Weekly Report: March 7, 2008 Budget Process Step-by-Step Appropriations hearing schedule for week of March 10: Week of March 10--House and Senate Floor Action on FY 2009 Budget Resolutions: The Senate, which has 50 hours available for debate under the Budget Act, is likely to begin consideration of the Budget Resolution on Tuesday. House action typically takes one day. March 15: Congress begins 2-week Easter recess and Budget Committee staffs begin "pre-conferencing" the House and Senate Budget Resolutions. Budget Resolution Background Budget Committees Mark-up FY 2009 Budget Resolutions Yesterday, the House and Senate Budget Committees approved their respective FY 2009 Budget Resolutions. Both votes were party line: 22-16 to report Chairman John Spratt's (D-SC) budget plan to the House; and 12-10 to report Chairman Kent Conrad's (D-ND) budget plan to the Senate. Floor action on both measures is expected next week, before Congress adjourns March 15 for Easter Recess. What is a Budget Resolution? In general, a "Budget Resolution" is a concurrent resolution of the Congress that establishes a general framework for subsequent congressional action on spending and revenue bills. The Budget Resolution does not require presidential signature and does not become law. The Budget Resolution includes spending and revenue totals, which are enforced through parliamentary rules, but the Budget Resolution does not set annual spending levels for specific programs; that authority belongs to the House and Senate Appropriations Committees. In order to calculate proposed spending and revenue totals, the Budget Resolution makes non-binding assumptions regarding levels of spending for specific programs, based on "views and estimates submitted by the authorizing committees" (see Budget Docs) as well as fiscal and political judgments on realistic and appropriate spending and revenue levels. Non-Defense Discretionary Spending Levels Already Face Veto Threats: In order to show a balanced by 2012, the President's FY 2009 Budget assumes declining non-defense discretionary spending over the next 5 years, i.e., no inflation adjustments and an actual dollar reduction from year-to-year. According to a preliminary CBO analysis of the President's Budget, nondefense discretionary budget authority would decline from $464 billion in FY 2008 to $460 billion in FY 2009. By comparison, the House Budget Resolution calls for approximately $22 billion more than the President in FY 2009 discretionary spending, and the Senate calls for about $18 billion more than the President's Budget. This sets the stage for another intense conflict between congressional appropriators and the White House. On March 3, before Chairmen Spratt and Conrad had released their respective Budget Resolutions, OMB Director Nussle had already issued a blanket veto threat: "I want to reiterate that appropriations bills that exceed the President's reasonable and responsible spending levels will be met with a veto." In addition to threatening vetoes over spending levels, Nussle added that the President "will veto any appropriations bill that does not reduce the number and cost of earmarks in half from its FY 2008 level." Nussle also added a veto threat against "any attempt to increase taxes," which is relevant to all of the "reserve funds" described below, which require that new initiatives be paid for with revenue increases or spending cuts. Reserve Funds: In order to project a balanced budget by 2012, while still showing support for specific policy priorities, Budget Chairmen Spratt and Conrad have again turned to "reserve funds." A typical Budget Resolution reserve fund provides that spending ceilings and committee allocations will be adjusted to allow for congressional consideration of specified new initiatives, but only if the new spending (or the new tax relief) is fully offset (by unspecified tax increases or spending cuts). In short, reserve funds do not provide any funding; they are a promise to provide funding if, and only if, taxes are raised or spending is cut to pay for the specified initiative. The House Budget Resolution contains reserve funds for SCHIP expansion (vetoed last year by the President), expanded veterans' benefits, infrastructure investment, renewable energy, middle-income tax relief, AMT (Alternative Minimum Tax) reform, higher education, affordable housing, Medicare improvements, health care, Medicaid, Trade Adjustment Assistance, county payments, water rights settlements, national parks, and child support enforcement. The Senate Budget Resolution contains reserve funds for SCHIP expansion, tax relief, tax incentives for manufacturing, affordable housing, trade-related programs, relief for families, flood insurance, initiatives authorized by the new Farm Bill (currently in conference), Secure Rural Schools, improving education, infrastructure investments, investments in energy and the environment, veterans benefits, Medicare improvements, health care improvement, FDA product regulation, Medicaid's transitional medical assistance program, and judicial pay. Stimulus Package #2? The Senate Resolution also includes a reserve fund that would permit budget spending