The Last Obama Budget

WSJ, Dec 16, 2015

The last budget debate of the Obama era will go out in a blaze of ennui on Friday, and good riddance. This $1.1 trillion spending omnibus and “tax extenders” twofer adheres to the outlines of Congress’s October deal, and the small salvation is that there are at least a few notable departures from bad business as usual.

The biggest policy breakthrough is the end of the 1970s-era federal ban on U.S. crude oil exports amid the global oil price bust. Allowing the U.S. industry to sell into the world market is a lifeline that will mitigate the domestic glut, and it may save numerous companies and thousands of jobs from bankruptcy.

WSJ Obama Budget

Congress wouldn’t lift the ban when gasoline prices are high, and carbon-obsessed Democrats will be ever more hostile to fossil fuels over time, so the political moment is ripe.

There might have been more such free-market victories, but Republicans were divided about priorities. National-security hawks wanted to break the sequester budget caps to supply more money for the Pentagon and some fiscal conservatives won’t vote for any omnibus—ever. This disunity handed leverage to Nancy Pelosi and Harry Reid, and the GOP had to make concessions on discretionary spending and policy “riders” to secure Democratic votes to fund the government.

This also means that the unfortunate price for allowing oil exports is a feeding frenzy for the green-energy lobby. The wind and solar tax credits that were due to expire are extended for another two and three years, respectively, and they may last until 2020 and 2022 thanks to the gimmick of fake “phase outs.” These supposedly infant industries are now entering late middle age.

Congress is also finishing the annual extravaganza to “extend” some 52 tax subsidies that are temporary on paper, like the credit for research and development. For a dispiriting tour through the moors of the U.S. tax code, browse the Ways and Means Committee’s section-by-section summary: You’ll find tax preferences for plug-in motorcycles, real-estate investment trusts, timber concerns, workers on Indian reservations, rum from the Virgin Islands and more.

The change this year is that Congress is making 19 of the tax subsidies permanent. The biggest is the “must pass” R&D credit that has permitted so much lousy policy to sneak through on its back. In return for this greater tax certainty for business, Republicans had to make permanent such liberal priorities as enhanced tax credits for children, earned-income and college tuition.

WSJ Paul Ryan

The less obvious agenda at work here is that adding these credits to the permanent budget is House Speaker Paul Ryan’s wager on tax reform. Under Congress’s bizarre budget rules, reducing the tax base now will make it easier for Congress to cut tax rates more deeply if the next President wants to reform the tax code in 2017. About $560 billion in “extenders” that expire on paper will be baked into the budget baseline and so won’t require offsetting “pay-fors” to finance lower tax rates. Mr. Ryan is thinking ahead.

Republicans also made gains against ObamaCare. Crucially, they preserved the explicit legal language preventing a risk-corridor bailout of money-losing insurers on the Affordable Care Act exchanges. The medical device tax will be suspended for two years, and the insurance industry tax for a year, while the so-called Cadillac tax on high-cost health plans will start in 2020 instead of 2018.

Support for these delays was bipartisan, not least because organized labor loathes the Cadillac tax because it will shrink its collectively bargained health benefits. Despite the delay, this destructive tax will continue as a bargaining chip that Republicans can use for some post-ObamaCare reform. We’ll have more to say on this in the coming days, though this the first time hard-boiled Democrats have permitted any large-scale revisions to the health law. Perhaps some of them are starting to recognize its design flaws, or at least its political liability.

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This kind of ugly Beltway compromise won’t make anyone feel better about Washington, but the hopeful way to think about the omnibus and the tax bill is as a reset for the next President and Congress. There’s much hard work ahead to undo the economic damage of the Obama years: In particular, Democrats refused to allow language that would have blocked costly rules on waterways, investment fiduciaries, joint employers or power plants.

One lesson is that Republicans will achieve more against even a Democratic President if they are unified. This is how postwar progressives like Henry Waxman and John Dingell added to the regulatory and entitlement state even during the Reagan Administration. Year after year they presented a united front behind modest policy changes that added up over time.

The other lesson is not to squander the historic opportunity that Republicans have to retake the White House in 2016 along with control of Congress. Lifting the oil-export ban is a hint of what is possible with the right GOP nominee.

 

 

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