Both parties have pledged to use excess payroll tax (FICA) revenues to pay down the national debt. To keep that promise, the Bush administration changed a 65-year-old accounting rule in its latest budget forecast. How did Bush cook the government’s books?
First, some background. Your payroll check stub indicates how much FICA taxes were withheld and how much income taxes were withheld. (Click here for a primer on FICA taxes.) But when employers send the withheld money to the IRS, they don’t identify the dollars that way. Only at the end of the fiscal year do companies file forms that give the breakdown.
So, during the year, the government guesses how much of the money is FICA and how much is income taxes. (Don’t believe Explainer? Read this government document.) The estimate becomes more precise as companies file, and that changes the amounts credited to the FICA side of the ledger, which pays for the “off-budget” program of Social Security. By the same token, it changes the amount credited to the other side of the ledger, the “on-budget” side. (For Explainer readers who don’t understand why the on-budget revenues would decline, remember that Bush’s budgeting is a zero-sum game. It’s tantamount to moving 56 cents from your left pocket to your right pocket. You still have the same amount of money, but the amount in each pocket has changed.)
The government underestimated FICA revenue by a total of $5.6 billion for fiscal years 1998, 1999, and 2000. Under the old accounting rules, that $5.6 billion would have been credited to FICA’s fiscal 2001 ledger. And that would have reduced the current “on-budget” revenues by $5.6 billion.
To keep from breaking his promise not to spend FICA revenues on tax cuts or spending, Bush needed a way to make that $5.6 billion adjustment without it appearing on FY 2001’s books. His solution: A new accounting rule that allowed him to reopen the books for FY 1998, 1999, and 2000 and credit the money to the FICA side the year the monies were received.
By doing so, Bush increased the off-budget surpluses for the boom years of 1998 through 2000 and decreased the on-budget surpluses for those years. And he decreased the off-budget surplus for 2001 (which was disproportionately large) and increased the on-budget surplus (which was close to running a deficit).
Explainer feels obliged to note that the rule change isn’t the only accounting gimmick used by the administration to balance its accounts. But it is the most complicated.
Does Bush’s fancy fiscal footwork about the Social Security surplus matter? Most budget experts say no. Click here for a good take from syndicated columnist Matthew Miller, and click here for another one from Charles Krauthammer.
Explainer thanks Amy Call of the Office of Management and Budget, Rudolph Penner of the Urban Institute, and Peter Orszag of the Brookings Institution.
