December 17, 2007

Capsule Summary--This Week:

Last week Congress extended the Continuing Resolution (HJRes 69) through this Friday, December 21.

NON-DEFENSE APPROPRIATIONS. Seeking to regain fiscal credibility after a 60 percent increase in the Federal Debt (from $5.7 trillion in 2001 to $9.2 trillion today), President Bush earlier this year drew a line in the sand on nondefense discretionary spending, promising to veto any bills that exceed his 2008 requested levels.

[Context: Nondefense discretionary spending is the smallest budget category, at about 18 percent, but funds most of the departments, agencies, and programs of the government. Mandatory spending (including Social Security, Medicare, Medicaid, other entitlements, and interest payments) consumes more than 60 percent of the budget, and defense discretionary spending consumes more than 20 percent of the budget.]

Last Spring's congressional budget resolution allowed the Appropriations Committees to write bills that would exceed the President's total discretionary spending request by about $23 billion.

With GOP congressional assurances that his vetoes would be sustained, the President eventually threatened to veto nine of the twelve nondefense spending bills--seven due to spending levels exceeding his top line.

In light of the President's recent veto of the Labor-HHS- Education bill (HR 3043), and promised vetoes to follow, congressional Democrats have been forced to accede to the President's top line on nondefense spending. An attempt last week to "split the difference" failed.

Appropriators worked through this past weekend to craft an omnibus appropriations bill that consolidates the 11 nondefense spending bills and cuts back spending levels to keep total discretionary appropriations roughly within the President's $933 billion request for FY 2008. Some additional "emergency" spending will be provided for veterans health care, and possibly border fencing, foreign aid, drought relief, and LIHEAP (Low Income Home Energy Assistance). (Omnibus Bill) (Obey Statement)

If agreement cannot be reached this week on an omnibus bill, the only remaining alternatives are another short-term CR to keep the government operating until Congress reconvenes in 2008, or another full year continuing resolution--which appropriators of both political parties want to avoid.

WAR FUNDING: It appears likely that a portion of the President's $195 billion 2008 war funding request (possibly $70 billion) will be added to the omnibus bill by a Senate amendment--without a timetable or other strings attached. However, a substantial number of Democrats committed to a withdrawal timetable can be expected to vote against any war funding that is unconditional. Final passage of the omnibus will consequently depend on attracting Republican support.

AMT PATCH: House Democrats may try one more time to move an AMT patch, with offsetting revenue raisers. Senate Republicans continue to strongly oppose enacting revenue raisers to pay for the cost of the patch, and Senate Finance Chairman Baucus has acceded to that position. However, former Fed Chairman Alan Greenspan said yesterday on ABC's This Week that Congress should follow PAYGO principles and pay for the AMT .

SCHIP: Last week the President again vetoed legislation to extend and expand the coverage of State Children's Health Insurance (SCHIP) paid for by cigarette taxes. The only question--to be answered this week--is the duration of the SCHIP extension, that is, whether it will last until early in calendar year 2008, the end of the fiscal year (a month before the presidential election), or into the next President's term.

ENERGY BILL: Final action is expected this week on a slimmed down energy bill that raises fuel efficiency requirements for automakers, but no longer includes tax incentives for hybrids and development of alternative fuels paid for by rolling back oil and gas industry tax preferences. The Senate dropped the tax provisions last week due to a threatened Republican filibuster.

MEDICARE PHYSICIAN PAYMENTS: Congress is likely this week to pass a slimmed down Medicare bill that repeals a scheduled 10 percent cut in Medicare physician payments.

FARM BILL (HR 2419): The Senate last week passed the farm bill, although a temporary extension of current law into 2008 will be required to give House and Senate negotiators time to work out a conference report when Congress reconvenes next year. Key votes in last week's Senate debate were the defeat of the Grassley-Dorgan amendment to cap annual farm payments and defeat of an amendment to prohibit subsidies to full-time farmers earning more than $750,000 per year.

Looking Ahead: House and Senate will reconvene for the second session on Tuesday, January 15. The President will deliver the State of the Union Address on January 22, 2008.

