Fiscal Cyclone: Hurricane Harvey aid, Federal Debt Ceiling, and Government Shutdown; Budget and Tax Cuts Stalled; Health Update

Fiscal Cyclone: Hurricane Harvey aid, Federal Debt Ceiling, and Government Shutdown:

  • See our new disaster funding webpage covering Flood Insurance, FEMA, Disaster Relief, and assistance available to individuals, families, and businesses. Some key points:
  • Short-term funding: House will vote Wednesday on a $7.85 billion measure for Texas and Louisiana – a small fraction of the recovery and rebuilding costs.
  • For the larger disaster relief and recovery needs, expect a fight in Congress over the appropriate amount of Federal disaster assistance and whether to require offsetting cuts in other domestic programs to pay for the assistance. OMB Director Mick Mulvaney was a proponent of requiring offsets to pay for Superstorm Sandy disaster relief.
  • In addition, the Treasury’s impending collision with the Federal Debt Ceiling may interfere with their capacity to disburse funds, even after Congress passes an appropriation. (See Debt Ceiling below.)
  • Consequently, Treasury Secretary Mnuchin has suggested attaching a Debt Ceiling increase to the Harvey disaster relief bill – but that may draw opposition from the House Freedom Caucus.
  • In a related matter, the National Flood Insurance Program’s authorization expires September 30, 2017, with some Members pushing to shrink the federal investment in flood coverage, in favor of privatization — although the rationale for Federal involvement is the unpredictability of floods and the potential enormity of claims.
  • See the CRS overview of the types of Federal assistance often made available following a flood: Flood Insurance payments, FEMA’s Individual and Households Program (IHP), SBA small business disaster loans, Community Development disaster recovery block grants (CDBG-DR), and other forms of aid.

October 1 Fiscal Cliff – Debt Ceiling and Government Shutdown:  The United States faces a potential government shutdown on October 1 and a Treasury default on U.S. debt in early October, but these are unrelated and the timing is coincidental.

Shutdown v. Default:  Federal government shutdown occurs when Congress fails to appropriate funds to keep government departments operating when a new fiscal year begins on October 1st.  Default, on the other hand, occurs when the Treasury has insufficient tax revenues and is unable to borrow funds to fulfill existing U.S. financial obligations (such as payment of bondholders or disbursing appropriated disaster funds) because the statutory limit on borrowing has been reached.

Why Treasury May Hit the Debt Ceiling:  Federal law places a limit on the Treasury’s ability to borrow funds (issuing Treasury Bonds and Notes); the limit is called the “statutory limit on the public debt,” or “debt ceiling.”

By prior agreement, the current debt ceiling was set at Federal debt levels as of March 16, 2017. Since that time, Treasury has been meeting financial requirements through so-called “extraordinary measures” — which includes managing cash flow and dis-investing certain Federal trust funds to remain under the March 16 debt ceiling.

However, Treasury’s capacity to manage operations within the March 16, 2017 debt ceiling is running out. The nonpartisan Congressional Budget Office has estimated the U.S. could default on legal and financial obligations by early October without an increase in the ceiling. Treasury Secretary Mnuchin said in a July 28 letter to Congress it “is critical that Congress act to increase the nation’s borrowing authority by September 29, 2017.”  Last week, the Secretary said the deadline could advance “a couple of days” based on disaster relief spending and tax receipts.  In addition, major cash payments for military retirement, Social Security, interest, and civil service retirement are due on October 2.

Political Uncertainty:  Republicans are currently split between Treasury Secretary Mnuchin who want Congress to pass a “clean debt ceiling increase,” and House Freedom Caucus Members (along with their former colleague OMB Director Mulvaney) who favor using the threat of default to force major budget changes through Congress (similar to the debt crisis of 2011 that led to enactment of the Budget Control Act).  The President’s likely response is unclear.

