Extenders and the Republican Alternative
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As the Senate continues to debate the current “Jobs Bill” before it, opposition is mounting. Many see this effort as yet another expensive and unpaid for spending behemoth. Apparently, gone are the days when the Senate would actually spend time and energy debating whether a new provision should really be classified as emergency spending (and therefore not include an equivalent offset or reduction someplace else in the budget). The legislation sponsored by Senator Baucus, which would temporarily extend several expiring tax provisions, would also include massive increases in spending. Under the Democrat’s plan, these increases – many dubiously dubbed as “emergencies” in order for the majority to avoid having to provide offsets for them – would be only partially offset with permanent tax increases elsewhere, and the rest would be added directly to the deficit.
Opposition to this approach comes in many forms. As we have previously noted, it is unwise and potentially destructive to continue to pay for the temporary extension of tax cuts with permanent increases in taxes elsewhere. It is a losing deal. Likewise, it is not only foolish, but also disingenuous to continue to increase deficit spending on arguably non-essential programs without making necessary cuts to spending elsewhere. The Democrats continue to ignore their own pay-go rule, further increasing deficit spending as the year drags on.
However, some Senators have come up with an alternative approach to the problem, proposing instead to finance the expiring tax provisions, and the defensible increases in spending with – shockingly enough – actual spending cuts! Senator Thune has introduced the alternative plan (amendment #4333) which would include all of the important (and bipartisan) provisions in the underlying bill, paid for with spending cuts instead of with the Democrat’s proposed tax increases.
According to the alternative’s drafters, the Thune amendment would cut taxes by $26 billion by extending current law, cut spending by over $100 billion, and reduce the deficit by $55 billion –all according to CBO. This is compared to the underlying proposal which increases spending by $126 billion, includes over $70 billion in new taxes (for a net tax increase of $48 billion), and increases the deficit by $79 billion over the next ten years (again, according to CBO). It’s shocking to think these two very different approaches could both accomplish the same things, but with very different ways to pay for them.
Both approaches do three primary things: extend the expiring unemployment provisions until November; extend expired tax provisions including the tax credit for research and development and the state and local sales tax deduction through the end of the year; and provide relief for doctors by extending the “doc fix”. However, the Baucus bill also includes other massive spending increases, such as $24 billion in payments to states and $4 billion in additional Build America Bonds, both of which the Thune plan eliminates. The Thune amendment is also fully offset by making strategic cuts in wasteful spending. Many of these cuts were originally proposed by Senator Coburn during the last debate on the war supplemental and include in part:
- Rescinding $38 billion in unobligated stimulus funds
- Selling $15 billion of unneeded and unused government property
- Auctioning and selling of unused and unneeded equipment
- Imposing a one-year freeze on the salaries of federal employees and eliminate their bonuses.
- Capping the total number of federal employees at current levels.
- Collecting unpaid taxes from federal employees. The IRS recently reported that federal employees owe $3 billion in unpaid taxes.
- Reducing government printing and publishing costs by $4.6 million by focusing on electronic publication.
- Reducing and rescinding duplicative and unnecessary spending and cutting discretionary spending across the board by 5 percent for all agencies, except at the VA and DOD.
- Eliminating “non-essential” government travel and capping annual travel expenses at $5 billion.
- Eliminating bonuses for poor performing government contractors.
- Limiting voluntary payments to the UN to $1 billion.
In addition, the Thune amendment also includes: an additional year of relief for doctors with one more year of the “doc-fix” (compared to the underlying proposal,) medical malpractice reforms, several Medicare-related extenders that passed the Senate in March, and would save $11 billion by lowering the affordability exemption in the healthcare law's individual mandate from 8 % of income to 5 %.
Given the fact that Democrats have added over $200 billion to the deficit since they passed the highly-touted statutory pay-go provision (ignoring their own law and continuing to spend without offsets), it is encouraging to see at least some Senators are still pursing actual cuts in spending.
Recent reports maintain that Senator Reid and others are clamoring to add still more unoffset spending to the bill. For example, a small bipartisan group led by Reid is trying to include a costly extension for homebuyers through the homebuyer tax credit. Under current law, homebuyers who signed a contract by April 30 have until the end of this month to close. Their amendment would extend that closing deadline to Sept. 30.
As the legislation faces another week of debate, the list of new and costly items to include only keeps growing. As the scope of the bill continues to grow it becomes increasingly problematic for moderate Democrats who will vote amid raised eyebrows by colleagues claiming to be (truly) deficit-minded. If the bill can ultimately muster the 60 votes it will need to pass the procedural hurdles in the Senate, and the increases in spending are included without offsets, the bill still faces a tough vote in the House where the deficit-minded Blue Dogs stand ready to oppose it. Currently the Senate bill contains $24 billion in state funding for Medicaid, which was stripped from the House version amid concerns of overspending.
In another confusing turn of events, President Obama when discussing the passage of the extender’s package this week said, “[it] is important to give families confidence that they're going to be able to get back on their feet, but also give businesses confidence in terms of what their tax structure's going to look like going forward." The President is conveniently ignoring the fact that the vast majority of small businesses file as individuals (in the top marginal bracket), and this extender’s package will do nothing to address the looming tax rate increase facing those businesses. If the President was serious about restoring certainty and confidence in the tax system, the most important move that could be made would be to address the lack of permanency of those rates. Instead, the underlying bill has become a patchwork of temporary extensions, paid for with tax increases that could hurt small businesses and economic growth in a variety of other ways.
In one attempt mitigate the detrimental effect the bill could have on small businesses, Senator Snowe is moving to strike a tax increase on small firms organized as S corporations. The provision included in the bill would force S corp shareholders to pay Medicare and social security taxes on business profits, on top of the taxes they pay on wages. Snowe argues rightly that this would be a devastating hit on small businesses, which would prevent many from expanding or hiring further.
Another controversial tax increase included in the underlying bill would tax carried interest as ordinary income rather than as capital gains. While proponents of this change have argued for years that it would primarily hurt wealthy hedge fund managers, it would also hurt the real estate market substantially and overall be detrimental to growth. The investment firms most likely to be affected by this increase provide much needed capital to small businesses, and young and growing businesses. Making it more expensive for private capital to flow to these enterprises would have a negative effect on any potential economic growth and job creation, both of which supporters claim are primary purposes of this bill.
Overall, it’s getting harder to figure out what the real purpose of this jobs bill really is? What’s clear is that instead of actually addressing the causes and pushing new solutions to America’s continued employment slump, the bill is taking the shape of yet another massive spending bill. Instead of adding yet more spending to the deficit – offset only in part with harmful tax increases – the bill should be narrowly tailored to extend the expiring tax provisions, provide true emergency aid where needed, and be fully offset with spending reductions elsewhere in the budget. It is encouraging that at least some Senators are getting the point.
Jennifer Pollom is the Director of External Affairs at e21 and was the Appropriations and Budget Counsel for the Senate Republican Policy Committee.