and revenue levels to be adjusted to accommodate a second fiscal stimulus package, should that become necessary. Unlike the other reserve funds, the stimulus package would not have to be offset (because in order to stimulate the economy, the bill must generate net new spending and/or net new tax cuts). The $35 billion stimulus package could include expanded benefits for unemployment, food stamps, low-income energy assistance, and/or housing assistance. Tax Increases, or Not? Similar to last year's debate on the Budget Resolution, much of the debate during the House and Senate Budget mark-ups focused on whether the budget plans increase taxes. Context: Under current law, many of the 2001 and 2003 tax cuts expire at the end of 2010 (due to the Senate's "Byrd Rule" that prevented making the tax cuts permanent when they were originally enacted). Tax cuts scheduled to expire include: reduced tax rates on ordinary income, dividends, and capital gains; a higher child tax credit; the elimination of the estate tax; and tax relief for married couples (expanded standard deduction and 15% tax bracket). Democrats assert that letting the tax cuts expire in 2010 would not be a tax increase because it would not change current law. Republicans counter that in 2011, if tax rates return to pre-2001 levels, taxpayers would clearly regard the upward adjustment in rates as a tax increase. This semantic debate will intensify next week during Floor action, with the fall elections looming large. Senate Democrats, while not proposing to extend all of the tax cuts, would extend some of them. The plan is for Senate Finance Committee Chairman Baucus to offer a Floor amendment next week to extend middle income tax relief (specifically, marriage penalty relief, the child tax credit, and the 10 percent bracket), as well as some estate tax relief, but in amounts that would preserve a balanced budget in 2012 and 2013. Senate Democrats are not requiring offsets to pay for middle income tax relief. By contrast, House Democrats would require any extension of middle class tax cuts to be fully offset under PAYGO rules. However, any action on post-2010 tax relief is highly unlikely this year. Alternative Minimum Tax Relief: Relief from the Alternative Minimum Tax is scheduled to expire with tax year 2007. Context: In 1969, after Congress learned that taxpayers with incomes above $200,000 had paid no 1966 Federal tax, lawmakers enacted the AMT in order to ensure that everyone pays a minimum amount of tax, regardless of how many tax preferences or deductions they may technically be entitled to. In general, the AMT operates by requiring people to recalculate their taxes under alternative rules that (1) include certain forms of income exempt from regular tax and (2) disallow certain exemptions, deductions, and preferences. Upper-middle and middle-income taxpayers are increasingly finding themselves subject to the AMT for two reasons. First, while the regular income tax is indexed for inflation, the AMT is not. Second, recent income tax rate reductions have narrowed the differences between regular and AMT tax liabilities. According to CBO, until 2000, less than 1% of taxpayers paid AMT in any year. In 2001, 2003, 2006, and 2007, Congress enacted temporary increases in the AMT exemption amounts in order to forestall the AMT's increasing impact on middle-income taxpayers. However, if AMT relief is not extended beyond 2007, in 2008 more than 20 million taxpayers would become subject to the AMT. The President's Budget would limit AMT relief to tax year 2008 (which is one of the reasons why his 5-year budget projections are unrealistic). The Senate and House Budget Resolutions likewise call for only a one-year patch, but differ on whether to follow PAYGO rules. The Senate Budget Resolution provides for a one-year AMT patch without offsetting revenues to pay the $60-70 billion cost, but the one-year patch called for in the House plan would be fully paid for in compliance with pay-as-you-go (PAYGO) rules. (The offsets required in the House plan are not specified, although they could resemble the offsets the House Ways & Means Committee attempted to enact in 2007.) As explained below, the House would use the Budget Reconciliation process to avoid Senate filibuster of the AMT revenue offsets. The House "Blue Dog" Coalition--fiscally conservative Democrats--pressed hard to require offsets for the AMT patch, despite the Senate's reluctance. Reconciliation: The most powerful leverage in the Budget Committees' arsenal is the Budget Reconciliation process because it can be used to protect legislation from Senate filibuster. Context: Because the Senate does not vote on measures until debate has concluded, a "filibuster" is simply the act of continuing debate in order to prevent a vote. When a filibuster is taking place, it takes 60 votes to bring debate to an end--a procedure called cloture. In recent years, with increasing partisanship and the near-even split of the Senate, filibusters have become more and more common resulting in a presumption that controversial legislation requires 60 votes to move forward. However, Budget Reconciliation legislation cannot be filibustered