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Washington Wire: Debt Limit Leads Off Series of Spending, Tax Deliberations

Published by Michael J. Novogradac on Sunday, May 1, 2011

Journal cover May 2011   Download PDF

Shortly before midnight on April 8, lawmakers cut a deal that slashed $38.5 billion from fiscal year (FY) 2010 funding levels—the largest annual spending cut in history. A week later, on April 15, the House voted 235 to 193 in favor of the 2012 budget resolution written by House Budget Committee Chairman Paul Ryan, R-Wis. The bill, pronounced dead on arrival in the Senate, is one of the first salvos in the next round of debate over federal spending.

But before serious negotiation begins on the FY 2012 budget, lawmakers will have to come to terms on raising the national debt ceiling. That process is expected to set the stage for a number of related deliberations, including FY 2012 appropriations and tax reform, and the heated rhetoric in Washington, D.C is expected to intensify.

As legislators’ positions take shape, let’s consider what is known so far.

Final FY 2011 Budget
After an agreement on a budget deal was reached by Senate Majority Leader Harry Reid, D-Nev., House Speaker John Boehner, R-Ohio, and President Obama, the House and Senate voted on H.R. 1473 on April 8. H.R. 1473 funds all federally funded agencies for the remainder of FY 2011. The long-term continuing resolution (CR) cut $38.5 billion from FY 2010 funding levels, or $78.5 billion from the President’s FY 2011 budget proposal.

A significant number of affordable housing programs were cut substantially. The CR includes $41.2 billion for the U.S. Department of Housing and Urban Development’s (HUD’s) budget, which is 6.4 percent below FY 2010 levels. The following are just a few of the cuts:
$149 million from the public housing operating fund
$100 million from HOPE VI
$456 million from the public housing capital fund
$942 million from the community development fund
$215 from HOME Investment Partnerships

The renewable energy sector was also subject to significant cuts. The Energy and Water section of the CR provides $31.8 billion in funding. This is a 10 percent reduction from the president’s fiscal year 2011 request and a 5 percent reduction from fiscal year 2010 levels. The bill provides $5 billion to the Advanced Research Projects Agency-Energy (ARPA-E). The bill restores $368 million in funding compared to the level set in H.R. 1 for energy efficiency and renewable energy projects. The final CR also maintains prior appropriated loan guarantee funds for energy efficiency and renewable energy projects.

In the immediate term, community development fared slightly better. The Community Development Financial Institutions (CDFI) Fund was funded at $227 million. This is nearly $20 million below 2010 funding, but is consistent with the Administration’s 2011 request.

Boehner, writing for Politico on April 13, said, “This agreement isn’t perfect. But it is exactly what we need to pave the way for the ‘Path to Prosperity’ budget offered by Budget Committee Chairman Paul Ryan, which moves the debate from cutting billions of dollars to cutting trillions.”

Boehner promised “many more steps, more cuts and more reforms to come.”

Turning to 2012
The budget resolution passed by the House on April 15 makes policy recommendations and sets spending levels for the House Appropriations Committee. When the House voted on April 15, all Democrats voted “no,” and only four Republicans joined them: Ron Paul, R-Texas, Walter Jones, R-N.C., Denny Rehberg, R-Mont., and David McKinley, R-W.V.

Ryan says his proposal would make $6.2 trillion in cuts over the next 10 years. The plan includes several provisions with potential to directly affect the efforts of affordable housing, community development, historic preservation and renewable energy communities. If enacted, the resolution would instruct Congress to:
cut domestic, non-security spending to FY 2008 levels and institute a five-year spending freeze;
impose federal time limits and work requirements on households receiving housing assistance;
take steps to eliminate the conservatorship of Fannie Mae and Freddie Mac; and
reduce the top corporate and personal tax rates to 25 percent while broadening the tax base by removing unspecified credits and deductions.

Specifically, the directive to cut domestic, non-security spending to FY 2008 levels and institute a five-year spending freeze will have a clear and immediate impact on the affordable housing community by limiting the amount of funding available. In addition, the plan to impose federal time limits and work requirements on households receiving housing assistance is expected to have significant consequences for affordable housing providers and owners by increasing compliance burdens. The ongoing debate over the future of Fannie Mae and Freddie Mac will also certainly influence the future of affordable housing finance.

The Republican plan reduces discretionary spending on energy programs to about $1 billion, compared to $8 billion in the President’s FY 2012 proposal. On April 5 Ryan wrote in the Wall Street Journal that the plan “rolls back expensive handouts for uncompetitive sources of energy.” While not mentioning specific programs or incentives that would be curtailed, the plan calls for “eliminating welfare for energy companies” and references “uncompetitive” energy sources.
The House Budget Committee report accompanying the budget resolution also takes aim at the new markets tax credit (NMTC). The report says that spending for the CDFI Fund has grown 43 percent since 2008; the text also alleges that “there is overlap with [the] CDFI [Fund] in other areas of the government, and the core purpose of the program is increasingly hard to define.”

The text goes on to say the NMTC, while designed to spur private capital investment in low-income areas, “has financed development in luxury hotels, condominiums, and other projects for financial institutions such as The Blackstone Group, Goldman Sachs, and JPMorgan Chase.” Clearly, for the NMTC to stand any chance of reauthorization in this environment, the tax credit community must aggressively refute any such implication or suggestion that the NMTC isn’t serving its congressional mandate.

