June 12, 1997
What's in the
On Friday, May 2, 1997, the Clinton Administration and Republican leaders in Congress announced agreement on a broad outline for a five-year budget plan. As is well known, the budget agreement is designed to reduce the federal deficit to zero in fiscal year 2002 and to offer a net tax cut of $85 billion between fiscal year 1998 and fiscal year 2002. The purpose of this memo is to summarize those provisions of the budget agreement that will affect safety net programs for low-income families and the fiscal situation of states. It is based on the House's Concurrent Resolution on the Budget Fiscal Year 1998, Report 105-100 and all figures on spending and revenue changes are for the five-year period of fiscal year 1998 through fiscal year 2002 unless otherwise noted.
It should be highlighted that in the months ahead as it proceeds to translate the agreement into law, Congress could significantly change the budget agreement and add provisions not contemplated by the agreement. Moreover, although at this time it appears that there is wide-spread support for the agreement, it is still possible that final legislation implementing it will not make it through the Congress and be signed into law by the President.
If it is written into law, the budget agreement will have a significant impact on states and on safety net programs for low-income families. On the positive side, the agreement does at least include provisions to undo some of the cuts in federal benefits for legal immigrants included in the 1996 welfare law, ease modestly the impact of the new three-month time limit on certain unemployed food stamp recipients, increase federal spending on welfare-to-work initiatives, and finance child health initiatives. However, at the same time, it leaves untouched most of the cuts included in last year's welfare law and imposes significant new cuts in federal Medicaid spending and discretionary programs.
The Medicaid, Medicare and discretionary spending cuts are considerably deeper than they would otherwise need to be if the agreement had not included significant tax reductions. Moreover, the fine print of the agreement suggests that the specific tax cuts it envisions are heavily backloaded and will explode in cost over time. If this is indeed the case, then the agreement will aggravate the very serious fiscal problems the nation will face when the baby boom generation begins to retire, creating pressure down the road for more cuts in programs serving low-income families. The tax reductions also could have an impact on many states' tax collections, giving rise to new spending cuts at the state level.
Time Line for Action on the Budget Agreement
In mid-May, Congress incorporated the terms of the agreement between congressional leaders and the Clinton Administration into a budget resolution that passed both the House and the Senate.(1) The budget resolution provides a broad outline of the changes in taxes and spending that Congress must enact for the budget agreement to be written into law. In general, it specifies only the level of tax reductions and spending cuts to be enacted and not the details of how Congress is expected to reach those levels. Over the next several weeks and months, Congress will take on the task of passing "reconciliation" bills that fill in the details of the tax reductions and spending cuts. At this point, Congress is expected to enact two separate reconciliation bills one that makes changes in discretionary and entitlement spending programs and a second that implements changes in the tax code. Congressional leaders have called for action on the two pieces of legislation to be completed by the end of July or early August, but it is quite possible that this time frame will slip.
Summary of Provisions Affecting Legal Immigrants, Food Stamps, and TANF
Last year's welfare law left hundreds of thousands of legal immigrants ineligible for federal benefits. Almost half of all savings from the welfare law some $24 billion out of $54 billion in federal savings resulted from denying legal immigrants cash, food, medical benefits, and other services.(2) The budget agreement includes $9.7 billion to restore Medicaid and SSI benefits for selected legal immigrants and to extend protections for refugees and asylees from the SSI and Medicaid bars.(3)
Restoration of Medicaid and SSI for selected disabled legal immigrants ($9.5 billion)
The budget agreement proposed to restore SSI and Medicaid eligibility for a select group of legal immigrants affected by the original welfare law those who arrived prior to August 23, 1996, and who are or become disabled. Elderly legal immigrants who are currently receiving SSI and Medicaid under the classification of "aged" can apply to receive SSI under the classification of "disabled." It is likely that a large proportion of elderly immigrants currently receiving SSI will meet the disability criteria.
The budget agreement does not propose to restore SSI and Medicaid eligibility for legal immigrants arriving on or after August 23, 1996.(4)
Extension of the exemption for refugees and asylees from 5 to 7 years ($200 million)
The agreement would lengthen the period during which refugees and asylees may qualify for SSI and Medicaid after attaining their immigration status from five to seven years. It is ambiguous as to whether this policy would apply to other programs.
