The Magnitude of Changes That Would Be Required to Balance the FY2011 Budget

Marc Labonte
Specialist in Macroeconomic Policy

A balanced federal budget is a bipartisan goal of many Members of Congress. In addition, moving the budget closer to balance is a long-term necessity because the national debt cannot grow as a percentage of GDP indefinitely, as it would under current policy. The budget deficit in FY2011 is projected to be between $980 billion and $1.27 trillion. Mathematically, the budget could be balanced by reducing total spending by 28%-35%, or mandatory spending by 47%-57%, or discretionary spending by 70%-87%, or by raising income tax rates by 76%-110%. Since nonmilitary discretionary spending is projected to be less than the total budget deficit in FY2011, the budget could not be balanced solely through reductions in this category of spending. The budget is unlikely to return to balance "on its own," as some have suggested, because higher growth rates should be incorporated in the projections; research suggests that the revenue estimates of tax cuts are unlikely to be significantly overstated; and the decline in the deficit found in the CBO baseline for FY2010 to FY2014, or in the President's budget for FY2011 to FY2014, rests on assumptions that differ substantially from what is typically thought of as current policy.


Date of Report: March 12, 2010
Number of Pages: 8
Order Number: RS21939
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Small Business: Access to Capital and Job Creation

Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in American National Government

The Small Business Administration's (SBA) authorization is due to expire on April 30, 2010. The SBA administers several programs to support small businesses, including loan guarantees to assist small businesses gain access to capital. This report addresses a core issue facing Congress during the SBA's reauthorization process: what, if any, additional action should the federal government take to enhance small business access to capital? Historically, small businesses (firms with less than 500 employees) have experienced greater job loss during economic recessions than larger businesses. Conversely, small businesses have led job creation during recent economic recoveries. As a result, many federal policymakers look to small businesses to lead the nation's recovery from its current economic difficulties. Some, including the chairs of the House and Senate Committees on Small Business and President Obama, have argued that current economic conditions make it imperative that the SBA be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small business economic growth and job creation. 

This report examines the pros and cons of federal intervention in the marketplace to enhance small business access to capital. It assesses recent federal credit market interventions, including the creation of the Troubled Asset Relief Program (TARP) and Term Asset-Backed Securities Loan Facility (TALF); modifications to the SBA's loan guarantee programs and other small business provisions under the American Recovery and Reinvestment Act of 2009 (ARRA); empirical evidence concerning small business lending and borrowing, including the number and amount of small business loans guaranteed by the SBA; the efficacy of the SBA's programs designed to enhance small business access to capital; and two bills introduced in the 111th Congress, H.R. 3854, the Small Business Financing and Investment Act of 2009, and S. 2869, the Small Business Job Creation and Access to Capital Act of 2009, which are designed to enhance small business access to capital. 

This report also discusses P.L. 111-118, the Department of Defense Appropriations Act, 2010, enacted on December 19, 2009, which provided $125 million to extend modifications to the SBA's loan guarantee programs under the ARRA through February 28, 2010, and P.L. 111-144, the Temporary Extension Act of 2010, enacted on March 2, 2010, which provided $60 million to extend those modifications through March 28, 2010. It also discusses H.R. 2847, the Jobs for Main Street Act of 2009, which would provide $325 million to extend those modifications through September 30, 2010; H.R. 4213, the American Workers, State, and Business Relief Act of 2010, which would provide $560 million to extend those modifications through December 31, 2010; H.R. 4899, the Disaster Relief and Summer Jobs Act of 2010, which would provide $60 million to extend those modification through April 30, 2010; and President Obama's State of the Union proposals—the "Small Business Jobs and Wages Tax Cut" to encourage small business job creation and wage increases and a $30 billion set-aside of TARP funds to encourage community banks to provide small business loans.


Date of Report: March 23, 2010
Number of Pages: 28
Order Number: R40985
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Tax Treaty Legislation in the 111th Congress: Explanation and Economic Analysis

Donald J. Marples
Specialist in Public Finance

"Treaty shopping" occurs where a foreign parent firm in one country receives its U.S.-source income through an intermediate subsidiary in a third country that is signatory to a tax-reducing treaty with the United States. Supporters of proposals to curb treaty-shopping argue that it would restrict a practice that deprives the United States of tax revenue and that it is unfair to competing U.S. firms. Opponents maintain that proposals to curb treaty-shopping would harm U.S. employment by raising the cost to foreign firms of doing business in the United States and may violate U.S. tax treaties. In addition, some Members of Congress have objected to the use of revenue-raising tax measures under the jurisdiction of tax-writing committees to offset increases in spending programs authorized by other committees. 

In the 111th Congress, the America's Affordable Health Choices Act of 2009, H.R. 3200, the Affordable Healthcare for America Act of 2009, H.R. 3962, and the Small Business and the Infrastructure Jobs Tax Act of 2010, H.R. 4849, include tax-treaty proposals which would restrict in certain cases the use of tax-treaty benefits by foreign firms with operations in the United States. The most recent preliminary revenue estimates projected a revenue gain of $3.8 billion over 5 years and $7.7 billion over 10 years, which would be used to partially offset either the cost of health care reform or provide tax relief to small businesses and extend the Build America Bonds. These provisions are identical to the provision offered in the Tax Reduction and Reform Act of 2007, H.R. 3970, during the 110th Congress. 

Economic theory suggests there is an economically optimal U.S. tax rate for foreign firms that balances tax revenue needs with the benefits that foreign investment produces for the U.S. economy. Under current law, the treaty-shopping arrangements some foreign firms undertake may combine, in some cases, with corporate income-tax deductions to eliminate U.S. tax on portions of their U.S. investment. In these cases, economic theory suggests that added restrictions on treaty-shopping would improve U.S. economic welfare. This analysis, however, does not consider possible reactions by foreign countries where U.S. firms invest, nor does it consider possible abrogation of existing U.S. tax treaties.


Date of Report: March 17, 2010
Number of Pages: 10
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Unemployment Insurance: Available Unemployment Benefits and Legislative Activity

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Various benefits may be available to unemployed workers to provide income support. When eligible workers lose their jobs, the Unemployment Compensation (UC) program may provide up to 26 weeks of income support through the payment of regular UC benefits. UC benefits may be extended for up to 13 or 20 additional weeks at the state level by the Extended Benefit (EB) program if certain economic situations exist within the state. In July 2008, a new temporary unemployment benefit, the Emergency Unemployment Compensation (EUC08) program, began. EUC08 now provides up to an additional 34 weeks of unemployment benefits and, if certain economic conditions exist within the state, EUC08 may provide up to an additional 19 weeks of EUC08 benefits (totaling four tiers and 53 weeks of EUC08 benefits). The EUC08 program expires on April 5, 2010. Certain groups of workers who lose their jobs because of international competition may qualify for income support through Trade Adjustment Act (TAA) programs. Unemployed workers may be eligible to receive Disaster Unemployment Assistance (DUA) benefits if they are not eligible for regular UC and if their unemployment may be directly attributed to a declared major disaster. 

