Happy Fourth of July!
Just wanted to let our loyal BudgetBlog readers know we're going on a short hiatus next week. With Congress heading out of town for a short summer recess and the upcoming Fourth of July holiday next week, the Fiscal Policy team is heading out of town in order to escape the heat for some well-deserved vacation. This means, though, that the BudgetBlog will be dormant next week.

But don't despair. Craig and I will return in one short week on July 7 to continue to bring you all the news, gossip, information, and analysis on federal fiscal policy you've come to expect.

Hope everyone has a safe and festive Independence Day next week - be careful with those fireworks.

The voted this afternoon (233-189) to pass a fully-offset, one-year AMT patch that would prevent some 25 million Americans from falling into an alternate tax universe in which their tax bills would jump by an average of $2,000.

The bill's $61.6 billion cost is fully offset mostly by:

• Treating income of equity fund managers as income, rather than capital gains
• Revoking some tax cuts for oil companies
• Closing a loophole currently enjoyed by some foreign-owned firms using tax havens
• Tighter tax enforcement of merchant credit card payments

These offsets, however, will most likely be stripped by the PAYGO-phobic Senate when it considers the measure.

Our friends over at the Government Accountability Office released another great report a week or two ago concerning how Medicare providers (hospitals, nursing homes, and doctors) are failing to pay federal taxes to the tune of at least $2 billion a year. Findings from the report:

Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns.

GAO found some pretty crazy stuff in their investigation, including abusive and potentially criminal activity, and found that many individuals associated with their investigation used the proceeds of their tax evasion for personal profit. Again from GAO:

Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes.

While the actions of these providers is pretty bad, the failure of the Centers for Medicare and Medicaid (CMS) to take any actions to prevent these abuses might be worse:

CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors.

IRS can continuously levy up to 15 percent of each payment made to a federal payee—for example, a Medicare hospital—until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes.

Health care providers receiving federal resources should be treated no differently than contractors who fail to pay their taxes. Congress recently passed legislation to prevent contractors from using off-shore tax havens to avoid paying federal taxes. They should do the same to make sure all entities who benefit from our common resources pay the taxes they owe.

One-Page Summary of GAO Report
Full Report: Thousands of Medicare Providers Abuse the Federal Tax System

The housing legislation that the Senate may vote on this week contains a property deduction similar to one found in the House version of the bill. The provision would allow homeowners who do not itemize their taxes to deduct a fixed amount from their taxes -- $500 for individuals and $1,000 for couples.

Senate Minority Whip John Kyl (R-AZ), however, has inserted language into the bill that would prohibit non-itemizers from using this deduction if they live in locality that raised property taxes from the time of the law's enactment until the end of the year. As the Center on Budget illustrates, this is just a finger in the eye to state and local governments.

In both the short and the long run, [Kyl's language] is likely to impede efforts of localities to provide an adequate level of services for their residents, including schools, public safety, roads, libraries, parks, and social services. Moreover, it is an unwarranted and unprecedented intrusion by the federal government into policies that always have been left to the states to determine.

But there's also a chance the legislation's property tax increase penalty could extend beyond Dec. 31, 2008.

History suggests, however, that once a deduction is included in the tax code for one year, there is a high probability it will become an "extender" that is renewed every year. Examples include the deduction for state and local sales tax, the deduction for qualified tuition expenses, and the deduction for teacher classroom expenses, as well as a host of business-oriented deductions and credits. If this type of restriction on local property tax revenue were continued for several years, it would fundamentally alter the nature of state and local finance in the country and represent a basic change in the principles of federalism.

This is all hooey...This is going to severely hamper the ability for state and local governments to address looming education shortfalls...

When President Bush signed into law the Heroes Earnings Assistance and Relief Tax Act (HR 6081) on Tuesday, he forced domestic firms employing workers through off-shore shell companies to pay payroll taxes when performing work on federal contracts. The provision in the bill uses language from the Fair Share Act (HR 5602).

Writing on Womenstake, the National Women's Law Center blog, Joan Entmacher notes that Bush signed the bill despite its inclusion of the Fair Share Act language.

Of course, cracking down on abuses by defense contractors wasn't the reason President Bush signed the bill. The new law provides tax assistance for military families -- a cause so popular that the bill passed the House 403 to 0 and the Senate by unanimous consent. So, at least this time, President Bush was willing to set aside his belief that tax cuts should not be financed by raising other revenues.

