On Tuesday of this week -- in response to pressure from the fiscally conservative House "Blue Dog" coalition -- the White House unveiled a proposal to re-enact the pay-as-you-go ("PAYGO") budget law from the 1990s.

The PAYGO concept was simple: if sponsors of new legislation want to enact new entitlement programs, expand existing entitlement programs, or enact new tax cuts, they had to find offsets to "pay for" the cost of the new benefits or tax cuts. Offsets could be reductions in entitlement (mandatory) spending or tax increases.

(Important note on discretionary spending: PAYGO has never applied to discretionary spending. In the 1990s, discretionary spending was controlled by statutory caps. If the caps were breached, automatic across-the-board cuts in discretionary spending were triggered. The Administration is NOT proposing to re-establish statutory caps on discretionary spending.)

The teeth in the 1990s PAYGO requirement was a "sequester mechanism." OMB was required to execute automatic cuts in nonexempt mandatory spending programs if the cumulative effect of tax and entitlement legislation was to increase the deficit. Under the PAYGO law, a negative balance on OMB's cumulative "PAYGO scorecard" was something to be carefully avoided since Medicare would take a significant hit from an automatic sequester. Other nonexempt programs that would be hit by a PAYGO sequester included farm price supports, child support enforcement, and social services block grants.

In other words, PAYGO was a "Sword of Damocles" approach to budget discipline: the automatic across-the-board cuts in Medicare and other programs that would result from violating the PAYGO requirement would be so politically unpalatable that Congress would avoid enacting new entitlement spending or new tax cuts without the required offsets.

In 2001, PAYGO was effectively terminated in order to enact massive tax cuts, and the PAYGO law officially expired in 2002.

In 2007, when Democrats became the majority party in Congress, they re-established PAYGO -- but as internal rules of the House and the Senate. Enactment of statutory PAYGO, with its automatic sequester mechanism, was strongly opposed by the Bush Administration and congressional Republicans on the grounds that new tax cuts should not have to be paid for with offsets.

The Obama Administration's proposal to re-enact statutory PAYGO is a mixed bag:

• On the positive side, if enacted, it will add more weight to the requirement that the costs of health care reform be fully paid for by spending cuts and tax increases. In addition, entitlement expansions -- such as filling the "doughnut hole" in the Medicare Rx program -- would have to be paid for.

• However, on the negative side, the Administration's PAYGO proposal specifically exempts $3.5 trillion of specific policies from the PAYGO requirement. These include extension of the 2001 and 2003 tax cuts; reducing the estate tax; effectively eliminating the AMT (Alternative Minimum Tax); and eliminating an automatic requirement that Medicare physician payments be cut--thereby accepting $3.5 trillion of additional public debt.

In sum, the Obama PAYGO proposal would enhance fiscal responsibility moving forward, but paves the way for easy extension of some very expensive policies that ought to be paid for.

President's PAYGO Announcement at the White House (C-SPAN)

White House Summary of PAYGO Legislation

PAYGO Legislative Text

Concord Coalition Statement

In late April, Congress' FY 2010 Budget Resolution (S.Con.Res. 13) set total spending levels for the new fiscal year beginning on October 1, 2009 and, based on those totals, the House and Senate Budget Committees allocated a lump sum to their respective Appropriations Committees for FY 2010 discretionary appropriations. (These lump sum allocations to the House and Senate Appropriations Committees are known as "302(a)" allocations.)

Last week, another major milestone in the FY 2010 budget process occurred when the House Appropriations Committee divided its lump sum allocation among its 12 subcommittees. (These sub-allocations are known as "302(b)" allocations.) This is key decision point in the budget process because it effectively prioritizes discretionary funds among the 12 program areas funded by the 12 subcommittees. The Budget Act prohibits any appropriations bill or amendment from exceeding the subcommittee's 302(b) allocation.

According to a table distributed by Appropriations Committee Republican staff, the FY 2010 allocations reflect an 8% increase ($77 billion) in discretionary appropriations compared to current non-emergency, non-stimulus levels. Within those totals, the largest percentage increases went to State-Foreign Ops (33%); Transportation-HUD (25%); Interior-Environment (17%); Agriculture (12 %), and Commerce-Justice-Science (12%). The largest dollar increase went to the Defense subcommittee, with a $20 billion increase over current spending.

Overall, the allocations are about $9 billion below levels requested by the President.

The 302(b) allocations were approved by the House Appropriations Committee on a party-line 34-21 vote.

House Subcommittee Allocations - 302(b)s

GOP Comparison Table

Last week, broad outlines of health care reform legislation emerged in the House and Senate; the Joint Committee on Taxation released some key revenue estimates under consideration as possible offsets to pay for health care reform; and the Administration released an outline of additional offsets to pay for health care reform.

