Reconciliation

The term budget reconciliation is in the news as the senate tries to pass bills on health care and tax reform. This is a provision which allows the senate to pass legislation with 51 votes thus eliminating the filibuster. In order to pass this way the bill must be revenue neutral that is the cost of the bill must be offset by savings in other areas. With the health care bill this is causing a lot of consternation since it is difficult to juggle the books, however with tax reform there is a loophole that is commonly used in pension plans. Many public pension plans are underfunded which means they do not have enough money in the plans to meet future commitments. This poses a problem since unlike the federal government the states cannot just print up more money. In addition states find they must balance their budget. Their solution to the pension problem is to project higher returns on their pension portfolio. California for example projected an 8.5% return when CD’s were paying one percent. Since they did not meet that goal the fund was underfunded and they are in a pickle. The solution for the federal government to fund tax reform is to project a GDP of 4% and use increased growth to increase tax revenues. In other words project more tax revenue by cutting taxes. This has worked in the past but the congress has often used the increase in revenues to add more programs. During the Reagan years tax revenues went up but spending went up more and thus the deficits increased. During the Clinton years tax revenues rose but spending was held in check and deficits decreased. The question is will this attempt at tax reform increase or decrease spending. During the Reagan terms the congress was democrat and during the Clinton years the congress was republican. If past is prolog then the deficits should go down.