On July 13, the White House's Office of Management and Budget (OMB) released its annual mid-session budget review, which predicts an improvement in the current FY 2005 deficit from its February projections. OMB claims there will be a $94 billion decrease in the FY05 deficit, and argues this proves the president's tax cuts are working. But most observers indicate the projected drop in deficit for this year is a result of tax provisions that have caused a one-time surge in revenue as well as the fact that OMB continues to omit certain costs in its deficit calculations. The mid-session review predicts a $333 billion deficit for FY 2005, citing increases in individual and corporate tax receipts as the primary reason for the change. The report increased tax receipt projections by $87 billion for 2005 to $2.14 trillion in total revenue, and estimates continuing increases of revenue over the next five years. But even this rosy report from the White House does not show the federal government emerging from large and sustained deficits. Despite the short-term increases, federal levels of revenue still remain drastically low as a share of the economy. Even if this year’s revenue increases can be sustained over the next decade, total revenues would still average less than 18 percent of the economy - an extremely low level based on today's spending level (currently about 20 percent of GDP). The long-term outlook for the federal government continues to be incredibly bleak, with the government mired in deficit-spending for decades to come. Data from the same report being hailed as "good news" by the administration project the national debt increasing by nearly $1.5 trillion over the next six years - nearly a 20 percent increase. It would be dangerous -- and wrong -- to take the news of decreasing deficits from the mid-session review as evidence that President Bush's tax cuts have boosted the economy, that those cuts should be made permanent, or that the country's long-term fiscal problems have been or can be so easily solved. The better-than-expected tax receipts are the result of certain economic factors that have provided a temporary increase in revenues. Factors Behind the Revenue Increase are Temporary As the Center on Budget and Policy Priorities has stressed, "The surge in economic growth is not behind the unexpected increase in 2005 revenues [and] many factors that do explain the increase are temporary." One such factor is a large business tax cut called the accelerated depreciation deduction that expired at the end of 2004. This tax cut allowed businesses to deduct 50 percent of the cost of qualifying new assets in the first year rather than spreading out the cost over multiple years. The expiration of the tax cut has caused an estimated $51 billion increase in business tax payments this year, according to the Joint Committee on Taxation. Another reason for the increase is that tax returns for 2004 show a significant increase in capital gains tax payments, which is a reflection of the strong stock market in 2004. Quarterly payments on investment gains and business earnings were up 20 percent. However, the stock market is no longer rising as it was a year ago; thus capital gains revenues cannot be expected to continue increasing indefinitely as they did during the last tax cycle. Goldman Sachs reported in their Daily Financial Market Comment in July, "The [revenues] bonanza has been concentrated in nonwithheld taxes;this surge was mainly a reflection of the prior year's strength in economic growth and the stock market. The fact is that both growth and stock market momentum have cooled in 2005. Thus the strength in nonwithheld taxes is apt to fade as well." Finally, revenues have been higher than normal this year partly because of a provision in the corporate tax legislation enacted last fall allowing businesses with foreign profits being held abroad to bring the profits back into the U.S. in 2005 at the highly discounted tax rate of 5.25 percent. (Note: the normal corporate income tax rate is 35 percent). This provides a major incentive for corporations to take advantage of a huge tax break and bring their profits back into the U.S only in 2005. According the Joint Committee on Taxation, this provision will boost revenues in 2005 and then result in revenue losses in 2006 and subsequent years as corporations keep their profits overseas. Specific factors such as these demonstrate that the increased level of revenues reported in OMB mid-session review as long-term should be viewed as a one time bump and not a fundamental change in the fiscal health of the federal government. Other Budget Analysts Take Critical View of OMB Many other budget analysts have lodged these and other criticisms of the mid-year review and the White House's interpretation of its estimates. The Center on Budget and Policy Priorities, the Joint Committee on Taxation, the Congressional Budget Office, and others have cautioned that the deficit improvement, though notable, could prove ephemeral, and will do little to eliminate much bigger fiscal problems on the horizon. Chief among concerns about the new projections is that they will be overemphasized by the White House and members