|$700 Billion Market Bailout: Piling on more Debt||FY 2009 Appropriations: Heading Towards a CR||Disaster Relief, Economic Stimulus Likely to Piggyback on CR||House, Senate still at Odds on Tax Measures||The Exploding Public Debt|
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Week of September 22:
--On Tuesday, the Senate takes up tax legislation (energy, AMT, extenders)
--Also on Tuesday, Treasury Secretary Paulson and FED Chairman Bernanke testify at Senate Banking--Later in the week, the House will consider a Continuing Resolution (CR) through March 2009
September 26: Target Adjournment Date for 110th Congress
The Administration released over the weekend proposed legislation that would give the Secretary of the Treasury sweeping authority to purchase "on such terms and conditions as determined by the Secretary" up to $700 billion of "mortgage-related assets from any financial institution having its headquarters in the United States."
The Treasury would issue new Treasury debt to finance the purchases. In order to accommodate the new debt, the bill would increase the statutory limit on the public debt to $11.3 trillion. When the Bush Administration took office in 2001, the public debt was half that amount, at $5.7 trillion.
There is ongoing discussion among congressional staff, and the Congressional Budget Office (CBO) and the Office of Management Budget (OMB), about how to "score" the Treasury purchases. The draft legislation states that the "cost of mortgage-related assets...shall be determined as provided under the Federal Credit Reform Act...." However, this would be an odd formulation, since the Credit Reform Act applies to direct loans and loan guarantees originated by the government -- not the purchase of market assets.
Regardless of how the "scoring" issues are resolved, the bottom line is that the Treasury would be borrowing up to $700 billion in order to purchase mortgage-related assets--and this borrowing would add substantially to the public debt, and U.S. indebtedness to foreign lenders.
Of particular importance, the ballooning debt would add substantially to annual interest payments by the Federal government. Net interest payments, already nearly $250 billion per year, consume more than one in five income tax dollars. The new Treasury borrowing would take an increasing bite out of income tax revenues--and leave future generations with the tab for this generation's market meltdown.
Key congressional Democrats have already signaled changes they would like to see in the Treasury proposal:
--Senate Banking Committee Chairman Chris Dodd (D-CT) said he would like to add provisions that set tough limits on executive compensation for companies participating in the program, allow the government to take shares in those firms, and create an Emergency Oversight Board;
--House Financial Services Committee Chairman Barney Frank (D-MA) said he agrees with the Senate approach and would also lilke to allow bankruptcy judges to reduce the principal and terms on primary residence mortgages; and
--Senate Judiciary Committee Chairman Pat Leahy (D-VT) wants to add a provision allowing for court review of the Treasury bailout, which is specifically barred by the Administration bill.
The bailout legislation is likely to be added to a Continuing Resolution that Congress must pass by September 30, 2008 in order to keep the government functioning when the new fiscal year begins on October 1.
By this point in the budget process, most of the twelve FY 2009 appropriations bills should be in House-Senate conference.
However, as reflected in the chart below, the House has taken up and passed only one appropriations bill--Military Construction/VA--and no bills have been passed by the Senate.
This year's appropriations process is in a serious logjam because of two key factors:
First, President Bush has threatened to veto any appropriations bills that exceed his request, and Democrats--as reflected in the Budget Resolution--have called for nearly $25 billion more than the President requested. From Democrats' perspective, if they wait until after the presidential election to make FY '09 funding decisions, they may be working with a Democratic President. As reported by Congressional Quarterly, Senate Majority Leader Harry Reid (D-NV) said recently, "I hope we would do a continuing resolution until after Sen. Obama becomes President."
Second, House Republicans have been attempting to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats. On June 26, House Appropriations Chairman David Obey (D-WI) suspended markup of the Labor-HHS-Education appropriations bill when Republicans attempted to substitute drilling language for the labor, health, and education provisions.
