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Budget Process: Step-by-Step Last week, the House of Representatives and the Senate adopted their respective versions of the FY 2008 Budget Resolution. The House measure, H Con Res 312, passed 212-207; and the Senate resolution, S Con Res 70, passed 51-44. The House-Senate conference will begin when the Senate reconvenes March 31, following the Easter Recess. (The Budget Resolution is an internal congressional framework requiring concurrence of the House and Senate, but is not a law and does not require the President's signature.)
House Committee Report April 15: Deadline for adoption of the Conference Report on the FY 2009 Budget Resolution Late April: House Appropriations Subcommittees begin marking up FY 2009 appropriations bills June 10: Deadline for House Appropriations Committee to report last of the 12 regular appropriations bills June 30: Deadline for House to complete action on annual appropriations bills Non-Defense Discretionary Spending Levels Already Face Veto Threats In order to show a balanced budget 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 the year 2013, the President's Budget calls for nondefense discretionary spending to be $68 billion below the "current services baseline," which projects current government programs continuing into the future with inflation-adjustments." In contrast to these deep cuts in nondefense spending, the House Budget Resolution calls for approximately $25 billion more than the President in FY 2009 non-defense discretionary spending, and the Senate calls for about $22 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 Budget Chairmen John Spratt (D-SC) and Conrad (D-ND) had even 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," making the prospective use of the "reserve funds" listed below highly unlikely. War Funding for Iraq and Afghanistan The Administration's February Budget includes only partial, short-term war funding ($70 billion for FY 2009 and nothing thereafter) -- one reason why their balanced budget projections for 2012 and 2013 are illusory (since they anticipate a substantial and continuing troop presence beyond 2009). The Administration's practice of under-funding war requests in the February Budget, and then seeking enormous supplemental appropriations, has caused significant friction with congressional Democrats and Republicans. The effect of the Administration's practice is to radically underestimate projected deficits in the President's February Budget. (The House and Senate Budget Resolutions reflect the President's requested level.) Budget Resolution Reserve Funds In order to project a balanced budget by 2012, while still showing support for specific policy priorities, the House- and Senate-passed Budget Resolutions again include numerous "reserve funds." WBR Backgrounder: What is a Reserve Fund? 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 reduced to pay for the specified initiative. (Therefore, the Administration's threat to veto any revenue raisers casts doubt on the viability of reserve funds that would allow new spending, paid for by new revenues.) The House-passed 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, as reported by the Budget Committee, contained 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. During last week's vote-a-rama, the Senate added dozens of additional reserve funds which are summarized in the Congressional Record digest for March 13, 2008. Tax Increases, AMT Relief, and the Estate Tax Tax Increases, or Not? Similar to last year's debate on the Budget Resolution, much of the debate during House and Senate Floor action 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; an expanded child tax credit; phase-out of the estate tax; and tax relief for married couples (expanded standard deduction and 15% tax bracket). (Expiration of the estate tax phase-out would cause the pre-2001 estate tax levels to spring back in 2011.) In general, Democrats assert that letting the tax cuts expire in 2010 would not constitute a tax increase because it would not change current law. Republicans counter that in 2011, if tax rates automatically return to pre-2001 levels, the effect would be equivalent to a tax increase. This debate will continue throughout consideration of the conference report and into the fall presidential and congressional election campaigns. Senate Democrats, while rejecting permanent extension of all 2001 and 2003 tax cuts, would extend some of them. Last week, the Senate adopted, by a vote of 99-1, a Floor amendment offered by Finance Committee Chairman Max Baucus (D-MT) that assumes extension of middle income tax relief beyond the current expiration date of 2010 (marriage penalty relief, the child tax credit, and the 10 percent bracket). However, no one is anticipating any legislative action until the next Congress. (Also, bear in mind that the current Senate and House PAYGO rules require that such extensions be fully offset by other tax increases or spending cuts.) Estate Taxes: Under current law, estate taxes in 2009 are to be rolled back to a 45% tax rate and a $3.5 million exemption ($7 million for joint estates), with a full repeal of estate taxes in 2010. However, because the Bush tax cuts expire in 2010, the pre-2001 estate tax is scheduled to "spring back" in 2011. The President's Budget would permanently repeal the estate tax. The House-passed Budget Resolution assumes the pre-2001 Estate Tax will spring back in 2011. The Senate-passed Budget Resolution assumes permanent extension of the 2009 estate tax rates (45% and $3.5 million exemption). The House-Senate conference will need to resolve this difference between the House and Senate Resolutions. Backgrounder: Estate and Gift Taxes -- Myths and Facts 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 will become subject to the AMT. The President's Budget would provide AMT relief for tax year 2008, costing $60-$70 billion. 