The American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, contained provisions affecting unemployment benefits. ARRA temporarily increased benefits by $25 per week (Federal Additional Compensation, or FAC). ARRA also extended the EUC08 program through the end of 2009. ARRA provided for 100% federal financing of the EB program through January 1, 2010, and allowed states the option of temporarily easing EB eligibility requirements. ARRA suspended income taxation on the first $2,400 of unemployment benefits received in 2009. In addition, states would not owe or accrue interest, through December 2010, on federal loans to states for the payment of unemployment benefits. ARRA also provided for a special transfer of up to $7 billion in federal monies to state unemployment programs as "incentive payments" for changing certain state UC laws. In addition, ARRA transferred $500 million to the states for administering unemployment programs. 

P.L. 111-92 expanded the number of weeks available in the EUC08 program. Tier I benefits continue to be up to 20 weeks in duration and tier II benefits are now 14 weeks in duration (compared with 13 previously) and no longer are dependent on a state's unemployment rate. The new tier III benefit provides up to 13 weeks of EUC08 benefits to those workers in states with an average unemployment rate of 6% or higher. The new tier IV benefit may provide up to an additional 6 weeks of benefits if the state unemployment rate is at least 8.5%. 

P.L. 111-118 extended the EUC08 program, 100% federal financing of the EB program, and the $25 FAC benefit through the end of February 2010. The Temporary Extension Act of 2010 (P.L. 111-144), extends the EUC08 program, 100% federal financing of the EB program, and the $25 FAC benefit to April 5, 2010. 

On March 10, 2010, the Senate passed H.R. 4213, the Tax Extenders Act of 2010. H.R. 4213 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, through the end of December 2010. Because the original bill was amended by the Senate in the nature of a substitute (S.Amdt. 3336), the Senate-passed version must now go back to the House for consideration. On March 17, 2010, the House passed H.R. 4851, the Continuing Extension Act of 2010. H.R. 4851 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before May 5, 2010.


Date of Report: March 18, 2010
Number of Pages: 32
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Oil Industry Tax Issues in the Fiscal Year 2011Budget Proposal

Robert Pirog
Specialist in Energy Economics

President Obama, in a speech on April 22, 2009 (Earth Day), addressed the linkage between the problems he associated with U.S. reliance on oil, especially imported oil, and the importance of a future based more on alternative energy sources. To move in the direction of accomplishing these goals, the Administration, in the Fiscal Year 2011 Budget Proposal, proposes that certain tax expenditures designed to increase domestic production of oil and natural gas be revised, thus reducing what the Administration sees as favorable treatment of the oil and natural gas industries. 

The Fiscal Year 2011 Budget Proposal outlined a set of proposals, framed in terms of deficit reduction, or termination of tax preferences, that would potentially increase the taxes of the oil and natural gas industries, especially the independent producers. These proposals included repeal of the enhanced oil recovery and marginal well tax credits, repeal of the expensing of intangible drilling costs, repeal of the deduction for tertiary injectants, repeal of passive loss exceptions for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increase of the amortization periods for certain expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers. In addition, a variety of inspection fee increases and a per-acre fee on unused leases were proposed to generate revenue for the Department of the Interior (DOI). 

The Administration estimates that the tax changes would provide $18.2 billion in deficit reduction, or new revenues, over the period 2011 to 2015. The changes, if enacted, also would reduce the tax advantage enjoyed by independent oil and natural gas producers over the major integrated oil companies. On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers, likely achieving the intended effect of reducing consumption of those fuels.


Date of Report: March 24, 2010
Number of Pages: 10
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Ongoing Government Assistance for American International Group (AIG)

Baird Webel
Specialist in Financial Economics

In the beginning of 2008, American International Group (AIG) was one of the world's largest insurers, generally considered to be financially sound with an AA credit rating. By the end of the year, it had undergone a near bankruptcy and had been forced to seek up to $173.4 billion in financial assistance from the U.S. government. The CEO had been replaced at the government's behest, executive compensation was under limits, and shareholders in AIG had been nearly wiped out as their equity was diluted by a new 79.9% stake held by the government. The government assistance to AIG has been largely ad hoc. The overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but because the company was primarily an insurer, it was largely outside of the normal Federal Reserve (Fed) facilities that lend to thrifts facing liquidity difficulties. AIG was also outside of the normal receivership provisions that apply to banking institutions. Had AIG not been effectively deemed "too big to fail" and given assistance by the government, bankruptcy seemed a near certainty in September 2008. 

The losses that led to AIG's essential failure resulted largely from two sources: the state-regulated AIG insurance subsidiaries' securities lending program and the AIG Financial Products (AIGFP) subsidiary, a largely unregulated subsidiary that specialized in financial derivatives. The transactions that led to the immediate losses were dealt with relatively quickly in 2008, albeit with significant outlay of government funds. Although the securities lending program was relatively straightforward to discontinue, the AIGFP derivative operations extended well beyond the transactions that caused the immediate losses and are taking longer to wind down. The overall AIGFP derivative portfolio remains significant, as AIG reported approximately $940.7 billion in notional net value of derivatives at the end of 2009. 

The government assistance to AIG began with an $85 billion loan from the Fed in September 2008. This loan was on relatively onerous terms with a high interest rate and required a handover of 79.9% of the equity in AIG to the government. As AIG's financial position weakened, several rounds of additional funding were provided to AIG and the terms were loosened to some degree. The current major restructuring of the assistance to AIG was announced in March 2009 and comprises (1) $47.3 billion (of up to $68.8 billion) in capital injections through preferred share purchases by the Treasury; (2) $25.3 billion (of up to $35 billion) in extraordinary loans from the Fed; (3) $24.8 billion in Fed loans retired by equity interests provided to the government by AIG; (4) $2.3 billion in Fed loans through the Commercial Paper Funding Facility; and (5) $43.8 billion (of up to $52.5 billion) in Fed loans for troubled asset purchases—assets that are now owned by the government. 

Congress has held several hearings specifically focusing on the intervention in AIG. Congressional attention and anger has been focused on perceived corporate profligacy, particularly bonuses for AIG employees. Bills that would place specific taxes on or otherwise restrict such bonuses include H.R. 1586, passed by the House on March 19, 2009; S. 651, introduced on the same day; and H.R. 1664, passed by the House on April 1, 2009. 

The future of AIG and the ultimate government cost of the intervention are unclear. Recently announced asset sales by AIG may repay all of the Fed loans, but this would leave the Troubled Asset Relief Program (TARP) preferred shares outstanding. Recent estimates of the losses on the TARP funding range from $9 billion to $49 billion.


