimated federal revenues by 
     $72 billion and they suspect revenues may be underestimated 
     by a similar magnitude this year.
       On June 23, CBO Director June O'Neill responded to her 
     critics in a letter to House Speaker Newt Gingrich. She 
     argued that everyone, not just the CBO, underestimated 
     revenues last year.
       Mrs. O'Neill pointed out that CBO's deficit forecasts were 
     close to those made by the Office of Management and Budget 
     and private forecasters. In short, CBO did as well as 
     economic science allowed and should not be singled out for 
     blame when no one else did much better.
       This is a strong argument. Nevertheless, CBO's estimate of 
     future revenues does seem to be unusually conservative. As 
     the figure indicates, CBO is predicting that revenues will 
     grow more slowly than gross domestic product (GDP) over the 
     next decade. Generally, because our tax system is 
     progressive, revenues grow faster than GDP. Throughout the 
     postwar period revenues grew by 0.6 percent per year more 
     than GDP. In the last 10 years, revenues grew even faster--
     0.9 percent more than GDP. If CBO's GDP estimate is correct, 
     one would ordinarily expect between 5.2 percent and 5.5 
     percent growth in future revenues, rather than the 4.5 
     percent growth that is projected.
       Mrs. O'Neill does not give a satisfactory explanation for 
     why revenues are expected to grow so much more slowly than 
     they have grown historically. Her main point seems to be that 
     there is bound to be a recession some time in the next decade 
     and that this will cause revenue growth to slow. But the 
     impact of past recessions is already incorporated into the 
     historical data on growth of actual revenues. So it seems odd 
     for the CBO in effect to predict a future recession will have 
     an impact on revenues much greater than those in the past.
       No one is suggesting that the CBO is deliberately fudging 
     its numbers for some political purpose. However, Congress is 
     entitled to raise questions about the accuracy of the numbers 
     it must rely upon when making important decisions about 
     taxing and spending. The questions that have been raised 
     about CBO's revenue forecasts are legitimate and deserve a 
     better response than it has provided.
                                  ____


                      IRET Congressional Advisory

                        (By Michael A. Schuyler)


             are cbo budget projections still understated?

