House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric

By Robert Greenstein and James R. Horney,
Center on Budget and Policy Priorities

House Republican leaders yesterday unveiled major changes to House procedural rules that are clearly designed to pave the way for more deficit-increasing tax cuts in the next two years. These rules stand in sharp contrast to the strong anti-deficit rhetoric that many Republicans used on the campaign trail this fall. While changes in congressional rules rarely get much public attention, these new rules — which are expected to be adopted by party-line vote when the 112^th Congress convenes on January 5 — could have a substantial impact and risk making the nation’s fiscal problems significantly worse.

Current House rules include a pay-as-you-go requirement that any tax cut or spending increase for a mandatory (i.e., entitlement) program must be offset by cuts in other mandatory spending or increases in other taxes, in order to avoid increasing the deficit. [1] Current rules also bar the House from using budget “reconciliation” procedures — special rules that facilitate speedy action on specified budget legislation — to pass bills that would increase the deficit. The new rules would alter and greatly weaken these commonsense measures:

• The new rules announced December 22 would replace pay-as-you-go with a much weaker, one-sided “cut-as-you-go” rule, under which increases in mandatory spending would still have to be paid for but tax cuts would not.In addition, increases in mandatory spending could be offset only by reductions in other mandatory spending, not by any measure to raise revenues such as by closing unproductive special-interest tax loopholes. For example, the House would be barred from paying for continuation of a provision enacted in 2009 (and extended in the just-enacted tax compromise) that enables many minimum-wage families to receive a full, rather than a partial, Child Tax Credit by closing wasteful tax breaks for multinational corporations that shelter profits overseas. Use of such an offset would violate the new House rules because the provision expanding the Child Tax Credit for working-poor families counts as spending and hence could not be paid for by closing a tax loophole. Yet the same new rules would enable the House to expand tax loopholes for multinational corporations and wealthy investors without paying for those tax breaks at all, because any tax cut, no matter how costly or ill-advised, could now be deficit financed.
• The new rules would stand the reconciliation process on its head , by allowing the House to use reconciliation to push through bills that greatly increase deficits as long as the deficit increases result from tax cuts, while barring the use of reconciliation in the House for legislation that reduces the deficit if that legislation contains a net increase in spending (no matter how small) that is more than offset by revenue-raising provisions.

By itself, this change in the House rules governing reconciliation would have a limited effect. Reconciliation rules are most important in the Senate because they prohibit use of a filibuster to block a vote on reconciliation legislation, enabling such legislation to pass the Senate with a majority vote instead of the 60 votes needed to end a filibuster (filibusters cannot be used in the House on any legislation). This change in House rules would not affect the current Senate rule barring the use of reconciliation to pass deficit-increasing legislation. But, revising the House rules to allow use of reconciliation to push through deficit-financed tax cuts could well be the first step toward elimination of all rules restricting the use of reconciliation for that purpose. After all, the current bar on using the reconciliation process to pass budget-busting tax cuts (and budget-busting spending increases) was made part of House and Senate rules only in 2007, over GOP opposition.

Sadly, we’ve been here before. In the 1990s, when pay-as-you-go rules applied to both spending increases and tax cuts and Congress used reconciliation solely to enact deficit-reduction packages, the country went from large deficits to a balanced budget. (A strong economy obviously helped as well.) But in the early 2000s, with Republicans controlling Congress and President Bush in the White House, Congress set aside pay-as-you-go and turned reconciliation on its head, using it not to reduce deficits but instead to push through costly, unpaid-for tax cuts in both 2001 and 2003. Previously, reconciliation had only been used for deficit reduction.

The results are plain to see. The Bush-era tax cuts were a significant factor in the return to large deficits after 2001, contributing $2.6 trillion (including added interest costs on the national debt) to the budgetary deterioration between 2001 and 2010. House Republicans now plan to restore the very type of permissive budget rules that contributed markedly to that fiscal deterioration.

Moreover, measures to scuttle the current, even-handed pay-as-you-go rule and to allow use of the reconciliation process to increase the deficit are even more indefensible today than such steps were in 2001 — because now we already have deficits that exceed $1 trillion a year.

