The President's Advisory Panel on Tax Reform will hold a tenth public meeting this wednesday. The meeting will start at 9:00 and will be held at the Renaissance Hotel in Washington D.C.

The panel has held nine meetings since its inception in January of this year. At each of the meetings witnesses testified about problems with the current tax system and various options for reform. At this meeting, panel members will discuss issues associated with reform, and there will not be any testimony presented. The meeting will not be available by web cast, however the panel did provide a conference call number so people can listen in. The conference call number is 866-341-2255 or 202-927-2255 and the participants pin number is #65560.

The panel is scheduled to submit their tax recommendations to the Treasury by the end of September.

The administration has been using the release of the mid-session revenue and the report of a lower deficit as an excuse to squawk about their excessive tax cuts causing economic growth. Simply because deficit projections were lowered to $333 instead of a whopping $427 billion for FY 2005 does not mean that Bush's tax policies have proven to be pro-growth.

Instead, much of the reason for the deficit reduction lies in the fact that revenue levels are up in 2005, mainly when it comes to corporate taxation. A number of particular tax laws has led to an increase in tax collections which will prove to be more temporary, according to many analysts, than the administration is currently admitting. The expiration of a specific business tax cut along with strong capital gains returns and a concentration in nonwitheld taxes led to a 2005 surge in revenue. The surge remember, is still lower than levels of revenue which were predicted for 2005 back in 2002. To read more on how the 2005 revenue collections have affected predicted deficits, see this CBPP report.

This morning the Office of Management and Budget released their mid-session review, which is a supplemental update from the President to Congress containing revised estimates (since February) of the budget deficit, receipts, outlays, and budget authority for fiscal years 2005 through 2010.

Notably, the OMB reported that the deficit for FY 2005 will be $94 billion lower than what was projected back in February ($427 billion). The latest projection is $333 billion, which is 2.7 percent of GDP. The OMB also predicts that under Bush's policies the deficit will continue to fall, and will be $162 billion in 2009.

The mid-session review provides a misleading analysis of our nation's fiscal path, by not taking into effect various factors, such as that Bush's tax cuts are going to cost far more in future years than we can see now. As Paul Krugman notes in this op-ed on the state of the economy, "Douglas Holtz-Eakin, the director of the Congressional Budget Office, warns us to take the new revenue figures with a 'grain of salt,' and declares that 'if you take yourself to 2008, 2009 or 2010, that vision is the same today as it was two months ago.'"

Check the OMB Watch web site soon for a more in depth analysis of the mid-session review.

*UPDATE*: A full analysis of OMB's mid-year review is available: Analysis of Misleading OMB Mid-Session Budget Review
To read how OMB manipulates budget projections for political advantage, read this article.

Sen. Jon Kyl (R-AZ) said yesterday that he continues to hold conversations with Finance Committee ranking member Max Baucus (D-MT) regarding specific parameters of possible estate tax reform. According to reports, it is likely the Senate will vote on a compromise before the end of August.

While many senate Democrats feel pressured to negotiate on the estate tax before the mid-term elections, the specifics that Kyl is discussing could severely gut the tax. Kyl has made it known that he is in favor of an $8 million exemption level, and has also expressed support for instating a ten-year pay period.

Concerning the tax rate, Kyl has said it would be best if it were tied to the capital gains rate (currently 15 percent although it is slated to revert to 20 percent in 2008). The Urban-Brookings Tax Policy Center estimates that this exemption, coupled with the low tax rate, would reduce estate tax revenue by 93 percent overall. In that sense, the reform would be little better than outright repeal.

Not only would a lower the tax rate significantly reduce the amount of revenue brought in by the estate tax, but it should also be viewed as a possible back-door attempt to do away with the estate tax altogether. If the capital gains tax rate were ever brought down to zero, the estate tax would effectively be eliminated. To read more on this, see the Watcher article, "Rhetoric Heats Up On Estate Tax as Political Reality Pushes Compromise," as well as the CBPP report, "Kyl Estate Tax 'Compromise' Proposal Extremely Costly; True Cost Likely to be Masked."

• Minnesota Government Experiences Unprecedented Shutdown Due to Budget Deadlock
• Expiring Tax Cuts Will Prove Costly to Extend

Sunday's New York Times included an article discussing the findings of the estate tax report released by the CBO last friday. The article notes that the number of farms owing the estate tax when the owners die has fallen by 82 percent since 2000. The number has fallen to 300 farms.

The estate tax raised an estimated $23.4 billion last year from the richest 1 percent of Americans. Responsible reform, as opposed to repeal, is necessary in order to ensure this continued source of much-needed revenue. For more information, also see this new Center on Budget and Policy Priorities analysis of the CBO report.

