January 15, 2008

A Look Ahead at Election Year Budget Battles

Budget Process Step-by-Step

Jan. 15: House convenes; override vote on President's veto of the FY 2008 defense authorization bill (although there is some dispute whether the President's veto was a "pocket-veto," which the Congress cannot override).

Jan. 17: Former Clinton Treasury Secretary Lawrence Summers will testify at the Joint Economic Committee on options for economic stimulus

Jan. 18: President Bush must decide by this date whether to release $3.7 billion in emergency veterans funding.

Jan. 22: Senate convenes

Jan. 23: CBO releases annual Budget and Economic Outlook: FY 2009-2018

Jan. 28: President's State of the Union Address laying out highlights of forthcoming Budget

Feb. 4: President transmits FY 2009 Budget requests to Congress

Feb: Budget and Appropriations Committees hold hearings on President's Budget requests

Late Feb./Early March: Authorizing committees transmit "views and estimates" on the President's proposals to the Budget Committees

Mid-March: House and Senate Budget Committees mark-up FY 2009 Budget Resolution

Late March/Early April: House and Senate Floor Action on respective Budget Resolutions

Log-in to WBR's Budget Calendar for more details.

Another Appropriations Battle Looming

Last year's appropriations battles began with congressional passage of a Budget Resolution in May 2007 calling for total discretionary spending levels $22 billion higher than the President's February request. The President insisted on capping discretionary spending at his requested level, prompting veto threats on nine congressional appropriation bills, and a highly contentious veto of the Labor-HHS-Education appropriations bill. Defense spending was the only appropriations bill to be enacted into law under the normal process.

After three continuing resolutions, the impasse was finally resolved in December with passage of an omnibus bill consolidating the remaining 11 appropriations bills--consistent with the President's total request, but reflecting many of Congress' priorities.

Looking ahead to this year's appropriations process, we can expect more of the same rancor between Congress and the President-- especially with the backdrop of a watershed election year. With Democrats hoping to re-gain the White House in January, we may very well see pre-election gridlock leading to a continuing resolution through early 2009.

Democrats will likely adopt a Budget Resolution calling for additional spending on priority domestic programs, and the President will respond with numerous veto threats attempting to recast his Administration's record as fiscally responsible.

Earmarks will again be a major rhetorical issue, particularly against the backdrop of the 2008 election campaign. (As predicted by WBR in December, the White House is reportedly considering an Executive Order directing agencies to ignore earmarks in congressional report language.) However, earmarks remain a red herring issue, distracting attention away from the rapidly growing public debt. Earmarks are a fraction of one percent of the Federal Budget and impact who makes the decisions on various projects--the Executive Branch or the Congress--not how much is spent. (The amount of overall spending is determined by the Congressional Budget Resolution.)

[Context-- Increasing Debt: The public debt has increased from $5.7 trillion in 2001 to $9.2 trillion today, due in large part to tax cuts, war spending, and entitlement expansion (the Medicaid prescription drug benefit) -- none of which were paid for. The increasing debt of the nation will accelerate as health care costs continue to outpace inflation and the baby boomers begin to retire.]

Log-in to WBR's Appropriations Tracker for details on the FY 2008 appropriations bills.

War Funding

Last February the President requested $145 billion in war funding for FY 2008, and later increased the request to a total of $196 billion. Last month's consolidated appropriations bill included only partial funding ($70 billion); Democrats will make another attempt in the spring of 2008 to attach a withdrawal timetable or various deployment conditions (limiting the length of deployments or repeat deployments) to the additional war funding.

Economic Stimulus Package; Dems Propose Summit

With some economists now mentioning the "R-word" (recession), presidential candidates and Members of Congress are beginning to talk publicly about an economic stimulus package.

The Administration will likely make extending the 2001 and 2003 tax cuts the centerpiece of its economic stimulus strategy when the FY 2009 Budget is released on February 4 (and President Bush will likely highlight extension of the tax cuts in the State of the Union Address on January 28). However, BNA's Daily Tax Report quotes Ways and Means Chairman Charles Rangel as saying that any stimulus package should be "temporary relief, fast, and targeted." [Context: The 2001 and 2003 tax cuts do not expire until the end of tax year 2010-- making extension of the tax cuts irrelevant to a short-term stimulus package.]

Democrats are split between those who favor middle-class tax cuts to stimulate consumer spending, some who favor increasing Federal infrastructure and other spending to boost encourage economic activity, and others who favor a combination of the two approaches. Depending on economic indicators, there may also be congressional proposals to provide Temporary Extended Unemployment Compensation-- provided most recently in 1991 and 2002.

