The Inflation Tax Bite

By Yuval Rosenberg

Good Tuesday evening. The Centers for Disease Control and Prevention is recommending second booster shots for all Americans age 65 or older and those over 50 who are immunocompromised. And the Biden administration continues to warn that the nation is running out of money to fight Covid-19, with some consequences for Congress’s failure to approve more funding already starting to be seen.

Here’s what else is going on.

Five More Takeaways on Biden's New Budget

President Biden’s $5.8 trillion budget request for fiscal year 2023, unveiled yesterday, includes a stronger emphasis on deficit reduction, a shift that Biden and the White House say is merited now that the nation is — hopefully — past the worst of the pandemic. It would also boost spending on defense and provide $32.2 billion to put "more police officers on the beat" and combat violent crime.

“The budget puts forward an economically and fiscally responsible path forward—addressing our country’s long-term fiscal challenges while making smart investments that will produce stronger growth and broadly shared prosperity for generations to come,” White House Office of Management and Budget Director Shalanda Young said Tuesday at a House Budget Committee hearing.

Here’s a look at what people are saying about the budget, with five more takeaways.

This is more like the Biden who ran in 2020: “Now, it seems, Biden has accepted that his first-year agenda is not going to fly. Instead, he has presented a budget that is more in keeping with our current economic and national security needs. It is also arguably closer to the center-left agenda he presented in his 2020 campaign victory,” says The Washington Post’s Jennifer Rubin. “The budget is centrist and even old-school conservative in some respects. Unlike his prior budget and his predecessor’s budgets, the $5.8 trillion plan reduces the deficit with tax hikes. … If Biden hopes to gain credibility in tackling inflation and to gain support from Sen. Joe Manchin III (D-W.Va.) for even a few parts of his spending plan, this is a start.”

Jim Kessler, executive vice president of policy for the centrist Third Way think tank, told Politico: “This is a return to Joe Biden 2020 — a centrist who won the Democratic nomination handily and then captured the middle to beat Donald Trump. This budget is ambitious and I think you can be ambitious and appeal to the middle at the same time.”

The tack to the center could help Biden revive parts of his agenda: The budget’s emphasis on deficit reduction and its proposed increase in military spending may disappoint the left flank of his party, but the approach could help win over centrist Democrats — most notably Sen. Joe Manchin of West Virginia — who are likely to determine the fate of Biden’s economic agenda. “Though some progressive lawmakers criticized Biden’s pitch to spend $813 billion on national security even as many of their priorities remain in limbo, most indicated they were willing to give him space to play to the party’s centrists,” Politico’s Laura Barrón-López writes.

Progressives aren’t giving up on their goals, though, as Rep. Pramila Jayapal (D-WA), chair of the Congressional Progressive Caucus, made clear to Politico. “Deficit reduction alone is not going to help families pay for child care, housing, prescription drugs or anything else,” Jayapal said. “The president must prioritize getting Senator Manchin back to the table to fulfill the commitment he originally made to the president and the president conveyed to us all. If Senator Manchin is serious about passing something, it is important to see legislative text so we can begin negotiations in earnest.”

Biden’s climate agenda sprinkled throughout: Democrats’ Build Back Better bill would have provided $550 billion for climate measures. With that legislation stalled, Biden’s budget looks to advance the president’s climate agenda to a lesser degree. “President Biden’s budget request includes a total of $45 billion spread across the federal government to address climate change, an increase of $16.7 billion over the 2021 enacted level,” The New York Times notes. And Politico points out that “Biden’s hugest climate ambitions have died in the Senate, but he’s still using this budget proposal to try to advance the cause — including $18 billion to help the country withstand the worsening wildfires, floods and storms fueled by rising temperatures.”

Biden won’t get what he wants from Congress: As we mentioned yesterday, Biden’s budget is simply a request, and congressional lawmakers will ultimately decide spending and revenue policy for fiscal year 2023. The end result will likely differ significantly from Biden’s budget — and that may be especially true given the outlook for the midterm elections, in which Republicans expect to make major gains. “Republican leaders are confident they will claw back the majority in at least one chamber, emboldening their push for changes,” Politico’s Jennifer Scholtes reports.

Republicans argue that Biden’s proposed 4% increase in defense spending to $813 billion fails to keep up with inflation and are pushing for more. And the GOP will seek to dial back Biden’s proposed $769 billion in non-defense spending. “The President has again proposed a fiscal blueprint that overspends on wasteful domestic programs and fails to adequately provide for our nation’s defense,” Sen. Richard Shelby (R-AL), the top Republican on the Senate Appropriations Committee, said in a statement Monday. “The Biden budget increases non-defense spending by nearly $100 billion while defense spending does not even keep pace with the skyrocketing rate of inflation. … Once again, this request puts us on the wrong foot to start the fiscal year 2023 cycle, and it does not bode well for the coming appropriations process.”

