January 29, 2007

Welcome to the second issue of the Washington Budget Report . In this e-newsletter, one of Washington's leading budget experts will provide you with plain English, nonpartisan analysis of Federal

Budget developments. Budget, appropriations, and tax issues, and the demographic tidal wave that is about to engulf our nation's entitlement programs, are at the top of our national domestic agenda. Washington Budget Report 's analysis of the Budget will assist journalists, financial leaders, government affairs professionals, nonprofit and corporate leaders, and the general public to identify key issues and track the complex congressional budget process as it unfolds.

We deliver WBR by e-mail at the beginning of each week, as well as "Budget Alerts" when news breaks. We're pleased to include you in this complimentary introduction to WBR . To continue receiving WBR and be guaranteed quick delivery in a PDA compatible format, enter your e-mail in the red subscribe bar above.

DEMS ON DEFENSE, AMT AND PRESIDENT'S BUDGET

House Speaker Nancy Pelosi (D-CA), Senate Majority Leader Harry Reid (D-NV), and Budget Chairmen Sen. Kent Conrad (D-ND) and Rep. John Spratt (D-SC) sent a letter to President Bush last Friday urging that the President's February 5th budget "should account realistically for projected Federal costs." The letter reiterates criticism that prior Administration budgets have not included realistic funding for the wars in Iraq and Afghanistan or for addressing action to mitigate the growing impact of the Alternative Minimum Tax (AMT) on the middle class.

Context: For FY 2007, for example, the President requested only $50 billion for Iraq and Afghanistan (Congress appropriated $70 billion); and he is expected to send Congress a FY '07 supplemental request for $100 billion to fund the wars. Critics argue that by requesting only a fraction of the anticipated cost up-front, the President's Budget projects unrealistically low Federal deficit projections in the upcoming budget year (and in subsequent budget years, where the projections are built on the upcoming budget year.) OMB Director Rob Portman, reportedly, has indicated that next week's FY '08 Budget will include projected war costs.

With regard to the AMT: Portman indicated the budget will include a one-year "patch" to prevent the AMT from automatically raising taxes on tens of millions of additional taxpayers. While the AMT was first enacted to ensure that upper income individuals pay a "fair share" of the tax burden, upper-middle and middle-income taxpayers are increasingly finding themselves subject to the AMT. This has occurred 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.

From a practical perspective, the Democratic letters will not impact the President's Budget; the Office of Management and Budget "locked down" the numbers in the President's budget two weeks ago to allow time for printing the massive budget volumes. The letter was more of a shot across the bow as the budget battles are about to begin. Democrats can be expected to argue that the President's promised balanced budget in 2012 is misleading because of defense under-funding, failure to resolve AMT, and unrealistic spending levels.

Budget Letter from Pelosi, Reid, Conrad, and Spratt

HOUSE AIMS TO TAKE UP FY '07 APPROPRIATIONS WEDNESDAY

With the FY 2008 congressional budget process about to begin, congressional appropriators are still working to complete FY 2007 appropriations. The 109th Congress failed to complete action on 9 out of 11 regular appropriations bills (only Defense and Homeland Security were enacted). Most of the Federal government is currently operating under a temporary funding measure called a "continuing resolution" ("CR") that expires February 15th (PL 109-383).

The Democratic Appropriations Chairmen—Senator Robert C. Byrd (D-WV) and Rep. David R. Obey (D-WI)—announced on December 11, 2006 their intention to resolve the fiscal mess they inherited by enacting a "year-long joint resolution" to dispose of the unfinished appropriations bills (a continuing resolution (CR) for the remainder of the year, with some upward adjustments for specific programs—essentially a CR-omnibus appropriations "hybrid").

Byrd-Obey Letter

Context: The amount of budget authority available for upward adjustments is very tight, since Byrd and Obey have said they will live within the limits established in the last Congress. Although Congress failed to adopt an FY'07 Budget Resolution last year, both the House and Senate, in separate measures, set $872.8 billion as the FY '07 spending cap for new discretionary "budget authority" (the technical term for appropriations).

