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BUDGET PROCESS: Step-by-Step

Week of June 9:

--Multiple House Appropriations Subcommittee Mark-ups: Click Here for Schedule

--House to consider Senate amendments to the FY 2008 Supplemental Appropriations Bill (HR 2642)

--Senate cloture vote on HR 6049, the $55 billion tax extenders and energy incentives bill

--Senate consideration of Baucus Medicare bill to replace scheduled cuts in physician payments with a temporary increase (see details below)

--President expected to veto a corrected version of the 5-year Farm Bill, HR 6124, followed by override votes (see last week's report for more details on the Farm Bill).

June 10: Budget Act deadline for House Appropriations Committee to report last of the 12 regular appropriations bills. (However, there is no sanction for missing the deadline.)

June 30: Deadline for House to complete action on annual appropriations bills. (Technically, the House cannot leave for the July 4th Recess until completing all appropriations bills, but this restriction is routinely waived.)

House and Senate Approve FY 2009 Budget Resolution Conference Report

Last week Congress adopted S.Con.Res. 70, the FY 2009 Budget Resolution Conference Report. As a concurrent resolution of Congress, the measure is not a law and does not go to the President for approval. Rather, it sets parameters for subsequent consideration of spending and tax bills.

The Senate approved the Conference Report 48-45,largely on party lines (except for Republican Senators Susan Collins and Olympia Snowe of Maine voting for the Resolution, and Democratic Senator Evan Bayh voting for the Resolution). Presumptive Democratic nominee Barack Obama voted for the Resolution, while presumptive Republican nominee John McCain missed the vote.

The House approved the Conference Report 214-210, with all Republicans opposing the measure and nearly all Democrats supporting the Resolution.

Key Provisions of the Conference Report:

--The House and Senate conferees agreed on a total discretionary spending level $24.6 billion higher than the President's FY 2009 requests.

--On the other key conference issue, the House dropped their insistence on a Budget Reconciliation bill requiring revenue offsets to pay for a one-year AMT (Alternative Minimum Tax) patch. The fiscally conservative House "Blue Dog" Democrats had been insisting on using the filibuster-proof Budget Reconciliation process to ensure that a 2008 AMT patch would be "paid for" as required by House and Senate PAYGO rules. However, as reported in National Journal's Congress Daily, the Blue Dogs agreed to settle for a new point of order in the Senate against any measure that would increase the deficit by $10 billion or more. (However, this new point of order will be easily waived when the Senate votes on the AMT patch.)

--Passage of the Budget Resolution automatically generated a joint resolution to increase the public debt limit to $10.6 trillion. (Although the House is "deemed" to have passed the debt limit increase by virtue of adopting the Budget Resolution Conference Report, the debt limit measure must still be approved by the Senate and signed by the President.)

--The Budget Resolution rejects the President's proposed cuts in Medicare and Medicaid spending of nearly $200 billion over five years.

Other Provisions:

With regard to the impending expiration of tax cuts in 2010, the Conference Report assumes that the "middle class tax cuts" scheduled to expire in 2010 will be extended through 2013 at a revenue cost of $340 billion. This includes marriage penalty relief, the child tax credit, and the 10-percent tax bracket. However, this is merely a nonbinding assumption; the Conference Report does not call for a Reconciliation bill to implement the tax cuts (which would be premature since the existing provisions do not expire for another two years).

Tax cuts that are assumed to lapse after 2010 include lower rates on capital gains and dividends, which budget resolution opponents are framing as a "tax increase."

With regard to the estate tax, under current law the exemption per person is scheduled to climb to $3.5 million in 2009, followed by full repeal of the estate tax in 2010, and a return to 2001 levels thereafter. The Conference Report assumes extending the 2009 estate tax levels, indexed for inflation. However, as with the middle class tax cuts, the Conference Report does not call for a Reconciliation bill to implement the policy.

Overview of the Conference Agreement (House Budget Committee)
Conference Report on FY 2009 Budget Resolution
Statement of Managers
Senate Budget Chairman Kent Conrad's statement on the Conference Report
Senate Budget Ranking Republican Judd Gregg's statement on the Conference Report

Background

In March, 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 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
Senate Committee Report
WBR Backgrounder: What is a Budget Resolution?

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 CBO's March 2008 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.)

As noted above, In contrast to these deep cuts in nondefense spending, the Conference Report calls for FY 2009 discretionary spending $24.6 billion above the President's request.

