|Date||August 10, 2010 (111th Congress, 2nd Session)|
|Staff Contact||Andy Koenig|
On Tuesday, August 10, 2010, the House is expected to consider the Senate amendments to H.R. 1586 (originally the FAA Air Transportation Modernization and Safety Improvement Act). The House-passed text of the FAA authorization was replaced by the Senate by an amendment sponsored by Sens. Reid (D-NV) and Murray (D-WA) which includes $26.1 billion in federal bailouts for states that is partially offset with permanent tax increases and rescissions. The amended version of the bill passed the Senate on Thursday, August 5, 2010, by a vote of 61-39. According to Democrat House Leadership, the Rules Committee will meet on Monday, August 9, 2010, to report a rule for consideration of the bill.
The bill contains a total of $26.1 billion in temporary state bailouts paid for with permanent tax increases and spending reductions (mainly from the “stimulus” bill). The bill provides $10 billion for a state education bailout that can only be used to pay teacher salaries. In order to receive the education money, states would be prohibited from reducing their education budgets below 2009 levels and the federal money could not be used to reduce the state’s debt. Thus, the bill not only shields states from making tough budget choices, it prohibits them from doing so.
In addition, the bill extends the increased federal Medicaid matching rate of 6.2 percent through 2010 and begins to phase out the increased rate by June, 2011. This provision will cost $16.1 billion.
The bill is partially offset by $9.7 billion in permanent tax increases which would impact U.S. multinational companies. These taxes have been used by Democrats at least three other times as offsets for other spending bills. While Democrats call these “tax loopholes,” these tax hikes could risk jobs and put American companies at a competitive disadvantage when operating in foreign markets.
In addition, the bill contains $14 billion dollars in spending reductions from the Democrats’ stimulus bill. The Democrats call this a spending cut, but stimulus money is designated as emergency funding and therefore not subject to PAYGO. CBO does not recognize any savings from stimulus reductions for the purposes of statutory PAYGO. Thus, CBO estimates that this bill will actually increase the deficit by $12.6 billion.
State Education Bailout: The legislation includes $10 billion for an “Education Jobs Fund” to supplement states’ education costs. The bill stipulates that the funds shall be distributed by the Department of Education through their respective funding formulas or based on each district’s share of Title I funds. States may only use the funds to pay the salaries of employees and the bill prohibits the spending from being used to add to “rainy-day funds” or to reduce state debt. The bill also forbids states from reducing education expenditures below FY 2009 levels. Thus, states would be barred from reducing spending to address their current budget shortfalls. In addition, the bill would require the Secretary of Education to refuse a Governor who did not want access to the $10 billion slush fund and provide the funds to another state entity for distribution. This provision would cost $10 billion over ten years.
The fund is similar to the State Fiscal Stabilization Fund, which was created in the first “stimulus” and has already distributed $53.5 billion to states to supplement education budgets. The president claimed that this spending would create millions of jobs. Instead, the funding was largely used to subsidize existing obligations, delaying tough budget decisions that would otherwise be essential. In a number of areas, cash-strapped state and local governments used the money to give employees raises. Meanwhile, these governments were shielded from budgeting within their means to meet funding gaps. In addition, states are barred from making reforms that would lower education spending and ease budget pressures. These federal bailouts not only allow state governments to skirt fiscal responsibility with fungible federal money, but they forbid them from cutting spending or reducing debt.
Extension of “Stimulus” Increase in FMAP: The bill would extend the federal Medicaid matching rate of 6.2 percent to all states through December 2010. The legislation would then begin to phase down the FMAP increase to 3.2 percent for the first three months of 2011 and 1.2 percent from April through June 2011. This provision would cost $16.1 billion over ten years.
TAX INCREASES, RESCISSIONS AND OTHER OFFSET PROVISIONS
The legislation includes $9.7 billion in permanent tax increases to offset a portion of temporary state bailouts. These tax provisions would impact U.S. multinational companies and increase the cost of doing business for companies during a recession. These tax hikes could risk jobs and put American companies at a competitive disadvantage when operating in foreign markets. In addition, these same tax provisions have been used as offsets for no less than two other pieces of House-passed legislation in the past two weeks (H.R. 5893 and H.R. 5982).