Date of Report: March 18, 2010
Number of Pages: 18
Order Number: R40438
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Temporary Extension of Unemployment Benefits: Emergency Unemployment Compensation (EUC08)

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

In July 2008, a new temporary unemployment benefit, the Emergency Unemployment Compensation (EUC08) program, began. The EUC08 program was created by P.L. 110-252, and it has been amended by P.L. 110-449, P.L. 111-5, P.L. 111-92, P.L. 111-118 and, P.L. 111-144.This temporary unemployment insurance program provides up to 20 additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular unemployment compensation (UC) benefits. A second tier of benefits provides up to an additional 14 weeks of benefits (for a total of 34 weeks of EUC08 benefits for all unemployed workers). A third tier is available in states with a total unemployment rate of at least 6% and provides up to an additional 13 weeks of EUC08 benefits (for a total of 47 weeks of EUC08 benefits in certain states). A fourth tier is available in states with a total unemployment rate of at least 8.5 % and provides up to an additional 6 weeks of EUC08 benefits (for a total of 53 weeks of EUC08 benefits in certain states). 

All tiers of EUC08 benefits are temporary and expire on April 5, 2010, although Congress is currently considering legislation to extend the program. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before April 3, 2010 (April 4, 2010, in New York) are "grandfathered" for their remaining weeks of eligibility for that particular tier only. There will be no new entrants into any tier of the EUC08 program after April 3, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier benefit after April 3, 2010, that individual would not be entitled to tier II benefits once those tier I benefits were exhausted. No EUC08 benefits— regardless of tier—are payable for any week after September 4, 2010. 

The Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, expanded benefits available in the EUC08 program. It created two new tiers of benefits, bringing total benefit tiers to four and adding 20 weeks to the number of weeks of EUC08 benefits available to individuals, for a total of up to 53 benefit weeks. The Department of Defense Appropriations Act of 2010, P.L. 111-118, was signed by the President on December 19, 2009, and extended the EUC08 program, the 100% federal financing of the Extended Benefits (EB) program, and the $25 supplemental weekly benefit through February 28, 2010. 

P.L. 111-144 extends EUC08, the $25 supplemental weekly benefit, and 100% federal EB financing until April 5, 2010. 

On March 10, 2010, the Senate passed H.R. 4213, the Tax Extenders Act of 2010. H.R. 4213 would extend the availability of EUC08, 100% federal financing of EB, and the $25 Federal Additional Compensation (FAC) benefits, through the end of December 2010. Because the original bill was amended by the Senate in the nature of a substitute (S.Amdt. 3336), the Senatepassed version must now go back to the House for consideration. 

On March 17, 2010, the House passed H.R. 4851, the Continuing Extension Act of 2010. H.R. 4851 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before May 5, 2010. 

This report will be updated to reflect current congressional action or programmatic changes. Individuals should contact their state's unemployment agency to obtain information on how to apply for and receive EUC08 benefits.


Date of Report: March 18, 2010
Number of Pages: 16
Order Number: RS22915
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Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest

Donald J. Marples
Specialist in Public Finance

General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range), and a percentage of the fund's earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called "carried interest" and is treated, or characterized, as capital gains under current tax rules. In the 111th Congress, the House-passed Tax Extenders Act of 2009, H.R. 4213, H.R. 1935, and the President's 2010 and 2011 Budget Proposals would make carried interest taxable as ordinary income. In addition, in the 110th Congress, H.R. 6275, would have made carried interest taxable as ordinary income. Other legislation (H.R. 2834 and H.R. 3996) made similar proposals. This report provides background on the issues related to the debate concerning the characterization of carried interest.


Date of Report: March 17, 2010
Number of Pages: 7
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Taxation of Hedge Fund and Private Equity Managers

Mark Jickling
Specialist in Financial Economics

Donald J. Marples
Specialist in Public Finance

Hedge funds and private equity funds are investment pools generally available only to institutions and wealthy individuals. Private equity funds acquire ownership stakes in other companies and seek to profit by improving operating results or through financial restructuring. Hedge funds follow many strategies, investing in any market where managers see profit opportunities. The two kinds of funds are generally structured as partnerships: the fund managers act as general partners, while the outside investors are limited partners. General partners are compensated in two ways. First, to the extent that they invest their own capital in the funds, they share in the appreciation of fund assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets, and a percentage of the fund's earnings. The latter performance fee is called "carried interest" and is treated as capital gains under current tax rules. 

In the 111th Congress, the House-passed Tax Extenders Act of 2009 (H.R. 4213), H.R. 1935, and the President's 2010 and 2011 Budget Proposals would make carried interest taxable as ordinary income, mirroring several bills introduced in the 110th Congress, H.R. 2834, H.R. 3996, and H.R. 6275. In addition, other bills introduced in the 110th Congress would also have redefined the tax treatment of carried interest. S. 1624 would have required private equity firms organized as publicly traded partnerships to pay corporate income tax, while H.R. 4351 and H.R. 6049 would have included in gross income the portion of carried interest currently deferred offshore in foreign-chartered funds. In addition to summarizing the legislation, this report provides background on hedge funds and private equity and summarizes the tax issues.


Date of Report: March 17, 2010
Number of Pages: 9
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New Markets Tax Credit: An Introduction

Donald J. Marples
Specialist in Public Finance

The New Markets Tax Credit (NMTC) is a non-refundable tax credit intended to encourage private capital investment in eligible, impoverished, low-income communities. NMTCs are allocated by the Community Development Financial Institutions Fund (CDFI), a bureau within the United States Department of the Treasury, under a competitive application process. Investors who make qualified equity investments reduce their federal income tax liability by claiming the credit. The NMTC program, enacted in 2000, is currently authorized to allocate $26 billion through the end of 2009. To date, the CDFI has made 396 awards totaling $26 billion in NMTC's allocation authority. 

In the 111th Congress, legislation is being considered to modify the NMTC program authorization. The American Recovery and Reinvestment Tax Act of 2009, P.L. 111-5, increases the NMTC allocation for 2008 and 2009, to $5 million from $3.5 million. Similarly, legislation in the 110th Congress focused primarily on extending the NMTC program authorization. This attention came to fruition with the enactment of P.L. 110-343, which extended the NMTC program authorization one year, through the end of 2009. Other legislation in the 111th Congress, H.R. 2628 and S. 1583, proposes to extend the NMTC for multi-year periods; H.R. 473 proposes to extend the NMTC to the insular areas; H.R. 4849 proposes to allow for the new markets tax credit to offset alternative minimum tax liability; and both the House- and Senate-passed versions of H.R. 4213 would extend the NMTC for one year and $5 million.


Date of Report: March 16, 2010
Number of Pages: 16
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The Financial Crisis: Impact on and Response by The European Union

James K. Jackson
Specialist in International Trade and Finance

Please visit this summary at our newest blog HTTP://INTERNATIONAL-TRADE-REPORTS.BLOGSPOT.COM where this report summary can be found by clicking here http://international-trade-reports.blogspot.com/2010/03/financial-crisis-impact-on-and-response.html

 

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Date of Report: March 17, 2010
Number of Pages: 38
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Federal Stafford Act Disaster Assistance: Presidential Declarations, Eligible Activities, and Funding

Keith Bea
Specialist in American National Government

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) authorizes the President to issue major disaster or emergency declarations in response to catastrophes in the United States that overwhelm state and local governments. Such declarations result in the distribution of a wide range of federal aid to individuals and families, certain nonprofit organizations, and public agencies. Congress appropriates money to the Disaster Relief Fund (DRF) for disaster assistance authorized by the Stafford Act. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security (DHS) administers most, but not all, of the authority the statute vests in the President. 

