Should the disconnect under the Budget Enforcement Act between taxes that are earmarked for investment and the investment spending be repaired as a way to increase funding for investment?

Discussion

Certain investment programs -- primarily highways and airports -- are funded by earmarked taxes. Taxes and fees have been increased by legislation, to support higher levels of investment. However, the Budget Enforcement Act has broken the linkage between these earmarked receipts and the investment spending. The receipts are established in authorizing legislation and are therefore under the PAYGO enforcement rules, but the spending is set in annual appropriations acts and is constrained by the discretionary caps. The rules do not permit applying PAYGO savings as offsets to increased discretionary spending. Because the discretionary caps are relatively flat, it is impossible to fund these investments at the level of collections without constraining or eliminating other discretionary programs. Funding has been below receipts, and unspent balances are growing.

Option

One option for dealing with this problem is to establish a separate cap for specific investments that are fully funded by earmarked receipts. OMB Director Raines suggested this approach in his testimony on April 24, 1998. Programs such as highways would be removed from the current discretionary caps and a new cap would be established for these programs. Spending would be set at the level of receipts. Funding above the level of receipts, if any were approved, would be scored against the existing caps.

The recently enacted highway bill followed this proposal. It creates a "firewall" within the existing discretionary caps for highways and another for mass transit. These firewalls are essentially separate caps. They are set at a level that permits spending to up to the previous year's level of receipts. The firewall for highways adjusts automatically to the previous year's receipt level; the firewall for mass transit is fixed.

Other similar legislative proposals are being considered. The pending tobacco legislation would allocate excise taxes on cigarettes to biomedical research and smoking cessation programs. Harbor cleanup is proposed to be funded through fees on imports and exports. A separate cap funded by airport and airways fees is proposed for the air traffic control system.

A disadvantage of this proposal is that it conceivably could be applied to large areas of the budget, fencing off much of spending from the necessary give and take of the budget process.