It should be recognized that the House rules unveiled December 22 go to great lengths to make clear the intent of the new Republican majority to pass an array of tax-cut measures that will significantly enlarge deficits. Not only do the new rules eliminate the pay-as-you-go restriction on tax cuts that are not paid for, but the rules also specifically authorize the Chairman of the House Budget Committee to ignore for purposes of budget enforcement rules all of the costs of:

• Extending or making permanent the 2001 and 2003 Bush tax cuts (including the tax cuts for the highest-income taxpayers) and relief from the Alternative Minimum Tax;
• Extending or making permanent the hollowing out of the estate tax included in the just-enacted tax-cut compromise legislation; and
• Legislation to provide a major, costly new tax cut — a deduction equal to 20 percent of gross income for “small businesses,” which Republican lawmakers typically have defined very expansively so the term covers a vast swath of firms and wealthy individuals that do not resemble what most Americans think of as a “small business.”

New Rules Allow Imposition of Spending and Revenue Limits that Members Have Not Been Allowed to See, Debate, or Vote On Another aspect of the proposed rules also seems at odds with promises made in the campaign about what a new Republican majority would do. There was much talk about increasing the transparency of the legislative process, and some proposals in the new rules package would do that. But the new rules also include a stunning and unprecedented provision authorizing the Chairman of the Budget Committee elected in the 112th Congress, expected to be Representative Paul Ryan of Wisconsin, to submit for publication in the Congressional Record total spending and revenue limits and allocations of spending to committees — and the rules provide that this submission “shall be considered as the completion of congressional action on a concurrent resolution on the budget for fiscal year 2011.” In other words, in the absence of a budget resolution agreement between the House and the Senate, it appears that Rep. Ryan (presumably with the concurrence of the Republican leadership) will be allowed to set enforceable spending and revenue limits, with any departure from those limits subject to being ruled “out of order.” This rule change has immediate, far-reaching implications. It means that by voting to adopt the proposed new rules on January 5, a vote on which party discipline will be strictly enforced, the House could effectively be adopting a budget resolution and limits for appropriations bills that it has never even seen, much less debated and had an opportunity to amend. (There is no requirement for Representative Ryan to make his proposed spending and revenue limits available to Members or the public before the vote on the new rules.) This would, among other things, facilitate the implementation of incoming Speaker John Boehner’s radical proposal to cut non-security discretionary funding for fiscal year 2011 by $101 billion (or 21.7 percent) below the level appropriated for 2010, as adjusted for inflation without any consideration or vote on that proposal. Once Rep. Ryan places in the Congressional Record discretionary funding limits set at the Boehner level, they will become binding on the House, and any attempt to provide funding levels that allow for less severe cuts will be out of order. This imposition of budget limits without debate or votes hardly seems consistent with the promised increase in transparency in the legislative process, much less with sound — or fair — budget practices.

The new rules also specifically empower the Budget Committee Chairman to exempt from budget enforcement rules the fiscal effects of repealing the health reform law. The Congressional Budget Office has estimated that the health reform law will reduce deficits by more than $100 billion over the first ten years and by roughly $1 trillion or more over the second ten years. Its repeal would increase deficits by those amounts.

Finally, the new rules would pave the way for a further widening of the already very large gap between rich and poor. While the new rules would allow the House to make permanent the Bush tax cuts for high-income families, continue the new estate-tax provisions that benefit only the top one-quarter of one percent of estates (those with a value in excess of $10 million for a couple, and create a big new tax break for “small businesses” — all without paying for the costs — they would prohibit the continuation of improvements for low-income working families in the child tax credit and earned income tax credit that were enacted in 2009 and extended in the recent tax-cut compromise legislation unless the cost of those extensions was fully offset. And, as noted above, the House would be barred from offsetting the cost of maintaining these low-income tax-credit provisions by curbing unwarranted tax loopholes, which will make the demise of these low-income tax-credit benefits more likely. To simultaneously pave the way for both deficit-financed extensions of massive tax cuts for the wealthiest Americans and termination of critical tax-credit measures that keep several million low-income working parents and their children out of poverty represents a set of priorities that can aptly be described as worthy of Ebenezer Scrooge.

At bottom, the new House GOP rules proposals make one other point abundantly clear — tax cuts for high-income taxpayers, not deficit reduction, is the top priority of the incoming House leadership.