The most recent significant action concerning the statute occurred in the closing months of the 109th Congress as a result of the congressional investigation on the response to Hurricane Katrina (August 2005). Senators inserted Stafford Act amendments into the FY2007 DHS appropriations legislation (Title VI of P.L. 109-295). These amendments expanded FEMA's authority to expedite emergency assistance to stricken areas, imposed new planning and preparedness requirements on federal administrators, provided new authority to regional offices, and increased federal assistance to victims and communities. More recently, Congress included a provision in the FY2010 appropriations legislation (P.L. 111-83) that allows retired law judges to arbitrate conflicts concerning the recovery of public infrastructure in the Gulf Coast due to Hurricanes Katrina and Rita. While not an amendment to the Stafford Act, this provision affects the administration of the FEMA appeals process under which applications for Stafford assistance are reconsidered. The decisions made to date by the arbitration panels resulted in an Administration request for supplemental funding for FY2010. That request is the subject of some debate in the 111th Congress. 

Legislation pending in the 111th Congress would amend the statute. Among the proposals, H.R. 3377, the Disaster Response, Recovery, and Mitigation Enhancement Act of 2009, would authorize the President to modernize the integrated public alert system to ensure that warnings are disseminated to the public, provide health benefits to temporary or intermittent federal employees who provide disaster assistance, authorize the National Urban Search and Rescue Response System, and make other changes to the statute. Other pending bills would reauthorize a mortgage and rental assistance program terminated in 2000 (H.R. 888/S. 763), establish new eligibility criteria (H.R. 941, H.R. 1059, H.R. 1494, H.R. 2484, H.R. 4141, and S. 1069), and mandate establishment of a tracking and storage plan for housing units used by disaster survivors (H.R. 3437/S. 713).


Date of Report: March 16, 2010
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Mortgage and Rental Assistance as Disaster Relief: Legislation in the 111th Congress

Francis X. McCarthy
Analyst in Emergency Management Policy

During the first session of the 111th Congress, Representative Oberstar, along with co-sponsors Representative Mica, Representative Holmes-Norton and Representative Mario Diaz-Balart introduced H.R. 3377, the Disaster Response, Recovery and Mitigation Enhancement Act of 2009. Along with other provisions, the legislation would reinstate a Robert T. Stafford Disaster Relief and Emergency Assistance Act (P.L. 93-288, as amended) provision that provided mortgage and rental assistance to disaster victims. Previously, Senators Feinstein and Boxer had introduced S. 2386, the Mortgage and Rental Disaster Relief Act of 2007. Mortgage and Rental Assistance (MRA) had been dropped from the Stafford Act by P.L. 106-390, the Disaster Mitigation Act of 2000 (DMA2K). 

MRA provided economic aid to help households remain in their residences by assisting with mortgage or rent payments for a period of up to eighteen months. This is distinct from temporary housing assistance under the Stafford Act that provides rental assistance due to disaster damage that makes a residence uninhabitable. For MRA help, the applicant had to prove a loss of income due to the disaster event. 

The MRA provision in H.R. 3377 is similar to the original Stafford Act language in providing such emergency help for up to 18 months. An earlier Senate bill to reauthorize MRA, S. 2386, differed from the original Stafford MRA provision in that it established eligibility based on an income threshold in order for an applicant to qualify for the proposed MRA assistance. 

This report summarizes the previous MRA provision administered by the Federal Emergency Management Agency, the issues that were a part of the discussion prior to its removal in P.L. 106- 390, and questions that have been raised since 2000 regarding mortgage and rental assistance.


Date of Report: March 16, 2010
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The Foreign Tax Credit’s Interest Allocation Rules

Jane G. Gravelle
Senior Specialist in Economic Policy

Donald J. Marples
Specialist in Public Finance

The foreign tax credit alleviates the double-taxation that would result if U.S. investors' overseas income were to be taxed by both the United States and a foreign country. U.S. taxpayers credit foreign taxes paid against U.S. taxes they would otherwise owe, and in doing so concede that the country where income is earned has the primary right to tax that income. But the United States retains the primary right to tax U.S.-source income, placing a limit on the foreign tax credit: foreign taxes can only offset the part of a U.S. taxpayer's U.S. tax that falls on foreign source income. It is this limit to which the American Jobs Creation Act of 2004 (P.L. 108-357, Jobs Act) applied. To calculate the limit, a firm separates its revenue and costs, for tax purposes, into those having a foreign source and those having a U.S. source. Foreign taxes can offset U.S. tax on revenue "sourced" abroad; in effect, foreign-source income is exempt from U.S. tax for firms whose foreign tax credits exceed the limit (firms with "excess credits"). But because deductions allocated abroad reduce U.S. tax, the effect is the same as if deductions allocated to foreign sources cannot be claimed for U.S. tax purposes.

If a U.S. firm has foreign investments, current law requires at least part of the U.S. interest to be allocated to foreign sources based on the theory that debt is fungible—that regardless of where funds are borrowed, they support a firm's worldwide investment. But multinational firms have argued that if part of domestic interest is allocated abroad, part of foreign interest should be allocated to the United States, which would reduce U.S. tax. (Some critics have suggested, however, that granting multinationals tax benefits through interest allocation revisions should be accompanied by restrictions on the benefit of deferral, which allows taxes.)

This worldwide allocation rule was adopted in the Jobs Act, but has not yet been implemented. The Jobs Act called for implementation starting in 2009, while P.L. 110-289 subsequently delayed implementation until 2011.

In the 111th Congress, the Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, delayed implementation of the worldwide allocation rules to 2018, while the Hiring Incentives To Restore Employment Act, P.L. 111-147, further delayed implementation to 2021. Another proposal in the 111th Congress, H.R. 3962, the Affordable Healthcare for America Act of 2009, would repeal the worldwide allocation rule.

The current law's interest allocation rules are likely imperfectly structured to achieve the objective of the foreign tax credit limit and worldwide allocation of interest as enacted by the Jobs Act, while losing revenue, would probably be more consistent with the basic objective of the foreign tax credit limit. Tax planning techniques, however, could undermine this objective and cause further revenue loss. And, like the foreign tax credit limit itself, allocation rules contribute to tax distortions which may be heightened with worldwide allocation. Further, an expansion of the bank "subgroup" elections contained in the Jobs Act may not be consistent with the general objective of worldwide allocation of interest. Although the Jobs Act contains anti-abuse rules, these subgroup elections may permit firms to avoid the impact of the interest allocation rules.


