April 23, 2007 War Supplemental Heading for Floor Votes, Veto BUDGET PROCESS: STEP-BY-STEP™
April 18: Democratic and Republican congressional leaders met with President Bush to discuss the impasse over the Iraq withdrawal timetables included in the FY 2007 War Supplemental (with the House-passed bill calling for a pullout by September 1, 2008 and the Senate bill calling for withdrawal to begin within 120 days and setting a nonbinding withdrawal goal of March 2008). No progress – veto likely on either House or Senate version. April 19: Army releases letter saying that with a variety of spending restrictions and transfers among budget accounts, “funds are sufficient to keep operations running only until the end of June.” April 20: Senate Finance and House Ways & Means Committees agree on a $4.8 billion small business tax relief package to accompany the minimum wage increase, to be included in H.R. 1591, the War Supplemental. April 23: Release of Social Security and Medicare Trustees Annual Reports. April 23 (4:30pm) : War Supplemental House and Senate conferees met and approved a Conference Agreement. April 23 (week of): Appointment of House and Senate Budget Resolution conferees (aiming at completion of conference report by mid-May). April 25: Possible vote in House on War Supplemental Conference Report, followed by Senate vote on April 26. April 27: House Appropriations Committee deadline for submission of FY 2008 earmark requests. ( Senate subcommittee deadlines were late March/early April.) May 15: Chairman Spratt's new target date for adoption of an FY 2008 Budget Resolution Conference Report. Mid-May: Following adoption of a Budget Resolution Conference Report, House and Senate Appropriations Committees make critical discretionary spending allocations (known as 302(b) allocations) among their 12 subcommittees. This is a key step in setting Federal spending priorities. CONFERENCE AGREEMENT ON WAR SUPPLEMENTAL Table Comparing President's Request, House-passed, Senate-passed, and Conference Agreement Funding legislation for the wars in Iraq and Afghanistan, military and veterans health care, homeland security, and hurricane Katrina recovery moved through a House-Senate Conference Committee yesterday. At yesterday's conference meeting, on the key issue of Iraq, House and Senate negotiators opted for the Senate approach of a soft timetable--setting goals rather than a firm deadline--with a goal of withdrawing most U.S. combat troopers by March 31, 2008 if certain benchmarks are met. Context: With a veto expected (particularly after last week's unproductive meeting of congressional leaders and the President), Democrats will likely attempt to modify the legislation, dropping the timetables but continuing to include benchmarks. At that point in the process, it is unclear whether the modified legislation will be a "full supplemental" (to cover the remainder of FY 2007) or a short-term supplemental (as some in the House are urging in order keep pressure on the Administration). Highlights of the $124.2 billion Conference Agreement:
Tax Package: Last Friday, Senate Finance Chairman Max Baucus (D-MT) and House Ways & Means Chairman Charles Rangel (D-NY) announced an agreement on a $4.8 billion small business tax relief package to accompany a minimum wage increase. The minimum wage-tax relief package, the costs of which are fully offset, are to be included in the War Supplemental bill. Major provisions of the tax package include extension of the Work Opportunity Tax Credit, provisions helpful to S-Corporations, increasing expensing limits, and Gulf Opportunity Zone provisions. Following is a link to a summary of the package. FY 2008 BUDGET RESOLUTION Table Comparing President's Budget, S.Con.Res. 21 and H.Con.Res. 99 While pre-conference negotiations have been ongoing, House and Senate Budget conferees will not be formally appointed until this week, with the first formal meeting of the conferees possibly occurring later this week. Top issue on the agenda: the Senate's Baucus amendment which: (1) provides funds to extend some of the expiring “middle class” tax cuts (including marriage penalty relief, the child credit, adoption tax credit, and the 10% bracket) ;and (2) provides $15 billion to expand State Children's Health Insurance coverage. The House-passed resolution, by contrast, makes tax cut extensions and SCHIP expansion contingent on identifying budgetary offsets (i.e. tax increases or entitlement spending cuts). Rather than making room in the resolution for the tax cut extensions and SCHIP funding, the House resolution generates a 2012 surplus of $153 billion. Context: The Budget Resolution is an internal procedural mechanism of the Congress—guiding subsequent action on spending and revenue bills—and does not go to the President for signature. Other conference issues will include : (1) Whether to adjust revenues to allow for an Alternative Minimum Tax ( AMT) fix for any years beyond FY 2007; (2) whether to let the estate tax bounce back to 2001 levels after 2010, or whether to accept the Baucus provision to extend the 2009 estate tax rate (45%) and exemption level ($3.5 million ); (3) whether to set the non-defense discretionary total for FY 2008 at the Senate's $448 billion level, or the House's $454 billion level; (4) whether to accept the Senate's Baucus amendment that provides $15 billion in additional funding for SCHIP , the State Children's Health Insurance program, or require that any funding for expansion of SCHIP coverage must be fully offset; (5) whether to include the House's “Budget Reconciliation” instruction that would place student loan reforms on a filibuster-proof fast-track; and (6) which of the Senate Resolution's new points of order to retain.
