Key Findings:

• The Administration is justifying its planned veto of Congress’s second children’s health bill in part on the claim that the bill would allow undocumented immigrants to obtain health coverage. This claim is false.
• The new bill contains a significant change from the previous bill (which the President vetoed). People claiming to be U.S. citizens would have to prove that fact through their Social Security record — which would have to verify their citizenship as well as their name and Social Security number — or by submitting a birth certificate or similar document.
• The verification procedures in the bill would prevent undocumented immigrants from obtaining health benefits while also reducing the barriers created by the current rules, which are denying coverage to thousands of eligible U.S. citizen children.

Key Findings

• Congress is preparing to send the President a Labor-HHS-Education-appropriation bill, which will provide a substantial share of the funding for domestic discretionary programs for fiscal year 2008.
• The President is insisting that Congress cut domestic programs. Specifically, he has threatened to veto domestic appropriations bills that, taken together, exceed the overall total in his budget. Yet his budget also includes large increases in military and security funding and substantial tax cuts. The appropriations battle is thus much more about priorities than about dollars or “fiscal responsibility.”
• The President’s budget would cut funding for Labor-HHS-Education programs by $6.7 billion (or 4.5 percent) below the 2007 level, adjusted for inflation. In contrast, the bill Congress has prepared provides for an increase of $5.2 billion (or 3.5 percent) for these programs.
• The President’s cuts would fall in a number of areas, including education, child care, health care, and services for the elderly.  States will lose millions of dollars used to fund basic services if the President succeeds in forcing these programs down to his requested levels. (See the state-by-state tables at the end of this report for more detail.)

Key Findings

• The President has vowed to veto the Transportation-HUD appropriations bill and other domestic appropriations bills that exceed the overall funding level for those bills in his budget. Congress would have to cut the Transportation–HUD bill by $3 billion to bring it down to the President’s proposed funding level for the bill.
• If programs funded by the bill are reduced to the levels the President’s budget calls for, housing vouchers used by 25,000 low-income families in 2007 will be cut off, and more than 15,000 new vouchers that Congress would provide for homeless veterans and other vulnerable families will not be funded.
• The President’s budget would also impose the deepest funding shortfalls in the public housing program’s history, exacerbating the recent deterioration in living conditions and security.
• Adopting the President’s funding level would eliminate, as well, $200 million that Congress included in the bill to mitigate growing rates of mortgage defaults and foreclosures and also would cause significant funding cuts in supportive housing for the elderly and people with disabilities, project-based Section 8 rental assistance, and the Community Development Block Grant.

Key Findings

This analysis examines — and finds wanting — the major rationales that have been offered to justify waiving "Pay-As-You-Go" (PAYGO) rules and deficit-financing the AMT “patch.”

Comparing the AMT patch with other policies whose costs have been offset shows that waiving PAYGO for the patch would:

• Send the message that Congress applies fiscal discipline to policies that help low- and moderate-income children and families, but not to policies benefiting upper-middle-income and high-income households.
• Reward the budget gimmicks through which the AMT was used to ease enactment of the 2001 and 2003 tax cuts, and suggest that Congress prioritizes keeping those tax cuts whole above investments in health care, education, or the environment.
• Signal that Congress takes higher tax bills for relatively affluent people more seriously than lost health insurance coverage, reduced student aid, or other kinds of harm imposed on children and families of more modest means.
• Show disregard for the principles that motivated Congress to reinstate the PAYGO rules in the first place.

Key Findings

• The tax package the Ways and Means Committee adopted last week — and which the full House is expected to vote on later this week — complies with Congress’s Pay-As-You-Go budget rules: its costs are fully offset.
• The package demonstrates that Congress can, if it chooses, provide AMT relief, extend expiring provisions, and live by PAYGO.
• The most controversial offset in the package — the “carried interest” provision — would improve the equity and efficiency of the tax system by eliminating an unwarranted tax break for highly-compensated private equity fund managers.
• Rather than targeting relief just to the upper-middle- and upper-income households helped most by the AMT patch, the Ways and Means Committee package also provides relief to struggling working families. The package would temporarily address key flaws in the Child Tax Credit, allowing 2.9 million more children in low-income working families to benefit from the credit next year and providing an increased tax benefit to an additional 10 million children.
• While the Committee’s adherence to PAYGO is commendable, the package also shows that patching the AMT year after year is not a sustainable approach. It underscores the need for fiscally responsible, permanent AMT reform, such as the reform that Committee Chairman Charles Rangel recently proposed.