Date of Report: March 19, 2010
Number of Pages: 16
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The Impact of Major Legislation on Budget Deficits: 2001 to 2009

Marc Labonte
Specialist in Macroeconomic Policy

Andrew Hanna
Presidential Management Fellow

After recording a fiscal year (FY) 2000 federal budget surplus of $236.2 billion, the Congressional Budget Office (CBO) in January 2001 projected continued surpluses throughout the decade. However, enactment of major legislation during the 107th to 111th Congresses, in combination with changing economic conditions, altered the federal budget outlook for the decade dramatically. In FY2002, the budget recorded a deficit for the first time since 1997, and the federal government has run a deficit in each subsequent year. 

This report examines to what extent major legislative changes from 2001 to 2009 caused the budget to move from surplus to deficit. Legislative actions taken in 2009 increased the FY2009 deficit by $509 billion, whereas legislative actions taken between 2001 and 2008 increased the FY2009 deficit by $903 billion. Furthermore, legislative changes have cumulatively increased federal budget deficits over FY2001 to FY2009 by $5.4 trillion. 

Several major tax laws passed by Congress reduced federal government revenues, including the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27), and the Working Families Tax Relief Act of 2004 (P.L. 108-311). On an aggregated basis, estimates by CBO and the Joint Committee on Taxation (JCT) at the time of legislative enactment placed the total anticipated cost for these three laws at $1.76 trillion for FY2001 to FY2011. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173) established a new Medicare Part D prescription drug benefit, which CBO originally projected would cost $552.2 billion over 10 years. However, the Boards of Trustees for Medicare estimated in May 2009 that Part D expenditures would total $381.3 billion for this same period. 

Funding for "Global War on Terror" operations has been provided primarily through emergency supplemental appropriations law. For FY2001 to FY2009, Congress approved legislation appropriating about $943.8 billion for military operations in Iraq and Afghanistan, with $887.8 billion of this amount allocated to the Department of Defense. 

On September 6, 2008, the Federal Housing Finance Agency exercised authority provided under the Housing and Economic Recovery Act of 2008 (P.L. 110-289) to place Fannie Mae and Freddie Mac into conservatorship. In August 2009, CBO estimated net subsidy costs related to Fannie Mae and Freddie Mac at $291 billion for FY2009. The Emergency Economic Stabilization Act of 2008 (Division A of P.L. 110-343) established the Troubled Asset Relief Program (TARP). In January 2010, CBO projected TARP would increase budget deficits by $99 billion over the complete duration of the program. 

In response to significant weakness in the U.S. economy, the Economic Stimulus Act of 2008 (P.L. 110-185) provided a refundable individual income tax rebate. JCT estimated in February 2008 that P.L. 110-185 would increase federal budget deficits by approximately $124.5 billion for FY2008 to FY2018. To provide additional economic stimulus, Congress enacted the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) on February 17, 2009. In January 2010 CBO estimated that P.L. 111-5 will increase federal budget deficits by $862 billion over 10 years.


Date of Report: March 23, 2010
Number of Pages: 36
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A Value-Added Tax Contrasted With a National Sales Tax

James M. Bickley
Specialist in Public Finance

Both a value-added tax (VAT) and a national sales tax (NST) have been proposed by participants in the tax-reform debate as replacement taxes for all or part of the nation's current income tax system. In addition, there is congressional interest in using a consumption tax to finance national health care. 

A firm's value added for a product is the increase in the value of that product caused by the application of the firm's factors of production. A VAT on a product would be levied at all stages of production of that product. VATs differ in their tax treatment of purchases of capital (plant and equipment). The type of VAT used by developed countries—termed a consumption VAT—treats a firm's purchases of plant and equipment the same as any other purchase. A firm's net VAT liability is usually calculated by using the credit-invoice method. According to this method, a firm determines its gross tax liability by aggregating VAT shown on its sales invoices. Then the firm computes its net VAT liability by subtracting VAT paid on purchases from other firms from the firm's gross VAT liability. This net tax is remitted to the government. The subtraction method can also be used to calculate the VAT. Under this method, the firm calculates its value added by subtracting its cost of taxed inputs from its taxable sales. Next, the firm determines its VAT liability by multiplying its value added by the VAT rate. A flat tax, based on the proposal formulated by Robert E. Hall and Alvin Rabushka of the Hoover Institution, is a type of modified subtraction method VAT. 

In contrast to a VAT, an NST would be a federal consumption tax collected only at the retail level by vendors. an NST would equal a set percentage of the retail price of taxable goods and services. Retail vendors would collect the NST and remit tax revenue to the federal government. Both a VAT and an NST are frequently assumed to be ultimately paid by consumers. For calendar year 2007, CRS estimated a VAT or NST would have raised net revenue of between $46 and $86 billion for each 1% levied if used as a replacement tax. Alternatively, if the VAT or NST would have been used as an additional revenue source, than those revenue estimates would be reduced by 25% because of partially offsetting declines in income tax revenues. 

The operating differences between a consumption VAT and an NST have important policy implications. On the one hand, the administrative cost of a VAT would exceed that of an NST because a VAT would require more information to be reported and audited. Also, an opportunity exists for an NST to be collected jointly with state sales taxes, but a federal VAT offers no readily available joint collection possibilities. A VAT would require more time to implement than an NST because a VAT is more complicated, covers more firms, and is a new tax method. On the other hand, a consumption VAT with the credit method more easily excludes inputs from double taxation than does an NST. A consumption VAT would be easier to enforce than an NST. It is in the self-interest of a firm to have accurate purchase invoices so that it can obtain full credit for prior VAT paid. Tax authorities can double check the accuracy of the VAT remitted by any firm because data are collected from producers at all levels of production. For a given year, a VAT could have a broader base than an NST because a VAT is easier to enforce. A VAT may be less visible to consumers than an NST. A VAT is levied at all stages of production, and policymakers have the option of not requiring the amount of VAT to be shown on retail sales receipts. As of March 19, 2010, the following bills concerning an NST or VAT have been introduced in the 111th Congress: H.R. 15, H.R. 25, S. 296, S. 741, H.R. 1040, S. 963, S. 932, H.R. 4529, and S. 1240.


Date of Report: March 19, 2010
Number of Pages: 10
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Business Investment and Employment Tax Incentives to Stimulate the Economy

Thomas L. Hungerford
Section Research Manager

Jane G. Gravelle
Senior Specialist in Economic Policy

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the U.S. economy has been in recession since December 2007. Congress passed and the President signed an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), in February 2009. The $787 billion package included $286 billion in tax cuts to help stimulate the economy. Among the tax reductions, many were tax incentives directed to business. The preliminary estimate of fourth quarter real gross domestic product (GDP) growth is 5.9%; the unemployment rate, a lagging indicator, averaged 9.6% in the third quarter and 10.0% in the fourth quarter of 2009. Federal Reserve Chairman Ben Bernanke expects the economy to continue growing at a modest pace, but predicts that bank lending will remain constrained and the job market will remain weak into at least 2010. To further assist unemployed workers, help business, and stimulate housing markets, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). The Obama Administration has advocated further business tax incentives to spur investment and employment, especially for small business. The House and Senate passed the Hiring Incentives to Restore Employment (HIRE) Act, which includes an employment tax credit. The President signed the act into law on March 18, 2010. 

