Congress Poised to Revisit Chained CPI in Debt-Limit Debate

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The decision by Senate Republicans to drop a revised measure of inflation from an agreement on legislation (H.R. 8) averting the fiscal cliff only puts off a debate over how to calculate the consumer price index--and not for long, lawmakers and policy analysts said.

The chained CPI will prove a tempting ground for compromise in the next two months as lawmakers tackle raising the nation's debt ceiling, Paul N. Van De Water, a senior fellow at the Center on Budget and Policy Priorities, told BNA Jan. 2.

Van De Water said the idea--which could affect the indexing of income tax brackets, as well as inflation-adjusted Social Security payments--is potentially appealing because it accomplishes two goals that play to the political landscape: raising greater revenue through tax code adjustments, and cutting spending through smaller increases in Social Security payments.

Chained CPI has “probably a better than ever chance” at that point of finding a way into law, Van de Water said. “I think it's something which will be considered very seriously.”

Adjusts for Spending Habits.

Unlike the traditional consumer price index, the chained CPI adjusts for consumers' tendency to switch products when prices climb. In that way, economists say, it is a more accurate measure of the cost of living for purposes of setting taxes and Social Security benefits, for instance. The traditional CPI tends to overstate inflation, economists say, because of the failure to adjust for consumer behavior.

But the idea has shortcomings too, economists say, as older consumers who are typically Social Security recipients tend to spend more on health care, for instance, costs that are climbing faster than those for other goods and services. And it amounts to a hidden tax increase because over time, more people are driven into higher tax brackets, Chris Edwards, director of federal tax policy at the Cato Institute, a libertarian think tank, told BNA Jan. 2.

Short on Data?

In addition, economists do not have enough data to accurately calculate a chained CPI, Barry P. Bosworth, senior fellow in economic studies at the Brookings Institution, told BNA Jan. 2. As a result, any calculation would require a mechanism for correcting discrepancies in future years, with about a two-year lag, he said.

The congressional Joint Committee on Taxation estimated in 2011 that the chained CPI would raise tax revenue by nearly $60 billion over a decade (130 DTR G-6, 7/7/11).

Republican senators told reporters Dec. 30--the day leaders dropped the proposal from discussions about the fiscal cliff--that chained CPI was taking only a temporary departure from the spending and tax debate.

The revised CPI appeared in recommendations from the National Commission on Fiscal Responsibility headed by Erskine Bowles and Alan Simpson, a former Republican senator from Wyoming, and President Barack Obama has said he supports the concept.

Former Sen. Pete Domenici (R-N.M.) and former Clinton White House budget chief Alice Rivlin also endorsed the idea in December as an update to recommendations from a deficit reduction task force they headed in 2010 (233 DTR G-2, 12/5/12).

“The president had thrown it out, and we knew the president supported it,” Sen. Bob Corker (R-Tenn.) told reporters Dec. 30, although he added that Republicans never really made it a serious pitch for the cliff deal.

“We do expect it to be part of the debt ceiling negotiations, where entitlements, we hope, will be dealt with,” Corker said. The Obama administration has said the debt ceiling must be raised in late February.

Republicans dropped the idea Dec. 30 amid stiff opposition from Democrats, who charged that the chained CPI amounted to cuts in Social Security. That sentiment was shared by Sen. Olympia Snowe (R-Maine), who told reporters, “I'm not a fan of affecting those who are currently on Social Security, especially the more elderly.”

By Marc Heller