Continuing Resolution.--The Constitution and Federal law prohibit agencies from spending in the absence of appropriations. When appropriations bills are not enacted by the start of the new fiscal year on October 1st, Congress typically passes a stop-gap measure(s) called a "continuing resolution" or "CR." These joint resolutions of Congress (requiring presidential signature) authorize agencies to continue current programs for a period of time according to a formula--usually the previous year's levels, or the lower of the funding levels in either the House or Senate bills.
Later in the week, the House will consider a Continuing Resolution (CR) through March 2009.
[Click on the blue links for information on each appropriations bill.]
|Latest House Committee|
|Latest Senate Committee|
|Agriculture||Subcomm: 6/19||--||Full Comm: 7/17||--||--
|Commerce-Justice-Science||Full Comm: 6/25||--
||Full Comm: 6/19||--||--
|Energy-Water||Full Comm: 6/25||--||Full Comm: 7/10||--
|Financial Services||Full Comm: 6/25||--||Full Comm: 7/10||--
|Homeland Security||Full Comm: 6/24||--||Full Comm: 6/19||--
||--||Full Comm: 6/26||--
|Legislative Branch||Subcomm: 6/23||--||--
|Military Construction-VA||Full Comm: 6/24||Passage:
|Full Comm: 7/17||--
|State-Foreign Operations||Subcomm: 7/16||--||Full Comm: 7/17||--
|Transportation-HUD||Subcomm: 6/20||--||Full Comm: 7/10||--
**War funding for the first part of FY '09 was provided in the FY '08 Supplemental Appropriations Bill.
Background on Appropriations.--The 12 annual appropriations bills provide funds for all of the discretionary programs, projects, and activities of the Federal government. In total, the 12 appropriations bills allocate about $1 trillion of discretionary spending -- one-third of the $3 trillion Federal budget.
(The other $2 trillion consists of entitlement programs--the largest being Social Security, Medicare, and Medicaid--as well as interest payments on the Federal debt and other "mandatory spending.")
The total amount of funding available for the annual appropriations bills is determined by the Congressional Budget Resolution. The House and Senate completed action June 5th on S.Con.Res. 70, the Congressional Budget Resolution for FY 2009 (the fiscal year beginning October 1, 2008).
Following adoption of the Budget Resolution, the House and Senate Budget Committees provided to their respective Appropriations Committees a lump-sum discretionary spending allocation (called a "302(a) allocation"). The total allocation for FY '09 was approximately $1,013 billion--about $21 billion higher than the President's $992 billion request (and $24.5 billion more than the President's request when advance appropriations and special adjustments for enforcement initiatives are included).
After receiving their respective 302(a) allocations, the House and Senate Appropriations Committees allocate total discretionary spending among their 12 respective subcommittees. These suballocations are called "302(b) allocations" and determine how much funding authority is available for programs under the jurisdiction of each subcommittee--a key decision-point in the budget process.
The Senate Appropriations Committee approved its 302(b) subcommittee allocations on June 19. The House Appropriations Committee approved its suballocations the week of June 24.
Congress is currently working on two appropriations measures which could be added to an FY 2009 continuing resolution (CR). Likely to piggyback on the CR is a disaster relief bill and at least two economic stimulus provisions.
Disaster Relief.--House Speaker Nancy Pelosi (D-CA) said earlier in the month that Congress is assembling a disaster relief package to respond to recent hurricanes (Ike and Gustav), wildfires, and floods."From debris removal and housing needs, to the restoration of infrastructure and local economies, the emergency disaster package will cover the range of recovery needs that must be immediately addressed," Pelosi said in a statement. The amount of aid to be included in the disaster relief bill has not yet been released.
Economic Stimulus.--Over the summer, the Senate Appropriations Committee staff began assembling a second economic stimulus bill for possible consideration this month. Congress Daily reports that Democratic leaders are currently considering stimulus measures--including an unemployment insurance extension and additional low income home energy assistance (LIHEAP)--as add-on's to the CR.
