December 3, 2007

A Look Ahead at the December Budget and Tax Battles

Budget Process Step-By-Step™

Note: Federal Government agencies are currently operating under a continuing resolution allowing Federal programs, projects, and activities to continue operating at FY 2007 spending levels through December 14.

This Week:

Senate reconvenes Monday and may continue action on the Farm Bill (HR 2419) if an agreement can be reached limiting amendments.

House will reconvene Tuesday and is expected to take up later in the week an energy bill that would raise gas efficiency standards (known as CAFE standards) from 25 MPG to 35 MPG by 2020, as well as require power companies to increase utilization of renewable fuels such as wind and solar; the energy package could also include tax provisions.

Senate Finance Committee may mark-up this week a Medicare bill to forestall scheduled cuts in payments to physicians.

The House and Senate may take up a conference report on the Defense Authorization bill later in the week.

Appropriations: Impasse on Spending Levels and War Funding

Congress and the President are mired in the most contentious budget battle since 1995 . Two months into the fiscal year, only one of the 12 FY 2008 appropriations bills has been enacted. The Federal Government is currently operating under a continuing resolution (included in HR 3222) allowing programs to operate at FY 2007 spending levels through December 14. Two fundamental issues divide Congress and the Administration: spending levels and Iraq.

1. Logjam on Spending Levels: President Bush is threatening to veto 7 of the 12 FY 2008 Appropriations Bills due to spending levels that exceed his requests by $23 billion; and has issued two additional veto threats on policy grounds.

2. Impasse on War Funding: Although the regular FY 2008 Defense Appropriations bill has been enacted (HR 3222), Democrats and Republicans have not yet reached agreement on war funding for the new fiscal year. The President has requested $196 billion in total war funding for FY 2008. The House passed a $50 billion partial war funding bill in November, but tied it to an Iraq withdrawal timetable--which ran into a Senate Republican filibuster.

Democrats are working on a "split the difference" compromise ($11-12 billion above the President's request, rather than $23 billion) but so far the Administration has shown no interest in this approach. Democratic appropriators will be working to include in a compromise bill provisions aimed at building a veto-proof majority for an omnibus spending package. If that effort fails, there will likely be another continuing resolution to February, or a reprise of last year's funding resolution that generally continued all funding at the prior year's levels, with some programs getting hikes, and others being cut.

War funding is unlikely to be provided until February 2008 when the Defense Department is projected to run out of resources that can be redirected to war funding.

Background--appropriations bills the President has threatened to veto due to funding levels:

1. Agriculture/ HR 3161: House bill $982 million over President's request; Senate-reported bill $874 million over President's request; White House threatened a veto on July 31. House Summary Senate Summary

2. Commerce-Justice-Science/ HR 3093: House bill $2.31 billion over President's request; Senate bill $4.2 billion over President's request; White House has threatened to veto the House and Senate bills. House Summary Senate Summary

3. Energy-Water/ HR 2641: House bill $1.13 billion over President's request; Senate-reported bill $800 million over President's request; White House threatened a veto on June 13. House Summary Senate Summary

4. Homeland Security/ HR 2638: House bill $2.06 billion over President's request; Senate bill $5.25 billion over President's request; White House has threatened to veto the House and Senate bills. House Summary Senate Summary

5. Interior-Environment/ HR 2643: House bill $1.95 billion over President's request; Senate-reported bill $1.498 billion over President's request; White House threatened a veto on June 25. House Summary Senate Summary

6. Labor-HHS-Education/ HR 3043: On November 13, the President vetoed the Conference Report, which would have appropriated $9.8 billion more than the President's request. On November 15, the House failed to override the President's veto 277-141, two votes short of the necessary two-thirds. Conference Report Summary

7. Transportation-HUD/ HR 3074: Conference Report is $3 billion above the President's request and includes an additional $195 million in emergency funds for rebuilding the I-35W bridge in Minneapolis. The Administration has threatened to veto the conference bill. Conference Report Summary