But, when it comes to closing much larger loopholes exploited by super-wealthy private investment fund managers, President Bush and his allies on Capitol Hill so far are giving no sign that they are willing to relent.

(Updated below)

By cancelling approps markups this week, House Majority Leader Steny Hoyer (D-MD) has cleared the deck for floor consideration of that chamber's latest revision of the war supplemental spending package. With the exception of additional funds for midwest region's recent flooding disaster (speculation is $2 billion-ish), the House bill is shaping up to look pretty much like the original sent to the Senate oh-so-long ago:

• Fulfillment of the remaining war funding request for FY 2008 and part of FY 2009
• 13 weeks of extended unemployment insurance benefits, with an another 13 weeks for those living in "high-unemployment" states (for a total of 26 weeks).
• $52 billion expansion of the G.I. bill
• A smattering of other domestic spending

Although House Blue Dogs talked Democratic leadership into including a tax provision to offset a $52 billion expansion of the G.I. bill, "Democratic aids" say that if the Senate ultimately strips the bill of the revenue raiser, they won't stand in the way of final passage in the House. Observers will recall that the first war supp included such an offset, and that the Senate voted on and rejected said offset. Baffling to me, then, is why the insistence on repeating the process only to announce that support for the offset in the House will totally collapse upon Senate rejection.

UPDATE: House Democratic leadership have announced they have reached a compromise with the White House.

• Fulfillment of the remaining war funding request for FY 2008 and part of FY 2009
• 13 weeks of extended unemployment insurance benefits for all states: There will be not additional 13 week extension for high-unemployment states.
• $52 billion expansion of the G.I. bill that will not be offset with a 0.5% millionaire surtax
• $2.65 billion for midwest flood relief
• Postponement of six new Medicaid regulations implemented by the Bush Administration (postponement of the a seventh regulation passed the House independently in April)

The Senate again today defeated a cloture motion (to permit voting) on the bill to extend a raft of popular tax breaks, by a vote of 52-44.

379 large U.S. companies, among them Bank of America, Boeing, Citigroup, Ford Motor Co., Pfizer and Walt Disney, wrote the Senate a letter yesterday warning that failing to approve tax extension provisions could harm the economy. Mindful that House Majority Leader Steny Hoyer (D-MD) and House Ways & Means chair Charles Rangel (D-NY) are adamant about paying for the extenders bill, the companies have made it clear they are determined to see the bill pass, even if it complies with PAYGO.

Word on the Hill is that some of those business leaders met this afternoon with Minority Leader Mitch McConnell (R-KY), Minority Whip Jon Kyl (R-AZ) and Finance ranking member Chuck Grassley (R-IA), and got a talking to. The Senators told them support for Senate Finance Committee chair Max Baucus' (D-MT) extenders bill -- which complies with PAYGO -- would threaten their relationship with conservative lawmakers, "ma[king] it very clear to the business community that they have the votes to block cloture," according to a lobbyist present at the meeting.

The reason for the tough talk? The business community may not oppose the offsets contained in the Baucus bill, the Senators told them, but they might oppose future offsets and Republicans must be consistent in their opposition.

Last week, a bid by Senate Majority Leader Harry Reid to invoke cloture (to stop debate and allow voting) on the Senate tax break extender bill fell short by ten votes (see background squib). But it appears that the Senate will vote on the cloture motion again later this afternoon.

What has happened in the interim to suggest a different outcome this time? Senate Republicans have come under increasing pressure from corporations which desperately want their tax incentives extended or revived, even if it means increases in certain business taxes to pay for it (see Corporate Community Copacetic).

Businesses have sought to rally support for the measure in recent days, going so far as to warn senators that not backing the tax breaks would harm the economy. In a letter sent to Senate Finance Committee chair Max Baucus (D-MT) today, 379 companies, including some of the largest in the U.S., among them Bank of America, Boeing, Citigroup, the Ford Motor Co., Pflzer and Walt Disney, wrote:

Swift action is now needed by the Senate to enact a tax extenders package that will bring significant positive benefits to the U.S. economy.

We applaude this display of corporate fiscal responsibility and will share the full text of the letter and the results of the cloture vote with you as soon as they become available.

Call it solomonic, metaphysical, ingenious, or disengenuous, but it appears that a great PAYGO Pact of 2008 is in the offing.