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 Jim 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.

"Reserve Funds"

In order to project a balanced budget by 2012, while still showing support for specific policy priorities, the Budget Resolution Conference Report includes 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 Conference Report includes reserve funds for: State Children's Health Insurance (SCHIP) expansion (vetoed last year by the President); expanded veterans' benefits; infrastructure investment; renewable energy and energy efficiency; middle- income tax relief; reform of the AMT; higher education; affordable housing; Medicare improvements; health reform; Medicaid reform; 9/11 first responders; trade adjustment assistance (TAA) and unemployment insurance modernization; payments to counties; water rights settlements; the National Park Centennial Fund; child support enforcement; education improvement; infrastructure investments; clean energy; judicial pay and judgeships; immigration and enforcement; science parks; food safety; Medicaid coverage of HIV- infected individuals; and reducing the income threshold for the child tax credit.

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 plan increases 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 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.

The Conference Report, while rejecting permanent extension of all 2001 and 2003 tax cuts, 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 actually anticipating 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.)

The Estate Tax

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 the following year (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 Conference Report assumes a permanent extension of the 2009 estate tax rates (45% and $3.5 million exemption). However, this policy would result in revenue losses in 2011 and beyond, and would therefore have to include offsetting revenue increases under the congressional PAYGO rules. Backgrounder: Estate and Gift Taxes -- Myths and Facts

Balanced Budget Projections are Illusory

The President's Budget and Congress' Budget Resolution both project a balanced budget or budget surplus by 2012. However, neither of the projections are realistic for the following reasons: (1) Both 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) Both 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) Both 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.

Earmarks: A Continuing Distraction

During Floor debate in March, 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 repeatedly as the November elections approach.

Earlier this spring, a Senate Republican task force proposed that all earmarks be included in bill text rather than report language (purportedly to improve transparency), as well as requiring that earmarks stripped from bills reduce the overall spending in the bill rather than simply releasing funds for allocation by the administering agency. The Task Force included Senators Thad Cochran of Mississippi, Tom Coburn of Oklahoma, Michael Crapo of Idaho, and Johnny Isakson of Georgia.

Four points should be kept in mind regarding 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 last 7 years, during which time the Federal debt has increased from $5.6 trillion to more than $9.4 trillion; (2) earmarks in FY 2008 totaled about one- half of one percent of the Federal Budget; (3) The level of earmarks approved by Congress for FY 2008 was $12-$17 billion, depending on who is doing the counting*; 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.

*The higher figure is from Citizens Against Government Waste 2008 "Pig Book."

House to Consider Senate Amendments to '08 Supplemental; Veto Loomsr

Work will continue this week on HR 2642, the FY '08 War Supplemental. House appropriators spent last week re-working the bill, hoping to find accommodations acceptable to both the Senate and the White House.

President Bush has promised to veto any measure sent to him that exceeds his funding requests or "ties the hands of our commanders or impose[s] artificial timelines for withdrawal." President's speech.

Following is a summary of key issues that need to be resolved:

War Funding.--The President has requested $108 billion for the remainder of FY 2008 and $70 billion for the first part of FY 2009. The House attempted to pass a total of $162.5 billion, but the measure failed due to opposition from war opponents, and opposition from Republicans who objected to the procedure that bypassed the Appropriations Committee. However, the Senate amended the bill with war funding of $165.4 billion-- which is now pending before the House.

New GI Bill.--The provision would provide expanded veterans' education benefits to ensure sufficient funds for a 4-year state university education. The House sought to pay for the provision last month through a new millionaires' surtax (applied to individual taxpayers earning over $500,000 and joint filers earning over $1 million.) The Senate passed the new GI Bill, but rejected the House surtax. House Blue Dogs continue to press for budgetary offsets to pay for the new education benefits. The Administration strongly opposes the surtax, and is concerned it "could harm retention rates within the armed forces."

Nondefense Domestic Funding.--Overall, the Senate version includes about $10 billion in additional discretionary spending not requested by the President, which would almost certainly trigger a veto threat from the White House. Among other items, the spending includes $1 billion for the Low Income Home Energy Assistance Program (LIHEAP); $490 million for state and local law enforcement grants, $275 million to beef up FDA enforcement, and $451 million for emergency highway repairs. Congressional Quarterly reports that Chairman Obey (D-WI) of the House Appropriations Committee is aiming for a smaller domestic spending package in order to avoid a veto.