Since it may take months to complete action on the budget deal, a separate pending piece of legislation would delay the termination of SSI benefits for legal immigrants until September 30, 1996. The delay would avoid having to terminate legal immigrants from SSI and then restore eligibility to a portion of them after enactment of a reconciliation bill. The delay provision has been included in both the House and Senate versions of a supplemental appropriations bill designed primarily to provide disaster relief to flood victims and to finance peace-keeping efforts in Bosnia. Although the supplemental appropriations bill has yet to be enacted into law, Congress is expected to complete action on it relatively quickly because of the pressing need for disaster relief.
The 1996 welfare law included a provision imposing a time limit on food stamp benefits for most unemployed individuals between the ages of 18 and 50 who are neither raising minor children nor disabled. In general, the time limit allows these individuals to receive food stamp benefits for only three months in a 36-month period. The budget agreement includes $1.5 billion to ease the effect of the three-month time limit modestly using two different approaches:
Work slots for unemployed individuals ($1 billion)
The agreement includes new federal funds to finance new work slots for some food stamp recipients who otherwise would be subject to the time limit, as well as an understanding that some amount of existing employment and training funds will be explicitly set aside for this group. In total, the agreement includes $1 billion for the cost of establishing the new works slots and of providing benefits to people who avoid hitting the three-month time limit when given the opportunity to engage in employment or training. It is unclear exactly how much new money for work slots would be provided to states.
Individual hardship exemption for unemployed individuals ($500 million)
The agreement allows states to offer a hardship exemption to up to 15 percent of the people who otherwise would lose food stamp benefits because of the three-month time limit.
The agreement includes $3 billion for states and communities to use to help welfare recipients find and retain employment. The money represents mandatory spending (i.e., it will not be subject to the annual appropriations process) and will be distributed through the TANF block grant. It is not yet clear exactly how the $3 billion will be allocated among states and communities or what rules will govern how they may use the funds. The conference report that accompanies the House budget resolution says only that it will be "allocated to States through a formula and targeted within a state to areas with poverty and unemployment rates at least 20 percent higher than the State average. A share of funds would go to cities/counties with large poverty populations commensurate with the share of long-term welfare recipients in those jurisdictions." Much of the $3 billion will be distributed to states in the early years of the budget period states are slated to receive $700 million in fiscal year 1998, $700 million in fiscal year 1999, $1 billion in fiscal year 2000, $600 million in fiscal year 2001, and nothing in fiscal year 2002, when the TANF work requirements reach 50 percent.
Medicaid and Child Health Provisions(5)
Medicaid Spending Cuts
The budget agreement anticipates $17.8 billion in gross federal Medicaid spending cuts between fiscal year 1998 and fiscal year 2002. Of this amount, $4.2 billion would be used to finance four proposals that increase Medicaid spending. Thus, on net, the agreement would impose federal Medicaid cuts over the five-year period of $13.6 billion.
The agreement assumes that the $17.8 billion in gross federal Medicaid savings will be achieved through a combination of reductions in federal Medicaid matching payments to disproportionate share (DSH) hospitals and savings resulting from additional state flexibility. The agreement does not identify what proportion of the total reductions it assumes from federal Medicaid DSH spending and it does not specify precisely how these reductions are to be achieved. With respect to additional state flexibility, the agreement indicates only that these provisions should include "repeal of the Boren amendment, converting current managed care and home/community-based care waiver process to State Plan Amendment, and elimination of unnecessary administrative requirements." The agreement does not rely on the imposition of a per capita cap in the Medicaid program to generate savings.
New Medicaid Spending
As noted above, $4.2 billion of the federal Medicaid savings generated through the DSH cuts and "state flexibility" will be used to finance new Medicaid spending for four items. They include the following:
Increase in Medicare Part B premium costs ($1.5 billion)
The budget agreement includes $115 billion in net Medicare savings over the five-year budget period. Most of the Medicare cuts are based on reducing reimbursement rates for providers, but some of the changes will cause an increase in Medicare Part B premiums. Since Medicaid pays a share of the Medicare Part B premiums of certain low-income Medicaid beneficiaries who are also eligible for Medicaid the dually-eligible, Qualified Medicare Beneficiaries (QMBs), and Specified Low-Income Medicare Beneficiaries (SLIMBs) the increase in Medicare premiums will cause a $1.5 billion increase in federal Medicaid spending on premium assistance for these groups. States also can expect their Medicaid spending on cost-sharing to increase by approximately $1.1 billion.
