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Government Urged to Change Inflation Calculation

Wednesday, December 4, 1996

Deloitte & Touche OnLine

The Consumer Price Index overstates inflation by 1.1 percentage points annually and causes the cost of living adjustment to Social Security and other government benefit programs, as well as income tax brackets adjustments, to be too high, according to a report released Dec. 4.

The bias in the CPI will contribute about $202 billion annually to the deficit by 2008 and $1.07 trillion to the national debt over the 1997 to 2008 period, according to the Congressional Budget Office.

Revise the CPI

The Bureau of Labor Statistics should revise its method of calculating consumer price inflation, the congressionally appointed Advisory Commission on the Consumer Price Index advised in its report, Toward A More Accurate Measure Of The Cost Of Living. The panel was headed by former Council of Economic Advisors Chairman Michael Boskin.

The CPI tracks inflation by studying month-to-month price fluctuations of a fixed basket of goods and is used by the government to adjust various governmental policies and programs for inflation. Critics charge the CPI does not account for changes in consumer behavior in response to price changes. For instance, consumers might buy more chicken if the price of beef increases, and critics argue that the current CPI does not take this into account.

The panel suggested BLS should move to a formula that takes changing market baskets into account, instead of using a fixed basket of assets to calculate the CPI.

The President and the Congress must decide whether "they wish to continue the widespread substantial overindexing of various federal spending programs," the panel advised.

"If the purpose of indexing is accurately and fully to insulate the groups receiving transfer payments and paying taxes, no more and no less, they should pass legislation adjusting indexing provisions accordingly," the study said.

The probable response to the report is that Congress will continue to study the issue, and the administration will react cautiously, a congressional aide told Deloitte & Touche.

Similarly, the Senate Budget Committee does not anticipate it will include in its fiscal 1998 budget resolution proposals that assume the CPI will be revised, a staff member said.

The panel may have reached the correct conclusion -- BLS overstates the CPI -- but it does not provide a politically expedient way to implement the change, various aides said. If the administration, through the BLS, were to implement the suggested change, government benefits would be reduced and taxes increased. The problem is that the GOP-controlled Congress would not share the blame for the pain, and that would be a political mistake for the President, the aide said.

The White House expressed a willingness to look at the issue, but only in the context of negotiations with Congress. "This issue has surfaced in the past in the context of bipartisan budget deliberations, and I suspect it will in the future," White House spokesman Mike McCurry said prior to the release of the report.

Reinstate Ticket Tax Quickly, Say Senators: A bipartisan group of senators urged the Senate Finance Committee to reinstate quickly the aviation ticket and other taxes that fund the Federal Aviation Administration.

The taxes expire Jan. 1, 1997, and the potential revenue loss "will have a detrimental impact on the long-term safety of our national transportation system," Senate Commerce Committee Chairman Sen. John McCain, R-Ariz., and ranking Democrat Ernest Hollings, D-S.C., wrote Dec. 3.

Senate Minority Leader Tom Daschle, D-S.D., Sen. Byron Dorgan, D-N.D., Sen. Wendell Ford, D-Ky., and Senate Majority Leader Trent Lott, R-Miss., also signed the letter.

An aide to one of the Senators said the Commerce Committee is frustrated with the Finance Committee’s lack of action in this area. The Commerce Committee is interested in the airline tax because it has jurisdiction over the FAA. Reading between the lines, the letter tells the Finance Committee "do your job," the aide said.

Though the taxes that fund the FAA expire at the end of the year, the FAA has enough funds to continue operating until October 1997, congressional aides estimate.

Jurisdictional Battle -- The letter also underscores the jurisdictional battle looming between the Finance and Commerce Committees over FAA funding.

Currently, the Finance Committee has jurisdiction over the ticket and other taxes used to fund the FAA. The large airlines want to replace the tax with user fees based on the number of flights, rather than the cost of a ticket. Switching to user fees would give the Commerce Committee jurisdiction over FAA funding.

The Finance Committee does not intend to give up jurisdiction over FAA funding, which when extended provides a revenue increase that can be used to offset the cost of revenue-losing tax proposals, the aide said.

It is too early to predict whether the committee will act quickly to reinstate the current tax for a short period, or whether a longer term extension of the tax will be developed, the aide said. "A lot depends on how big a tax bill the chairman wants to do."