Obama Signs Bill To Extend Bush Tax Cuts

In a display of compromise rarely seen during his time in office, President Obama has signed into law a $858 billion tax cut bill despite the misgivings of members of both parties.

“We are here with some good news for the American people this holiday season,” Mr. Obama said.

The bill, which was largely worked out earlier this month between the White House and Congressional Republicans, extends the Bush-era tax cuts for all Americans for two years, extends unemployment benefits for 13 months and includes a one-year Social Security tax cut, among other measures.

The measure is not paid for, and costs more than Mr. Obama’s controversial stimulus package that was harshly criticized by Republicans for exacerbating America’s deficit and debt problem.

The president acknowledged that the bill’s cost and the coming effort to address the deficit, stating, “In some ways this was easier than some of the tougher choices we’re going to have to make next year.”

Mr. Obama said the bill would create jobs and boost the still-struggling U.S. economy. He called it a “substantial victory for middle class families” who would otherwise have seen a tax increase.

“In fact, not only will middle class Americans avoid a tax increase, but tens of millions of Americans will start the new year off right by opening their first paycheck to see that it’s larger than the one they get right now,” he said.

The president also noted the bill included tax breaks for millions of college students and their families and extensions of the earned income tax credit and $1,000-per-child tax credit. It also includes extensions of tax incentives for businesses to invest and expand and lower taxes on capitol gains and dividends.

The 2 percent Social Security tax reduction would mean a savings of about $1,000 for a worker making $50,000 per year.

Senate Republican leader Mitch McConnell was one of five Republicans present at the bill signing ceremony, along with 19 Democrats. It was Mr. Obama’s 29th public bill-signing ceremony — but the first at which McConnell was in attendance.

President Obama, joined by Vice President Biden, speaks before signing a compromise bill that extends the Bush-era tax cuts for all Americans, December 17, 2010.

The tax cut package angered liberals in the president’s party due to the extension of the Bush-era tax cuts for the roughly two percent of highest-earning Americans, which comes at a cost of $120 billion over two years. They were also incensed at the level at which the estate tax was set in the measure, which exempts estates under $10 million for couples and taxes subsequent income at 35 percent.

But the bill passed overwhelmingly in the Senate and also got through the House, where angry Democrats eventually accepted what came to be seen as inevitable. Still, many complained that the bill was an expensive giveaway to the richest Americans at a time when America could not afford it. Some fiscally conservative Republicans also expressed concerns about the cost of bill, though most GOP lawmakers supported it.

Had Congress not acted to address the expiring Bush-era tax cuts, all Americans would have seen a tax increase on January 1st. (The average tax increase per family, the White House said, would have been $3,000.) Mr. Obama, who had long opposed extending the Bush tax cuts for America’s highest-earners, has argued he had no choice but to agree to GOP demands to do so in order to avoid a tax increase on the middle class.

In his remarks Friday, however, he cast the agreement as evidence that both parties can work together.

“Now, candidly speaking, there are some elements of this legislation that I don’t like,” he said. “There are some elements that members of my party don’t like. There are some elements that Republicans here today don’t like. That’s the nature of compromise. Yielding on something each of us cares about to move forward on what all of us care about.”

The president said the bill ultimately reflected “a good deal for the American people.”

“The final product proves when we can put aside the partisanship and political gains, we can get a lot done,” he said. “If we can keep doing it, if we can keep that spirit I’m hopeful that we won’t just reinvigorate this economy and restore the American dream, I’m also hopeful that we might refresh the American people’s faith in the capability of their leaders to govern in challenging times.”

Posted by Brian Montopoli
Brian Montopoli is senior political reporter for CBSNews.com.

Tax Deal Trust Fund Loophole Could Save Billions For Rich

Dec. 16 2010 – 9:34 am |

By JANET NOVACK, Forbes Magazine

If the Senate-passed Obama-Republican tax deal clears the House in its current form, rich families will have until Dec. 31 to save billions in Generation Skipping Transfer Tax on money already sitting in trust funds. Noted estate planning lawyer Jonathan Blattmachr, a retired partner of Milbank, Tweed, Hadley & McCloy, says he’s been telling his peers: “Cancel your ski trip or trip to Hawaii. This is a once in a lifetime opportunity.”