Rules to Prevent Splitting Foreign Tax Credits from the Income to Which They Relate: This provision would implement a matching rule that suspends the recognition of foreign tax credits until the related foreign income is taken into account for taxing purposes in the U.S. This provision would apply to all split foreign taxes claimed by taxpayers after the date of introduction. According to JCT, this provision would increase taxes by $4.25 billion over ten years.
Denial of Foreign Tax Credit with Respect to Foreign Income Not Subject to U.S. Taxation by Reason of Covered Asset Acquisition: This provision would prohibit taxpayers from claiming the foreign tax credit with regard to foreign income that is never subject to U.S. taxation because of a covered asset acquisition. The legislation would apply to related party transactions occurring after the date of introduction. According to JCT, this provision would increase taxes by $3.64 billion over ten years.
Separate Application of Foreign Tax Credit Limitation to Items Resourced Under Treaties: The legislation abides by the treaty commitment to treating income as a foreign source, but segregates the income so that it is not the basis for claiming foreign tax credits that have nothing to do with double taxation. The bill would conform the foreign tax credit treatment of taxpayers operating abroad through foreign branches and disregarded entities to the treatment already afforded to taxpayers operating through foreign corporations. According to JCT, this provision would increase taxes by $250 million over ten years.
Limitation on the Amount of Foreign Taxes Deemed Paid with Respect to Section 956 Inclusions: The bill would limit the amount of foreign tax credits that may be claimed on a deemed dividend under section 956 to the amount that would have been allowed with respect to an actual dividend. According to JCT, this provision would increase taxes by $704 million over ten years.
Special Rule with Respect to Certain Redemptions by Foreign Subsidiaries: The bill would eliminate a tax planning technique that allows foreign-based multinationals (e.g. a foreign-based company that owns a U.S. company, and that U.S. company owns a foreign subsidiary) earnings to bypass the U.S. tax system. According to JCT, this provision would increase taxes by $250 million over ten years.
Modification of Affiliation Rule for Purposes of Rules Allocating Interest Expense: The bill would prevent taxpayers from using certain techniques to minimize the amount of foreign source interest expense, which has the effect of boosting foreign source income – thus allowing taxpayer to utilize more foreign tax credits. According to JCT, this provision would increase taxes by $390 million over ten years.
Termination of Special Rules for Interest and Dividend Received from Persons Meeting the 80-percent Foreign Business Requirement: The bill terminates the “80/20” rule that exclude a corporation with gross income of at least 80 percent from a foreign source income and attributable to foreign trade or business during a three-year period from a 30 percent withholding tax. Some corporations that meet specific requirements and are not abusing the “80/20” company rules may receive relief. According to JCT, this provision would increase taxes by $153 million over ten years.
Limitation on Extension of Statute of Limitations for Failure to Notify Secretary of Certain Foreign Transfers: The bill would make a technical correction to the Hiring Incentives to Restore Employment (HIRE). This provision would clarify the circumstances in which the statute of limitations period for corporations that fail to provide certain information on cross-border transactions or foreign assets. According to JCT, this provision would have no revenue impact over ten years.
Elimination of the Advance Earned Income Tax Credit: The bill eliminates the ability of recipients of the Earned Income Tax Credit (EITC) to receive advanced payments throughout the year by having their payments of withheld income reduced by their employer. According to Senate Democrat staff, the advanced option is employed by three percent of EITC recipients. According to CBO, this provision will reduce spending and increase revenue by $1.13 billion over ten years.
Medicaid Average Manufacturer Price: The bill would include inhalation, infusion, and injectable drugs not dispensed through retail community pharmacies in the calculation of the Medicaid average manufacturer price (AMP). Under current law, the AMP calculation excludes certain payments and rebates if received from or provided to entities other than retail community pharmacies. According to CBO, including these additional drugs in the AMP calculation will reduce spending by $795 million over five years and $2 billion over ten years.
