This week the House and Senate Budget Committee staffs are drafting their respective FY 2010 budget resolutions for consideration by their committees next week (week of March 23rd).  As the resolutions are being crafted, 3 major issues stand out: (1) Whether to use Budget Reconciliation for health care reform, global warming measures, and other major policy initiatives; (2) Whether to apply PAYGO rules to health care reform; and (3) Increases in debt held by the public.

To Reconcile or Not, That is the Question 

As discussed in last week's WBR, one of the hottest topics on Capitol Hill is whether to use the filibuster-proof "Budget Reconciliation" process to move the President's budget forward. 

Recent development: More than two dozen senators from both parties signed a letter to Senate Budget Committee Chairman Kent Conrad (D-ND) and Ranking Republican Judd Gregg (R-NH) urging them not to use reconciliation procedures to expedite climate change legislation. "Legislation so far-reaching should be fully vetted and given appropriate time for debate, something the budget reconciliation process does not allow,"said the letter. "Using this procedure would circumvent normal Senate practice, and would be inconsistent with the administration's stated goals of bipartisanship, cooperation, and openness." 

Should PAYGO apply to Health Care Reform?

A coalition of 30 organizations, representing insurance and pharmaceutical organizations, unions and business groups, patient and physician groups sent a letter to the House and Senate Budget Committees urging that House and Senate pay-as-you-go rules (PAYGO) be modified for the consideration of comprehensive health care reform.

In general, the House and Senate PAYGO rules--which the Concord Coalition strongly supports--require that new mandatory spending (for example, health insurance subsidies for workers) be paid for with offsetting spending cuts and/or tax increases.  The President's FY 2010 budget proposes that the first installment of health care reform be paid for by a combination of limiting deductions for upper income earners and reforms that reduce Medicare and Medicaid operating costs.

Others, including Senate Finance Committee Chairman Max Baucus, have suggested that the tax exclusion of employer-provided health insurance benefits be capped as a means of offsetting the costs of health care reform.  (See article below.)

Build-Up of Debt 

The Obama Budget projects that, under its proposals, Debt Held by the Public would increase from $5.8 trillion in 2008, to $11.5 trillion in 2013 and $15.4 trillion by 2019. 

As a percentage of GDP, this amounts to 41% in 2008, 66% in 2013, and 67% in 2019.

(Debt held by the public refers to Treasury notes and bonds held by individuals, institutions, and governments; it excludes debt held by government trust funds, such as Social Security). 

Many in Congress, on both sides of the aisle, have expressed concern about these long-term debt numbers. Congressional Quarterly reports that Senate Budget Committee Chairman Kent Conrad (D-ND) said, "I want to emphasize I feel it is critically important we do better in the second five years." According to CQ, Conrad (and his counterpart, Chairman Spratt at the House Budget Committee) are considering writing a 5-year instead of a 10-year budget resolution because of the uncertainty of longer term projections.

Comment: This would be a serious mistake. Of course, long-term numbers are subject to more uncertainty, but it is critical that policymakers remain focused on long-term, as well as near-term projections, so that long-term fiscal issues -- including the sustainability of Medicare, Medicaid, and Social Security -- are not ignored in the budget process.

Last week, the President signed into law HR 1105, a $410 billion omnibus appropriations bill for the remainder of FY 2009.

The Senate cleared the bill March 10 after several days of debate on amendments including failed attempts to freeze spending at 2008 levels and to eliminate earmarks in the bill.  The bill passed the Senate on a voice vote after cloture was invoked 62-35. (Cloture ends debate on a bill, allowing a vote to occur.)  Three Democrats voted against cloture and 8 Republicans, most of them Members of the Appropriations Committee, voted for cloture.

The House passed the omnibus appropriations bill by a vote of 245-178 on February 25th.

Reason for the omnibus bill:  Last fall, Congress completed action on only 3 of the 12 regular FY 2009 appropriations bills. 

The pending omnibus bill passed the House on a close to party-line vote.  House Republicans argued that the measure should have frozen 2009 spending at 2008 levels, rather than providing adjustments for inflation and other increases.

Congressional Quarterly reported that the bill increases spending by about $31 billion -- 8 percent, more than the total funding in the FY 2008 versions of the spending bills.