The two most common measures to provide business tax incentives for new investment are investment tax credits and accelerated deductions for depreciation. The evidence, however, suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus, largely because of the uncertainty of its success in stimulating aggregate demand. If such subsidies are used, however, the most effective short-run policy is probably a temporary investment subsidy. Permanent investment subsidies may distort the allocation of investment in the long run. 

Employment and wage subsidies are designed to increase employment directly by reducing a firm's wage bill. The tax system is a frequently used means for providing employment subsidies. Most of the business tax incentives for hiring currently under discussion are modeled partially on the New Jobs Tax Credit (NJTC) from 1977 and 1978. Evidence provided in various studies suggests that incremental tax credits have the potential of increasing employment, but in practice may not be as effective in increasing employment as desired. There are several reasons why this may be the case. First, jobs tax credits are often complex and many employers, especially small businesses, may not want to incur the necessary record-keeping costs. Second, since eligibility for the tax credit is determined when the firm files the annual tax return, firms do not know if they are eligible for the credit at the time hiring decisions are made. Third, many firms may not even be aware of the availability of the tax credit until it is time to file a tax return. Lastly, product demand appears to be the primary determinant of hiring. .


Date of Report: March 18, 2010
Number of Pages: 19
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Charitable Contributions: The Itemized Deduction Cap and Other FY2011 Budget Options

Jane G. Gravelle
Senior Specialist in Economic Policy

Donald J. Marples
Specialist in Public Finance

The Administration's 2010 and 2011 budget outlines contain a proposal to cap the value of itemized deductions at 28%, for high-income taxpayers. In the 2010 proposal, the expected revenue was dedicated to addressing health care issues; as other sources are expected to finance health care, the proposal is now part of the increased taxes on upper income taxpayers. This proposal has generated considerable concern about its potential negative effect on charitable contributions. This concern has been heightened because charities are having difficulties in the current economic climate. The proposed tax change, however, would not go into effect until 2011 and thus the change could actually increase near-term contributions. Thus, it is the longer-term, or permanent, effect on giving that is the effect considered in this analysis. The analysis also considers the effects of other income tax changes and of the estate tax. 

The estimated effects of the cap and other elements of the budget package depend on whether the proposals are compared with the current tax rates of 33% and 35% or the rates scheduled for 2011, 36% and 39.6%. Compared with current rules, estimated effects are between one-half a percent and 1% decline in charitable giving, depending on whether the effects of capital gains tax rates on gifts of appreciated property are included. When compared with tax rate provisions in 2011, charitable deductions are estimated to fall by about 1.5% if only the cap is considered, but if income effects from the entire budget package are included contributions actually rise 2.5%. The relatively modest effects of the proposal arise because (1) the effect of caps on the subsidy value is limited, (2) only a fraction (about 16%) of charitable giving is affected, and (3) because evidence suggests that behavioral responses to changes in subsidies are relatively small. 

Different charities will be affected differently because the giving patterns of higher-income individuals differ from the average. Estimates show smaller reductions or larger increases for religious or combined charities, or charities directed at meeting basic needs, whereas the proposal is more likely to have negative effects for charities serving the health sector, and to a lesser extent art and education charities. Overall, contributions that benefit the poor will be less likely to fall or more likely to rise than the average contribution because the charitable purposes more favored by higher-income contributors are less likely to direct benefits to low-income recipients. 

Estate tax changes would also affect charitable giving. The budget outlines hold the current 2009 estate tax rules constant. Allowing the estate tax to lapse in 2010, as would the current rules, could lead to reductions in charitable giving of around 4%. Returning to the higher estate tax rates currently scheduled for 2011 could increase charitable giving, by about 1%, while adopting the FY2010 Senate Budget Resolution provision could reduce charitable contributions by about 1%. Although a smaller share of charitable contributions are affected by the estate tax, the changes in subsidy value are much larger if the estate tax is repealed, and the estimated behavioral response is greater. The immediate effects on contributions and the distributional effects of changes are, however, uncertain. Over half of bequests involve gifts to foundations, which finance a variety of charitable objectives and provide benefits with a considerable delay. 

Revenue from the cap on itemized deductions is currently directed at increasing revenues to finance other programs. If the cap is rejected either overall, or for charitable contributions, other revenue sources found, or the debt increased. Alternative revenue options include, among others, implementing a floor under charitable deductions and increases in tax rates on high-income taxpayers.


Date of Report: March 18, 2010
Number of Pages: 35
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Tax Reform: An Overview of Proposals in the 111th Congress

James M. Bickley
Specialist in Public Finance

Tax reform is of congressional interest in the 111th Congress. This report primarily covers fundamental tax reform because CRS reports are available online concerning the other three categories of tax reform: tax reform based on the elimination of the individual alternative minimum tax (AMT), proposals for reforming the corporate income tax, and proposals for reforming the U.S. taxation of international business. Most proposals for fundamental tax reform involve the concept of replacing the current income tax system with some form of a consumption tax, usually with a single or "flat tax" rate. Other proposals would significantly broaden the income tax base and lower tax rates. Proponents of these tax revisions often maintain that they would simplify the tax system, make the government less intrusive, and create an environment more conducive to saving. Critics express concern about the distributional consequences and transitional costs of a dramatic change in the tax system. For those fundamental tax reform proposals involving shifting to a consumption tax, one or more of the following four major types of broad-based consumption taxes are included in these congressional tax proposals: the valueadded tax (VAT), the retail sales tax, the consumed-income tax, and the flat tax based on a proposal formulated by Robert E. Hall and Alvin Rabushka of the Hoover Institution. As of March 17, 2010, the following bills for fundamental tax reform have been introduced: Representative David Dreier's proposal (H.R. 99), Representative John Linder's proposal (H.R. 25), Senator Saxby Chambliss's proposal (S. 296), and Senator Arlen Specter's proposal (S. 741), Representative Michael C. Burgess's proposal (H.R. 1040), Senator Lamar Alexander's proposal (S. 963), Senator Richard C. Shelby's proposal (S. 932), Representative Paul D. Ryan's proposal (H.R. 4529), Senator Jim DeMint's proposal (S. 1240), Senator Ron Wyden's proposal (S. 3018), and Representative Chaka Fattah's proposal (H.R. 4646). Companion bills are H.R. 25/S. 296 and H.R. 1040/S. 963. 

A temporary patch for 2009 for the individual alternative minimum tax (AMT) was included in American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5). The patch increased the individual AMT exemption amount and allowed personal credits against the AMT. The FY2010 budget resolution conference report (S.Con.Res. 13) provides for three years of relief from the AMT, through 2012, without the need for any revenue offset. 

In the 111th Congress, options for reforming the federal business income tax are under consideration. The concept of lowering the marginal corporate income tax rate and broadening the corporate income tax base has been advocated by some Members of Congress, including Representative Charles B. Rangel, Chairman of the House Ways and Means Committee. Other options for reform include corporate tax integration and the replacement of the income tax system with a consumption tax. 