The GST tax, in place since 1986, is a second layer of tax applied to gifts and bequests that “skip” a generation—for example, gifts made to grandkids if their parents are still alive. The big, tax saving opportunity comes because the massive tax deal, as passed yesterday by the Senate, not only confirms a 0% GST tax rate for all of 2010, but also creates an additional  loophole that wasn’t available when my colleague Ashlea Ebeling first blogged about a potential end-of-the-year “payday for trust babies”.

The new loophole is this: the money doesn’t (as most planners had believed) have to be distributed outright to the grandkids to qualify for the 0% rate.  Instead, according to the fine print in the tax deal, it can be put in a trust for them, Blattmachr says. That means, he explains, that money can be taken from an existing multigenerational trust, declared subject to the 2010 GST tax, and deposited in a new trust for grandkids’ benefit, with the GST tax now pre-paid at a 0% rate. Transferring money to a new trust answers worries that the grandkids might lose the cash to creditors or in a messy divorce, or blow it on, say, a $2.6 million Bugatti sports car.

Under the tax-cut deal, in 2011 and 2012 the GST tax rate will be 35%, down from the 55% it would have been had the Bush tax cuts simply been allowed to expire. In 2013, if no further legislation is passed, the GST will again be 55%. But that uncertain tax future won’t affect the rich folks who prepay the GST in the next two weeks at no cost, except for lawyers and trust fees.

Money that isn’t yet in a trust and is given to grandkids (either outright or in a trust) before year’s end could also benefit from the 0% rate. But such a transfer, to the extent the giver has used up his or her $1 million lifetime gift tax exemption, would still be subject to a 35% gift tax —and rich people hate paying gift taxes, planners say. (Under the tax deal, each person’s lifetime exemption from gift, estate and GST tax will be “unified” at a hefty $5 million in 2011 and 2012. But that gift tax exemption increase, which itself presents a huge new wealth transfer opportunity for the rich, is not retroactive to 2010.)

Currently, according to Bernard Garbo, editor of Trust Updates, there is somewhere near $1.1 trillion in personal trusts at U.S. banks, trust companies and independent trust companies.  It’s unknown what portion of this trillion dollar hoard represents “non-exempt” multigenerational trusts created over the last quarter century that could benefit from the year-end loophole, but clearly, billions in tax dollars are at stake.  (Non-exempt means the money in the trust is still subject to the GST tax when distributed to grandkids. Some trusts created since the GST tax became law are exempt because the donor either set them up using his or her $1 million GST exemption or paid the GST tax upfront.)

Some of these non-exempt trusts were created at a wealthy person’s death; in other cases the donor is still alive. Technically, this money has already been subjected to the first layer of normal gift or estate tax, although much of it was funneled into the trusts with little or no taxes paid, through such transfer tax minimization devices as Walton GRATs (named after the family which founded Wal-Mart), charitable lead trusts and installment sales to trusts.

Not all non-exempt multigenerational trusts can take advantage of the GST tax loophole. For example, the trustee needs a fair amount of discretion, including the right to “invade principal”.  In addition, only 11 states (Alaska, Arizona, Delaware, Florida, Indiana, Nevada, New Hampshire, New York, North Carolina, South Dakota and Tennessee) allow “decanting”—the movement of money from one trust to another for the benefit of one or more of the trust beneficiaries. But Blattmachr, who helped write New York’s first-in-the-nation decanting law, says that need not be a barrier to trusts in other states, thanks to a law signed by Sarah Palin while she was Alaska’s Governor. That law (also a Blattmachr special) allows out of state trusts to take advantage of Alaska’s decanting law so long as an Alaska co-trustee is named to administer the trust. Not coincidentally, Blattmachr’s brother, Douglas Blattmachr, is founder, president and CEO of Alaska Trust Co. which plans to have all hands on deck to help clients make the most of the GST tax avoidance opportunity through the end of this year.

What if the older generation benefiting from a trust isn’t ready to cede the money to their kids yet? Blattmachr, known (as you have probably deduced by now) for aggressive and creative legal handiwork, has a solution for that too. In some cases it may be possible to decant money into what he dubs a “generation jumping” trust—the trust is exclusively for grandkids, but their parents can be added back in as beneficiaries after five years.

