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.

Bush tax cuts: What you need to know

NEW YORK (CNNMoney.com) — There probably aren’t enough earbuds to go around to block out the confusing noise emanating from Washington over the expiring Bush tax cut

While we can’t quiet the partisan shouting, we’ll try to offer clarity on just what it is they’re debating.

What happens on Jan. 1 if Congress does nothing?

Everyone’s federal income and investment tax rates will go back up to where they were before the 2001 tax cuts were passed. In other words, your tax bill next year would increase.

If the tax cuts do expire and tax rates go up, you may notice the difference in your wallet as early as January, when your employer starts to withhold more taxes from your paycheck.

The Tax Policy Center estimates that a married couple with two kids under 13 and a household income of roughly $75,000 could end up paying about $2,600 more in federal income taxes next year than they would if the tax cuts were extended.

But the likelihood of all the tax cuts expiring isn’t high, since both Democrats and Republicans agree on one thing: They want to extend the tax cuts at least for folks making less than $200,000 ($250,000 for joint filers).

What’s the economic argument for extending the tax cuts?

Here’s the main concern of many economists and lawmakers: If Americans’ tax bills go up next year, they will have less money to spend and invest in the economy, and that could erase whatever economic ground has been recovered since the housing crisis sent the country into a tailspin.

“The biggest argument for extending the tax cuts right now is our economy is very weak, and raising taxes during a recession, or the recent weak recovery from the recession, could reverse our economic growth,” Roberton Williams, a senior fellow at the Tax Policy Center, noted in one of the group’s videos.

If the tax cuts are extended, however, taxpayers won’t really notice any change in their bottom line. So it’s unlikely to create any new stimulus for the economy.

That’s in part why some deficit hawks, like Diane Rogers of the Concord Coalition, say the Bush tax cuts should be compared in their effectiveness to other types of tax cuts to make sure the money is well spent.

Overall, extending the tax cuts may prove to be a mixed bag for the economy if they are extended permanently, according to a recent analysis by the Congressional Budget Office. In the short-run, making them permanent might help preserve the recovery, but may actually dampen economic growth in the long run because extending the cuts would add significantly to U.S. debt.

That’s why many who don’t want to let the tax cuts expire right away are only pushing for a one- to two-year extension.

What’s the beef about extending them for the $250,000-and-up crowd?

President Obama and many Democrats have said they want the Bush tax cuts to expire for couples with incomes over $250,000 ($200,000 for individuals).

Their argument: wealthy taxpayers don’t need the extra money, and if they get it they will probably save it and not spend it. That won’t do much to help the economy. By contrast, they say, lower- and middle-income families are more strapped and would be more likely to spend any extra money from a tax cut.

If Obama gets his way, high-income households would see the top two income tax rates increase to 36% (from 33%) and 39.6% (from 35%). In addition, their investment tax rates would go up to 20% from 15%.

But high-income taxpayers would still benefit from the extension of tax cuts for the middle class. Among other things, that’s because the changes made at the lower tax brackets would be preserved for everyone. Two examples: the creation of the 10% tax bracket and the reduced marriage penalty. The marriage penalty used to result in two-earner couples paying more than they would have as single filers.

And, ironically, if the Bush tax cuts do expire for top earners, some might actually find themselves with a somewhat smaller tax bill next year.

Republicans and a small but growing number of Democrats say the cuts should also be extended for high earners, at least temporarily because the economy is too fragile to raise anyone’s taxes.

//

Republicans also contend that small business job growth could be hurt because some business owners file at the top two tax rates and they, while a very small minority, generate a lot of small business income. The tax statistics aren’t very clear, however, on the job creation potential among those who report small business income at the top two income tax rates.

What’s at stake for the deficit?

Treasury estimates the costs of making the tax cuts permanent for everyone is $3.7 trillion over 10 years.

Of that, $3 trillion accounts for the cost of extending them for the vast majority of Americans, as the president has proposed. The remaining $700 billion is the cost of extending them permanently for the high-income earners.

The cost would obviously be less if the cuts were extended for only one or two years. There are no formal estimates for a short-term extension, but based on Treasury Department estimates, the cost is likely to range anywhere from $200 billion to $500 billion, depending on whose cuts are extended and for how long.

Those who support extending the tax cuts note that if the cuts expire and the economy suffers as a result, the deficit will get worse because the government will have to borrow more.