On January 11, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid sent a letter to the President proposing a summit meeting on the economy to develop a bipartisan approach prior to the State of the Union Address.

The PAYGO rules adopted by the House and Senate last year make a discretionary spending package procedurally easier than tax cuts, since new tax cuts are required to be offset. [Context: New entitlement spending requires offsets, but additional discretionary spending does not require offsets as long as it is accommodated in the upcoming Budget Resolution's overall spending ceiling.]

Taxes: AMT Patch, Extenders, Alternative Energy Incentives

AMT Patch: Last month Congress enacted a one-year "AMT patch" to prevent 21 million people from paying higher Alternative Minimum Tax rates when they file their 2007 tax returns. Another patch for the 2008 tax year is a virtual certainty, although some House Democrats-- the fiscally conservative "Blue Dogs" in particular-- are likely to again demand that the revenue losses resulting from the patch be paid for by closing corporate loopholes. Under one possible scenario, Democrats will opt to use the filibuster-proof Budget Reconciliation process this year to pass an AMT patch, offset by closing loopholes. The Joint Tax Committee estimates that a one-year patch for 2008 will cost nearly $75 billion.

Tax Extenders: Congress failed to pass a "tax extenders" bill in 2007 to extend a range of tax credits and deductions that expired in 2006. The House passed an extenders bill last fall (HR 3996), but Senate Republicans objected to paying for the extenders with revenue raising provisions. However, it remains possible that at least some of the more popular extenders will be retroactively extended for tax year 2007 early in Congress' 2008 session.

The "extenders" refer to tax credits including the Work Opportunity Tax Credit (WOTC), the Welfare-to-Work Tax Credit (WWTC), and the research and experimentation (usually called the R&D) credit; deductions including elementary and secondary school teachers, tuition expenses, mortgage insurance premiums, corporate charitable contributions of computer technology, food inventory, and books, contributions of capital gain real property made for conservation, and state and local sales taxes; and other provisions including an excise tax to induce parity in the application of certain mental health benefits, penalty-free withdrawals from individual retirement plans (IRAs) for individuals called to active duty or for charitable giving, and mortgage revenue bonds for veterans.

Energy Bill: Last year, Congress passed landmark energy legislation (PL 110-140) increasing fuel efficiency requirements for automobiles. However, a filibuster in the Senate required Democrats to drop other provisions calling for a renewable energy mandate on utilities, as well as extension of tax incentives for wind and solar power (expiring in 2008), which would have been paid for by rolling back existing petroleum tax preferences. Congressional Quarterly reports that backers of these provisions are likely to take another run at passage this year.

Log-in to WBR's Tax Tracker for more details on pending tax issues.

Other Spending Bills: Farm Bill, SCHIP, Physician Payments

Farm Bill: The Senate passed its version of the multiyear Farm Bill, HR 2419, on December 14, 2007. The House passed its version on July 27, 2007. The House-Senate conference will begin early in 2008 session. The Administration has threatened to veto both the House version of the bill and the Senate version. In particular, the White House objects to increases in commodity price supports (which they say antagonize foreign trading partners), expansion of Davis-Bacon labor protections, and revenue raisers in the bills intended to pay for disaster relief for farmers, land conservation programs, and nutrition programs. CRS Comparison of House and Senate Farm Bills.

[Context: The "Farm Bill," renewed every 5 to 6 years, governs the key aspects of Federal farm policy. Many provisions of the last Farm Bill, enacted in 2002, expired in 2007 (but were temporarily extended). The 2002 bill covered 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 Programs.]

SCHIP, the State Children's Health Insurance Program, was extended until March 31, 2009 (S 2499), but without adding funding to expand the coverage of the program from 6 million to 10 million. Despite the extension, we will likely see another attempt during 2008 to expand the program, using increased cigarette taxes. [Context: 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.]

Medicare Physician Payments: Congress will likely address in 2008 the issue of scheduled Medicare physician payments; similar to the AMT patch, this may be another candidate for Budget Reconciliation. [Context: Last year, Congress included in the SCHIP extension (S 2499) a provision to postpone for 6 months a scheduled 10% cut in Medicare payments to physicians. The scheduled cuts date back to the Balanced Budget Act of 1997, which sought to slow the growth of Medicare spending, in part, by scheduling cuts in payments to physicians. Opponents of the scheduled cuts have been concerned that allowing them to go into effect would result in fewer physicians willing to treat Medicare patients. Under the temporary provision, Medicare will increase physician payments by 0.5 percent for the first 6 months of 2008, but without additional action the scheduled cuts will spring back next July.]

Log-in to WBR's Other Major Spending Legislation for more details on pending legislation.