Up Next: The Debt Ceiling
At the time of this writing, Treasury estimated that the United States would reach its debt limit on May 16. It is unclear when the actual limit would be reached; Treasury could use borrowing legerdemain to delay actual default beyond that date, for as long as a few weeks. It is very likely that the vote to increase the debt ceiling will establish the timing and the direction of future tax changes, including the future of various tax credits, such as the low-income housing, new markets, historic, and renewable energy tax credits. That debate most certainly will include additional agreement among the House and Senate members and President Obama on how to address the budget deficit and long-term increases in the U.S. debt. This agreement will likely have some broad guidelines regarding tax reform and tax increases.

On April 13, President Obama made a key overture in the form of a speech at George Washington University. In his remarks, the president proposed cutting non-security discretionary spending to levels consistent with the National Commission on Fiscal Responsibility and Reform’s (Fiscal Commission’s) recommendations; holding the growth in base security spending below inflation while ensuring the capacity to meet national security responsibilities; making changes to Medicare and Medicaid; and reducing tax expenditures enough to lower rates and the deficit. All 11 Republicans on the Senate Budget Committee responded to the address by calling on President Obama to submit a revised 2012 budget plan to reflect the proposals laid out in his speech to slash the deficit by $4 trillion over the next 12 years.

Next, it’s expected that either the so-called “Gang of Six” in the Senate will release its deficit plan or Senate Budget Chairman Kent Conrad, D-N.D., will release his. The Gang of Six is comprised of Sens. Saxby Chambliss, R-Ga., Tom Coburn, R-Okla., and Mike Crapo, R-Idaho, as well as Dick Durbin, D-Ill., Kent Conrad, D-N.D., and Mark Warner, D-Va. Initial reports indicate that the Gang of Six will also aim in its plan to cut approximately $4 trillion from the debt over the next 10 years. Unlike the GOP proposal, however, the Gang of Six is reportedly looking to reduce spending in all categories while advising tax reform that would raise revenue. The plan presented by the Gang of Six is expected to be modeled on recommendations of the Fiscal Commission appointed by President Obama in 2010.

In his April 13 speech, President Obama called on House and Senate leaders to name four members of each caucus to negotiate by the end of June a deficit reduction plan with Vice President Joe Biden. The number of participants is now expected to be less than the original 17. House Minority Leader Nancy Pelosi, D-Calif., named Assistant Minority Leader Rep. James E. Clyburn, D-S.C., and Rep. Chris Van Hollen, D-Md., to represent her caucus. Rep. Van Hollen also serves as ranking member of the Ways and Means Committee, which will be charged with drafting any tax legislation that comes from the debt deal. Reid announced that Senate Finance Committee Chairman Max Baucus, D-Mont., and Appropriations Committee Chairman Daniel Inouye, D-Hawaii, will join the talks. Two Republican lawmakers will participate; Senate Minority Leader Mitch McConnell named his deputy, Minority Whip Jon Kyl, R-Ariz., the GOP’s representative in the Senate, and House Speaker John Boehner named House Majority Leader Eric Cantor, R-Va., to speak for House Republicans.

Van Hollen said last month that President Obama had laid out a “two-track” process whereby a clean debt ceiling bill is passed and a deficit package is developed separately. Gang of Six member Coburn in public statements last month was adamant that he will not accept an increase in the nation’s debt limit without agreement on a debt reduction package. Republicans are said to be pushing a number of legislative proposals they want to see tied to a vote on raising the debt limit, such as a balanced-budget amendment or spending caps.

Recurring Theme: Tax Reform
As mentioned previously, one of the key provisions of President Obama’s plan was the broad call to reduce spending by addressing tax expenditures in the tax code. The President said on April 13 that his proposal calls for tax reform to cut about $1 trillion in tax expenditures from the tax code; he did not address which expenditures would be cut under his plan.

Ryan’s FY 2012 budget proposal also includes provisions to simplify the tax code by eliminating tax expenditures and so-called tax loopholes. While the low-income housing tax credit, new markets tax credit, historic tax credit and renewable energy tax credit are not named for elimination in the House budget resolution, neither had they been exempted at the time of this writing.

Ryan’s budget resolution would lower the corporate tax rate from 35 percent to 25 percent. It would accomplish this reduction using projected savings that would result from eliminating or modifying “deductions, credits and special carve-outs” from the tax code. The description of Ryan’s budget proposal says, “This budget would offset lower rates with a broader base, scaling back or eliminating entirely the deductions and credits that have skewed corporate behavior and benefitted the largest corporations disproportionately. Government should not be in the business of picking winners and losers in the market.”

Many of these ideas were echoed in legislation released on April 5 by Sens. Ron Wyden, D-Ore., and Dan Coats, R-Ind. Wyden and Coats say S. 772, the Bipartisan Tax Fairness and Simplification Act of 2011, would streamline “the tangled web of nearly 10,000 exemptions, deductions, credits and other preferences currently cluttering the U.S. tax code.”

For individuals, S. 727 reduces the number of individual tax brackets from the current six to three: 15 percent, 25 percent and 35 percent. It would also eliminate the alternative minimum tax (AMT) completely. In an effort to encourage small business growth, S. 727 would allow more than 95 percent of small businesses – those with gross annual receipts of up to $1 million – to permanently expense all equipment and inventory costs in a single year. The bill would also reduce the top corporate tax rate and replace the existing six corporate rates and eight brackets with a single flat rate of 24 percent.
Buckle Up and Stay Tuned
At the time of this writing, the House and Senate were adjourned for their Spring Recess and State Work Period, respectively. Lawmakers will return to work May 2 and attempt to come to terms on the matter of the debt ceiling.

The backdrop for these discussions will be a possible government default much like the backdrop for a FY 2011 spending bill was the threat of a government shutdown. Things could move very quickly, and the agreements forged in the coming weeks and months could have long-lasting implications, so stay tuned!

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