According to a new report issued by the National Governor's Association, many state budgets are near historical levels of growth. Only five states' revenues for fiscal year 2005 are below projections, while 42 states generated more tax revenue than they planned. Despite this good news, the NGA does caution in their report that Medicaid costs for long-term care and other services still threatens budgetary stability. NGA Executive Director Raymond Sheppach stated, "The continued rise in health care costs, spurred by Medicaid, continues to throw a wrench in the recovery of many states." Medicaid, in fact, has now surpassed education as the greatest overall expense to states.

The Congressional Budget Office (CBO) released a report today called "Effects of the Federal Estate Tax on Farms and Small Businesses." The report, which was prepared at the request of Senate Finance Committee Ranking member Max Baucus (D-MT), looks at how family farms and small businesses are truly affected by the existence of an estate tax.

Proponents of estate tax repeal often make the argument that the tax unfairly hurts family farms and small businesses. In reality, a number of exemptions for family farms and small businesses exist, which can serve to significantly lower the number of estate tax filers. This analysis, which uses data from 1999 and 2000, looked at the effects of freezing the estate tax exemption level at $1.5 million, $2 million, and $3.5 million. The report found that any of those expemtion levels, along with a 48 percent tax rate and a large Qualified Family-Owned Business Interest (QFOBI) would substantially reduce the number of small businesses and farmers affected by the tax.

The estate tax needs to be reformed so that in 2011 (when it is scheduled to revert to it's pre-2001 form), family farms and small businesses are not unfairly burdened with the tax. However, as this report alludes to, repeal is not necessary in order to reduce the burden on family farms and small businesses. Deductions like QFOBI as well as raising the exemption level to one of the above-mentioned levels can work to do the accomplish the same end.

The White House is continuing to push for legislation which would create private accounts funded by payroll taxes, even though Democrats remain almost unanimously opposed and some top congressional Republicans want to scale back such plans. Some House Republicans support Ways and Means Chairman Bill Thomas' (R-CA) proposal, which creates these accounts and while also claiming to move the program towards solvency. Yet although he has the support of some, many House members on both sides of the aisle continue to remain skepitcal about moving a solvency bill loaded with benefit cuts.

As this Economic Snapshot from the Economic Policy Institute illustrates, the plan to create private accounts out of the Social Security surplus is less sound than it appears. As EPI says, "Proponents tout this plan as a way to 'stop the raid' on Social Security, but, like other privatization proposals, it diverts money from the trust fund and relies on infusions of general revenues to avoid worsening the trust fund balance."

The Social Security surplus next year is projected to be around $85 billion. EPI estimates, "credits in the accounts would start at 2.2% of payroll in 2006 and shrink thereafter, dropping below 2% by 2009, below 1% in 2014, and to zero in 2017. Over 11 years, the typical worker would probably accumulate about three to five thousand dollars in such an account and face a comparable debt to the government."

Today, parts of the Minnesota state government shut down for the first time in history, leaving 9,000 state employees without jobs, pay, or benefits. The shut down occured at midnight last night because lawmakers failed to to pass a stpgap plan to keep the government up and running while budget negotiators continue to work on funding details.

Senate Majority Leader Dean Johnson, a Democrat, said ''We need to fix it today. As far as I'm concerned, a one-day partial government shutdown is enough.''

While many states often miss their budget deadlines, their governments continue to run because of laws that automatically extend spending past the end of its fiscal year if a new budget is not approved. The major services affected in Minnesota Services were the highway rest areas, which closed, and the issuing of new driver's licenses. Also significantly affected were the 9,000 employees who were locked out of their jobs. Hopefully this shut down will be temporary, and state legislators will consider passing budget process laws to avoid this in the future.

New York Times article: Minnesota Government Shuts Down; 9,000 Jobless

Along with work happening in the House, the Senate Finance Committee also plans to move ahead with work to draft a Social Security bill. The Finance Committee staff plans to meet next week during the July 4 recess with the goal of having a draft ready to present to senators when they return. The focus during staff sessions leading up to this work has been mainly on how to work payroll tax funded "carve-out" accounts into a solvency bill. Apparently, tax increases are off the table, and Senate Finance Committee Chairman Grassley is continuing to push for larger carve-out accounts than proposed last week by Sen. Jim DeMint, (R-SC), sources said.

It is not clear yet if the legislation will end up including carve-out accounts or "add on" accounts that are funded outside the Social Security system. Apparently, Grassley will insist on legislation that includes accounts as well as provisions for making the system solvent, even if the House does only a limited DeMint-style proposal without addressing solvency.