This is all about midterm messaging: The budget is a chance for Biden and Democrats to push back against Republican election attacks — attacks on Biden’s management of the economy, of global threats and of crime at home. The budget is a chance for Democrats to “inoculate against some of these narratives,” Celinda Lake, a pollster for the Democratic National Committee and former pollster for Biden’s campaign, told Vox.

The request for law enforcement funding may help blunt attacks that Biden and Democrats are soft on crime and want to defund the police. And Biden’s proposed minimum income tax on billionaires and 28% corporate tax rate will likely poll well and allow Democrats to set up a contrast with Republican tax plans. Overall, though, it’s not clear how much a budget blueprint can help overcome, say, voter concerns about inflation (see below) — and not clear how much certain other elements of Biden’s plan will resonate with voters. For example: “Whether an emphasis on deficit reduction is a winning argument heading into November remains to be seen,” Barrón-López says.

Chart of the Day: The Inflation Tax

Inflation will cost the average American household about $430 per month in lost purchasing power in 2022, according to estimates from Bloomberg Economics. That translates to $5,200 for the full year, though total losses will vary considerably at different income levels.

“The excess savings built up over the pandemic, and increases in wages, will cushion those costs, and allow spending to expand at a decent pace this year,” say Bloomberg’s Andrew Husby and Anna Wong. “But accelerated depletion of savings will increase the urgency for those staying on the sidelines to join the labor force, and the resulting increase in labor supply will likely dampen wage growth.”

Americans are certainly taking notice. A Gallup poll released Tuesday finds that inflation is seen as the most important economic problem facing the country. “Inflation began rising as a public concern last fall, after being a nonissue for Americans throughout 2020,” Gallup’s Lydia Saad writes. “It registered no more than 2% of mentions in 2021 until October, when 5% cited it. But the percentage has increased more in the past month -- seven percentage points to 17% -- than in any month since the upward trend began. This increase in concern comes as the U.S. inflation rate continues to climb, and is now at its highest point in 40 years.”

Quote of the Day: Running Out of Covid-19 Funds

“After two years of pain, loss and grief, we all want to safely move forward with our lives. The good news is that we have more tools to do so than ever before. The question is: Will we act to ensure that these protections are available to all who need them when they need them? The answer depends on whether Congress chooses to sustain funding for the Covid-19 response. We hope they do, because the virus has not quit — and neither should we.”

— U.S. Surgeon General Vivek H. Murthy and David A. Kessler, chief science officer for the U.S. Covid-19 response team, from an op-ed in The New York Times. Murthy and Kessler report that the federal government is running out of money to combat the Covid-19 pandemic. “Last week, we were forced to cut our shipments of lifesaving monoclonal antibodies to states by 35 percent — and we anticipate running out of monoclonal antibodies later this spring,” they write. “We will not be able to continue making home tests available, and the critical surveillance efforts that help us anticipate new waves and variants will be compromised” if Congress fails to provide additional funding.

“It would be a grave mistake to assume Covid-19 no longer requires our action and investment,” they warn. “The virus has not disappeared. … while we cannot predict exactly when cases will rise again, the increase in cases we are seeing in Europe should serve as a reminder that being prepared for future waves is imperative.”

Business Lobbies Push Back Against Gas Tax Holiday

Some major lobbying groups are making it clear that they do not support the idea of suspending the federal fuel tax to provide relief to consumers facing soaring prices at the pump.

The U.S. Chamber of Commerce sent a letter Monday to lawmakers spelling out their position. “Federal investments in highway and public transportation infrastructure are funded primarily through taxes on gasoline and diesel fuel,” wrote Neil L. Bradley, the group’s executive vice president. “The level of federal investment in these systems was significantly increased in the bipartisan Infrastructure Investment and Jobs Act, representing a generational opportunity to fix and modernize America’s transportation infrastructure. Suspending the gasoline tax would undermine these investments and will jeopardize the benefits that American families, communities, and the economy stand to gain from the law.”

Bradley added that lawmakers “who refrain from cosponsoring this legislation” would receive more favorable ratings from the massive business lobbying group. 

The American Road & Transportation Builders Association, which represents construction companies, is also fighting the tax holiday proposal and has been circulating an analysis that suggests that consumers won’t benefit much from a suspension of the fuel tax. “Do gas tax holidays automatically result in significantly lower prices and big savings for motorists at the pump?” the group asked in a press release. “The short answer is ‘no.’”

Still, some lawmakers think the tax holiday makes sense. “People are feeling a real pinch on everyday goods, and we must do more to help address rising costs, particularly the price of gas,” said Sen. Maggie Hassan (D-NH), who co-sponsored a bill to suspend the tax for the rest of the year.

And some states aren’t waiting for the federal government to act. According to The Wall Street Journal, Connecticut, Maryland and Georgia have plans in place to suspend their state fuel taxes, and other states including California, Virginia, Michigan, Ohio, Illinois and Florida are discussing plans to lower prices through rebates or tax reductions.

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