The President has also threatened to veto the Financial Services and State-Foreign Ops appropriations bill on policy grounds:

Financial Services/ HR 2829: House bill $244 million under President's request; Senate-reported bill $122 million over President's request; White House threatened a veto on June 26 because of provisions that would "weaken current [trade] restrictions against Cuba." House Summary Senate Summary

State-Foreign Ops/ HR 2764: House bill $700 million under President's request; Senate bill $720 million under President's request; White House has threatened to veto the House and Senate bills; both bills face veto threats because of language that would overturn a policy barring U.S. funding for any international organization that performs abortions overseas (even if U.S. funds are not used for abortions). House Summary Senate Summary

The President has called for offsets to pay for the Mil Con-VA Bill/ HR 2642: While the conference report is $4 billion ove the President's request, the White House has not threatened a veto but is instead calling for offsets in other spending bills. Despite Republican calls to send the measure to the President, Democrats have withheld the Veterans bill hoping to use it as a vehicle to move other spending bills. Conference Report Summary

Alternative Minimum Tax: Recap and Outlook

On November 9, the House passed H.R. 3996 by a vote of 216-193. The tax package included a one-year Alternative Minimum Tax (AMT) "patch"; numerous "extenders" of expiring tax provisions; and several revenue raisers to pay for the AMT patch and extenders.

The AMT patch would cost $51 billion and the extenders $21 billion. The 32 " extenders " include extension of the R&D tax credit, and deductibility of State and local sales taxes. (Bill Summary) The bill also includes $4 billion to expand the child credit and increase the standard deduction.

The revenue-raisers to pay for the bill include $24 billion from taxing certain deferred compensation; $26 billion from taxing so-called "carried interest" as ordinary income (instead of allowing investment fund managers to pay capital gains rates on investment management services); and $25 billion from delaying a tax cut for multinational corporations. (JCT explanation of provisions)

The President has threatened to veto the bill over the revenue raisers, as well as provisions that would repeal the IRS's authorization to use private debt collectors.

The Treasury Department projects that the number of taxpayers subject to the AMT in 2007 will jump from 4 million to 25 million without enactment of a one-year patch. (Treasury Statement)

PAYGO Offsets: The bill presents a major problem for Democrats who trumpeted the importance of reestablishing PAYGO rules last January. House Democratic leaders have publicly committed to enforcing PAYGO rules that require revenue increases to offset the costs of the AMT patch and extenders. (Pelosi Statement) Last month's vote, however, exposed divisions in the party, with some Democrats siding with the Republicans. Congressional Republicans have called for patching the AMT without offsets. (House Republican Release) In the Senate, Finance Committee Chairman Max Baucus (D-MT) supports patching the AMT and providing extenders, but has remained relatively quiet on the issue of offsets. (Baucus Statement) Ranking Member Chuck Grassley (R-IA) made a statement calling for a package without offsets. Budget Chairman Kent Conrad (D-ND) has made statements strongly urging adherence to PAYGO.

[Context on AMT: The AMT was enacted in 1969 to preclude very wealthy individuals from escaping all tax liability due to tax loopholes. It operates as an alternative calculation of income tax liability which cancels out various deductions, exclusions, and tax preferences. Taxpayers are required to pay the higher of AMT tax liability and regular income tax liability. However, 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.]

SCHIP: Recap and Outlook

Congress will send the President the revised SCHIP bill this week, despite a veto threat.

On November 1, the Senate passed a revised SCHIP bill (H.R. 3963) by a vote of 64-30. (CBO Cost Estimate) The revised provisions, however, have not attracted the votes needed to reach a 2/3 veto-proof majority in the House. Congressional leaders have delayed enrolling the bill in order to attract additional House Republican votes. However, Democratic leaders decided last Friday to send the revised SCHIP bill to the President (which would force the President to publicly veto the bill rather than let it die through a “pocket veto” after Congress adjourns).