The current system of U.S. taxation of international business is complex and difficult to administer. Furthermore, critics argue that the current system is not sufficiently neutral, which results in economic inefficiency. Proposals to reform the system include the replacement of the current hybrid system with either a territorial tax system or a residence based system. In the FY2011 Budget, the Obama Administration proposed numerous changes in the U.S. international tax system that would raise revenue through "reforms" and closing "loopholes."


Date of Report: March 19, 2010
Number of Pages: 18
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Tax Options for Financing Health Care Reform

Jane G. Gravelle
Senior Specialist in Economic Policy

Several tax options have been proposed to provide financing for health care reform. President Obama has proposed restricting itemized deductions for high-income taxpayers, along with some narrower provisions. H.R. 3962 passed in the House on November 14, 2009; its largest source of increased revenues is from additional income taxes for higher-income taxpayers. On December 24, 2009, the Senate adopted H.R. 3590, whose revenue provisions are similar to those in the bill reported by the Senate Finance Committee (S. 1796). Taxing insurance companies on high-cost employer plans is the largest single source of revenue in that plan. Both plans include health related provisions, including fees or excise taxes, along with some other provisions. 

On February 22, 2010, the Obama Administration released a new compromise proposal, which generally uses H.R. 3590 as a starting point, but offers several changes to the revenue provisions of this bill. The President's proposal would delay the effective date for the tax on high-cost employer plans proposed in H.R. 3590 from 2013 to 2018 and raise the exemption threshold for this tax to $27,500 for families and $10,200 for individuals. In addition, the new plan offered by the Administration would broaden H.R. 3590's proposed increase of the Medicare Hospital Insurance (HI) tax for high-income households by adding a tax on unearned income at a 2.9% rate. The House is considering the Senate bill, along with the revenue revisions (H.R. 4872). 

Several proposals for revenue, considered during the health care financing debate of 2009, have not been included in legislation reported out by congressional committees. These proposals include eliminating tax benefits from the exclusion of employer-provided health insurance, which has a significant revenue potential, and limiting tax savings to 28% of itemized deductions for the top two brackets, which was the centerpiece of the President's health reform tax proposals. 

These provisions differ in their potential revenue gain, and behavioral and distributional effects. Some proposals are progressive (imposing higher relative burdens on higher income groups), some impose larger relative burdens on lower-income families, and some tend to fall on middleclass groups. The distributional analysis, however, relates only to finance: the total health care program may redistribute in favor of lower-income families even if the revenue sources do not. 

The House bill (H.R. 3962) includes a high-income surtax of 5.4% on income above $1,000,000 (income levels are 50% as large for singles). The proposal would initially raise more than $30 billion per year. One concern that has been raised about this surtax is the effect on small business, entrepreneurship, and job creation; however, much of this income is passive income or income of professions (e.g., stockbrokers, doctors). The proposal also includes some narrower, largely corporate provisions and restrictions on health-related tax expenditures. The Senate bill (H.R. 3590) would impose an excise tax on insurance companies for high-cost employer plans. Most of the remaining revenue is raised from restricting health-related tax expenditures; increasing the Medicare payroll tax for high-income earners; and imposing fees on medical devices, branded drugs, and health insurance providers. 

Witnesses in a round-table discussion held by the Senate Finance Committee in 2009 also discussed a number of other options, including other base broadening provisions as well as rate increases for the individual income tax, increases in payroll taxes, and new revenue sources such as a value added tax (VAT) and a cap and trade auction system for carbon emission permits.


Date of Report: March 19, 2010
Number of Pages: 33
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Certain Temporary Tax Provisions Scheduled to Expire in 2009 (“Extenders”)

James M. Bickley
Specialist in Public Finance

Jennifer Teefy
Information Research Specialist

Numerous temporary tax provisions expired on December 31, 2009. Often referred to as "extenders," these provisions were originally enacted with expiration dates that have subsequently been extended, in some cases numerous times. The temporary nature of extenders can be considered useful as it allows policymakers to evaluate the effectiveness of the provisions on a regular basis. If an extender is found to be ineffective, its scheduled expiration allows several policymaking options, including allowing the provision to expire or redesigning the provision to improve its use as a policy tool. However, policymakers have, for the most part, considered the extenders as a group during the enactment process, and have not reviewed the unique strengths and weaknesses of specific provisions. 

In the 111th Congress, a provision for the extension of certain expiring provisions was included in the House and Senate Budget Resolution (S.Con.Res. 13). The conference report for S.Con.Res. 13 was passed by both chambers on April 29, 2009. More recently, the House passed a package of expiring provisions, the Tax Extenders Act of 2009 (H.R. 4213) on December 9, 2009. On March 1, 2010, the Senate officially began consideration of H.R. 4213. A Senate proposal, offered as a substitute by Senate Finance Committee Chair Max Baucus and Senate Majority Leader Harry Reid, offered substitute text for H.R. 4213 that would be Title I, Extension of Expiring Provisions, in the proposed American Workers, State, and Business Relief Act of 2010. The only amendment (S.Amdt. 3350) to be adopted was a provision that would (1) allow companies that cannot benefit from other tax incentives in the bill to use existing alternative minimum tax credits to pay for new investments made during 2010 and (2) create new rental property reporting requirements for payments made after 2010. 

This report's analysis of extenders considers the degrees to which extenders are actually temporary tax provisions and the tax benefits of an extender; the analysis examines efficiency, equity, and simplicity features. 

Some tax extenders, which expired on December 31, 2009, are examined in this report. These extenders include the following tax credits: the tax credit for holders of qualified zone academy bonds, the tax credit for first-time homebuyers in the District of Columbia, the tax credits for research and experimentation expenses, the New Markets Tax Credit, the possession tax credit with respect to American Samoa, and a credit for certain expenditures for maintaining railroad tracks. The extenders include the following deductions: expenses for elementary and secondary school teachers; tuition expenses; corporate charitable contributions of computer technology, food inventory, and books; contributions of capital gain real property made for conservation; and state and local sales taxes. Also depreciation allowances are included for qualified leasehold and restaurant improvements, for property on Indian reservations, and a seven-year recovery period for motor sports entertainment complexes. Other temporary tax provisions include tax incentives for investment in the District of Columbia, an increased "cover over" of tax on distilled spirits from Puerto Rico and the U.S. Virgin Islands, penalty-free withdrawals from individual retirement plans (IRAs) for individuals called to active duty or for charitable giving, and mortgage revenue bonds for veterans.


Date of Report: March 8, 2010
Number of Pages: 25
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Developing Debt-Limit Legislation: The House’s “Gephardt Rule”

Bill Heniff Jr.
Analyst on Congress and the Legislative Process

The amount of money the federal government is allowed to borrow generally is subject to a statutory limit. From time to time, Congress and the President enact legislation to adjust this limit. 