Medicare Premium Assistance for Low-Income Medicaid Beneficiaries ($1.5 billion)
The agreement also includes $1.5 billion in federal Medicaid spending to ease the impact of increasing Medicare premiums on other low-income beneficiaries. Although it still is far from clear how the $1.5 billion will be used, there has been some discussion of relying on it to expand the group of low-income elderly and disabled people who are classified as Special Low-Income Medicare Beneficiaries (SLIMBs). SLIMBs are elderly and disabled people with income between 100 percent and 120 percent of poverty and countable resources of less than approximately $4,000 who have their Medicare Part B premiums paid for by Medicaid. It is not clear whether states would be expected to contribute to the cost of the premium assistance.
70 Percent FMAP for the District of Columbia ($900 million)
The agreement includes an increase in the federal Medicaid matching rate for the District of Columbia from 50 percent to 70 percent as part of a number of fiscal relief proposals.
Increase in Federal Medicaid Payment for Puerto Rico ($300 million)
The agreement includes $300 million for an inflation adjustment for Medicaid programs in Puerto Rico and the territories.
There are two other proposals in the budget agreement that will increase federal Medicaid outlays, but they will not be financed with other Medicaid cuts. Instead, the cost of these proposals which total $2.8 billion will be offset by other unspecified federal savings. The first proposal, which costs $1.7 billion, is to finance the cost of restoring Medicaid for disabled legal immigrants who arrived prior to August 23, 1996 (see section on legal immigrants). The agreement also includes a $1.1 billion proposal to extend the expiring current law limit on the amount of VA pension benefits that can be paid to eligible veterans who are residents in nursing homes and who qualify for Medicaid. (The limit means that the Medicaid program pays more because the veteran's full pension is not available to be applied to the cost of care in the nursing home before the Medicaid program begins to pay.)
Child Health Initiatives
The agreement includes $16.0 billion in new money for children health initiatives. According to the House budget resolution, the money can be used for one or more of the following purposes:
Discretionary programs represent less than one third of federal spending. As in past years, the budget resolution divides overall funding for discretionary programs into two separate streams defense and non-defense but does not set funding levels for individual non-defense discretionary programs. (Funding levels for these programs are generally determined through the annual appropriation process.)
Defense spending would be reduced $77 billion or five percent over the five years. The savings would increase from $3 billion or one percent of the CBO baseline in FY 1998 to $28 billion or nine percent in FY 2002.
The budget resolution would save a total of $64 billion in non-defense discretionary outlays over the five-year period from FY 1998 through FY 2002 when compared to the Congressional Budget Office baseline estimate of the five-year cost of these programs including an adjustment for inflation. The savings grow over time from $1.6 billion in FY 1998 a reduction of less than one percent to $33 billion in FY 2002 or ten percent below the CBO inflation-adjusted baseline. For the five-year period as a whole, the budget resolution would reduce non-defense discretionary spending a total of four percent below the CBO inflation-adjusted estimate.
The budget resolution does not assume that all non-defense discretionary programs would be treated alike. A small number of programs are designated as protected discretionary priorities in the budget agreement and would be funded at the levels proposed by President Clinton in his FY 1998 budget. Among the protected discretionary programs are: Head Start, Bilingual and Immigrant Education, Pell Grants, child literacy initiatives, training and employment services including Job Corps, and the Community Development Financial Institution Fund.
The budget agreement specifies the total size of the tax cuts over the next 10 years and the types of tax cuts to be included in the package, but does not provide details on how the tax cuts will be designed. In a letter referred to as the "side letter" that the Congressional leadership sent to President Clinton clarifying their understanding of the budget agreement, they have noted the following about the tax package:
The net tax cut will be $85 billion through 2002 and not more than $250 billion through 2007.
They believe that there is enough room in the tax package for "broad-based permanent capital gains tax reductions, significant death tax relief, a $500 per child credit, and expansion of IRA's."
The package will "include tax relief of roughly $35 billion over five years for post-secondary education, including a deduction and a tax credit." Moreover, they believe the package "could be consistent with the objectives put forward in the HOPE scholarship and tuition tax proposals contained in the Administration's FY 1998 budget to assist middle-class parents."
They will "seek to include other proposals from the President's 1998 budget (e.g., the welfare-to-work tax credit, capital gains tax relief for home sales, enterprise zone and enterprise community proposals...)."
Reforms to the EITC or other programs designed to benefit primarily lower-income individuals will not be used to offset the costs of the tax cuts.