Extended Unemployment Insurance Benefits.--The House and Senate bills include extension of unemployment insurance benefits beyond the usual 6 months. The Administration views the proposed extension as unnecessary, and expresses concern that "it would reduce the incentive for workers to find new employment." It is unclear whether that position might soften given the recent spike in unemployment from 5 percent to 5.5 percent.

Delaying Medicaid Regs.--The Senate amendment would delay implementation of 7 new Medicaid regulations that would reduce Federal payments to States. The Administration strongly opposes the delay arguing it "would turn back progress that has already been made to stop waste, fraud and abuse." Congressional Quarterly reports the House may propose delaying 4 of the 7 regulations until April 2009 (which would give the new President time to address the Medicaid regs.)

FY '08 Supplemental: Key Provisions	Administration Request	House- Passed	Senate- Passed
War funding for remainder of FY' 08	$108 billion	$162.5 billion for war funding (failed to pass the House)	Senate passed $165.4 billion
War ("bridge") funding for first part of FY'09	$70 billion
War policy provisions	Veto threat on war policy provisions	Withdrawal by Dec 31, 2009; Ban permanent bases	No war policy provisions
New "GI Bill" for Veterans	Opposed due to cost and retention concerns	New GI Bill offset by millionaires surtax	New GI Bill would cost $52 b over 10 years
Additional Domestic Spending	Administration threatens a veto over additional domestic spending	House likely to reject much of the additional spending	Census, Bureau of Prisons, Science programs, LIHEAP, law enforcement, rural schools, FDA, wildfires
Extension of unemployment insurance benefits	Opposes as unnecessary	Additional 13 weeks for all states; more for high unemployment states	Additional 13 weeks for all states; more for high unemployment states
Delay recent Medicaid Regs aimed at cutting Federal payments to State Medicaid programs	Administration opposes and delay	Would delay implementation of 4 regs	Would overturn the Medicaid regs

Statement of Administration Policy: Senate Bill
Summary of Senate Action
Chairman Byrd Statement on Supplemental
Statement of Administration Policy: House Bill
Text of FY 2008 Emergency Supplemental (House)
Preliminary CBO cost estimate for Post-9/11 Veterans Educational Assistance Act (the new GI Bill)

Senate Finance Chairman Unveils Medicare Bill to Block Cuts in Physician Pay;
Outlook Uncertain due to Medicare Advantage Offsets

Last Friday, Senate Finance Committee Chairman Max Baucus (D-MT) unveiled a Medicare bill (S. 3101) designed to nullify a scheduled cut in payments to physicians and substitute a payment increase of 1.1 percent in 2009. In the absence of legislation, a cut of 10.6% in Medicare payments to physicians will occur automatically on July 1st, as required by prior legislation. Advocates of overturning the cuts believe that some physicians will stop treating Medicare beneficiaries if the scheduled cuts were to take effect.

The Administration and many congressional Republicans oppose the Baucus plan because it would offset the 5-year $20 billion cost of the bill largely by cuts to privately run ("Medicare Advantage") plans. Many Democrats believe the private plans receive too much government support, while many Republicans believe the private sector managed care plans will reduce overall Medicare costs (though that has not yet been the experience).

In a May 22, 2008 letter to Congress, Health and Human Services Secretary Michael Leavitt said the President would veto any Medicare bill that cuts payments to Medicare Advantage plans.

Other provisions included in the Baucus bill would: provide incentives for physicians who use electronic prescribing; offer more assistance to low-income participants in the Medicare prescription drug program; eliminate higher copayments for mental health services; and enhance services in rural areas.

Outlook: Senator Charles Grassley (R-IA), Ranking Republican on the Senate Finance Committee, plans to release his own bill early in the week containing fewer cuts to Medicare Advantage plans. Ultimately, Baucus and Grassley are likely to negotiate a compromise version of the bill acceptable to the Administration prior to July 1.

From a fiscal perspective, legislation of this type--which tinkers around the edges of the Medicare program--reflects an ongoing stalemate between Democrats and Republicans over how to significantly rein in the rapid growth of Medicare costs.

Section-by-section summary of Sen. Baucus' Medicare Improvements for Patients and Providers Act of 2008

Senate Takes Up $55 Billion "Tax Extenders" Bill; Outlook Uncertain Due to Offsets

This week the Senate take ups HR 6049, a $55 billion tax extenders and energy incentives bill. Senate Majority Leader Harry Reid (D-NV) filed a cloture petition on the bill last Friday due to strong Republican opposition to revenue- raising measures included in the bill to offset its costs.

