Before Congress leaves for August, they must pass a transportation bill extending highway programs and transferring additional money into the Highway Trust Fund. The House posted a revised version of their transportation bill yesterday, which continues to responsibly offset the transfer to the Highway Trust Fund but adds in two deficit-financed tax cuts for veterans. The bill is expected to be voted on today, and Senate Majority Leader Mitch McConnell (R-KY) says the Senate will consider the bill after it is passed by the House.
The previous House bill used a variety of programs to pay for transferring $8.1 billion into the Highway Trust Fund, projected to be enough to continue current highway spending for five months, and presumably, allow Congress to continue negotiations over highway spending when they return in September. The revised bill keeps the same transportation section, although it only extends programs for three months, rather than five. Highway programs would need to be reauthorized by October 29, but Congress would likely be able to pass another extension through December without transferring additional money into the Highway Trust Fund.
However, the revised transportation bill also includes a new section on veterans, which refines and expands some veterans health programs, limits others, allows $3.3 billion of the Veterans Choice program to cover shortfalls within the VA health system, and enacts two small tax cuts. One of these cuts would exempt employers from counting veterans against the employer mandate, so veterans that already have access to health care will not count against the 50 employees that normally would require an employer to offer health insurance to their employees. The other tax cut allows veterans with service-connected disabilities to obtain health savings accounts, despite having medical coverage that would normally disqualify them.
|Provisions in July 28 House Transportation & Veterans Bill
|Transportation Section||$0 billion
|Transfer $8.1 billion into the Highway Trust Fund||-$8.1 billion|
|Extend current budget treatment of TSA fees from 2023 to 2025||$3.2 billion|
|Require lenders to report more information on outstanding mortgages||$1.8 billion|
|Close an estate tax loophole about the reporting of property||$1.5 billion|
|Clarify the statute of limitations on reassessing certain tax returns||$1.2 billion|
|Adjust tax-filing deadlines for businesses||$0.3 billion|
|Allow employers to transfer excess defined-benefit plan assets to retiree medical accounts and group-term life insurance||$0.2 billion|
|Equalize taxes on natural gas fuels||-$0.1 billion|
|Veterans Section||-$1.2 billion|
|Transfer funds from Veterans Choice program to cover VA shortfall||$0 billion|
|Exempt from the employer mandate servicemembers and veterans who already have health insurance||-$0.8 billion|
|Allow veterans to qualify for health savings accounts, even if they receive VA care||-$0.4 billion|
Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.
The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.
The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.
The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.
Consensus on the Gas Tax
Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.
No One Likes the Sequester
The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.
The budget resolution conference agreement has passed both the House and Senate. While we previously wrote about the conference's deficit reduction and budget process issues, a likely flash point between Congress and the President will be how the Congressional budget handles discretionary spending and the sequester. While the budget resolution does not call for changes in the discretionary spending limits set under sequestration, the discretionary spending levels in the budget directly and indirectly deviate from the Budget Control Act (BCA).
The conference agreement does this by cutting both non-defense discretionary (NDD) spending below sequester levels and using Overseas Contingency Operations (OCO) funding to allow the defense budget to go above the sequester levels. For FY 2016, the conference agreement would keep spending at the levels set by the sequester. In addition the conference agreement leaves open a mechanism for sequester replacement in a fiscally responsible way, though this may still lead to conflicts between the House, Senate, and White House.
Discretionary spending in FY 2016
For the FY 2016 appropriations season, which we will continue to update on The Bottom Line as bills develop, the agreement abides by the sequester levels for non-war spending, although it would also effectively raise defense spending by creating a $38 billion slush fund in war spending. In effect, this takes the congressional budget to the total defense request in the President's budget, which instead provided sequester relief through the normal defense channel offset with other savings. The President’s budget also provided NDD funding above the sequester with offsets.
One of the most troubling elements of the budget conference agreement was the use of the Overseas Contingency Operations (OCO) account as a slush fund to circumvent the spending limits under the Budget Control Act (BCA). Specifically, the budget conference report allocated $96 billion in spending for OCO in FY 2016, $38 billion more than the President’s request, with the expectation that the additional spending would be used to increase funding for the base Department of Defense (DoD) budget above the limits under the BCA (it also provided funding above the President's budget for 2017-2021 for the same purpose). This strategy will face its first test today when the House of Representatives votes on a series of amendments by Representative Mick Mulvaney (R-SC) and Budget Committee Ranking Member Chris Van Hollen (D-MD) striking OCO funding in the appropriations bill for Military Construction and Veterans Affairs (MilCon/VA).
The MilCon/VA bill reported by the House Appropriations Committee included a new section for OCO that provided $532 million in spending for construction projects that were in the DoD budget request. Reps. Mulvaney and Van Hollen offered a series of amendments that would strike this funding. While the amount of funding involved is relatively modest, the principle is very important. The votes on whether or not to maintain funding for the base defense budget that uses OCO to get around the BCA caps will set an important precedent about whether or not Congress will follow through on the plan to use OCO to circumvent spending limits.
During the House debate on the amendments, Rep. Mulvaney argued that if Congress believes the BCA spending limits are too low, it should change the law and increase the spending limits instead of using OCO to circumvent the spending limits. Ranking Member Van Hollen noted that the use of OCO to fund items in the base defense budget was in conflict with the position taken by the House Budget Committee last year in their report accompanying the FY 2015 budget resolution. The report described the use of OCO for spending in the base defense budget as a “backdoor loophole that undermines the integrity of the budget process” and pledged to exercise oversight on the use of OCO that is not war-related and oppose increases above the levels military commanders say are needed to carry out operations.