So what’s gonna happen?

Um, who knows?

The lack of consensus on the tax cuts isn’t just between the Democrats and the Republicans. It’s within each party as well. And with a midterm election at stake, there’s no predicting yet what, if anything, will be extended, for how long and for whom.

But since both parties support extending the tax cuts at least for the lower- and middle-income families, chances are high that that will happen.

And given that a small but apparently growing number of Democrats now support extending the tax cuts for upper-income folks as well, there’s some chance that could happen too, at least in part.

But few are expecting lawmakers to sign off on any final piece of legislation before the mid-term elections, although the House or Senate may take a vote on their own tax cut bills before that. 

By Jeanne Sahadi

Nickel and dimed by Obama’s microtaxes

May 14, 2010: 9:32 AM ET

Stuart Rohatiner, CPA, JD

(Fortune) — Woven throughout President Barack Obama’s health care reform act are a variety of new taxes on high earners: a 3.8% tax on interest and dividends, a 0.9% increase in the Medicare payroll tax, a $2,500 cap on pretax contributions to flexible savings accounts. Then there are new taxes on the most expensive health insurance plans and on sales of medical equipment like bedpans and catheters. The President’s proposed budget is laden with assorted other goodies, including a limit on deductions for mortgage interest and charitable contributions, and a capital gains hike.

It’s easy to get lost in the maze of new levies. Which is really the point, at least as a political strategy. Call it nickel-and-diming by a President who seems to instinctively understand the electoral dangers of imposing a single broad new levy — even on people he defines as high income. (Manhattan families earning just over $250,000 — not exactly a killing in New York City — that means you.) Even his plan to raise the top two individual income tax rates is marketed as a rollback of unfair tax cuts under President Bush. Some of us would call it a hike.

Not long ago House Democrats were pushing a more overt “millionaire’s tax.” At least the intention was clear. Instead, the White House is pursuing a drip, drip, drip of microtaxes on the nearly 3.5 million households Obama considers wealthy enough to fund his government plans. And, oh, how those nickels and dimes add up. “We estimate that the health reform law will take an additional $52,000 on average from the top 1%” of earners, concluded the nonpartisan Tax Foundation. Households affected by the expiration of the Bush tax cuts — along with other tax hikes in his budget — will pay an additional $17,925 on average. Citizens, especially the so-called wealthy, aren’t going to be happy about the onslaught of new tariffs.

A huge segment of the country has always felt overtaxed. In 1938, when taxes were roughly 17% of income, a Fortune survey found that nearly half of all Americans thought they paid too much relative to what they got in return. That number was remarkably similar — 46% — when Gallup asked the question last year, as taxes were eating up roughly 30% of our paychecks. We can presume, moreover, that those who actually pay federal income taxes — a record 36% do not — will be especially irked by politicians who want them to send more of their hard-earned money to Washington.

In recent years Democrats have enjoyed a reputation as the most trusted party on tax questions. That is now changing, with Republicans gaining the upper hand in the latest NBC News/Wall Street Journal poll. Obama’s tax hikes fuel the mood shift. But the White House’s ambitious spending also plays a role: Americans think half their money is wasted by government.

This is a dangerous political environment for President Obama as he faces his next big economic challenge: what to do about a national debt scheduled to balloon to 77% of GDP in the next decade. It’s hard to microtax your way out of that one, and it’s far from clear that this administration has the stomach for massive cuts to entitlement programs. He can keep squeezing revenue out of the rich, but the top 1% of earners already pay more in federal income taxes than the bottom 95% combined.

That, of course, is why some politicians are floating the idea of a value added tax (VAT) — an embedded sales tax that hides all those nickels and dimes along the production chain. It’s a big revenue raiser that offers the illusion that people won’t really notice a little tax here, a little tax there.

But all that loose change adds up to hundreds and thousands of dollars. Upper-income earners are stirring tax revolts this election year, despite White House efforts to suggest that its collection of taxes won’t be quite so painful. If Democrats pursue a VAT that adds to the tax burden of average Americans, the middle class will sit up and take notice too. And that adds up to a big headache for Democrats — in 2010, 2012, and beyond. 