Key Findings

• CBO data show that the House has achieved impressive compliance this year with its new PAYGO rule; it has passed entitlement and tax legislation containing several hundred billion dollars in costs (over ten years) — and has fully offset those costs. In fact, the net effect of the tax and entitlement legislation the House has passed would be a slight reduction in deficits (about $8 billion over ten years).
• Only one extremely small bill appears not to have been paid for. The cost of that bill is a minuscule $150,000.
• Compliance has very largely been achieved through real offsets, not gimmicks. And three-fourths of the savings have been entitlement reductions, not tax increases.
• This year’s record of compliance to date stands in sharp contrast to the record of the last three Congresses, which violated the PAYGO principle by almost $1.3 trillion over the 2001-2006 period.
• The biggest test for PAYGO lies ahead, as the extension of expiring tax breaks — such as AMT relief — moves to the top of the Congressional schedule. PAYGO compliance is critical to avoiding an explosion of federal debt over the long term.

Key Findings:

• Legislation introduced by Senator Mel Martinez as an alternative to the bipartisan SCHIP legislation the President vetoed would provide insufficient SCHIP funds to maintain existing SCHIP programs. The bill also would prohibit the redistribution of unspent SCHIP funds from states that do not use them to states that need additional funds to avert cutbacks, leading to further reductions in SCHIP coverage. By 2012, an estimated 27 states would face SCHIP funding shortfalls.
• Unlike the vetoed legislation, the Martinez bill provides states with no new tools or financial incentives to enroll poor children who are eligible but uninsured.
• The bill scales back SCHIP coverage for children between 200 and 300 percent of the poverty line and substitutes a tax credit that families in this income range could use to purchase insurance for their children, primarily in the individual health insurance market.
• Analysis by Urban Institute health experts finds that the bill’s tax credit “would involve significant financial burdens for families with healthy children and even larger burdens for families whose children have health problems,” would reach fewer insured children than an SCHIP expansion, and could result in children with even minor health problems being denied coverage outright, denied coverage for the health conditions they have, or charged very high amounts.
• The tax credit could be exploited by unscrupulous insurers who deceptively market children’s coverage that contains very large gaps. That is what happened when Congress enacted a similar tax credit in 1990 for coverage of low- and moderate-income children. Abuse was so substantial that Congress found it necessary to repeal that tax credit in 1993.

Key Findings

• To shore up their eroding corporate income taxes, an increasing number of states are adopting a policy known as “combined reporting.” Combined reporting treats a business composed of a parent corporation and one or more subsidiaries as a single corporation for tax purposes.
• States without combined reporting are vulnerable to a wide variety of corporate tax shelters and tax-avoidance strategies that are based on artificially shifting profits to subsidiaries located in “tax-haven” states.
• Combined reporting nullifies most of these shelters in one fell swoop. Attacking them one by one, as some states are doing, is inefficient and costly. Moreover, some of the strategies simply cannot be shut down effectively by any policy other than combined reporting.

Key Findings

• Tax increases being considered to balance Maryland’s budget will have a disproportionate impact on low-income families.
• A typical low-income family in Maryland is likely to face a tax increase of a few hundred dollars — a significant amount for a family struggling to get by.
• To mitigate these tax increases, Maryland could do one or more of the following (with varying degrees of effectiveness):
  • Increase and expand Maryland’s refundable Earned Income Credit.
  • Create a new refundable sales tax credit.
  • Increase and reform Maryland’s standard deduction; and/or
  • Expand the property tax circuit breaker for homeowners and renters.

Key Findings

• The federal government and 21 other states allow low-income workers without children living at home to claim the Earned Income Tax Credit. Of states with an EITC, only Maryland and Wisconsin do not.
• Eliminating this restriction would help tens of thousands of employed, low-income Maryland residents meet the added costs of regressive tax changes such as a sales tax increase.
• The change would be easy to administer, would have a small fiscal impact (substantially less than $4 million annually), and would simplify the Maryland income tax instructions.

Key Findings

• Maryland’s governor has proposed a revenue package to avert or minimize budget cuts in education, health care and other areas.
• The governor’s package might prove insufficient, or some elements such as legalized slot machines might prove unacceptable to the legislature. If so, there are additional revenue options that would be consistent with the governor’s goal of a fairer, more modern and more adequate tax system.
• The options described in this memo would raise over $600 million per year toward financing Maryland public services.