Here's the conundrum: since the principles of PAYGO apply only to changes in current law increasing mandatory spending or decreasing taxes, how many times must temporary extensions of tax breaks be extended before they are no longer regarded as "extenders," but as "current law." It seems to beg reasoning to say that merely calling them "permanent" (since they can be eliminated any time) makes them current law. But it also seems paradoxical that an extended tax break can ever evade the strictures of PAYGO.

Count on Chuck Grassley (R-IA), the Senate Finance Committee's ranking member, to cut the Gordian knot. He's working on a plan that would offset certain extenders that could be considered "new" extenders because they are being added or modified in the extenders package. Under the plan, extension of the research and development tax credit would not be paid for, while a number of the energy provisions, like the newly-added credit for energy-efficiency improvements to existing homes would be offset.

Elegant enough? Not quite. Grassley said he hears that Democrats on the Finance Committee believe there is $18-19 billion in new policy to be offset, but his staff puts the number closer to $5-6 billion.

It may come down to what the meaning of "new" is. Take the Grassley Challenge and figure it out for yourself:

• Bill Summary: Energy Independence and Tax Relief Act
• Bill Text
• JCT Scoring

Whatever the answer is could be known, the extender package pay-fors determined, and the package voted on as early as next Monday.

House Republican leadership are attempting to get their caucus to coalesce around a two-tier flat tax.

The flat-tax proposal is expected to resemble a measure (HR 3818) sponsored by Rep. Paul D. Ryan of Wisconsin, the ranking Republican on the Budget Committee, to allow taxpayers to opt out of the current income tax system and opt into a two-tier flat tax.

Sen. McCain, R-Ariz., has said he supports "giving Americans a choice between filing under the current system or using a two-rate flat tax with generous deductions."

McCain "wants a simplified tax. He wants taxpayers to be able to file a one-page return and something they could opt into," said Senate Minority Whip Jon Kyl, R-Ariz.

Look, it's not the progressive schedule of tax rates that makes filing taxes so complicated. The complicating factor is what to tax. Figuring out what can be deducted, how much can be deducted, what kind of income is taxed at rate X and which is taxed at rate Y, are what turns the annual ritual into a multi-page extravangaza.

Here's how our progressive tax structure filing taxes complicated an confusing:

(click to enlarge)

Why flat tax advocates believe this little calculator is responsible for complicated and multipaged tax returns is beyond me. Is it possible that they would use obtuse tax forms as an excuse to decimate the tax code's progressivity?

And ironically, there's overlap between the One Page Return Flat Tax group and those who are constantly suggesting new ways in which the tax code can ease all our social ills (i.e. tax breaks for health savings accounts, tax breaks for homeowners, tax breaks for charitable donations, etc). It's precisely this chipping away at the tax code that makes filing taxes so complicated.

Congressional Quarterly has obtained a preliminary draft of a letter from 300 Americans companies from Apple to Xerox expressing a support for a package extending expiring tax breaks -- paid for by the curtailing of some big-ticket corporate tax cuts.

According to the early draft, the companies indicated that the House bill

includes revenue-raising provisions that are relatively noncontroversial compared to the large tax increases that would fall on American companies and American workers if the expired and expiring provisions are not extended... Opposition to any and all revenue raisers should not impede action necessary to prevent these tax increases.

Such a position would be directly at odds with the oft-stated, nearly-unanimous view of the GOP Senate conference that corporate tax breaks should not be paid for -- and certainly not by offsetting reduction of other corporate tax breaks.

We will keep you posted regarding the letter and further lobbying efforts by the corporations regarding the tax extenders package.

The Center on Budget and Policy Priorities has a helpful policy brief out today that runs through all the reasons the upcoming package of tax cuts -- popularly referred to as the "extenders" package -- should be offset. We couldn't agree with CBPP more. In their brief, they make four main points, the last of which is probably the most important:

• Congress should pay for the tax extenders, as its budget rules require.
• Arguments against applying PAYGO to the extenders bill do not withstand scrutiny..
• The offsets in the House-passed bill are reasonable policy.
• In the future, Congress should subject the extenders to greater scrutiny.

CBPP makes a great point with the fourth one on the list. There has not been any mention during debate on the extenders this year (or in any past year I can remember) that considered whether some of the provisions of the "extenders" package should continue to exist. House Ways and Means Committee Chairman Charles Rangel (D-NY) did mention during a committee markup that a comprehensive review of the package to determine which aspects were achieving their goals was necessary, but that review has not yet taken place. The popular name of the package itself -- the "extenders -- implies these tax policy provision will live on year after year without any review.