because the Budget Act imposes a time limitation on debate. Consequently, Reconciliation legislation can pass with the support of 50 percent-plus-1, rather than the more typical 60-vote threshold. Reconciliation instructions in a Budget Resolution direct specific committees to report legislation by a specified date, that changes spending or revenue legislation under their jurisdiction by a specified amount. (While dollar amounts are specified in Reconciliation instructions, the policies needed to achieve the Reconciliation directives are not specified.) Chairman Spratt's Budget Resolution includes instructions to the Ways & Means Committee to give Reconciliation protection to a bill reducing revenues in FY 2009 by $70 billion, and raising revenues over the subsequent 4-year period by the same amount. This is designed to give Reconciliation's filibuster-proof protection to a one-year AMT patch. The Reconciliation section of the House resolution also includes a placeholder for mandatory spending legislation, such as extending the moratorium on scheduled cuts in Medicare physician payments. War Funding: The President included only partial war funding--$70 billion for FY 2009 and nothing thereafter--in his February Budget (which is another reason why his 5-year budget projections are unrealistic). The House and Senate Budget Resolutions both reflect the President's requested level. The Looming Entitlement Crisis: There is broad based agreement across the political spectrum that the U.S. is on an unsustainable fiscal path. The total federal debt has increased from $5.6 trillion at the end of FY 2000 to nearly $9.4 trillion today. In January 2008, the Congressional Budget Office reported to Congress that "the United States continues to face severe long-term budgetary challenges....Ongoing increases in health care costs, along with the aging of the population, are expected to put substantial pressure on the budget in coming decades....Economic growth alone will be insufficient to alleviate that pressure, as Medicare and Medicaid and, to a lesser extent, Social Security require ever greater resources under current law." The response to the looming crisis has been underwhelming, to say the least. The President's Budget proposes significant Medicare and Medicaid reforms to cut spending by $568 billion over 10 years, but at the same time proposes to make the 2001 and 2003 tax cuts permanent at a cost of $2.3 trillion over 10 years. (Moreover, Democrats assert that the deep cuts in Medicare and Medicaid "would shift costs and reduce access to health care, while doing little to address the underlying causes of the rising cost of health care." The President also proposes a partial privatization of Social Security--which would add significantly to growing Federal deficits as Social Security revenues are diverted from payment of current benefits, into individual accounts of future retirees. On the congressional side, Democratic leaders are opposing permanent extension of the 2001 and 2003 tax cuts due to their enormous cost, but have not taken significant actions to rein in Medicare and Medicaid. Nor are there any proposals in the FY 2009 Budget Resolutions addressing Social Security, which will begin paying out more than it takes in by 2017. Earmarks: Observers will hear a lot of rhetoric on the House and Senate Floors next week regarding appropriations earmarks. Members on both sides of the aisle are jockeying to sponsor, and gain credit for, a moratorium on earmarks during the FY 2009 appropriations process. However, four facts should be kept in mind about earmarks: (1) The level of earmarks approved by Congress for FY 2008 that were not requested by the President was about $12 billion, a 40% cut below FY 2005; (2) earmarks in FY 2008 totaled less than one-half of one percent of the Federal Budget; (3) The lofty rhetoric against earmarks, on Capitol Hill and at the White House, is largely a smoke screen intended to distract voters' attention away from the fiscal irresponsibility of the last 7 years, when the Federal debt has increased from $5.6 trillion to nearly $9.4 trillion; and (4) while everyone would agree that wasteful earmarks should be eliminated, some earmarks, such as Senator Domenici's earmark to begin NIH's human genome project, have been invaluable. Quotable: "Look closely at the Bush budget for 2009, and you will see that dog won't hunt." -House Budget Chairman John Spratt. Recent Budget Docs (See "Budget Docs" at the new www. WashingtonBudgetReport.com for all Budget Resolution documents.) Senate Budget Committee Chairman's Mark on the FY 2009 Budget Resolution House Budget Committee Chairman's Mark on the FY 2009 Budget Resolution CBO: Preliminary Analysis of the President's Budget America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year, by Charles S. Konigsberg, Editor and Publisher of Washington Budget Report. * * * * * * * * * * * * * * * * * * To advertise in this space, call 703-351-5048 or advertise@washingtonbudgetreport.com
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| Charles S. Konigsberg, President | (703) 351-5048 (ph) | (703) 351-6218 (fax) | ckonigsberg@federalbudgetgroup.com | |