May 8, 2007

Post-Veto War Supplemental Negotiations Continue

Congressional Leaders Discuss "Tax Cut Trigger" as Negotiations Continue on '08 Budget Resolution Conference Report

BUDGET PROCESS STEP-BY-STEP™

May 8: House will vote to formally appoint conferees on the Budget Resolution (although negotiations have been ongoing) and will also consider a Republican motion to instruct budget conferees to make room in the Resolution for tax cut extensions. (The Senate may officially appoint conferees on May 9.)

May 8 (week of): Although Budget Resolution negotiations are ongoing, as soon as House and Senate budget negotiators come to agreement on the total discretionary spending allocation to the Appropriations Committees, Appropriations Chairmen David Obey and Robert C. Byrd can move ahead with key negotiations among their subcommittee chairs on dividing the discretionary total among the 12 appropriations subcommittees. This is a key decision-making point in the budget process because it prioritizes available discretionary funds among the 12 regular appropriations bills.

Context: The total allocations to the House and Senate Appropriations Committees are known as 302(a) allocations, and the sub-allocations to the subcommittees are known as 302(b) allocations, reflecting the sections of the Budget Act that lay out the allocation process.

Also this week, negotiations are continuing on a revised FY 2007 War Supplemental - details below.

May 15: The House and Senate Budget Chairmen are aiming to complete the FY 2008 Budget Resolution Conference Report by May 15. Following adoption of the Budget Resolution, the Budget Committees will make their official 302(a) allocations to the Appropriations Committees, and to authorizing committees that have "direct spending" (entitlement) programs in their jurisdiction.

May 21 (week of): House tentatively scheduled to begin Floor consideration of appropriations bills. Under the Budget Act, the House may begin work on Appropriations Bills after May 15, even if a Budget Resolution Conference Report has not yet been adopted.

May 25: Congressional leaders aiming to complete action on FY 2007 War Supplemental prior to the Memorial Day Recess.

THE WAR SUPPLEMENTAL: H.R. 1591

Table Comparing President's Request, House-passed, Senate-passed, and Conference Agreement

Last Tuesday the President vetoed H.R. 1591, the $124.2 billion Iraq War Supplemental, and on Wednesday the House failed to muster the necessary two-thirds vote to override the veto. The override vote was 222-203. Override Vote

Congressional and White House officials are currently negotiating a compromise measure, with the likely outcome a bill with benchmarks but no timetable.

There continues to be some talk among House Democrats about a short-term supplemental that would fund operations only through July, but this is unlikely due to strong Republican opposition and the reality that the war debate will continue throughout the spring and summer in the context of the FY 2008 DOD Authorization Bill and the FY 2008 DOD Appropriations Bill.

Benchmarks could include enactment of oil revenue-sharing legislation, turnover of security duties, and holding elections. Republicans will insist on avoiding any perception that there is linkage between achievement of the benchmarks and U.S. troop levels, although Republican leaders are increasingly looking at the end of the summer as an appropriate time to assess the effectiveness of the troop surge.

Despite continuing rhetoric about wanting a "clean bill," when an accommodation is reached on benchmarks, it is highly unlikely the President will veto due to non-war provisions that include Katrina aid, veterans' health, international food assistance, emergency farm relief, children's health insurance, homeland security, LIHEAP, flu vaccines, minimum wage/tax relief, and other provisions. (Context: Since annual supplemental appropriations for domestic needs are routine, the insistence on a so-called "clean bill" dedicated solely to military and international affairs is contrary to precedent.)

Timetable for enactment: congressional leaders are aiming for enactment before Congress' week-long Memorial Day Recess. House floor action late this week or early next week, followed by Senate action and conference.

Highlights of the $124.2 billion Conference Agreement:

- $95.5 billion in emergency war spending for the Defense Department ($4 billion more than the President's request);
- More than $5 billion in defense and veterans funding for health care;
- $5.736 billion for State Dept. and International Assistance;
- $500 million for International Food Aid;
- $2.25 billion in new funding for Homeland Security;
- $6.9 billion for recovery from hurricanes Katrina and Rita (more than double the President's request);
- $3.5 billion in emergency farm relief;
- $650 million for the children's health insurance program to address shortfalls in 14 states; and
- Deficit neutral $4.8 billion small business tax relief package to accompany minimum wage increase.