Appropriations: Impasse on Spending Levels and War Funding

Congress and the President are mired in the most contentious budget battle since 1995. Two months into the fiscal year, only 1 of the 12 FY 2008 appropriations bills (Defense non-war spending) has been enacted. The Federal Government is currently operating under a continuing resolution (included in HR 3222) allowing programs to operate at FY 2007 spending levels through December 21. Two fundamental issues divide Congress and the Administration: discretionary spending levels and funding for the war in Iraq.

1. Logjam on Spending Levels: President Bush has threatened to veto 7 of the 12 FY 2008 Appropriations Bills due to spending levels that exceed his requests by $23 billion; and has issued 2 additional veto threats on policy grounds [summarized below].

The bills which the President has threatened to veto due to spending levels are:
Agriculture, Commerce-Justice-State, Energy-Water, Homeland Security, Interior-Environment, Labor-HHS-Education, and Transportation-HUD. The President has also threatened to veto the Financial Services and State-Foreign Ops appropriations bills on policy grounds (Cuba and abortion funding, respectively). The President has called for offsets to pay for the Mil Con-VA Bill.

Omnibus Bill Summaries:
Agriculture-Rural Development
Commerce-Justice-Science
Energy-Water
Financial Services
Homeland Security
Interior-Environment
Labor-HHS-Education
Legislative
Mil Con-VA
State-Foreign Ops
Transportation-HUD

AMT: Disagreement Continues on Offsets

The Treasury Department projects that the number of taxpayers subject to the AMT in 2007 will jump from 4 million to 25 million without enactment of a one-year patch. (Treasury Statement)

House Democrats may make another attempt this week to bring to the Floor an AMT patch with offsetting revenue raisers, including $24 billion from new limits on the ability of hedge fund managers to defer offshore compensation, and $25 billion from delaying new interest expense allocation rules that benefit multinational corporations. (Rangel Release)

However, on December 6, the Senate voted 88-5 to pass an AMT patch, but without offsets to pay for the patch and without tax extenders. (H.R. 3996) The offsets and extenders included in the House bill were dropped by a Baucus amendment, after a cloture motion on the House bill failed by a vote of 46-48.

This morning, BNA Daily Tax Report quoted Senator Baucus as saying, "AMT will pass, unpaid for, this year....It will happen, you can count on it."

The President had threatened to veto the House bill over the revenue raisers, as well as provisions that would repeal the IRS's authorization to use private debt collectors.

PAYGO Offsets: The AMT/extenders legislation presents a major problem for Democrats who trumpeted the importance of reestablishing PAYGO rules last January. House Democrats remain committed to passing the AMT patch with offsets, refusing to waive PAYGO rules. (Blue Dog Statement) Last month's House vote, however, exposed divisions in the party, with some Democrats siding with the Republicans. Congressional Republicans have renewed calls for patching the AMT without offsets. (Boehner Release)

[Context on AMT: The AMT was enacted in 1969 to preclude very wealthy individuals from escaping all tax liability due to tax loopholes. It operates as an alternative calculation of income tax liability which cancels out various deductions, exclusions, and tax preferences. Taxpayers are required to pay the higher of AMT tax liability and regular income tax liability. However, 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.]

SCHIP to be extended, but not expanded

With Congress and the President at an impasse on legislation to expand State Children's Health Insurance (SCHIP) funding, Congress is instead likely to pass a simple extension of the program, with sufficient funds to cover increasing health care costs for current recipients--but not to increase enrollment.

The only remaining question is whether Democrats will draft the extension of the current program to require another vote early in calendar year 2008, at the end of the fiscal year (a month before the presidential election), or into the next President's term.

Last week the President vetoed a revised SCHIP bill (H.R. 3963) which would have expanded the program.

[Context: The congressional SCHIP bill would reauthorize the program and increase Federal funding by $35 billion over 5 years ($30 billion more than the President's request) in order to boost covered children from 6 million to 10 million. 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.]

Recent Budget-Related Docs

CBO: Long-Term Budget Outlook

CBO: Long-Term Implications of Current Defense Plans

CBO: Historical Effective Federal Tax Rates