Background -- Last year's FY 2009 appropriations process was one of the worst on record. Only one FY 2009 appropriations bill made it to the House Floor.

There were two reasons for the serious disruption of the regular appropriations process. First, President Bush threatened to veto any appropriations bills that exceeded his requests, and Democrats--as reflected in the Budget Resolution--called for nearly $25 billion more than the President requested. Second, House Republicans attempted to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats.

Consequently, in late September, Congress enacted a stopgap measure to keep Federal programs operating. The stopgap measure: 

• included detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs (based upon provisions informally negotiated by House and Senate Appropriators); and

• included stopgap funding through March 6, 2009 for all other departments and agencies of government at FY 2008 levels.

Impending $76 Billion War Supplemental:  The Administration will send to Congress, within the next few weeks, a $76 billion war supplemental for the remainder of FY 2009.  This would bring total war spending for the current fiscal year up to $143 billion.

Legislative Text and Joint Explanatory Statement of FY 2009 Omnibus Appropriations   

In the wake of complaints about the nearly 9000 earmarks in the omnibus appropriations bill (see the article above), House Democratic leadership announced two new reforms in the earmark process:

1. Increased Executive Branch Review:  When a Member submits a request for an earmark, the appropriate Executive Branch agency will be given 20 days to review the project to ensure that the earmark is eligible to receive funds and meets goals established in law.
2. Competitive Selection Required of Earmark Funding Directed to For-Profits: For any earmark intended to be directed to a for-profit entity, the Executive Branch will be required to ensure that the earmark will be awarded through a competitive bidding.

With these new requirements, the earmark process in the House will operate as follows:

The new congressional rules that will further increase transparency on the congressional earmarking progress reflect good government and will avoid some wasteful spending.  But it’s important – vital, in fact – that we not let earmarks become a red herring, distracting our attention from far larger fiscal challenges that face the country.  Earmarks constitute less than 1 percent of the federal budget, and dumb earmarks a fraction of that. 

We should instead be focusing our collective attention on the long-term sustainability of federal expenditures on Medicare, Medicaid, and Social Security.  Because of rapid increases in health care costs, as well as the retirement of the boomer generation, those three programs are now growing at an unsustainable pace. By 2030, at the current rate of growth, Medicare, Medicaid, Social Security and Interest on the Debt will consume all federal revenues.

Federal policymakers need to focus their attention on slowing the growth of health care costs and other urgent measures to place the federal budget on a sustainable path.  The amount of attention currently being paid to earmarks is penny wise and pound foolish.  And in most cases, it’s not even about how much money is being spent; it’s about who makes the decisions – bureaucrats or Congress.  

It is encouraging that the President's FY 2010 Budget calls for a reserve fund to pay for the costs of health care reform.  More specifically, the plan would provide $634 billion over 10 years, paid for equally by (1) reforms in Medicare and Medicaid; and (2) limiting the tax deductions of upper income tax filers. 

The philanthropic community has expressed strong misgivings about the tax provision, suggesting that limiting deductions would reduce incentives to make contributions.

As an alternative some Members of Congress, including Senate Finance Committee Chairman Max Baucus (D-MT), have discussed the possibility of an alternative source of revenue, namely, scaling back the exclusion of worker health benefits from taxation. Current tax law allows workers to receive employer provided health insurance without taxing it as income to the employee.

As explained by the Congressional Budget Office: "Although employer-paid premiums for health insurance are part of many employees' total compensation, those premiums are exempt from individual income taxes and payroll taxes....This option would limit the extent to which employer-paid health insurance premiums...could be excluded from income and payroll taxation."  For example, the tax code could be amended to include in employees' taxable income any contributions that employers made for health insurance that exceed $1440 a month for family coverage or $565 a month for individual coverage.

According to CBO, this limitation would generate $452 billion in tax revenues over 10 years.

The rationale for this approach would be that current tax law in effect subsidizes expensive "cadillac" health insurance plans paid for by employers. Imposing a cap would shift the tax subsidy of expensive employer health plans into health care reform efforts that expand access to care.

On the downside, it is likely that imposing a tax on employer provided health insurance would be regarded as a tax increase on employees.