Default would have catastrophic effects on the ability of the U.S. Treasury to issue bonds in the future, vastly increasing the cost of borrowing, as well as destabilizing global financial markets – likely triggering another major recession. FedWeb’s Debt Ceiling page

October 1 Government ShutdownWith Fiscal Year 2018 beginning on October 1, Congress has passed no appropriations bills to keep federal agencies operating.  Most federal appropriations, along with the authority to continue operations, expire on September 30, 2017.  Appropriations Portal

“Placeholder bills” for FY 2018 have been marked up by the Appropriations Committees and 4 bills (Defense, Energy-Water, Mil Con-VA, and Leg. Branch) passed the House on July 27, 2017 as a “minibus” package (HR 3219) and are expected to be combined with the remaining 8 bills in September.  However, these placeholder bills will not become law.  Here’s why:

The Budget Control Act of 2011 placed tight spending caps on defense and non-defense discretionary (NDD) appropriations for each year through FY 2021.  However, Congress has been unwilling to live within the caps.  The Bipartisan Budget Act of 2013 increased the defense and non-defense caps for FY 2014 and 2015; and the Bipartisan Budget Act of 2015 increased the caps for FY 2016 and 2017.

In both instances, Republicans generally sought increased caps for Defense and Democrats generally sought to ease Non-Defense Discretionary (NDD) caps. Bipartisan agreement was necessary because raising the appropriations caps, and enacting the appropriations bills, themselves, require 60 votes in the Senate (where Republicans have a slim 52-48 majority).

Many Republicans and Democrats agree the caps should be adjusted again — for FY 2018 and 2019. In fact, the House has already passed Defense appropriations that far exceed the statutory Defense cap — and would trigger automatic “sequestration” cuts if enacted.

However, deep partisan disagreements over healthcare and paying for a U.S.-Mexico border wall have delayed the start of bipartisan negotiations on increasing the spending caps. (The President said at his recent Phoenix rally, “if we have to close down our government, we’re building that wall.”) Moreover, yesterday’s announced intention to terminate the DACA program (Deferred Action for Childhood Arrivals) that protects from deportation 800,000 young people brought to the U.S. as children, adds additional complexity to impending negotiations.  The result could be a government shutdown on October 1.

Tax Cuts: Stalled due to Budget Impasse and Limited by Senate’s Byrd Rule

The Administration and Republican leaders have been hoping to pass a Republican-only tax cut bill, using the filibuster-proof Budget Reconciliation process (that requires only 50 votes for passage in the Senate).

However, passage of an FY 2018 Congressional Budget Resolution by both chambers is a prerequisite to launching a Tax Reconciliation Bill.  Reason: a Reconciliation Bill is launched by including “Reconciliation instructions” to the tax-writing committees in the Budget Resolution.  The instructions require the tax committees to report legislative language – meeting specified deadlines and budgetary targets.

However, Congress has yet to pass an FY 2018 Budget Resolution.  The House Budget Committee reported a budget plan, but the full House has yet to take it up.  The Senate Budget Committee will not meet to begin drafting a budget plan until this month.

Adoption of the Budget Resolution is protected by filibuster-proof procedures, but action has been slowed by disagreements between Republican conservatives and moderates on tax cuts and entitlement reforms.

Strategic Gamble – Combining Tax and Entitlement Cuts:  House GOP leaders made a key strategic decision when they decided to combine tax cuts and entitlement cuts into a single set of Budget Reconciliation instructions – tying the outcome on tax cuts to controversial cuts in entitlement programs.

The Reconciliation instructions in the House Committee’s budget plan assume a revenue-neutral tax bill and require House committees to report $203 billion in entitlement cuts over 10 years.

The most significant tax reform challenge is achieving a revenue-neutral bill, that is, a bill where the revenues lost by cutting tax rates are offset by revenue increases from closing existing deductions and credits.

The bulk of the entitlement cuts in the House Budget Committee’s draft Reconciliation instructions would come from Ways & Means Committee ($52b), Judiciary Committee ($45b), Government Reform ($32b), Educations & Workforce ($20b), and Energy & Commerce ($20b). (Instructions to Senate Committees are left to the Senate Budget Committee to draft.)