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 assumes passage of a one-year AMT patch without offsetting revenues, 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--is pressing hard to require offsets for the AMT patch, despite the Senate's reluctance. Budget Reconciliation for '09 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, changing 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.) The House-passed Budget Resolution includes instructions to the Ways & Means Committee to report by July 15, 2008 a Reconciliation 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, deficit-neutral (fully paid for) AMT patch. The Reconciliation section of the House-passed resolution also includes a placeholder for legislation to forestall cuts in Medicare payments to physicians, possibly paid for with cuts to the Medicare Advantage (managed care) program. The inclusion of Reconciliation instructions in the Budget Resolution will be a major point of contention during the upcoming House-Senate conference, because the use of Reconciliation could jeopardize the support of Senate Republicans Susan Collins and Olympia Snowe of Maine--votes that are key to passage of a conference report. 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 $540 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. (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 increase the public debt by $287 billion by 2018. This would occur because the President's privatization plan would divert Social Security revenues from payment of current benefits, into individual accounts of future retirees. On the congressional side, House leaders oppose permanent extension of the 2001 and 2003 tax cuts (and Senate leaders would extend only some of the tax cuts) due to their enormous cost. However, the draft Budget Resolutions do not propose 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: A Continuing Distraction During last week's Floor debate, observers heard a lot of rhetoric regarding appropriations earmarks. Although efforts to impose an earmarks moratorium via the Budget Resolution failed, this "hot-button issue" is not going away, and is certain to be debated again and again as the November elections approach. Four points should be kept in mind about earmarks: (1) The lofty rhetoric against earmarks, on Capitol Hill and at the White House, is essentially a red herring intended to distract voters' attention away from the fiscal irresponsibility of the last 7 years during which time the Federal debt has increased from $5.6 trillion to nearly $9.4 trillion; (2) earmarks in FY 2008 totaled less than one-half of one percent of the Federal Budget; (3) The level of earmarks approved by Congress for FY 2008 was about $12 billion, a 40% cut below FY 2005; and (4) while everyone would agree that wasteful earmarks should be eliminated, some earmarks, such as Senator Pete Domenici's (R-NM) earmark to begin NIH's human genome project, have been invaluable. Balanced Budget Projections are Illusory Each of the three budget plans -- the President's Budget, the House Resolution, and the Senate Resolution -- project a balanced budget or budget surplus by 2012. Unfortunately, none of the projections are realistic for the following reasons: (1) All three budgets continue to use Social Security surpluses to mask ongoing structural deficits - a reckless practice since the Social Security surpluses will disappear by 2017; (2) All three budgets fail to include Iraq and Afghanistan war funding beyond mid-2009 - which is highly unrealistic even assuming that a withdrawal from Iraq begins next year; and (3) All three budgets assume only a one-year "patch" for the Alternative Minimum Tax, despite widespread agreement that AMT relief is likely to be provided in each of the next 5 years. In addition, the President's Budget proposes sharply declining spending for nondefense discretionary programs which would necessitate unrealistic, draconian cuts. Recent Budget Docs CBO: The Long-Term Budgetary Effects of Three Specified Policy Scenarios CBO: Health Care - Capturing the Opportunity in the Nation's Core Fiscal Challenge 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. * * * * * * * * * * * * * * * * *
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| Charles S. Konigsberg, President | (703) 351-5048 (ph) | (703) 351-6218 (fax) | ckonigsberg@federalbudgetgroup.com | |
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