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-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.

House leader: Tax cut vote won’t happen this week

(AP) – 2 hours ago

WASHINGTON — The second-ranking House Democratic leader says the House probably won’t vote this week on extending middle-class tax cuts and will deal instead with the issue after the elections.

Rep. Steny Hoyer of Maryland says that because the legislation is stuck in the Senate for now, forcing a vote before the House leaves town for the fall elections would be a “specious act.”

Hoyer says Democrats will pass legislation by year’s end that ensures taxes won’t raised be raised on the middle class.

House Speaker Nancy Pelosi had said a vote was possible.

House Democrats — much like their Senate counterparts — are divided on the issue. Republicans and a few Democrats want to extend the tax cuts for everyone, even the wealthiest Americans.

Copyright © 2010 The Associated Press. All rights reserved.

Related articles

• Dems Duck Middle Class Tax Cut Fight
  Huffington Post – 2 days ago
• Democrats divided on Bush-era tax cuts vote
  Reuters – 3 days ago
• Tax cut delay
  WatertownDailyTimes.com – 7 hours ago

Taxorama: 7 changes on the docket

By Jeanne Sahadi, senior writer

January 17, 2010: 2:01 PM ET

NEW YORK (CNNMoney.com) — Everybody’s angry at banks. Federal deficits are wide and need addressing. And the president and Congress are starting to map out next year’s budget.

That means they’re talking taxes in Washington. The capital is awash in proposals for how to raise revenue and score political points.

There’s no guarantee all of them – or even some – will pass.

But they are an indication of the direction the White House and Congress may go as they finalize decisions for how to pay for health reform, reduce debt, support other government efforts and garner votes in a mid-term election year.

Tax banks to make taxpayers whole

President Obama on Thursday called on Congress to recoup any federal bailout money that hasn’t been repaid by imposing a fee on large banks, even if they themselves haven’t taken bailout money, or if they’ve repaid the bailout money they did take.

The “financial crisis responsibility fee” would target 50 major institutions with assets over $50 billion. It’s designed to tax firms with the greatest leverage, which is a proxy for how much risk the firm is taking in the markets.

“This is as much a political statement as it is a tax policy statement,” said Mel Schwarz, director of tax legislative affairs at Grant Thornton LLP.

Some in Congress have already expressed their support for the idea, if not necessarily the specifics. And Jaret Seiberg, a policy analyst at Concept Capital’s Washington Research Group, believes the odds favor enactment of the measure.

“This remains far from a slam dunk, but momentum is building by the day,” Seiberg said in a research note.

Tax banker bonuses more

The populist fury unleashed when bonuses were paid to AIG executives is back. This time it’s during bonus season on Wall Street, where investment banks are expected to distribute tens of billions of dollars to reward their employees for the banks’ 2009 performance.

House Financial Services Chairman Barney Frank, D-Mass., will hold a hearing on Wall Street compensation next week. On the agenda will be consideration of bonus taxation, as well as President Obama’s proposal to tax banks to make up for any bailout money that isn’t repaid.

Frank’s committee doesn’t write tax law. That’s up to the House Ways and Means and the Senate Finance committees. But he is beating the drums for change.

Will the US tax bank bonuses?

“I think compensation has gotten excessive,” Frank said in a statement. “I want to underline what we are already doing. Frankly, in the hope that maybe the Senate will be even more inclined to [act].”

So don’t be surprised if talk of a banker bonus tax is revived. But it’s not clear how viable it would be. “That’s more politics than policy,” Schwarz said.

Tax investment managers more

Lawmakers may effectively raise taxes on income earned by managers of hedge funds and private-equity funds.

Typically the managers are paid a portion of the profits earned by their funds, but they only need to pay capital gains tax on those profits. A proposal before the House would instead subject the profits to ordinary income tax rates, which are higher.

Mathias thinks the proposal might pass, but not before the mid-term elections in November. Schwarz thinks the issue will be debated but not necessarily passed this year. “It’s not a slam-dunk.”

Tax financial transactions

Bills in the House and Senate propose a new excise tax on financial firms for their securities transactions, such as in stocks, futures, swaps and options. If passed, it could be used to help fund deficit reduction and legislative efforts to create jobs.

“It’s very much on the table,” Schwarz said. But, he added, “I’d be surprised to see it pass this year.”

Temporarily extend all tax cuts

Between now and early February, when the president will present his 2011 budget proposal to Congress, there will be a lot of guessing as to just what tax proposals will be included.

On Wednesday, Congress Daily reported that the administration might seek a one- to two-year extension to the 2001 and 2003 tax cuts, set to expire on Dec. 31.

If that’s the case, it would be a switch from the administration’s earlier call to permanently extend the cuts for everyone except those making more than $200,000 ($250,000 for couples filing jointly).