Background: The first stimulus bill this year was signed into law on February 13, 2008 and cost $152 billion (HR 5140). The bipartisan package provided tax rebates for individuals and business incentives. CBO cost estimate on first 2008 economic stimulus bill
The House and Senate are still at odds on how to dispose of almost $150 billion of tax measures, including (1) $17-18 billion in renewable energy incentives, (2) a one-year AMT patch, and (3) business and individual "tax extenders."
In a nutshell, the logjam boils down to House Democrats' insistence on offsetting the full cost of tax extenders as required by the PAYGO (pay-as-you-go) rule, while Senate Republicans' threaten to filibuster legislation that offsets the extenders.
The Senate this week will combine all three elements into a single tax "omnibus" where the renewable energy incentives will be offset (under the PAYGO rules), the AMT patch will not be offset, and the tax extenders will be partially offset.
However, Congress Daily reports, House Democrats are insisting on a formulation that would offset more of the tax extenders. Under the House approach, there would be two tax bills.
--One bill, that would combine the AMT patch and some disaster aid provisions, would not be offset; and
--A second bill, that would be fully offset, would combine the energy incentives and the tax extenders.
Energy Incentives--Senate tax negotiators are working from a bipartisan Baucus-Grassley energy tax package (S. 3478) that includes: long-term extensions of wind and solar energy tax credits; a consumer credit of up to $7500 for plug-in electric vehicles; $2.5 billion in new credits for clean coal facilities; and long-term extensions for credits for alternative transportation fuel. Summary of Baucus-Grassley bill
Tax Extenders--Would continue numerous expiring individual and business tax preferences and incentives such as the widely supported R&D tax credit. For a description of some of the individual and business tax extenders under consideration, see this JCT description released last spring.
AMT Patch.--Relief from the Alternative Minimum Tax is scheduled to expire with tax year 2007. Since the AMT is not indexed for inflation, its reach has extended to middle-income taxpayers. 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 provided for tax year 2008, more than 20 million taxpayers would become subject to the AMT.
Background on PAYGO.--The current House and Senate PAYGO rules were put in place when Democrats regained the majority in 2007. They are based on the PAYGO law of the 1990s, which required that any new tax cuts need to be offset by revenue raisers or entitlement cuts (and new entitlement spending offset by spending cuts or revenue raisers).
However, unlike the PAYGO statute of the 1990s (which was enforced through the threat of automatic entitlement cuts), the current PAYGO rules lack any statutory enforcement mechanism. Consequently, it has been difficult to enforce the current rules, which have already been waived a number of times. Most notably, last year's AMT patch, costing more than $50 billion, was not offset.
The current legislative conundrum began earlier this year, when 41 Republican Senators (the number needed to successfully filibuster legislation) signed a letter opposing the use of any offsets for extenders or AMT relief.
Since 2001, the debt held by the public has increased from $3.3 trillion to $5.4 trillion, and total public debt has increased from $5.7 trillion to nearly $10 trillion, due to deficit-financed tax cuts; two deficit-financed wars; a recession in 2001-02; and a deficit-financed expansion of Medicare (the prescription drug plan). In recent weeks, several actions have been undertaken or proposed that could swell debt held by the public to more than $6 trillion and total public debt to more than $11 trillion. These include:
--$700 billion: Proposed authority for the Treasury to purchase distressed mortgages to ease the credit crunch
--$85 billion: Federal Reserve loan to AIG (American International Group)
--$29 billion: Federal guarantees to allow Bear Stearns to be purchased by JP Morgan Chase
--$25 billion: CBO estimate of the Federal bailout of Fannie Mae and Freddie Mac
"What we found, in dialogue after dialogue across the country, is that the main obstacle to building support for the difficult choices we face is not public opposition to tax increases or program cuts, nor it is public lack of interest. The main obstacle is a deeply felt and pervasive mistrust of of government."