Although no additional detail is available on how the tax cuts will be designed and the tax-writing committees can establish their own policies, the House budget resolution does offer specific numbers for the year-by-year revenue loss they will create. The specificity and uneven pattern of these numbers indicate that negotiators may have had in mind a particular package of tax cuts. Using the year-by-year revenue loss numbers, the Center has prepared a detailed analysis of the tax provisions that are likely to be included in reconciliation legislation.(7) The Center's analysis indicates that the agreement envisions heavily backloaded tax cuts that will ultimately explode in cost and lose far more revenue over the long term than has been realized. Moreover, virtually all of the growth in the out-year costs of the tax cuts reflected in the budget agreement appears to be due to the mushrooming costs of three tax cuts primarily benefitting upper-income taxpayers capital gains indexing, backloaded IRA tax cuts, and estate tax cuts. Although the provisions of the tax package aimed at middle income tax payers such as the child credit initially constitute most of the tax relief provided, they dwindle over time as a proportion of the tax cuts overall.
The implications of the budget agreement's tax cuts for state revenue collections will not be known until the details of the design of the tax cuts are determined. The provisions that have the potential to reduce state revenue collections are the capital gains tax cut, the estate tax cut and the IRA expansion. The impact on state tax collections will depend on both the design of the federal tax cuts and the design of each state's income and estate taxes.
1. There are minor differences between the House and Senate versions of the budget agreement that are expected to be readily resolved in conference when Congress returns from its Memorial Day recess in early June.
2. Last year's welfare law made most legal immigrants ineligible for SSI and food stamps. It also gave states the option to decide whether to provide non-emergency Medicaid to most legal immigrants who arrived in the United States before August 22, 1996, and barred most legal immigrants arriving on or after that date from receiving non-emergency Medicaid for their first five years in the country. One exception to the restrictions on SSI and non-emergency Medicaid receipt was a provision allowing refugees and asylees to receive aid from these programs for a period of five years after they attain their immigration status regardless of whether they entered the United States before or after enactment of the welfare law.
3. It is not appropriate to directly compare the $9.7 billion in restorations to the original cut of $24 billion because the Congressional Budget Office has revised some of its assumptions about baseline spending since enactment of the welfare law. However, the two numbers do indicate generally that the restorations contemplated under the budget agreement fall far short of reversing most of the legal immigrant cuts included in the welfare law.
4. The only exception is that the agreement proposes to restore SSI and Medicaid for legal immigrants arriving after August 23, 1996 and on the rolls by June 1, 1997. In practice, this exception is largely meaningless. As noted above, the welfare law barred most legal immigrants who arrived on or after August 22, 1996 from receiving Medicaid for their first five years in the country and from SSI permanently. As a result, there will be very few legal immigrants arriving after August 23, 1996 who will find their way onto the rolls by June 1, 1997. The only exception is legal immigrants who fall into one of the narrow groups exempt from the bars at the time of or soon after entry into the United States (e.g., refugees and asylees). However, for these groups the protection included in the budget agreement is largely redundant. They can get on the SSI or Medicaid rolls and, hence, be in a position to benefit from the budget agreement only because the 1996 welfare law already extended special protections to them.
5. For more detailed analysis of the Medicaid and Child Health Proposals, see Andy Schneider, Medicaid and Child Health Provisions of the Bipartisan Budget Agreement, Center on Budget and Policy Priorities.
6. As reported by the Senate Budget Committee, the budget resolution contained the following sense of the Senate regarding children's health coverage: "It is the sense of the Senate that the provisions of this resolution assume that from resources available in this budget resolution, a portion should be set aside for an immediate 100 percent deductibility of health insurance costs for the self-employed. Full-deductibility of health expenses for the self-employed would make health insurance more attractive and affordable, resulting in more dependents being covered. The government should not encourage parents to forego private insurance for a government-run program." Section 303(b), S. Con. Res. 27.
7. For more details, see Iris Lav and Bob Greenstein, The Tax Cuts in the Budget Agreement: Phase-Ins, Backloading, and Revenue Acceleration Lock in Very Large Future Costs, May 21, 1997.
Other budget agreement analyses:
Analysis of the Tax Cuts Authorized in the Budget Agreement
Medicaid and Child Health Provisions of the Budget Agreement
Analysis of the Tax Cuts Authorized in the Budget Agreement
Medicaid and Child Health Provisions of the Budget Agreement