The House Appropriations Committee kicked off appropriations season this week by starting to mark up their Fiscal Year 2016 bills at the same time that the House of Representatives approved its allocations to the individual appropriations subcommittees. Technically, the House is jumping the gun by marking up appropriations bills before the Budget Committees complete their conference agreement that will set topline spending limits.
The House Appropriations committee has approved both the Energy and Water bill (E&W) and the Military Construction and Veterans Affairs bill (MilCon/VA) on voice votes. Those bills will now head to the House floor for full consideration.
The E&W bill provides $35.4 billion in discretionary funding, which is $1.2 billion above the FY 2015 level but about $0.6 billion below the President’s request. This is not surprising since the President's budget proposes a higher overall non-defense spending limit for FY 2016 than that prescribed by the sequester.
The MilCon/VA bill provides $76.6 billion in discretionary budget authority ($4.6 billion above FY 2015 and $1.2 billion below the President's request), of which $532 million is from Overseas Contingency Operations (OCO) funding. OCO funding is not subject to the Budget Control Act limits on discretionary spending, and we have written extensively in the past month about our concerns that both the House and Senate budgets allow a very high OCO budget of $96 billion without offsetting the increased cost with savings elsewhere. This funding level is $38 billion higher than the President’s request of $58 billion and $22 billion above the FY 2015 level. By providing significant funding above the President’s request, OCO will likely become a slush fund for regular defense spending to circumvent the spending cap.
Rep. Mick Mulvaney (R-SC) wrote a commentary published in The Wall Street Journal on Monday in which he decried the recently-passed budgets in the House and Senate for their irresponsible approach to defense spending. The budgets use a gimmick to provide higher defense spending than allowed by the spending limits in the Budget Control Act without having to pay for it.
Mulvaney called for any increases in defense spending to be offset with spending cuts elsewhere. This principle of offsetting sequester relief with savings elsewhere in the budget has been followed by most sequester relief plans, whether in the President's Budget, the 2013 Ryan-Murray budget agreement, or the Senate amendments to this year's budget. If lawmakers are going to relax the sequester, they should replace it with other savings, preferably smarter savings that are more focused on long-term deficit reduction.
With the Murray-Ryan deal expiring at the end of September, the sequester will once again be a hot topic as lawmakers will be prompted to deal with the discretionary spending reductions it prescribes. Despite the House and Senate being controlled by the same party, their budgets take very different approaches to the sequester. The two budgets have large differences in the amount of defense and non-defense discretionary spending and slight differences in their approach to war spending. Although both only get a small portion of their deficit reduction from discretionary spending, the two budgets get there in different ways. In addition, the Senate budget provides a more realistic method for a future sequester relief deal, by establishing a deficit-neutral reserve fund for that purpose.
Both budgets abide by the sequester levels for non-war spending for FY 2016, although they would also effectively raise defense spending by creating a $38 billion slush fund in war spending so that their total defense requests equal the President's budget, which instead provides sequester relief through the normal channel, offset with other savings. After 2016, the budgets would remove the slush fund and make changes to the cap themselves.
|Changes in Discretionary Spending in the House and Senate Budgets (billions)|
A big discussion has ensued in both the House and Senate about defense spending, and for the FY 2016 budget, that has meant how much to increase war spending (Overseas Contingency Operations) above the President's request which would effectively provide a defense slush fund. The original Senate budget had no slush fund at all, setting war spending at $58 billion and creating a point of order against exempting more than that amount from statutory spending caps that could only be overcome with 60 votes. However, an amendment in the committee markup increased war spending by $38 billion so that total defense plus war spending would match the President's budget, with the difference being that the President's budget provided $38 billion of sequester relief in 2016 and paid for it.
For background, the Budget Control Act established statutory caps on discretionary spending which have subsequently been reduced by sequestration, with any spending above the caps offset by an across-the-board cut in spending. For FY 2016, the limit on defense discretionary spending set by sequester is $523 billion, an increase of just $2 billion above the FY 2015 level. However, any spending designated as being for “Overseas Contingency Operations” is effectively exempt from those spending limits, creating temptation to use the OCO designation as a way to circumvent spending limits. The budget resolutions reported by the House and Senate legitimize this gimmick by setting defense spending levels that purport to comply with the spending limits under sequestration but blatantly create a slush fund by providing for substantially higher spending levels for OCO than the President requested.
The amendment offered in committee increased the amount of OCO spending in the Senate budget resolution, but it did not remove the point of order against the amount of spending that could be designated as OCO funding exempt from the statutory budget caps created by the Budget Control Act. This meant that an appropriations bill which used the $38 billion slush fund for "war spending" above the President's request could not exempt that extra spending from the BCA spending caps without 60 votes to get around the point of order. Otherwise, lawmakers would have to increase the normal defense spending caps by $38 billion and offset that spending or simply live within the current spending cap and $58 billion of war spending.
In order to resolve disagreement between defense hawks and fiscal hawks, the House will vote on two competing budgets with different approaches to funding for Overseas Contingency Operation spending (also known as OCO or war spending) and offsets. Neither of these versions is responsible, but one is more irresponsible than the other.
The first and less irresponsible version is the original House budget provision, which would provide $94 billion for OCO, $36 billion above the President's request for FY 2016 and $20 billion above the current level of $74 billion. This increase fills in almost all of the difference in the non-war defense budgets between the House and the President, thus creating a slush fund to slip normal defense spending into the war category. This would effectively provide the same amount of sequester relief for defense spending for next year while purporting to comply with the sequester caps on paper. However, the budget does require that the $20 billion of spending above current law be offset, so it at least partially pays for this increase.
As potentially irresponsible as this approach is, it is not as bad as the alternative, which would eliminate the requirement that the $20 billion in spending above the FY15 level be offset. This approach is counterproductive in both legitimizing the use of OCO as a slush fund and undermining the principle that sequester relief must be offset by savings elsewhere in the budget.