Stimulus Food Stamp Provisions: The bill would terminate stimulus spending increases for the Supplemental Nutrition Assistance Program (SNAP), also known as Food Stamps, on March 31, 2014. According to CBO, this provision would reduce spending by $7.4 billion over five years and $11.9 billion over ten. Some Members may question the accounting methods which lead CBO to score this provision as a spending reduction. Since the SNAP spending baseline was raised 18 months ago in the Democrats’ stimulus, the bill merely reduces a significant funding increase that was designated as emergency spending and never offset. In essence, the Democrats increased the spending baseline without offsetting the cost and are now returning the baseline to its original trajectory and calling it a “savings.”
Because this spending was designated as emergency, these savings are not counted in the calculation of the effect of the bill on the deficit under the Statutory Pay As You Go Act. Since these funds—and roughly $2 billion of emergency rescissions in the bill—cannot be counted as a savings under PAYGO, the legislation violates the Democrats’ statutory PAYGO by $12.6 billion.
The bill includes $6.7 billion in rescissions, including approximately $2.5 billion in Department of Defense rescissions. In addition, the bill includes roughly $2.3 billion in rescission from the stimulus bill. Since these funds are regarded as emergency spending, these savings are not taken into consideration when calculating the deficit effect of the bill for PAYGO. A list of the specific rescissions in the bill follows.
The bill includes $26.1 billion in new spending which is offset with $27.4 billion in increased taxes and spending reductions. However, CBO states that $14 billion of spending reductions come from emergency funding which is not subject to PAYGO and thus cannot be used as an offset. Therefore, according to CBO, the bill violates statutory PAYGO and increases the deficit by $12.6 billion.
More “Stimulus” Spending: The bill contains $10 billion in so-called “teacher jobs” spending. This money would be used to bail out states with shortfalls in their education budget. The funding is on top of $53.6 billion that was provided to states in the Democrats’ stimulus bill through the State Fiscal Stabilization Fund in order to fill education gaps. According to the Department of Education, the “one-time appropriation” in the stimulus bill was meant as “a historic infusion of funds that is expected to be temporary.”
While Democrats may argue that the increased government spending will result in the creation of jobs, past experience suggests otherwise. Since last year more than a trillion dollars has been spent by Democrats on so-called “jobs” legislation that has done little to lower unemployment or curb the effects of the recession. As it has been widely reported, the Obama Administration said in late January 2009, if the $1 trillion stimulus bill was passed unemployment would not surpass 8 percent. However, unemployment has hovered near 10 percent since the stimulus was passed and the recent drop in the unemployment rate—from 9.9 percent to 9.7 percent—was due only to 410,000 new government jobs. Even the country’s economic growth rate has disappointingly slowed from 5.6 percent in the fourth quarter of 2009 to the 3 percent in the first quarter of 2010. Such growth rates are entirely insufficient to put the 15 million unemployed Americans back to work. In short, government spending has done nothing to improve our nation’s economic station and done much to impair fiscal stability.
Prohibits Responsible Budgeting: Some Members may be concerned that the bill bars states from making reforms which may be necessary to maintain a fiscally responsible state budgeting process. The bill temporarily shields states from addressing budget and funding gaps within their means to meet funding gaps. In addition, states are prohibited from reforming and reducing education spending to ease budget pressures. These federal bailouts not only allow state governments to skirt fiscal responsibility with federal money, but they forbid them from cutting spending or reducing debt.
Permanent Tax Increases for Temporary Bailouts: Some Members may be concerned that the legislation includes $9.7 billion in permanent tax increases to offset a portion of temporary state bailouts. These tax provisions would impact U.S. multinational companies and increase the cost of doing business for companies during a recession. These taxes risk jobs and put American companies at a competitive disadvantage when operating in foreign markets.
PAYGO Violations and Gimmicks: According to CBO, the net effect of the legislation is a deficit reduction of $1.3 billion. However, this estimate includes $14 billion in spending reduction from Food Stamps and stimulus rescission which are designated as emergency funding and thus not subject to PAYGO. According to CBO, these savings are not counted in the calculation of the effect on the deficit under the Statutory Pay-As-You-Go Act of 2010. Some Members may be that CBO’s estimated effect of the bill for compliance with statutory PAYGO is an increase in the deficit of $12.6 billion over ten years and would be a violation of the Democrats’ PAYGO.