BUDGET ALERT: May 17 , 2007

Congress Adopts FY 2008 Budget Resolution

BUDGET PROCESS STEP-BY-STEP™

May 17: At 4pm today, the House adopted S.Con.Res. 21, the FY 2008 Budget Resolution, 214-209 and, shortly thereafter, the Senate adopted the Conference Report 52-40.

Senate Vote
House Vote

Context: The Budget Resolution is now in effect, since it is concurrent resolution of the Congress and is not presented to the President for signature.

With adoption of the Budget Resolution and accompanying 302(a) spending allocations to committees, Appropriations Chairmen David Obey and Robert C. Byrd will now complete negotiations with their subcommittee chairs on subdividing the FY 2008 discretionary spending totals among the 12 appropriations subcommittees. These “302(b)” allocations to the appropriations subcommittees are a key decision-making point in the budget process, because they prioritize available discretionary funds among the 12 regular appropriations bills.

May 21 (week of): Congressional leaders aiming to complete negotiations with the White House and pass an FY 2007 War Supplemental prior to the Memorial Day Recess.

S.Con.Res. 21, THE FY 2008 BUDGET RESOLUTION - HIGHLIGHTS

See our exclusive Side-bySide comparing the Budget Resolution with the President's Budget

Non-defense Discretionary Spending: Budget Resolution provides $454 billion for FY 2008, compared to the President's request for $432 billion. The Budget Committees, in distributing funds among the various “budget functions” make assumptions about how the discretionary funds should be spent; however, the real decisions belong to the Appropriations Committees.

Defense Discretionary Spending: Both the Budget Resolution and the President's Budget provide $504 billion in base funding for DOD, plus $142 billion in war funding for FY 2008.

Deficits/Surpluses: Budget Resolution sets forth a plan that would result in a 2008 deficit of $252 billion and a 2012 surplus of $41 billion. (Excluding Social Security surpluses: $454 billion deficit in 2008 and $215 billion deficit in 2012). It is important to examine deficits excluding Social Security surpluses, because the Social Security surpluses will disappear in 2017.

President's Budget request would result in a 2008 deficit of $226 billion and a 2012 deficit of $31 billion . (Excluding Social Security surpluses: $428 billion deficit in 2012 and $286 billion in 2012.)

Revenues: Following is a comparison of the revenue baseline (i.e. current law) and the Budget Resolution and President's Budget.

There has been a lot of rhetoric about whether the Budget Resolution is calling for a tax increase. The answer depends on your perspective.

From a global budgetary perspective, it has always been the practice of both Republicans and Democrats in Congress to measure tax increases or tax cuts against the Congressional Budget Office revenue baseline, which reflects current law. The CBO baseline assumes that the 2001 and 2003 tax cuts expire in 2010, as provided by current law. (The 2010 expiration date was enacted at the outset, to comply with the Senate's Byrd Rule, which is designed to prevent filibuster-proof budget reconciliation legislation—such as the anti-recession tax cuts of 2001 and 2003—from causing major outyear deficits). As reflected in the numbers above, both the Budget Resolution and the President's Budget would reduce tax receipts over the next five years as compared with the CBO baseline.

From the perspective of an individual taxpayer, it is true that tax rates will go up in 2011 when the anti-recession tax cuts of 2001 and 2003 expire. However, to call this a tax increase, is to suggest that Congress should consider all tax cuts to be permanent when determining the baseline, or starting point, for debate. This would run contrary to the historical reality that temporary tax cuts are often used to respond to recessions.

Income Tax Rates: In 2001, tax rates were reduced from 15, 28, 31 and 39.6 percent, to 10, 15, 25, 31, and 35 percent, with the lower rates expiring in 2010. President's Budget would permanently extend the lower rates. The Budget Resolution assumes extension of middle class tax relief (marriage penalty relief, child credit, adoption credit, 10% bracket) subject to identifying PAYGO offsets and including “trigger” language that would prevent the tax cut extensions from taking effect unless sufficient surpluses materialize.

Estate Tax: Under current law estate tax phases out with total repeal in 2010, but bounces back to 2001 rates in 2011. President's Budget would permanently extend the repeal. Budget Resolution rejects permanent repeal but would provide estate tax relief, setting estate taxes at 2009 level (45% rate and $3.5 million exemption) subject to identifying PAYGO offsets and including “trigger” language that would prevent the estate tax relief from taking effect unless sufficient surpluses materialize.

AMT: President provides patch for '07. Budget Resolution provides patch for '07 subject to PAYGO offsets.

Capital Gains and Dividends: Current law calls for reduced rates to expire in 2010. President would permanently extend lower rates. Budget Resolution would allow lower rates to expire.

Research and Experimentation Credit: President calls for permanent extension of R&E credit. Budget Resolution would allow the credit to expire, unless PAYGO offsets are identified to pay for extension.

Entitlement Reform: Rapid entitlement growth represents a major long-term threat to the economy, with projections showing entitlement spending spiraling out of control within a decade without reforms. President proposes measures to slow the growth of Medicare and Medicaid spending, but proposes a Social Security plan that would increase Social Security outlays and worsen Social Security's long-term solvency. The Budget Resolution proposes no reforms in any of three major entitlement programs.

Budget Reconciliation/Student Loans: Budget Resolution would use fast-track, filibuster-proof Reconciliation procedures to enact reductions in the cost of student loans, offset by reduced subsidies to lenders.

Children's Health Insurance Program (SCHIP): Up for reauthorization this year. President requests $12 billion increase above the $5 billion/year baseline. Budget Resolution sets a non-binding goal of spending $50 billion through 2012 to enroll more eligible children and expand coverage, but the funding is contingent on identifying PAYGO offsets. Possible offsets: Medicare reforms and tobacco tax increase.

Reserve Funds: There has been much discussion of the many “reserve funds” in the Budget Resolution, however these mechanisms do not provide any funding. They simply allow Budget Resolution levels to be adjusted to accommodate new spending or tax relief, if offsetting revenue increases or spending cuts are identified to pay for the desired new spending programs or tax relief.

Budget Enforcement: Extension of numerous existing budget rules including: Senate's PAYGO requirement; Senate's prohibition on legislation that would increase long-term deficits; Senate's requirement for 60 votes to sustain an emergency designation; supermajority waiver requirements for most Budget Act rules; limitations on advance appropriations in the House and Senate; and point of order against legislation in the Senate causing discretionary caps for FY 2008 to be exceeded. (Senate Republicans criticized that the conference report does not establish any spending caps beyond FY 2008.) New points of order in the Senate against using Reconciliation for non-deficit reduction and increasing entitlement spending in appropriations bills.

Budget Resolution Conference Report
Summary of Conference Agreement
Conrad-Spratt Press Release
Senate Republican Statement
House Republican Statement

FY 2007 SUPPLEMENTAL UPDATE

Yesterday, the Senate defeated two cloture motions (60 votes required to cut off debate and permit a final vote):

1. Defeated 29-67 a cloture motion on a Feingold (D-WI) amendment setting a March 31, 2008 deadline for the withdrawal of U.S. troops from Iraq .

2. Fell short of 60 votes (52-44) on a cloture motion on a Warner (R-VA) amendment setting Iraq benchmarks, requiring the President to report on progress, but requiring withdrawal only if the Iraqi government passed a resolution calling for withdrawal.