One offset in the bill would prevent executives and some hedge fund managers from deferring compensation by using offshore arrangements ($24 billion over 10 years). Another offset would delay rules that give multinational corporations more flexibility in how they allocate interest expenses ($30 billion over 10 years).

Over 10 years, the bill spends about $27 billion on provisions to extend dozens of expired (and expiring) tax provisions. The bill also includes nearly $17 billion in energy tax incentives and about $10 billion in additional tax relief. The bill passed the House 263-160 on May 21.

JCT Revenue Estimate (summarizes the bill)
JCT Description (detailed description of provisions)

President Bush has threatened to veto the bill due to the revenue raisers.

Many Republicans argue that extension of current tax laws should not require offsets. They point out that under current congressional budget rules, extension of expiring entitlement spending programs do not require offsets.

On the issue of offsets, 41 Republican Senators (the number needed to successfully filibuster legislation) have signed a letter opposing the use of any offsets for extenders or AMT relief. (The letter was signed by the party leadership, Senator John McCain (R-AZ), and all Finance Committee Republicans except for Maine Senator Olympia Snowe.) Text of the Senate Letter

2008 AMT Patch: The House- passed bill does not include an AMT patch. Failure to extend Alternative Minimum Tax Relief through 2008 would result in the AMT boosting taxes for an additional 21 million taxpayers. It is unclear whether congressional leaders will opt to include a $61 billion AMT patch in this measure, or move it separately. The political calculus depends on whether the extenders bill stalls over the offsets issue.

Among the Items extended by the bill are:

--the R&E tax credit (usually referred to as the research and development credit)
--the option to deduct state sales taxes instead of income taxes
--the deduction for qualified tuition expenses
--tax-free distribution from IRAs to certain public charities
--the deduction for teacher classroom expenses
--the "new markets" tax credit
--15-yr straight-line cost recovery for qualified leasehold improvements
--expensing of "Brownfields" environmental remediation costs

Among the energy tax incentives are:

--$10 billion over 10 years for clean energy production incentives
--$2.7 billion over 10 years for transportation and domestic fuel security provisions
--$4.3 billion over 10 years for energy conservation and efficiency provisions

Negotiations Continue on Housing and Mortgage Relief Legislation

Last month, the Senate Banking, Housing, and Urban Affairs Committee overwhelmingly (19-2) approved bipartisan legislation aimed at helping borrowers refinance home mortgages and overhauling the regulation of Fannie Mae and Freddie Mac. The Senate Committee, the House Financial Services Committee, and Administration officials are currently negotiating key points of contention in an effort to complete action before the July 4th recess.

Key issues include the Senate's proposal to use a new Affordable Housing Trust Fund to pay for an expansion of Federal mortgage guarantees. House Financial Services Chairman Barney Frank (D-MA) strongly opposes this use of Trust Fund resources.

Senate Banking Committee Summary of Dodd-Shelby Housing Bill
Statement of Administration Policy on HR 3221

Following is a brief comparison of the Senate Banking Committee and House-passed measures:

The House also passed a related measure HR 5818, that would authorize the Department of Housing and Urban Development (HUD) to make $15 billion in loans to States for housing authorities and nonprofits to purchase, renovate, and sell foreclosed housing. The Bush Administration has threatened to veto the bill, saying it would "constitute a costly bailout for lenders and speculators and would delay the economic recovery it purports to advance."

Statement of Administration Policy on HR 5818

Recent Budget Docs


"Taking Back Our Fiscal Future" -- Brookings, AEI, Heritage, Urban Institute, Concord Coalition, PPI

CBO: Sources of Projected Growth in Medicare and Medicaid

CBO Cost Estimate: Lieberman- Warner Climate Security Act of 2008

CBO: Issues and Options in Infrastructure Investment

CBO: Capital Budgeting

CBO: Policy Options for the Housing and Financial Markets

CBO: Long-Term Effects of Alternative Budget Policies

GAO: The Nation's Long-Term Fiscal Outlook (Update)

GAO: Making Tough Budget Choices to Create a Better Future

America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year, by Charles S. Konigsberg, Editor-in-Chief and Publisher, Washington Budget Report.

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