of Congress and overshadow more serious budgetary and fiscal problems in the future. "Lawmakers who allow themselves to be lulled into thinking that the economy is growing its way out of the deficit," wrote Edward McKelvey, an economist and federal budget analyst at Goldman Sachs in New York, "are unlikely to support the painful measures needed to reach a more lasting solution." Mid-Session Review Omits Certain Costs Besides the new OMB revenue projections being based on temporary or short-term factors that are likely to ebb, the mid-year analysis also continues to omit many looming costs that artificially improves the budget outlook. These costs are outlined below. War/Military Funding: The OMB review includes only $50 billion for war costs in Iraq and Afghanistan in 2006, (only half the rate of current spending) and does not include any spending after 2006. This is even while the Pentagon has plans to increase troop levels this fall and has acknowledged the necessity of a large and continuing presence beyond 2006. The omission of war costs is nothing new as the White House has repeated refused to include accurate and honest long-term projections on how much the war is likely to cost (even after receiving criticism from key members of Congress). The war costs will almost surely be more than $50 billion over the next five years, however, and will therefore significantly worsen the deficit estimates in the mid-year review. Alternative Minimum Tax Relief: OMB Director Bolten noted recently in regards to the AMT that, "We have not, in our numbers going out beyond 2005, projected any additional patching of the AMT, and that is because our policy is that the AMT does need to be reformed." Yet reform of the AMT will, at a minimum, have drastic effects on the federal budget, significantly shrinking the tax base currently being relied upon for revenues and shooting up deficits. In fact, many in Congress want to repeal the tax outright at the cost of between $900 billion and $1.2 trillion over ten years. Though significant changes to the AMT are widely acknowledged to be a top tax priority one way or another, the OMB projections assume no revenue impact from those changes. The chart below shows the annual increases in gross debt under the Bush budget through 2010, taking into account both AMT reform and ongoing war costs. Including these costs drastically changes the outlook over the next five years. Source: OMB, Senate Democratic Budget Committee Medicare: Because the White House projections only extend out five years, the forecast omits major new costs that arise just afterward that window. The forecast includes only a small part of the costs for the Medicare prescription drug program, which starts in 2006 but will become increasingly expensive with each passing year. Social Security: Likewise, the White House forecast includes just a small fraction of the cost of its proposal for replacing part of Social Security with private retirement accounts. The administration estimates the plan would cost $754 billion in its first 10 years, and several trillion dollars over the following decades. But because the plan would not be fully implemented until 2009, the recent mid-year forecast includes only about 3 percent of the total estimated 10-year cost (about $23 billion). Long-Term Fiscal Outlook Still Very, Very Bad... Despite the overemphasis on temporary revenue increases and the large and growing omitted costs, the administration and OMB have been aggressively promoting this mid-year review as "good news." Claims that the president's tax cuts are "working" and that Mr. Bush will meet his goal of cutting the deficit in half in five years have been multitudinous. They trumpet that deficits will fall to just over 1 percent of GDP by 2008 and speciously insist the President's tax cuts should be made permanent. Yet the fiscal pressures expected after the five year window get hardly any notice as the budgetary picture takes a turn for the worse with each passing year. The Bush tax cuts have resulted in a structural deficit in the federal government - meaning there is no amount of economic growth that could boost revenues enough to cover all the spending obligations the government currently maintains. Passing new tax cuts or extending permanently those from President Bush's first term will only further exacerbate this problem. The news of a short-term fall in projected deficits needs to be taken with more that just a grain of salt. It is time for the administration, and for Congress as well, to begin to make difficult decisions in order to prepare for massive future obligations instead of using misleading and biased analyses as a green light to continue passing deficit-financed legislation. As Sen. Kent Conrad (D-ND), ranking Democrat on the Budget Committee recently said, "Future presidents and future Congresses are going to be faced with pressure to drastically cut Social Security and Medicare because of the decisions being made now.” He could not be more right. It is as crucial a time as ever to be looking past this short-term and artificial decrease in deficits, and instead at what the future will hold without all of the budget gimmicks and fuzzy math.