CBO Assumptions Tell Us More Than CBO Deficit Projections

Congressional Budget Office budget projections for anything other than the current fiscal year seem almost worthless, since they are based on current laws rather than likely future circumstances.

To illustrate, look at the January 2010 budget projections.

The deficit for fiscal year 2010 was projected to be $1.3 trillion—pretty close to the actual figure for that year.

As shown in the interactive graph at the beginning of the January 2010 report, the federal budget deficit for fiscal year 2011 was projected to be $980 billion.

Now turn to the January 2011 projection, which projects a federal budget deficit of $1.5 trillion for fiscal year 2011.

What a difference a year makes, huh?

The difference largely results from the requirement that the CBO assume current law stays in effect during the future fiscal year, but the law doesn’t.

Here’s part of the explanation in the most recent CBO report:

CBO's baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. Consequently, they incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:
---Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;
---Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
---Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and
---Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

The assumptions illustrate what hard choices are ahead. That makes them more useful than the projected deficit figures based on them.

Port district levy authority increase is pending in the legislature

Port districts in Washington could levy much more for “industrial development district” (IDD) levies, if either House Bill 1308 or its companion bill, Senate Bill 5222, is enacted.

The first committee hearing is scheduled for Monday, Jan. 24, 2011, in the House Committee on Community Development & Housing.

Section 1 of the bill sets a new limit on the aggregate tax revenue that can be collected during the term of the IDD levy, and makes the allowable duration 20 years in each of two periods rather than the current 6 years in each of the two periods. (Port districts in counties bordering the Pacific Ocean can impose the IDD levy in a third period.)

Section 2 of the bill removes the limit on annual levy increases stated in RCW 84.55.010.

The aggregate limit that could be collected over the entire 20 year period is so large as to be meaningless as a limit on taxation. It is an amount of dollars equal to $2.70 multiplied by the total assessed value of all taxable property in the port district in the year prior to the first year’s IDD levy (the “base year”).

This isn’t the dollars per $1000 of assessed value that people are familiar with when tax rates are stated. It is $2.70 times the total valuation, not times each $1000 of valuation.

The resulting aggregate amount is so large that it could not in any probable circumstances be collected over a 20 year period without exceeding the maximum allowable tax rate of 45 cents per $1000 of assessed value.

So, the effect is to make the maximum tax rate of 45 cents per $1000 of assessed value the only limit on annual increases in IDD levies.

The tax rate could remain at the same 45 cents per $1000 each year no matter what change occurs in total assessed valuation.

If total valuation rises by 10 percent in one year, so could the tax imposed by this IDD levy.

To show how this bill would affect property taxes imposed by port districts, imagine that the Port of Bremerton could have done as this bill allows when it imposed its IDD levy.

The “base year” would have been 2006, when the total valuation was $7,829,291,586.

Multiplying $2.70 by the base year’s total assessed value gives a limit on the aggregate tax to be collected over a period up to 20 years—and that limit would be $21,139,087,282. That’s more than $21 billion with a “b.”

In the first year of the Bremerton Port District IDD levy (2007), the tax rate was the maximum 45 cents per $1000, and the levy amount was $4,336,635.

The allowable amount in the first year would have been the same even if HB 1308 or SB 5222 had already been enacted.

The effect of the bill shows up in later years.

In 2008, assessed values rose more than one percent, so the actual tax rate went down because of the limit on annual increases stated in RCW 84.55.010. Total assessed value was $11,152,989,919; the tax rate was $0.406517 per $1000 of assessed value; and the levy amount was $4,533,885.

Under current law, the limit on annual increases is usually described as one percent plus new construction; and this limit allowed the Bremerton Port District IDD levy to rise in 2008 by $197,250, or 4.55 percent. (There was a lot of new construction added to the tax rolls, since the “bubble” had not yet burst when the assessed values were set for taxes payable in 2008.)

Under the bill now pending in the legislature, the tax rate could have stayed at 45 cents per $1000, which would have resulted in a levy amount of $5,018,845—for an increase of $682,210 or 15.7 percent.

When the bubble burst and assessed values declined (and new construction activity almost stopped), the tax rate went up in 2009 and 2010. In 2010, the rate hit the maximum allowed 45 cents per $1000.

Under the bill, the declining values would have caused the IDD levy to decrease by less than one percent in 2009 rather than the 2.32 percent increase that actually occurred. The rising tax rate in the real world allowed the levy amount to rise, but the tax rate in the imaginary world in which the bill has already become law causes the levy amount to go down slightly. The rate is already at its maximum in this imaginary world, so the decline in total valuation causes a decline in the levy amount.

In 2010, the actual levy amount was lower by 1.35 percent from 2009; and the imaginary levy would have been down by 8 percent because of the continued decline in total assessed value.

In 2011, the actual levy and the imaginary levy experience the same 3.88 percent decline because of further declines in total assessed values.

So during a once-in-a-generation period of declining property values, the bill would have caused the IDD levy amount to go down each year just as fast as values decline—after first having shot up by more than 15 percent when assessed values were still rising.

Over the 5 years in which the Bremerton Port District IDD levy has existed so far, the total actually levied through 2011 is $22,485,384.

If the bill were already in effect, the total would have been $23,306,927.

The big increase allowed by the meaningless limit in the bill caused the imaginary levy to collect more in this 5 year period despite the bigger declines in the imaginary levy amount as property values dropped.

When the tax rate can remain the same each year—as it could under this bill—the property tax levied by the port districts for their IDD levies will go up each year as much as total values rise, or down each year as much as total values decline.

The current “one percent plus new construction” limit on annual increases in the IDD levy amount would no longer be in effect.

Port districts could levy much higher taxes through their IDD levies compared to current law.

Update 7:45 pm, Jan. 21: The Washington Public Ports Association apparently is the group requesting this increase in port district property tax authority. In the association's weekly legislative report for today is this paragraph:

Ports IDD Levy Flexibility: The WPPA proposal to provide more flexibility in how IDD levies are structured was introduced in both the House and Senate this week. The House Bill, HB 1308 is scheduled for public hearing on Monday, January 24 at 1:30 p.m. in the House Community Development Committee. Senate Bill 5222 is tentatively set to receive a public hearing on Wednesday, January 26 at 8:00 a.m. in the Senate Economic Development, Trade and Innovation Committee.

"Flexibility" may be the new euphemism for "authority to impose higher taxes."

Update 8:05 pm, Jan. 21: The WPPA describes this bill in its legislative agenda without saying that it is an increase in levy authority:

With state funding difficult to come by, ports must better utilize current funding mechanisms in order to build necessary infrastructure. Providing additional flexibility to current IDD levy financing tools will provide more opportunities for ports to fund infrastructure projects themselves. WPPA will work for passage of legislation that will allow ports to use smaller portions of their IDD levy capacity on specific projects over extended periods of time without forfeiting their remaining capacity, while maintaining the current level of taxing authority.

The bill clearly does more than "maintaining the current level of taxing authority." Being able to levy an amount that can be collected each year for 20 years at 45 cents per $1000 is clearly greater taxing authority than port districts now have.

Have they fooled themselves into believing what they say? Notice that the current law allows the first year of a 6 year IDD levy to start with the amount that can be collected by a tax rate of 45 cents per $1000. Multiply $0.45 by 6, and the result is $2.70, which is the figure used in the bill to arrive at the aggregate limit on the amount collected in 20 years. Do they not realize that multiplying $2.70 by the total assessed valuation results in a total tax that is 270 percent of the total assessed valuation?