The House Rules Committee has scheduled a markup for Tuesday, January 30 to adopt a rule that would govern House Floor consideration of the FY '07 appropriations measure on Wednesday, January 31. Action in the Senate will be slower, since the bill will be open to unlimited debate and amendments, but final action will be taken before February 15th when the current CR expires.

SENATE REJECTS "LINE ITEM"

Summary of the Gregg Amendment

Context:Under the 1974 Budget and Impoundment Control Act, the President is permitted to propose to Congress "rescissions" of appropriated funds. The President can withhold the funds for 45 days, but if Congress does not enact the rescissions into law, the President must release the funds. (This requirement was enacted into law as a result of President Nixon's "impoundment" of funds.) The Gregg proposal would "enhance" the existing rescission authority by requiring that Congress vote, within ten days and without amendment, on the President's proposed rescissions. In addition, the proposal would have expanded the reach of proposed rescissions beyond appropriations to include tax benefits and new entitlement spending. Enhanced rescission proposals are often confused with "line-item" veto which was enacted into law in 1996 and subsequently struck down by the Supreme Court in 1998. The defunct law had given the President authority to unilaterally cancel items of appropriations, tax preferences and entitlement benefits. The Court ruled that the Constitution does not permit the President to veto individual provisions of bills.

See Backgrounder on Line Item Veto and Enhanced Rescission

IRS OVERSIGHT BOARD CITES "TAX GAP" AS SERIOUS CONCERN

IRS Oversight Board's Annual Report

Context: With both political parties publicly committed to a balanced budget in 2012 (at the same time that defense spending is rapidly increasing, entitlements are exploding, and middle class taxpayers need AMT relief), "closing the tax gap" is increasingly a major focus of deficit reduction plans. However, current budget scorekeeping rules prohibit the Congressional Budget Office from attributing specific budgetary savings from IRS enforcement initiatives. (The House and Senate Budget Committees, as final arbiters of budget projections, could overturn the existing prohibition.)

BUDGET PROCESS: STEP-BY-STEP™

Tuesday, January 30: House Rules Committee to adopt a rule for consideration of the FY '07 funding resolution. · CBO Director Peter Orszag to testify at House Budget Committee on last week's release of CBO's Budget and Economic for FY 2008. See our Special Backgrounder for highlights of the report. Robert Reischauer (former CBO Director) of the Urban Institute and others will testify at Senate Budget Committee on long-term fiscal challenges.

Wednesday, January 31: House to consider, and likely complete, action on FY '07 funding resolution. · Senate aiming to complete action on the minimum wage bill, including a Senate Finance Committee reported $8.3 billion package of tax breaks and incentives for small business (However, because the tax provisions are originating in the Senate, the House—where tax provisions must Constitutionally originate—is likely to return the bill to the Senate, a process known as "blue-slipping a bill.") · Experts from the Concord Coalition, Brookings Institution, and Heritage Foundation will testify at Senate Budget Committee on long-term fiscal challenges.

Monday, February 5: President's transmittal of his FY 2008 Budget. The President's Budget is simply a request to Congress. The constitutional authority to make funding decisions resides in the Congress. After February 5th, the Budget Committees of the House and Senate hold hearings on the President's requests, receive "views and estimates" on the President's Budget from the other committees of Congress, and in March draft a Congressional Budget Resolution setting forth a broad framework of spending and revenue totals to govern subsequent action on individual spending and revenue bills. The Budget Resolution is a congressional budget blueprint; it is not presented to the President for signature and does not become law.

Budget Quote of the Week: "Now pending before the Senate is a legislative line-item veto proposal… Such a proposal is a lethal aggrandizement of the Chief Executive's role in the legislative process. Lethal, deadly… It is a gross, colossal distortion of the congressional power of the purse. It is a dangerous, dangerous proposition, a wolf in sheep's clothing of fiscal responsibility… I will stand here until my bones crumble under me, until I have no further breath….Why would we ever want to bargain away our most important tool for protecting the liberties of the people…"

-- Senator Robert C. Byrd, President Pro Tempore and Chairman of the Appropriations Committee, speaking on the Senate Floor last week