       Confronted with a torrent of tax dollars, the Congressional 
     Budget Office (CBO) has revised its surplus projections 
     upward several times in 1998. In January, the CBO had 
     projected a $5 billion deficit for 1998 but surpluses of $127 
     billion for 1998-2003 and $655 billion for 1998-2008. In 
     March, the CBO changed its 1998 forecast to an $8 billion 
     surplus but added only $11 billion to projected surpluses for 
     all subsequent years. In May, as tax revenues continued to 
     pour into Washington, the CBO upped its 1998 forecast to a 
     $43-$63 billion surplus, raised its 1999 forecast to a $30-
     $40 billion surplus, but said it expected the changes for 
     years beyond then to be ``smaller amounts.'' In its July 
     budget update, the CBO projects a $63 billion surplus for 
     1998, an $80 billion surplus for 1999, a $583 billion surplus 
     for 1998-2003, and a $1,611 billion surplus for 1998-2008. 
     These are enormous numbers, but they may still be too low.
       For several years, federal revenues have climbed 
     substantially more rapidly than nominal gross domestic 
     product (GDP). Between fiscal years 1995 and 1998, for 
     example, nominal GDP growth averaged a 5.3% annually while 
     revenue growth topped that by 3 percentage points yearly, 
     averaging 8.3% annually; for fiscal year 1998 alone, nominal 
     GDP is expected to increase 5.2% while revenues jump 8.7%. 
     The CBO's projections, however, assume that this pattern is 
     suddenly about to reverse itself. According to the CBO, 
     revenues will increase only slightly more rapidly than 
     nominal GDP in 1999, considerably more slowly than nominal 
     GDP in fiscal years 2000, 2001, 2002, and 2003, and generally 
     no faster than nominal GDP in subsequent years.
       If the CBO had projected that revenue growth would merely 
     match nominal GDP growth, the 1998-2003 surplus would be $167 
     billion greater than it currently projects and the 1998-2008 
     surplus would be $570 billion greater, boosting the 11-year 
     total to more than $2.1 trillion.
       The surpluses currently being projected indicate that 
     policymakers now have a major opportunity to reform the 
     troubled U.S. tax system in ways that would substantially 
     reduce both its inefficiencies and its complexity. If the 
     actual surpluses prove to be higher, the opportunity to make 
     positive tax changes would be even greater. Unfortunately, 
     unreasonably low CBO projections may deter policymakers from 
     acting on this opportunity.
       Another consideration for policymakers is that, except for 
     a brief period during World War II, federal revenues have 
     never commandeered a larger share of GDP than they are now 
     (20.5%). It is only by postulating that revenues will 
     suddenly grow more slowly than GDP that the CBO can project a 
     reduction in the revenue-GDP ratio without the need for a tax 
     cut. If the historical relationship holds and taxes are not 
     reduced, the government will be setting new records every 
     year in the share of people's productive output it is taking 
     away in taxes.
       Despite the CBO's projection, two lines of reasoning 
     suggest that, unless there is tax relief, revenues are likely 
     to continue growing faster than nominal GDP is attributable 
     to inflation, and inflation would push up taxes and nominal 
     GDP at equal rates even if the tax code were fully indexed 
     for inflation. In actuality, because many tax provisions lack 
     inflation protection (some examples are the alternative 
     minimum tax's exempt amount, the income threshold for taxing 
     social security benefits, the computation of capital gains, 
     and the corporate income tax's progressive rate schedule), 
     the government reaps an inflation dividend from taxpayers 
     (albeit a much smaller inflation dividend from taxpayers 
     (albeit a much smaller inflation dividend that before the 
     Reagan Administration introduced inflation indexing in the 
     1980s.) thus, to the extent nominal GDP increases because of 
     inflation, federal revenues would be expected to increase as 
     rapidly or more rapidly than nominal GDP.
       In addition, nominal GDP increases because of real growth 
     in the economy. Some real growth occurs simply because 
     population is increasing. Real growth from this source tends 
     to increase federal revenues at the same rate as GDP. Real 
     growth also occurs, though, because people are becoming more 
     productive over time, resulting in rising wages and 
     incomes. Because the tax system is progressive, real 
     growth per capita pushes people into higher tax brackets, 
     which causes the government to take a larger share of 
     their incomes. (Tax indexing does not cover real wage 
     growth. In fact, even if the CPI slightly overstated 
     inflation, tax indexing does not fully offset the combined 
     effects on real tax collections of productivity-related 
     wage hikes and inflation.) Thus, the portion of real 
     growth attributable to higher population will tend to 
     raise federal revenues in line with GDP increases and the 
     portion attributable to higher productivity will tend to 
     boost revenues relative to GDP. Either way, there is no 
     explanation for revenues growing more slowly than GDP.
       The Taxpayer Relief Act of 1997 (TRA-97) included some tax 
     reductions phased in over several years. Could the phased-in 
     tax cuts of TRA-97 explain why the CBO is projecting such 
     slow relative growth in federal revenues? No, even if TRA-
     97's changes are added back to revenues, the CBO is still 
     projecting that revenues will grow more slowly than nominal 
     GDP.
       Another possible explanation for revenues suddenly growing 
     more slowly than GDP would be a redistribution of GDP from 
     taxpayers subject to high tax rates to taxpayers subject to 
     low tax rates. Among those taxed at higher rates are 
     corporations, and the CBO does project that corporate profits 
     as a share of GDP will decline somewhat over the next five 
     years. But this does not explain the revenue slowdown. The 
     CBO's projection for revenue growth, excluding corporate 
     income