The revised bill includes several revisions aimed at attracting additional Republican votes:
--capping eligibility at 300 percent of the Federal Poverty Level (FPL);
--strengthening language to prevent illegal immigrants from receiving benefits (although illegal immigrants are already ineligible for SCHIP); and
--including language to accelerate phasing out childless adults from receiving benefits.

The Administration remains committed to its plan to cap SCHIP eligibility at 200 percent of the Federal Poverty Level (a reduction from current levels in many States) and has promised to veto the revised bill. (October 31 Statement of Administration Policy) The Administration also objects to the tobacco tax increase to pay for the SCHIP legislation.

With hopes for a compromise dwindling, Congress may be forced to enact a simple extension of SCHIP for FY 2008, abandoning efforts to expand enrollment. However, even a simple extension would have to include some increase in funding to cover current beneficiaries, due to rapidly increasing health care costs.

[Context: The President's proposal to cap SCHIP assistance at 200% of the Federal Poverty Level is much stricter than current law. Under current law, States may--with Administration approval--provide SCHIP coverage to children in families above the Federal Poverty Level ($20,650 for a family of four in 2007). In fact, 19 States currently cover children in families earning more than 200% above the FPL.

The congressional SCHIP bill would reauthorize the program and increase Federal funding by $35 billion over 5 years ($30 billion more than the President's request) in order to boost covered children from 6 million to 10 million.

SCHIP was established in 1997 and provides health coverage to children in families whose incomes are low, but somewhat higher than Medicaid's very tight income eligibility limits. The program operates similar to Medicaid with Federal reimbursements for a percentage of State expenditures to provide health coverage for eligible children.]

The Farm Bill: Recap and Outlook

Last month the Senate began debate on the multiyear Farm Bill (HR 2419), quickly descending into a procedural quagmire. On November 16, the Senate failed to invoke cloture with a 55-42 vote. The Democratic leadership has sought agreement to limit amendments to "relevant" items (a standard somewhat looser than germaneness), but Republicans balked at the request-- wanting to offer amendments on Immigration and other hot-button issues.

There are some reports that an agreement on amendments may be within reach. If not, the chances of a simple extension of the current farm bill increase.

The White House has issued a Statement of Administration Policy threatening to veto the bill, criticizing the legislation for using budgetary "gimmicks" to comply with Senate PAYGO rules.

Delaying the Farm Bill to next session would pose new challenges for farm advocates because rising commodity prices will lower the "baseline," i.e., the budgetary starting point for assembling new farm legislation. (In short, waiting until next year could boost the amount of offsets needed to pay for the farm bill.)

[Context: The "Farm Bill," renewed every 5 to 6 years, governs the key aspects of Federal farm policy. Many provisions of the current Farm Bill, enacted in 2002, expired this year. The 2002 bill covers a wide range of programs. Those with the greatest budget impact are (1) Food Stamps; (2) Commodity Support programs (government subsidies to producers of certain farm commodities--primarily corn, cotton, wheat, rice, and soybeans--intended to stabilize farm income); (3) Agricultural Conservation programs (payments and incentives addressing environmental concerns, soil erosion and water supplies); and (4) Export promotion programs.]

Senate Agriculture Committee Summary
CBO Cost Estimate
CRS Report: Crop Insurance and Disaster Assistance: 2007 Farm Bill Issues

New Budget Docs

CBO: Longterm Outlook For Health Care Spending (November 2007) finding that "Spending on health care in the United States has been growing faster than the economy for many years, representing a challenge not only for the government's two major health insurance programs-Medicare and Medicaid-but also for the private sector. As health care spending consumes a greater and greater share of the nation's economic output in the future, Americans will be faced with increasingly difficult choices between health care and other priorities. However, a variety of evidence suggests that opportunities exist to constrain health care costs without adverse health consequences."

CBO: Issues in Climate Change finding that "Employing incentive-based policies to reduce CO2 emissions would be much more cost-effective than using more-restrictive command-and-control approaches (such as imposing technology standards on electricity generators)."

IRS: Fall 2007 Statistics of Income Bulletin