The instructed amounts of deficit reduction are “floors” – not “ceilings” — on the amount of entitlement cuts the Committees can report; committees can report larger cuts, but not smaller.  In addition, the Ways & Means Committee could decide to draft tax cuts that are not revenue-neutral, if they meet their net deficit reduction instructions.

While the Reconciliation instructions focus on deficit reduction in the next 10 years, in the Senate there is an additional constraint that focuses on the longer-term.  The Senate’s Byrd Rule prohibits any title of the Reconciliation bill from causing deficit increases beyond the (10-year) budget window.  This prevents a tax bill from making tax cuts that phase in major revenue losses in the out-years.

Latest Developments on Tax Reform:  On July 27, 2017, the “Big Six” — Speaker Ryan, Leader McConnell, Treasury Secretary Mnuchin, NEC Director Cohn, Senate Finance Chairman Hatch, and House Ways & Means Chairman Brady — released a joint statement on tax reform that sets aside the controversial Border Adjustment Tax proposed last year by the House GOP, and commits to developing a plan to lower tax rates for individuals and  businesses, increase capital expensing, and incentivizes repatriation of corporate profits.

On August 1, 2017, Senate Democrats sent a letter to President Trump, Leader McConnell and Chairman Hatch urging Republicans to work with Democrats on tax reform and laying out three prerequisites: (1) tax reform should not increase middle class taxes or cut taxes for the top one percent;  (2) tax reform should be accomplished with open debate and amendments instead of the fast-track Reconciliation process; and (3) tax reform should provide a revenue base sufficient to fund critical programs like Medicare, Medicaid, Social Security, and public investments.

On August 30, 2017 President Trump delivered a speech billed as making a case for tax reform – large on populist anti-tax rhetoric, but short on details. The speech called for: reducing the 35% corporate tax rate to 15 percent; unspecified middle-class tax relief; unspecified incentives to repatriate corporate profits; and eliminating unspecified tax deductions and credits, while creating new tax incentives for child care.

Bottom line on “tax-reform”:  Genuine tax reform is immensely complicated – both technically and politically — and requires a sustained bipartisan effort, as in 1986.  The decision to advance a Republican-only bill, reflects an effort likely to focus on business tax rate cuts rather than broad reform.  But even that more limited objective cannot advance unless Congress first adopts an FY 2018 Budget Resolution.

Health Focus Shifts from Repeal-and-Replace to Market Stabilization

A recent analysis by Drew Altman, of the nonpartisan Kaiser Family Foundation, explains that health market instability is not widespread, as some have suggested. “Average premiums in the employer insurance market, where 151 million Americans get their health coverage, rose by an average of just 3% last year. And we’re expecting continued moderation this year.  Likewise, per capita spending for Medicaid is projected to grow a modest 3% in 2017, with per capita Medicare spending growing by just 2 percent.”

The problem receiving considerable media and political attention is the growth of premiums in the Affordable Care Act (ACA) non-group (individual) marketplaces, which cover about 18 million people. The average increase for the benchmark “silver plan” is up 21% this year. Reasons include a sicker than expected risk pool due to lack of enforcement of the individual mandate and uncertainty over whether the Administration will continue to pay $7 billion in cost-sharing reduction (CSR) subsidies.

Stabilization of the ACA non-group marketplaces may depend on whether the Senate HELP (Health, Education, Labor, and Pensions) Committee can craft a narrow bipartisan deal to ensure CSR funding, stabilize the risk pool with more healthy enrollees, while attracting GOP support with some additional State flexibility.

As for any efforts to revive “repeal-and-replace legislation,” the Senate Parliamentarian has ruled that the availability of the Budget Reconciliation process to fast-track repeal-and-replace as a filibuster-proof bill expires September 30, 2017 – although any interest in reviving the legislation is quickly being replaced by the urgency of disaster relief, the debt ceiling, and avoiding a government shutdown.