Key Findings

The Earned Income Tax Credit for workers without children is currently extremely small, too small even to fully offset federal income taxes for workers at the poverty line.

Ways and Means Committee Chairman Charles Rangel’s proposal to increase the EITC for childless workers would:

• Prevent workers whose wages leave them in poverty from owing federal income taxes.
• Improve work incentives for childless adults and, in particular, for less-educated men — a group whose declining employment rates are a major cause for concern.
• Ensure that full-time minimum wage workers will not become ineligible for the EITC when the minimum wage increases to $7.25 an hour in 2009.
• Reduce poverty and hardship among low-wage workers without children, a group with access to almost no other forms of government support.
• Likely have a positive impact on children, because many “childless” workers eligible for the EITC are noncustodial parents.
• Benefit more than 7 million workers nationwide and thousands in each state (see state-by-state estimates in the appendix).
   

Key Findings:

• Senate Minority Leader Mitch McConnell plans to ask for Senate reconsideration this week of a SCHIP plan he and Senator Trent Lott offered in August. In contrast to the SCHIP legislation that the President vetoed, the McConnell plan would make no progress in reducing the number of uninsured low-income children. In August, the Senate rejected the plan 61-35.
• Under the plan, more than one-third of the states would face SCHIP funding shortfalls by 2012. This would occur, in part, because the plan would distribute SCHIP funds inefficiently — giving some states less than they need and other states more than they will use — and prohibit any redistribution of funds from states that leave funds unspent to states needing additional funds to avert cutbacks. This prohibition would reverse current SCHIP policy.
• The plan also restricts existing state flexibility in covering children, and fails to provide new tools or financial incentives for states to enroll low-income children who are eligible for SCHIP or Medicaid but are uninsured.
• The plan is financed by cuts in federal matching payments for costs state incur in administering Medicaid. These cuts would likely weaken state efforts to enroll more of the low-income children who are eligible for Medicaid but are uninsured.

Key Findings

An unlimited estate tax exemption for farmland:

• Would likely prove extremely costly because it would create strong incentives for wealthy individuals to convert large amounts of their estates into qualifying farmland.
• Could undermine its own goals. If wealthy individuals seeking to shield assets from the estate tax bid up the price of farmland, that would make it more difficult for genuine family farmers to keep their farms in their families and could discourage others of ordinary means from entering farming.

In contrast, a broad-based reform like making the current ($4 million per-couple) estate tax exemption, or the 2009 ($7 million per-couple) estate tax exemption permanent:

• Would protect virtually all farm estates from tax, according to Congressional Budget Office estimates.
• Would be far simpler, more administrable, and less open to abuse, and would not have unintended negative consequences for family farmers.

Key Findings

• Housing agencies began recently to assist more low-income families, reversing somewhat the loss of 150,000 Section 8 vouchers during 2004-2006.
• The President’s budget for fiscal year 2008 would fail to renew 80,000 housing vouchers likely to be used by families in 2007, and the House appropriations bill would fail to renew 55,000 vouchers. In contrast, the Senate bill would fund all vouchers in use in 2007.
• The potential cuts under the House bill are due primarily to the less efficient formula it uses to allocate voucher funding among housing agencies, which fails to account for recent increases in voucher use. The House bill also provides less funding for vouchers than the Senate bill. Both bills provide more than the President.
• Because the House bill does not fully fund its voucher formula, agencies would receive a pro rata reduction in renewal funding of about 3 percent. As a result, agency funding would be insufficient to keep pace with inflation in rents and utility costs, and one-quarter of agencies would receive less funding in 2008 than in 2007.
• The Senate funding formula is more cost-effective: for every given dollar of renewal funding allocated by Congress, the Senate formula would renew more vouchers than the formula prescribed by the House bill. The Senate bill also would encourage agencies to use available funds to assist more families. In contrast, the House bill would adversely affect agencies that improved their performance in 2007 and discourage agencies from performing better in 2008.