[[Page S9598]]

     taxes, is not quite as slow as the CBO's projected growth 
     rate for all revenues, but it still trails GDP growth for 
     several years starting in 2000 and then in later years grows 
     no more rapidly.
       Tax collections have been running much higher than the CBO 
     had previously forecast mainly in the area of personal income 
     not subject to withholding. Due to the government's slowness 
     in analyzing tax return data, the sources of that taxable 
     income are not yet known with certainty. Two often-mentioned 
     possibilities are non-corporate business income and capital 
     gains realizations. Business income has been strong and 
     capital gains realizations have been bolstered by lower tax 
     rates and a strong stock market. If business income and 
     capital gains realizations are the sources of the robust 
     revenue growth, there is no reason to expect them to 
     evaporate, barring undesirable policy changes such as higher 
     taxes, more government regulations, or higher inflation.
       The CBO argues, however, that because the sources of the 
     higher-than-it-expected taxable income are not yet entirely 
     clear, the income from those sources should be assumed to be 
     atypically high in 1998, and the CBO arbitrarily excludes 
     part of it in projecting future taxable income and tax 
     collections. This arbitrary exclusion is a key reason the 
     CBO projects that revenues will increase more slowly than 
     GDP for several years and then increase no more rapidly. 
     As explained, this result is peculiar because, unless 
     taxes are cut from time to time, revenues tend to increase 
     relative to GDP due to inflation and real growth.
       The uncertainty about the source of higher-than-anticipated 
     current revenues could be resolved very quickly if the 
     Internal Revenue Service immediately analyzed a sample of 
     recently received tax returns. With literally billions of 
     dollars of tax relief perhaps hanging in the balance, such a 
     sample should be examined at once.
       In the discussion thus far, it has been assumed that the 
     CBO's assumptions about GDP growth are accurate. In reality, 
     they may be too pessimistic--especially if pro-productivity 
     tax relief is enacted to invigorate the U.S. economy. The CBO 
     assumes that real GDP will grow less than 2.2% annually over 
     the next decade and that for most of the period the 
     unemployment rate will be more than a percentage point higher 
     than it is presently. The CBO is apparently still wedded to 
     the idea of the Phillips curve and cannot believe that 
     unemployment much under 6% can coexist for very long with low 
     inflation. If the CBO did not assume the economy would expand 
     so little in the future, its revenue projection would be much 
     higher (the size of the economy is one of the most powerful 
     determinants of tax revenues), leading to far larger 
     surpluses.
       The strong possibility that the CBO is still 
     underestimating budget surpluses underscores the desirability 
     of tax relief. As surpluses mount, there is less and less 
     reason to endure tax inefficiencies and complexities that 
     could be corrected through well designed relief.
       Changes that ease anti-production tax biases will tend to 
     strengthen the economy and sustain the economic expansion, 
     leading to further benefits for everyone, and recouping much 
     of the static revenue loss in the process. In contrast, if 
     tax relief is not forthcoming, the American people may be 
     condemned to paying a steadily mounting share of their 
     incomes and output to the government, weakening the economy 
     and income growth in the process. Further, while some claim 
     that Washington will use the projected surpluses to pay off 
     the federal debt, a more realistic appraisal is that 
     Washington will soon channel into increased government 
     spending whatever it does not relinquish through tax cuts, 
     notwithstanding the waste, inefficiency, and perverse 
     incentives of many government spending programs.
     Note: Nothing here is to be construed as necessarily 
     reflecting the views of IRET or as an attempt to aid or 
     hinder the passage of any bill before the Congress.
                                 ______
                                 
      By Mr. SESSIONS (for himself, Mr. Graham, Mr. McConnell, and Mr. 
        Coverdell):
  S. 2425. A bill to amend the Internal Revenue Code of 1986 to provide 
additional tax incentives for education; to the Committee on Finance.