Meanwhile, the entrepreneurial Blattmachr, who also has an estate planning software company,  is planning a webinar next Tuesday to clue in other attorneys on the last minute opportunity. His warning to those who would rather keep their reservations in Vail or Oahu: “If you do not give your clients an opportunity to do this, they’re going to be furious with you.’’

Obama-GOP Tax Deal: Winners and Losers

by Howard Gleckman on Tue 07 Dec 2010 09:55 PM EST  |

On the defensive for cutting a $700 billion tax deal with Republicans, President Obama argued that the agreement is important because it would benefit middle-class Americans. The Tax Policy Center’s preliminary analysis of the plan finds that he’s right—though the proposal would help just about everyone else as well, including the nation’s highest-earners.

How much depends, as always, on what you measure the plan against. If you assume the Bush-era tax cuts were going to be extended anyway (what wonks like to call the current policy baseline), this deal is a sweet tax cut across the board. But if you compare it to the tax law at the end of the Clinton Administration—that is, if you assume the Bush-era revenue law expires in three weeks (the current law baseline)—this proposal is a big tax cut indeed and one that benefits very high earners much more than others.

For the next two years, the Obama-GOP proposal would continue all of the 2001 and 2003 tax cuts. It would keep current low rates for ordinary income as well as for capital gains and dividends. It would patch the Alternative Minimum Tax, and keep expanded child credits and earned income credits from the 2009 stimulus. It would restore the estate tax, but with a $5 million exemption ($10 million for couples) and a 35 percent rate. It would also create a new, one-year payroll tax cut for all workers regardless of income.

This is far more generous than simply extending the Bush-era tax cuts, which was once the issue on the table. Thus, relative to maintaining current policy, taxes would be cut in 2011 by an average of nearly $1,000 and after-tax incomes would rise by 1.7 percent on average. The lowest earning 20 percent of households would get a tax cut of about $300, and see their after-tax incomes rise by an average of 3.2 percent. Middle-income households would enjoy a boost in after-tax incomes of 2 percent or about $800, while the top 20 percent of earners would get an income boost of 1.3 percent or $2,500. The top 0.1 percent (those making an average of $7.5 million) would see their taxes cut by about $20,000, raising their after-tax income by about 0.4 percent. .

If you assume the Bush era tax cuts die by year’s end, the tax cuts are bigger for all, and the pattern is less progressive. The average tax reduction would be about $2,800—a 5.2 percent increase in after-tax income. The lowest earning 20 percent of households would get a tax cut of about $350, raising their incomes by 3.7 percent, while middle-income families would enjoy a tax reduction of about $1,800, a boost in their income of 4.4 percent. But the real benefit comes at the top. The highest earning 0.1 percent would enjoy a tax cut of $360,000—a 7.3 percent increase in their after-tax income.

My colleague Elaine Maag notes that if you use yet another baseline, one that assumes continuation of the stimulus provisions as well as the 2001 and 2003 laws, low-income households may do worse under the Obama deal. They’ll lose the benefit of the expiring Making Work Pay credit but get very little from the payroll tax holiday. Keep in mind, btw, that we only looked at the tax changes, and not at the proposal to extend some unemployment benefits.

As usual, people will pick a baseline to score political points for or against this deal. But however you measure it, this plan would cut taxes more than if Congress simply extended the Bush-era law, and far more than if lawmakers simply went home tomorrow, mired in gridlock, and let all the tax cuts on the table fade away.

Unofficial Problem Bank list increases to 920 Institutions

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Dec 3, 2010.

Changes and comments from surferdude808:

It was a very quiet week for the Unofficial Problem Bank List. There were two additions and one removal because of duplication.

The two additions were First Community Bank, Glasgow, MT ($219 million) and Monadnock Community Bank, Peterborough, NH ($110 million), which is the first institution from New Hampshire to appear on the Unofficial Problem Bank List. The duplicated entry was SouthBank, a Federal Savings Bank, Cornith, MS, which has relocated to Huntsville, AL.

The other change is the termination of a Prompt Corrective Action order by the OTS issued against Aurora Bank FSB, Wilmington, DE ($4.4 billion). After these changes, the Unofficial Problem Bank List includes 920 institutions with assets of $410.3 billion.