By Nina Easton, senior editor at large

Wall Street stumbles into September

After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.
NEW YORK (CNNMoney.com) — Markets tumbled Tuesday afternoon, as investors took a big step back at the start of what is typically a rough month, betting that stocks have risen too far too fast without any underlying support.
“I think we’ve had a nice run and it’s time for a bit of a pullback,” said Tom Schrader, managing director at Stifel Nicolaus. “I wouldn’t be surprised if we moved back to the 880 level (on the S&P 500) before moving back up.”
A drop to the 880 level would constitute a slide of about 12% from the current levels.
Investors nitpicked through the morning’s better-than-expected reports on housing and manufacturing but found little reason to jump back into the fray.
With around 40 minutes left in Tuesday’s session , the Dow Jones industrial average (INDU) had lost 160 points, or 1.7%. The S&P 500 (SPX) index fell 18 points, or 1.8%. The Nasdaq composite (COMP) fell 33 points, or 1.7%.
“I think the ‘whisper number’ for [the manufacturing report] was higher and once people digested that, the market swung in the other direction,” said Schrader.
Schrader said that investors were also reacting to the “calendar influence,” amid a variety of reports about the tendency for September to be a weak month on Wall Street. September is typically the biggest percentage loser of the month for the Dow, S&P 500 and Nasdaq composite, according to the Stock Trader’s Almanac.
“The reports this morning were positive, but investors are basically saying that stocks have had a good run up and now it’s time to take some profits,” chimed in Phil Orlando, chief equity market strategist at Federated Investors.
Stocks have essentially been on the rise since March, as investors have welcomed extraordinary fiscal and monetary stimulus and signs that corporate profits and the economy have stabilized. The major gauges ended last week at the highest levels in 9 to 10 months. Financial shares took a beating Tuesday after enjoying a nice ride through the late summer, fueled largely by speculation and momentum.
But with the S&P up 52% from the March 9 lows, market participants are now looking for concrete evidence that the economy is recovering. The morning’s reports were positive, but perhaps not as positive as the most optimistic forecasts.
Manufacturing: The Institute for Supply Management’s manufacturing index for August showed growth in the sector for the first time since January 2008. The index rose to 52.9 from 48.9 previously. Economists surveyed by Briefing.com thought it would rise to 50.5.
Pending home sales rose for the sixth straight month, jumping 3.2% in July, to the highest point in nearly two years, according to a report from the National Association of Realtors released Tuesday morning. The index rose 3.6% in June. Economists surveyed by Briefing.com thought sales would rise 1.5% in July.
Construction spending fell 0.2% in July versus forecasts for an unchanged reading. Spending rose a revised 0.1% in June.
Financials: Many of the summer’s big bank sector winners led the declines Tuesday.
Dow component Bank of America (BAC, Fortune 500) slipped 5% in active NYSE trading. BofA was the biggest Dow gainer in the June through August period, rising 56%.
Dow component American Express (AXP, Fortune 500) lost 4% Tuesday. Over the last three months, AmEx has gained 36% and was the second-best Dow performer.
Dow component JPMorgan Chase (JPM, Fortune 500) lost 3% after rising 17% this summer.
Among other movers, Citigroup (C, Fortune 500) lost 6% after rising 34% in the summer. Regional bank Fifth Third Bancorp (FITB, Fortune 500) lost 5% after rising 59% this summer.
The KBW Bank (BKX) index fell 4.6% after rising 20% over the summer.
Oil prices and stocks: U.S. light crude oil for October delivery fell $1.91 to settle at $68.05 a barrel on the New York Mercantile Exchange. Oil prices have been slipping since hitting a ten-month high just below $75 a barrel late last month.
The decline in oil prices dragged on heavily-weighted energy stocks including Dow components Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).
Auto sales: The government’s popular Cash for Clunkers program gave a boost to sales in August, major automakers said. Although a plunge in sales in the last week of the month, following the program’s end, suggests the impact will not be far reaching.
Company news: Online auctioneer eBay (EBAY, Fortune 500) said it will sell a large stake in its Skype Internet phone business to a group of investors for $2.75 billion.
World markets: European markets tumbled, while Asian markets ended higher.
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.37% from 3.40% late Monday. Treasury prices and yields move in opposite directions.
Other markets: COMEX gold for December delivery rose $3.50 to settle at $957 an ounce.
In currency trading, the dollar gained versus the euro and the Japanese yen.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by over four to one on volume of 1.09 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 2.19 billion shares.