Key Findings

•  The Senate immigration bill requires workers seeking to legalize to pay back taxes. An amendment offered by Senator Ensign would turn this reasonable provision into an unreasonable one by denying these workers all tax credits and prohibiting them from receiving refunds if they overpaid their taxes.  
• Immigrants seeking to legalize would effectively be taxed at higher rates — often dramatically higher — than other Americans with identical financial and household situations. Some would face back-tax bills almost as large as their total annual incomes.
• For example, a self-employed single parent with an income of $13,000 would be charged more than $8,000 in back taxes, on top of the substantial non-tax fines and fees she would also be required to pay in order to legalize. If allowed to file her taxes under the same tax rules as everyone else, she would owe no back taxes because of her low income. 
• By imposing different tax rules and severe back-tax liabilities on low-income immigrants, the Ensign amendment would make the legalization process nearly impossible for many workers, thereby subverting one of the Senate bill’s basic objectives.

Key Findings:

• Charges that the bipartisan SCHIP bill coming to the House and Senate floors would enable undocumented immigrants to obtain Medicaid and SCHIP coverage are false. Undocumented immigrants have never been eligible for regular Medicaid or SCHIP. The bill maintains this prohibition.
• The bill would give states more flexibility in how to ensure that children applying for Medicaid are citizens or eligible legal immigrants. This would address severe problems caused by a poorly designed documentation requirement imposed in 2006, which has shut tens of thousands of U.S. citizen children out of Medicaid while identifying virtually no undocumented immigrants.
• The increased flexibility the bill provides responds to an appeal for such flexibility from governors of both parties.
• The bill also would extend to SCHIP the requirement that states institute procedures to ensure that participating children are not undocumented immigrants.[1]
• Some opponents of the bill are seeking to demagogue this issue with inflammatory — and inaccurate — charges that the bill is a “multi-billion dollar giveaway to illegal aliens.”

Key Findings

Some of those seeking to preserve the tax break for managers of private equity funds (the “carried interest” tax break) have argued that, if this tax break were eliminated, pension funds and their investors — as well as minority-owned businesses and low-income communities — would be hurt. These arguments collapse under scrutiny.

• If taxes on carried interest are raised, most of the tax burden will fall on the managers fighting so hard to preserve the tax break. They are unlikely to be able to shift much of the cost to their investors, since investors are unlikely to keep investing in funds that substantially increase fees.
• Even if a change to the tax treatment of carried interest did affect investor returns, the impact on pension funds would be very small, since investment in private equity accounts for a small share of pension funds’ total investment.
• The argument regarding minority-owned businesses and low-income housing is even more far fetched. Its advocates have offered no evidence that the private equity industry directs a large share of its resources toward these investments; in fact, in other contexts they themselves have stated that “less than 2 percent of all available private equity is invested in minority firms in a given year.”
• Even if the tax break did offer some benefits to pension funds, minority-owned businesses, or low-income communities, this would not justify preserving it, as there are far less costly, better targeted options for helping these firms and areas.

Key Findings:

Proponents of the “Permanent Internet Tax Freedom Act” argue that banning state and local taxes on Internet access is key to encouraging more households to subscribe and incentivizing companies to make broadband more widely available. Considerable real-world evidence refutes this claim:

• The major barriers to greater household subscribership are lack of computer ownership and not being aware of the potential benefits of being online, not the price of Internet access, according to the Pew Internet Project and the Parks Associates market research firm.
• Every country that leads the U.S. in broadband deployment and uptake does tax access, often at rates 2-3 times greater than in the U.S..
• Rates of broadband deployment and household subscriptions are no lower in states that tax access than in states that do not.
• Five of the states currently taxing access are among the first in which Verizon and AT&T are deploying state-of-the-art fiber-optic networks.

In addition, state and local governments play a critical role in giving many low-income people their first hands-on exposure to the Internet (e.g., in public libraries and schools) and in making broadband more available (e.g., through municipal wireless networks in small towns). Depriving states and localities of the funds they use to support these services by permanently banning taxation of Internet access is likely to widen, not close, the “digital divide.”

Key Findings

• Most assessments of the long-run fiscal outlook conclude that higher revenues will need to be a part of any serious effort to prevent budget deficits from growing to unsustainable levels.

• A recent CBO analysis shows that the economic benefits of achieving fiscal sustainability are substantial, and that the difference between the economic effects of reducing the deficit through tax increases and doing so through spending cuts would likely be very small by comparison.

• CBO also finds that any negative economic effects of tax increases can be mitigated by relying more on policies that broaden the tax base than on increases in marginal tax rates. CBO suggests that the economic effects of raising revenue by broadening the tax base can be similar to the effects of cuts in government benefit programs.

• CBO’s analysis also indicates that no policy to restore long-term fiscal sustainability is likely to be successful if the rate of growth in health care expenditures is not reduced.