|House Rejects Bailout Plan; Senate to vote late Wed. on Modified Bill||President Signs Stopgap Funding for FY 2009||House Passes 2d Stimulus Bill; Filibustered in Senate||House, Senate still at Odds on Tax Measures|
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October 1: Fiscal Year 2009 begins. Many of the government's departments and agencies are being funded by a stopgap measure through March 6, 2009 due to a political logjam over appropriations levels -- see below for details.
The House on Monday failed to pass 205-228 the "Emergency Economic Stabilization Act of 2008." About two-thirds of House Republicans (133) joined 40 percent of House Democrats (95) in defeating the bill.
Congressional and Administration negotiators had arrived at the compromise measure on Sunday. The 110-page bill incorporated a host of provisions negotiated over the last week after the bailout was first proposed by Treasury Secretary Paulson.
CURRENT STATUS: As this report is published, the Senate Leadership have announced plans to vote on a slightly revised bill Wednesday evening. It is unclear at this time what specific changes will be made to secure the necessary votes in the House, but it appears likely that the package will include a boost in FDIC insurance from $100,000 to $250,000.
Key provisions of the bailout legislation:
--As originally proposed by Treasury Secretary Henry Paulson, the bill would provide up to $700 billion to the Treasury to buy so-called "troubled assets," -- mostly mortgage-backed securities -- "the purchase of which the Secretary determines promotes financial market stability."
--The Secretary would have substantial discretion to purchase any financial asset at any price and to sell that asset for any price at any future date.
--However, rather than giving the Treasury all the funds at once, the legislation would give the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to congressional disapproval);
--The bill would allow the Treasury to insure troubled assets (including mortgage-backed securities) and collect premiums from participating financial institutions. According to the Congressional Budget Office the premiums would offset part of the $700 billion cost of the program.
--The bill would require the Treasury wherever possible to modify troubled mortgage loans to help Americans stay in their homes.
--The bill would require companies that sell troubled assets to the government to provide warrants (equity interests) so that taxpayers would benefit from any future growth.
--It would require the President to propose legislation to cover anticipated losses from Federal purchase of troubled assets.
--Participating companies would be required to limit executive compensation.
--The bill would establish an Oversight Board, as well as a special Inspector General.
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 has been much discussion about the potential, under the proposed legislation, to recoup some of the $700 billion through equity interests the Treasury would gain in participating companies. Nevertheless, that is speculative. All we know for sure is that under the legislation, the Treasury would be borrowing up to $700 billion in order to purchase mortgage-related assets--and this borrowing would, at least in the short term, add substantially to the public debt and U.S. indebtedness to foreign lenders.
Moreover, 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.
Supporters of the bill, however, argue that failure to pass the legislation in a timely manner could trigger a severe economic downturn with potentially worse implications for the economy than a $700 billion increase in the public debt.
Over the weekend Congress completed action on a funding measure (HR 2638) to keep the government operating into the new fiscal year -- FY 2009 -- which begins October 1st. President Bush signed the measure late on September 30th.
The measure is actually a hybrid of an "omnibus" appropriations bill and a "continuing resolution":
--it includes detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs; and
--it includes stopgap funding through March 6, 2009 for Health and Human Services (HHS), and all other departments and agencies of government, at FY 2008 levels.
The stopgap provision does not provide inflation adjustments for the covered agencies.However, some specific programs did receive increases: the low income home energy assistance program (LIHEAP) received a $2.5 billion increase over '08; Pell Grants for higher education received $2.5 billion over '08; and the WIC program received $1 billion over '08 to assist with nutrition for new mothers and their children.
The bill includes a part-year extension of the Federal flood insurance program, which has been caught in a battle over whether to forgive the program's $17.5 billion debt without offsetting the costs, as required under PAYGO.
While there was no formal passage or House-Senate conference on the three full-year bills, the House and Senate Appropriations Committees informally "pre-conferenced" the measures.
In addition, the bill also includes $23 billion for disaster relief, and authorizes $25 billion in loans to the auto industry to retool and develop more fuel efficient vehicles.
This year's appropriations process has been one of the worst on record in terms of following the regular order, that is, passing 12 individual bills in the House and the Senate, and then conferencing the respective bills. Only one appropriations bill made it to the House Floor during this session. There are two reasons for the disruptions in the regular process:
First, President Bush threatened to veto any appropriations bills that exceed his request, and Democrats--as reflected in the Budget Resolution--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 were 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. However, in the end Democrats yielded on the drilling issue and let an annual ban on offshore drilling expire as of September 30, 2008.
However, Senate attempts to pass a similar stimulus bill failed when proponents fell 8 votes short of the 60 votes needed to shut down a Republican filibuster.The Senate bill (S. 3604) also drew a presidential veto threat.
Both stimulus bills would have extended unemployment benefits, and provided funding for infrastructure projects, state Medicaid programs, and food stamps. (For background on Medicaid and food stamps, see GovBudget.com.)
[Background: The first economic 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.
The House and Senate are still at odds on how to dispose of about $150 billion of tax measures, including $17-18 billion in renewable energy incentives, a one-year AMT (Alternative Minimum Tax) patch, business and individual "tax extenders," and disaster relief.
In a nutshell, the logjam boils down to House "Blue Dog" 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 raises revenues to fully pay for the extenders.
The Senate last week combined all the provisions into a single tax "omnibus" (HR 6049) where the renewable energy incentives were offset (under the PAYGO rules), the AMT patch was not offset, and the tax extenders were only partially offset. The package, which passed 93-2, also included a milestone provision establishing mental health parity as a requirement for health insurance plans. Senate Finance Committee summary
However, House Democrats -- particularly the fiscally conservative Blue Dogs -- continue to insist on fully offsetting the cost of the tax extenders and responded by breaking the Senate package into four pieces:
1. mental health parity with offsets (HR 6983)
The Senate and House bills are not far apart on the numbers. According to Congressional Quarterly, the Senate package contains about $151 billion in tax breaks and includes $43.5 billion in offsets. The four House bills contain $138 billion in tax breaks and $66 billion in offsets.
Nevertheless, the House Blue Dogs and Senate Republicans remain locked in a battle over whether the cost of extending expiring tax provisions should be offset by raising revenues. The Blue Dogs believe the PAYGO requirement is central to fiscal responsibility, while Senate Republicans argue that Congress should be able to extend current tax policies without finding offsets.
Neither side is currently budging, despite the broad impact of failing to enact an AMT patch, and the broad support for the energy incentives and tax extenders.
Background on 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 budget 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; and House Democrats sent a letter to the Senate signed by 218 Members saying they would oppose an extenders bill that did not comply with the PAYGO rule.