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September 1, 2009

New Legislation: What Will it Cost?

New Legislation: What Will it Cost?

Taxes and the associated fees for the latest Great Ideas in Congress and the administration are certainly rising. Quickly.

The only things certain in life, as we all know, are death and taxes. There seems to be no possibility of raising the number of deaths we all face. But taxes? They and associated fees for the latest Great Ideas in Congress and the administration are certainly rising. Quickly.

Even before the new administration took the reins, those ideas included the $700 billion Troubled Asset Relief Program. Then came $787 billion in economic stimulus early this year, and a trillion dollar-plus health care proposal. Talk of billions has become talk of $9 trillion in the most recent 10-year federal budget estimates.

In an effort to keep score, Forward has toted up what seem to be the best estimates we can find about how much the historic public policy decisions of 2009 will cost us—$2.13 trillion by our calculation, over a 10-year period. Those with faint hearts, read no further, but keep in mind that most of these items haven’t yet passed Congress, which as we all know has a tendency to pile on when it comes to spending. Also keep in mind that no one really knows what any government program will really cost. Ever.

WHEN ESTIMATES CONFLICT

While proposed and approved legislation always carries a cost estimate from the nonpartisan Congressional Budget Office (CBO), estimates from other research entities vary widely, often flavored by partisan leanings.

The CBO estimates the Waxman-Markey “Cap-and- Trade” bill, for example (see chart), will cost households $175 per year in 2020. However, the Heritage Foundation, a Washington, D.C.-based conservative public policy research group, equates the cost to a $2,000 annual tax per household. Why the huge gap? First, CBO is looking at the 2020 economy in a 2010 economic context, says David Kreutzer, senior policy analyst in energy economics and climate change, Center for Data Analysis at The Heritage Foundation. “They’re talking about economic impact with a weaker economy than 2020,” says Kreutzer.

Additionally, the CBO “doesn’t look at the impact on national income,” he says. The Heritage Foundation anticipates the hit to the economy as a result of the legislation will be $161 billion versus the CBO’s estimate of $22 billion. Research and policy think tank The Brookings Institution estimates the cost will be even more.

WHEN ESTIMATES ARE HARD TO FIND

Everyone agrees that legislation will have associated costs. They just don’t know where to start the calculation.

For example, the proposed LIFO repeal is especially cost-murky. Last-in, first-out accounting repeal has a potentially huge impact on companies that use the accounting method. Actually calculating the impact is almost impossible because the number of companies that use LIFO is unknown, and the tax burden companies will face varies depending on how long a company has used LIFO. Estimates range from $61 billion to upwards of $100 billion.

“Nobody has a clue. It’s almost impossible to calculate,” says Jade West, senior vice president, government relations for the National Association of Wholesaler-Distributors in Washington, D.C. “Because publicly traded companies footnote LIFO, you can sometimes get at what their LIFO repeal cost is.” However, the number of private companies using LIFO is known only by the IRS, and estimates range from 20,000 companies to 25% to 30% of private companies, says West.

Individual circumstances also make a difference. In the case of LIFO repeal, the amount a company owes would be calculated based on its LIFO reserves. For some, a short time period may lead to a small uptick in taxes. For those that have used LIFO for decades, the burden would be much larger. West cites one National Association of Wholesaler-Distributors member that would owe $3 million based on a 30% tax rate—more than the net worth of that company.

WHAT WILL NEW TAXES MEAN?

The CBO estimates a cumulative 10-year deficit of $9.1 trillion under the president’s proposals.

“The bottom line with taxation in this country is that the Congress has approved a budget that is totally out of whack with recent history or with what economists believe is a stable, sustainable, long-run fiscal balance between spending and taxation,” says Martin Regalia, senior vice president for economic and tax policy and chief economist for the U.S. Chamber of Commerce. “Debt held by the American public accumulates to about 41% of GDP in 2008 to over 80% of GDP in 2019”—a level of debt that is unsustainable, Regalia says.

Those increases in public debt can exert downward pressure on the economy. “You try to raise rates to generate revenue, but you retard growth. It’s kind of like a dog chasing its tail—you never get anywhere,” says Regalia.