Hopefully while Congress tries to get its act together in order to go the extra mile and do a comprehensive review of the "extenders" package, they will at least do no harm and pay for the policies they want to extend wholesale.

The good folks over at the Congressional Budget Office (CBO) released their monthly budget review yesterday. Some highlights of the number crunching in the report are below:

The federal government incurred a deficit of about $317 billion during the first eight months of fiscal year 2008, CBO estimates, $168 billion more than the shortfall recorded through May of last year. About $50 billion of that change is due to the distribution to individuals of the tax rebates enacted in the Economic Stimulus Act of 2008. That amount is just under half of the total rebates expected for this year; most of the remainder will be disbursed during the next two months.

...

CBO estimates that the federal government recorded a deficit of $165 billion in May, about $97 billion more than the deficit recorded in May 2007. About half of that increase was due to rebate payments, which are recorded as either reductions in revenues or increases in outlays. (When a rebate exceeds an individual's federal income tax payment, the excess is classified as an outlay in the budget.)

...

Outlays were $174 billion higher than in the October-May period last year, far outpacing the $6 billion growth in net revenues...

The broad category of other programs and activities accounted for almost half of the increase in outlays through May. Spending for that category was up by 12.6 percent on an adjusted basis, reflecting an estimated $19 billion in rebate payments as well as double-digit growth in outlays for refundable tax credits, veterans' health programs, unemployment benefits, and food and nutrition services. Defense outlays have also grown rapidly in recent months, rising by 10 percent through May, compared with 7 percent in fiscal year 2007. Much of the growth this year has been driven by a 14 percent increase in spending for military operations, maintenance, and procurement, well above last year's average gain of 8 percent for those activities.

CBO: Monthly Budget Review

In a post over at inclusionist, Shawn Fremstad makes a crucial point about federal health care spending.

In fact, the 2nd biggest health care entitlement isn't Medicaid, it's the $200+ billion tax break for employer-sponsored health insurance. The health insurance tax break costs around $30 billion more than Medicaid and, if my recollection is correct, is increasing at a faster rate than either Medicaid or Medicare. It's also, unlike Medicare or Medicaid, a regressive tax subsidy that provides more benefits for the wealthy.

As much sweat and tears have been spilled by former Comptroller General David Walker and others pleading American lawmakers to — for the love of Pete — do something! about the coming "entitlement crisis," rare (if ever) is the tax expenditure subsidy for private health care considered part of the problem. This strikes me as a $168 bn oversight (I'm using the number in the Analytical Perspectives in President's FY 2009 budget [Ch. 19].).

But this oversight isn't limited to tax subsidies health insurance. No one seems aware of the other massive entitlement programs like the $100 billion housing subsidy that helps higher-income families buy homes (Filers earning more than $100,000 represent 11% of all filers, but they see 60% of the benefit.).

Crafting policies aimed at reducing per-unit costs of health care would not only allow all Americans to access more and higher-quality health care, but it would also help avert the a doomsday debt scenario (AKA The Entitlement Crisis^®). And as long as we neglect to consider the health insurance subsidy part of the federal health care system, this solution will remain obscured.

When the Treasury Department released a stack of propaganda analyses yesterday on the 2001-2003 Bush tax cuts, they also promulgated a press release to accompany their reports. While their message was nothing more than years-old, warmed over talking points, it has provided yet another opportunity to talk about the continual deepening of income inequality in the United States.

The administration crows about the enormous burden of taxes that upper income groups shoulder, however, it remains typically silent on why they pay such a large share of taxes -- upper income groups earn way more than lower income groups.

From the Treasury's talking points we learn that the individual income tax is "highly progressive" because:

• In 2005, the top 5 percent of taxpayers paid more than one half (59.7 percent) of all individual income taxes, and the top 1 percent paid 39.4 percent; and
• Taxpayers who rank in the top 50 percent of taxpayers by income pay virtually all individual income taxes. In 2005, they paid 96.9 percent of all individual income taxes.

But what remains unsaid is the underlying reason for these numbers:

• Taxpayers in the top 50% earned the overwhelming majority of income. In 2005 they earned 87.2 percent of all income, up from 86.2 percent in 2001; while
• The bottom 50% has not fared as well. In 2005, they earned 12.8 percent of all income, down from 13.8 percent in 2001.