Mathias doesn’t think extending the tax cuts temporarily for upper income households will fly.

As for everyone else’s tax cuts, a temporary extension is very likely since permanently extending them is a tough sell in a deficit-conscious environment. Over 10 years, it would cost roughly $2 trillion in forgone tax revenue.

But calling for a one- or two-year extension could make the proposition seem much less expensive than it really is. That’s because lawmakers may just decide to keep extending them temporarily, Mathias and Schwarz said. As proof, they point to the many “temporary” fixes for the Alternative Minimum Tax that Congress has passed over the years.

Bring in more Medicare tax

Lawmakers are considering ways to boost how much high-income people pay in Medicare tax to help pay for health reform.

In the Senate health bill, one provision would raise Medicare taxes on income over $200,000 ($250,000 for couples).

Currently, the Medicare payroll tax is 2.9% on all wages – with the worker and his employer each paying 1.45%. Under the Senate bill, these high-income workers would pay 2.35%.

In addition, they may expand the reach of the Medicare tax, which currently only applies to wages and salaries. Under consideration: subjecting unearned income such as dividends to the Medicare tax as well.

Tax profits earned offshore

Currently, a U.S.-based company doesn’t need to pay income tax on its foreign subsidiaries’ profits unless and until the money is brought back to U.S. shores.

One idea under consideration is to eliminate the deferral option so companies have to pay tax on their overseas profits even if the money stays offshore.

Another is to lower the corporate income tax rate for foreign earnings to entice companies to repatriate the money. That happened once before on a temporary basis. Going forward, Schwarz said, having another temporary incentive to repatriate could be tempting if lawmakers need to raise revenue over the short term.

Mathias believes some change to the repatriation rules could pass by the end of the year but not before the mid-term elections. Schwarz expects a debate could start this year but given everything else on Congress’ plate, he doesn’t think anything would pass in 2010.

The Incredible Shrinking Estate Tax

by Bob Williams on Thu 22 Oct 2009 08:00 AM EDT
The estate tax is only a faint shadow of its former self. In 2009, less than one-quarter of one percent of deaths—just 5,500 decedents—will leave taxable estates, the smallest percentage since at least the Great Depression. In part, that tiny fraction reflects the current recession’s devastation of assets—the Fed estimates that the total value of household and nonprofit assets fell by about one-sixth between 2007 and the first quarter of 2009. But changes in estate tax rules over the past decade have played a much larger role than economic swings.

The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA), best known as the Bush tax cuts, phases the estate tax out over a decade. The act raised the effective exemption incrementally from $675,000 in 2001 to $3.5 million in 2009 and dropped the top tax rate from 55 percent to 45 percent. The levy disappears entirely in 2010, only to return in 2011 under pre-EGTRRA law—a $1-million exemption and 55-percent top rate. The Obama administration has proposed making the 2009 parameters permanent and indexing them for inflation. Others would set a higher exemption and a lower tax rate.

So what’s happened?

For decades before 1976, only estates worth $60,000 or more owed estate tax. That threshold remained constant in nominal terms, so more and more estates had to pay the tax as economic growth and inflation boosted household wealth. In 1943, just under 1 percent of deaths led to estate tax payments; by 1976, that share had grown to 7.65 percent (see graph).

Congress doubled the effective exemption to $120,000 in 1977 and raised it gradually to $600,000 in 1987, where it stayed for ten years. As the exemption rose, the share of estates owing tax fell to just 0.9 percent in 1987 before growing again because of the fixed exemption. In 1997, when a bit more than 2 percent of estates owed tax, Congress again enacted a series of increases in the exemption that would have reached $1 million in 2006. Deaths resulting in estate tax liability stabilized until EGTRRA set off the latest inexorable drop in taxable estates.

So what’s next? The share of estates owing tax is scheduled to drop to zero in 2010, thanks to the one-year repeal. Except Congress won’t let that happen. Smart money says Congress will extend the 2009 law for 2010—a $3.5-million exemption and a 45-percent tax rate—and then consider a permanent fix when they deal with the scheduled 2011 sunset of almost all of the Bush tax cuts. Senators John Kyl (R-Az) and and Blanche Lincoln (D-AR) want to shrink the tax below its 2009 level—they want a $5-million exemption and a 35-percent tax rate.

Few lawmakers now call for total repeal, though such a proposal would surely get lots of votes. Opinion polls show significant numbers of voters saying they would more likely vote for a candidate who favors repeal. Maybe they all think they’ll win the lottery or their next great idea will become another Google. In the real world, we’re spending a lot of time worrying about a tax that fewer than three in a thousand of us will pay. And, when we do, we’ll be dead.

graph