CRS Summary of War Supplemental (Updated April 30, 2007)

Technical Explanation and Revenue Estimates for the Small Business and Work Opportunity Tax Act (included in H.R. 1591, to accompany the minimum wage increase).

FY 2008 BUDGET RESOLUTION

Table Comparing President's Budget, S.Con.Res. 21 and H.Con.Res. 99

Pressure is building to bring House-Senate budget negotiations to a conclusion before May 15 (after which the House is permitted to begin consideration of appropriations bills even if a Budget Resolution setting forth spending totals and committee allocations has not yet been adopted). Failure to adopt a Budget Resolution would be a major embarrassment for Democratic leaders.

Extension of tax cuts continues to be a key issue for negotiators. The House-passed resolution, strictly adhering to its new PAYGO Rule, calls for no changes to current tax law, allowing the 2001 and 2003 tax cuts to expire in 2010.

However, the Senate-passed resolution - as amended on the Floor by Senator Baucus - would use projected surpluses in 2012 to extend some of the middle class tax cuts (including marriage penalty relief, the child credit, adoption tax credit, and the 10% bracket) as well as expand the State Children's Health Insurance program (SCHIP).

The impasse is significant: fiscal conservatives in the House "Blue Dog Coalition" want to strictly adhere to PAYGO and require that any extension of the tax cuts be fully paid for by offsetting spending cuts or tax increases. At the same time, many Democrats in the Senate want to use projected short-term surpluses to extend middle class tax cuts and begin to address SCHIP expansion-a key Democratic priority.

"Tax Trigger": A proposal currently under consideration to address the impasse would provide that tax cut extensions could be considered in the House only if budget surpluses materialize. The hope is that a trigger might partially address the concerns of fiscal conservatives that new tax cuts not push the budget into the red in 2012.

Trigger Options: Details on the trigger remain sketchy. One way to do this would be to waive the House PAYGO rule for middle class tax cut extensions only if specified surpluses are projected for 2012. Another way would be to allow a PAYGO waiver only if the tax legislation itself includes provisions that make the tax cut extensions contingent on surpluses actually materializing. (This latter approach is reportedly being reviewed by the Senate Parliamentarian, with respect to whether its prescriptive nature would exceed the scope of a Budget Resolution and cause the Resolution to lose its filibuster-proof protections.)

Context: It remains unclear whether any such "trigger" would adequately address the concerns of Blue Dog Democrats since it would be a clear departure from the newly re-adopted PAYGO Rule and also ignores the major deficits facing the nation at the end of the next decade when the boomer retirement and steep health care inflation will combine to form a "perfect fiscal storm." Some fiscal conservatives will argue that the coming fiscal crisis makes any tax cut extensions reckless.

Other major conference issues include:

Whether to include the House "Budget Reconciliation" instruction that would place student loan subsidy cuts on a filibuster-proof fast-track (Context: Senator Conrad is reluctant to use Reconciliation to protect legislation which generates only a minimal amount of deficit reduction);

Whether to set the non-defense discretionary total for FY 2008 at the Senate's $448 billion level, or the House's $454 billion level (likely outcome will split the difference);

Whether to adjust revenues to allow for an Alternative Minimum Tax (AMT) fix for any years beyond FY 2007;

Whether to let the estate tax bounce back to 2001 levels after 2010, or whether to accept the Baucus proposal that assumes extension of the 2009 estate tax rate (45%) and exemption level ($3.5 million) ; and

Whether to accept the Senate's Baucus amendment that provides $15 billion in additional funding for SCHIP, the State Children's Health Insurance program, or require that any funding for expansion of SCHIP coverage be fully offset.

Link to H.Con.Res. 99

Link to S.Con.Res.21

Link to WBR Revenue Chart

GAO: Climate Change --Financial Risks to Federal and Private Insurers in Coming Decades are Potentially Significant, May 3, 2007 Abstract - Highlights-PDF - PDF

GAO: Crop Insurance --Continuing Efforts Are Needed to Improve Program Integrity and Ensure Program Costs Are Reasonable, May 3, 2007 Abstract - Highlights-PDF - PDF

GAO: Tax Compliance --Challenges in Ensuring Offshore Tax Compliance, May 3, 2007 Abstract - Highlights-PDF - PDF

Letter From Health Care Groups to House, Senate Budget Leadership Urging Increase in Tobacco Taxes to Fund SCHIP Link to Letter