SOCIAL SECURITY, MEDICARE TRUSTEES RELEASE ANNUAL REPOR Today the Social Security and Medicare Trustees released their annual reports on the Social Security and Medicare Trust Funds finding that “ the financial condition of the Social Security and Medicare programs remains problematic; we believe their currently projected long run growth rates are not sustainable under current financing arrangements …. We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer we wait to address these challenges, the more limited will be the options available, the greater will be the required adjustments, and the more severe the potential detrimental economic impact on our nation.” Highlights of the report: “Medicare's financial difficulties come sooner--and are much more severe--than those confronting Social Security. While both programs face demographic challenges, the impact is greater for Medicare because health care costs increase at older ages. Moreover, underlying health care costs per enrollee are projected to rise faster than the wages per worker on which payroll taxes and Social Security benefits are based. As a result, while Medicare's annual costs were 3.1 percent of GDP in 2006…they are projected to surpass Social Security expenditures in 2028 and exceed 11 percent of GDP in 2081.” “The projected date of (Medicare Part A Hospital Insurance) Trust Fund exhaustion is 2019…when tax income will be sufficient to pay only 79 percent of HI costs.” The Trustees estimate that within 6 years, 45 percent of Medicare funding will come from general revenues. Under the 2003 Medicare Rx legislation, this triggers a “Medicare Funding Warning” which requires that the President propose legislation early next year to address the amount of general revenues being used to sustain the program and for Congress to consider the proposal on an expedited basis. Context: The 45 percent threshold is an artificial milestone. Medicare has always been intended to be funded through a combination of general revenues, payroll taxes, and premiums. The more relevant issue is how to moderate rapidly rising health care costs so that the rapid growth of the overall Medicare program is brought under control. The annual cost of Social Security benefits represented 4.2 percent of Gross Domestic Product (GDP) in 2006, is projected to increase to 6.2 percent of GDP in 2030, and then rise slowly to 6.3 percent of GDP in 2081. Projected Social Security tax income will begin to fall short of outlays in 2017 and will be sufficient to finance only 75 percent of scheduled annual benefits in 2041. TAX GAP RECEIVES INCREASING SCRUTINY Last week, Senate Finance Committee Chairman Max Baucus (D-MT) told Treasury Secretary Paulson that the Treasury Department must transmit to Congress by July 18 a plan to reduce the tax gap, with a goal of 90 percent voluntary compliance by 2017. Senator Baucus has long focused on “closing the tax gap”—taxes owed but not paid—as a means of boosting federal revenues. The Department estimates the tax gap in 2001, the most recent year for which estimates are available, at $345 billion reflecting a compliance rate of 84 percent. The “net tax gap” for that year, which includes late payments and recoveries, was $290 billion. Assistant Secretary for Tax Policy Eric Solomon outlined in testimony Treasury's tax gap strategy, including the administration's fiscal year 2008 budget proposals, regulatory projects, and other initiatives.
Also last week, the Governmental Accountability Office released a report on the Tax Gap . The report finds that “promising targets for additional research to improve reporting compliance include: income/losses from partnerships and S corporations; income/losses from rental real estate; sole proprietor income/losses; income/losses from farming; other income—net operating losses; gambling income/losses; capital gains for assets other than securities; other gains/losses; Earned Income Tax Credit; Additional Child Tax Credit; deduction for charitable contributions; deduction for medical and dental expenses; deduction for job expenses and most other deductions; and exemptions.” SENATE REPUBLICANS FILIBUSTER MEDICARE Rx BILL Last Wednesday, Senate Democrats fell 5 votes short of getting the 60 votes needed to shut down a Republican filibuster of S. 3, Senator Baucus' bill to strike language in the 2003 Medicare Rx law that prohibits the Secretary of HHS from negotiating drug prices (known as the “noninterference clause”). Senate Vote Tally Prior to the cloture vote, the Office of Management and Budget had already promised a veto, should the bill reach the White House. OMB Veto Threat While the issue has generated a great deal of debate, the practical budgetary implications are minimal. Prior to the Finance Committee action, the Congressional Budget Office released two letters casting doubt on how much savings could actually be achieved from the Baucus proposal. The CBO letter to Senator Baucus, states in part "that modifying the noninterference provision would have a negligible effect on federal spending because we anticipate that under the bill the Secretary would lack the leverage to negotiate prices... that are more favorable than those obtained by prescription drug plans under current law." CBO also stated in a letter to Sen. Ron Wyden (D-OR) that significant savings can be achieved only by allowing Medicare to establish a formulary or set prices administratively --which neither the Baucus bill nor the Medicare Rx bill that already passed the House (H.R. 4)—would permit.
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| Charles S. Konigsberg, President | (202) 587-2984 (ph) | (202) 587-2983 (fax) | ckonigsberg@federalbudgetgroup.com | |