          ``The Collegiate Learning and Student Savings Act''

  Mr. SESSIONS. Mr. President, I rise today to introduce ``The 
Collegiate Learning and Student Savings Act'' a common sense piece of 
legislation which will help more than 2.5 million students afford a 
college education.
  This legislation, cosponsored by Senators Bob Graham, Mitch McConnell 
and Paul Coverdell, will allow private colleges and universities to 
establish prepaid tuition plans and allow a family's investment in ALL 
state or private tuition savings and prepaid plans to be tax-free.
  Let me take a few minutes to discuss the concept of prepaid tuition 
plans and why they are critically important to America's families.
  As a parent who has put two children through college and who has 
another currently enrolled in college, I know first-hand that America's 
families are struggling to meet the rising costs of higher education. 
In fact, American families have already accrued more college debt in 
the 1990s than during the previous three decades combined. The reason 
is twofold: the federal government subsidizes student debt with 
interest rate breaks and penalizes educational savings by taxing the 
interest earned on that savings.
  In recent years, however, many families have tackled rising tuition 
costs by taking advantage of pre-paid college tuition plans. These 
plans allow families to purchase tuition credits years in advance. 
Thanks to innovative programs already established by 17 states, like my 
home state of Alabama, parents can actually lock in today's tuition 
rates for tomorrow's education.
  Congress has supported participating families by expanding the scope 
of the pre-paid tuition plans and by deferring the taxes on the 
interest earned until the student goes off to college.
  My legislation, modeled after the efforts of the House Ways and Means 
Chairman Bill Archer and Senator Coverdell's efforts on the ``A+ 
Education Accounts'' bill, will make earnings in state AND private 
education pre-paid plans completely tax-free.
  Currently, most of the interest earned by families saving for college 
is taxed twice. Families are taxed on the income they earn and then 
again on the interest they earn through savings. On the other hand, the 
federal government subsidizes student loans by deferring interest 
payments until graduation. It is no wonder that families are struggling 
to save for college and instead are going heavily into debt. This trend 
must not continue.
  In order to provide families a new alternative, ``The Collegiate 
Learning and Student Savings Act'' will provide tax-free treatment to 
all pre-paid plans for public and private colleges and universities. 
This would place all savings plans and all schools on an equal playing 
field.
  This bipartisan piece of legislation would not only provide American 
families with more than $1 billion dollars in much-needed tax relief 
over the next decade, but would also help control the cost of college 
for all students. In fact, the track record of existing state pre-paid 
plans indicates that working, middle-income families, not the rich, 
benefit the most from pre-paid plans.
  Mr. President, It is erroneous to assume that tuition savings and 
prepaid plans benefit mainly the wealthy. In fact, the experience of 
existing state plans indicates that working, middle-income families 
benefit most. For example, families with an annual income of less than 
$35,000 purchased 62 percent of the prepaid tuition contracts sold by 
Pennsylvania in 1996. The average monthly contribution to a family's 
college savings account during 1995 in Kentucky was $43.
  Prepaid tuition plans must become law. The federal government can no 
longer subsidize student debt with interest rate breaks and penalize 
educational savings by taxing the interest earned by families who are 
trying to save for college. Both public and private prepaid tuition 
plans should be held equal by the federal government and must be 
completely tax free. If these goals are achieved, the federal 
government would be providing families the help they need to meet the 
cost of college through savings rather than through debt.
  Mr. President, American families accumulated more college debt during 
the first five years of the 1990s than in the previous three decades 
combined. Recognizing that this trend cannot continue, several states 
have established tuition savings and prepaid tuition plans. Now, a 
nationwide consortium of more than 50 private schools, with more than 1 
million alumni, has launched a similar plan for private institutions. 
These plans are extremely popular with parents, students, and alumni. 
They make it easier for families to save for college, and the prepaid 
tuition plans also take the uncertainty out of the future cost of 
college.
  ``The Collegiate Learning and Student Savings Act'' eliminates the 
double taxation that exists on interest earned through the programs and 
ends the disparity that currently exists between public and private 
colleges.
  Mr. President, I would like to thank the cosponsors of ``The 
Collegiate Learning and Student Savings Act'', Senators Graham, 
McConnell and

[[Page S9599]]

Coverdell, for their assistance and dedication to this issue.

                          ____________________