• On June 9th, Democrats on the Senate HELP (Health, Education, Labor, and Pensions) Committee released draft legislative language and a summary of their health care reform plan, the "Affordable Health Choices Act." Full Committee mark-up will begin the week of June 15. Press Release Bill Text Bill Summary


• On June 9th, House Ways & Means Chairman Rangel (D-NY), Education and Labor Chairman Miller (D-CA), and Energy and Commerce Chairman Waxman (D-CA) jointly released a four-page outline of legislation being jointly developed by the three committees of jurisdiction. Chairman Rangel also said he is aiming for $1 trillion in pay-fors, with approximately $600 billion in revenue raisers and $400 billion from cost savings, largely from Medicare. Press Release Outline of Plan
  


• On the subject of paying for health reform....In a June 2, 2009 letter to Finance Chairman Baucus and Ranking Member Grassley, the Joint Committee on Taxation estimated that:
  
  
  
  • limiting the tax exclusion for employer provided health benefits to the first 50 percent of the premium amount would raise $1.2 trillion over 10 years; and
  
  
  • limiting the exclusion to benefits equivalent to the FEHBP (Federal Employee Health Benefits Program) would raise $419 billion over 10 years; and further limiting that amount to individual filers with AGI in excess of $100,000 ($200,000 for joint filers) would raise $162 billion over 10 years.
  
  
• On Saturday, June 13, the Administration released a set of proposals to partially pay for the projected costs of health care reform:

• Reduce Medicare provider payments to reflect greater "productivity." (This proposal could encounter skepticism at the Congressional Budget Office, which will be tasked with "scoring" the impact of proposed changes.)


• Reduce subsidies to hospitals for treating the uninsured (known as DSH payments) as coverage increases. (However, the reduction would not become effective until 2013.)


• Pay lower prices for Medicare Part D drugs. (Whether this can be scored by CBO as a cost savings will depend on details that have yet to be released.)


• Reduce payment rates for imaging services.


• Reduce payment rates for skilled nursing facilities, rehab facilities, and long-term care hospitals.


• Increase pre-payment reviews to reduce unnecessary or excessive treatment (details yet to be released).


• The above proposals are in addition to several Medicare and Medicaid reforms the Administration proposed in February in the President's budget outline, including: (1) reducing Medicare payments to private insurers; (2) program integrity efforts to reduce overpayments; and (3) improving care after hospitalizations to reduce readmission rates.

JCT Estimates on Potential Offsets

President's Proposed Offsets for Health Reform

House and Senate conferees reached agreement late this week on a $106 billion FY 2009 supplemental appropriations bill.

In addition to war funding for Iraq and Afghanistan, the bill also includes funds for Pakistan, pandemic flu, and "cash for clunkers" to encourage people to trade in older vehicles for ones that are more fuel efficient.

The House will vote on the conference report June 16th, although DOD subcommittee Chairman Murtha (D-PA) warned it may not have enough support to pass. The bill faces opposition from anti-war Democrats; and all Republicans who oppose the bill's funding for the International Monetary Fund.

Summary of Supplemental Conference Report

Text of the conference report

LATEST NEWS: Last week, the House Appropriations Committee approved spending allocations for each of its 12 subcommittees. The full committee also approved the Commerce-Justice-Science bill, the Homeland Security bill, and the Legislative Branch bill. Bill marked up at the House subcommittee level last week: Agriculture, and Interior-Environment. (See below for web-links to details)

MARK-UPS THIS WEEK:

House subcommittee: Mil Con-VA; State-Foreign Ops

House full committee: Agriculture; Interior-Environment

Senate subcommittee: Homeland Security

Senate full committee: Homeland Security; Legislative Branch

In general--Congressional appropriators face the task of reconciling the President's FY 2010 discretionary funding requests that total $10 billion more than the amount allowed by the FY 2010 congressional budget resolution (see April 30, 2009 WBR). Appropriators will also have to decide whether to accept the $17 billion in program reductions and terminations proposed by the Administration (see May 11, 2009 WBR). Obama Administration's proposed "Terminations, Reductions, and Savings"

Following are LINKS to the latest congressional action, plus a sampling of issues facing the appropriators as reported by Congressional Quarterly. The numbers in parentheses are the FY '09 regular appropriations level in billions (not including stimulus funds), followed by the FY 2010 President's request.

1. AGRICULTURE ($21.6 / $22.9) -- Major issues include the President's proposed 6.5% increase over the current year; overhaul of the food safety system; and the President's proposal to end direct payments to farmers with more than $500,000 in annual sales revenue. House: Chairman's Statement Summary Table Earmark List

2. COMMERCE-JUSTICE-SCIENCE ($60.1 / $64.6) -- Major issues include the President's proposed 7% increase over the current year; funds to close Gitmo (not provided by the House bill); NASA's budget; a major Southwest Border Initiative; readiness of the Census Bureau for the upcoming census; and and NASA's post-space shuttle priorities. House: Chairman's Statement Summary Table Earmark List