The House may develop debt-limit legislation under House Rule XXVIII, commonly referred to as the Gephardt rule, named after its author, former Representative Richard Gephardt. The rule, which was established by P.L. 96-78 and first applied in calendar year 1980, provides for the automatic engrossment and transmittal to the Senate of a joint resolution changing the public debt limit, upon the adoption by Congress of the budget resolution, thereby avoiding a separate vote in the House on the public debt-limit legislation. The Senate has no comparable procedure; if it chooses to consider a House-passed joint resolution, it does so under the regular legislative process. 

The House also may develop and consider debt-limit legislation without resorting to the Gephardt rule, either as freestanding legislation, as part of another measure, or as part of a budget reconciliation bill. Of the 47 public-debt limit changes enacted into law during the period 1980 to the present (March 18, 2010), 32 were enacted without resorting to the Gephardt rule. 

In 11 of the 30 years since the Gephardt rule was established, the rule did not apply, due to its suspension or repeal by the House (calendar years 1988, 1990-1991, 1994-1997, and 1999-2002). In most cases, the House suspended the rule because legislation changing the statutory limit was not necessary; at the time, the existing public debt limit was expected to be sufficient. 

During the remaining 19 years, when the rule was in effect, the House originated 20 joint resolutions under this procedure; 15 were signed into law. The first seven of these 20 joint resolutions were generated under the Gephardt rule in its original form. The rule was modified in 1983; the current rule is substantively the same as the 1983 form of the rule. The subsequent 13 joint resolutions were generated under this modified language. In three years (calendar years 1998, 2004, and 2006), the House and Senate did not agree to a conference report on the budget resolution and therefore the automatic engrossment process under the Gephardt rule was not used. 

The Senate passed 16 of the 20 joint resolutions automatically engrossed pursuant to the Gephardt rule, passing 10 without amendment and six with amendments. Only one of these 16 joint resolutions was not signed into law. Of the remaining four joint resolutions, the Senate began consideration on one but came to no resolution on it, and took no action on three.


Date of Report: March 18, 2010
Number of Pages: 12
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Small Business Expensing Allowance: Current Status, Legislative Proposals, and Economic Effects

Gary Guenther
Analyst in Public Finance

Under Section 179 of the Internal Revenue Code (IRC), a business taxpayer is allowed to expense (or deduct as a current expense rather than a capital expense) up to $134,00 of the total cost of new and used qualified depreciable assets bought and placed in service in 2010, within certain limits. A more generous allowance ($250,000) was available in 2008 and 2009, as a countercyclical measure. Assuming no change in current law, the maximum allowance is set to drop to $25,000 in 2011 and thereafter, with no adjustment for inflation. The allowance begins to phase out, dollar for dollar, when a taxpayer's total spending on qualified assets surpasses $530,000 in 2010—which means that it may expense no amount when spending exceeds $664,000. This phaseout threshold, which was set at $800,000 in 2008 and 2009, is scheduled to fall to $200,000 in 2011 and thereafter, also with no adjustment for inflation. 

Firms unable to take advantage of the Section 179 expensing option may recover the cost of acquiring qualified assets over a longer period, using the appropriate depreciation schedules. While the expensing allowance is not targeted at firms that are relatively small in employment, asset, or receipt size, the rules governing its use confine most of its benefits to such firms. 

This report focuses on the current status, legislative history, and economic effects of what might be called the small business expensing allowance. It also discusses legislation being considered in the second session of the 111th Congress to modify the allowance.

There was bipartisan support in recent Congresses for enhancing the expensing allowance, and backing for the allowance has shown no sign of waning in the current Congress. Several bills to extend the current enhanced allowance were introduced before the passage of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). ARRA extended through 2009 an enhancement of the allowance first enacted in 2008. Congress is now considering whether to extend that version or to make it more generous. On February 24, 2010, the Senate passed an amended version of H.R. 2847 (S.Amdt. 3310) that includes an extension of the 2009 allowance through 2010; a version of the Senate-passed bill approved by the House on March 4 included the same provision. President Obama has expressed support for such an extension. 

The Section 179 allowance appears to have a minor effect on the composition and allocation of business investment, the distribution of the federal tax burden among income groups, and the cost of tax compliance for smaller firms. These effects correspond to three traditional criteria for evaluating tax policy: efficiency, equity, and simplicity. On the one hand, the allowance has the potential to spur increased small business investment by reducing the user cost of capital and increasing the cash flow of firms that use qualified assets. On the other hand, it can harm economic welfare by discouraging a greater flow of capital into more productive investments. At the same time, the allowance appears to have no measurable impact on the distribution of the federal tax burden among income groups, but it simplifies tax accounting for firms claiming it. 

There are several reasons why it can be argued that the allowance has limited usefulness as a tool for economic stimulus. Business expectations about the duration of a temporary enhancement of the allowance can lessen its incentive effect. The design of the allowance limits its potential to affect economic activity. And a temporary increase in the allowance is likely to impart a greater stimulus to small business investment when it is least needed—during an economic expansion— than during a recession when it is most needed.


Date of Report: March 8, 2010
Number of Pages: 17
Order Number: RL31852
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Energy Tax Policy: Issues in the 111th Congress

Donald J. Marples
Specialist in Public Finance

Molly F. Sherlock
Analyst in Economics

Energy tax policy involves the use of one of the government's main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or even macroeconomic) objective. In practice, however, energy tax policy in the United States is made in a political setting, being determined by the views and interests of the key players in this setting: politicians, special interest groups, bureaucrats, academic scholars, and fiscal dictates. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions.

The economic rationale for government intervention in energy markets is commonly based on the government's perceived ability to correct for market failures. Market failures, such as externalities, principal-agent problems, and informational asymmetries, result in an economically inefficient allocation of resources—in which society does not maximize well-being. To correct for these market failures governments can utilize several policy options, including taxes and regulation, in an effort to achieve policy goals.

Current energy policy reflects efforts to achieve both current and past policy objectives. Recent legislative efforts have primarily focused on renewable energy production and conservation to address environmental concerns. In contrast, past efforts attempted to reduce reliance on foreign energy sources through increased domestic production of fossil fuels. Recently enacted legislation focusing on encouraging renewable energy production and conservation reduces reliance on imported, foreign oil, while also addressing environmental concerns by reducing the use of fossil fuels. Favorable tax preferences given to domestic fossil fuel energy sources also promote domestic energy production, reducing the demand for imported oil.

In the 111th Congress energy tax legislation continues to be focused on increasing incentives for renewable energy production and conservation. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) expanded and extended a number of tax incentives designed to promote renewable energy, conservation, and alternative technology vehicles. In addition, the President's 2010 and 2011 Budget Proposals contain a number of provisions that would, if enacted, continue to move energy policy toward promoting alternative energy sources by eliminating a number of the tax subsidies currently available to the oil and gas industry while also imposing additional taxes that would be borne—at least partially—by these industries. The President's 2011 Budget Proposal continued this policy direction through the proposed removal of a number of subsidies currently available to the coal industry.


Date of Report: March 8, 2010
Number of Pages: 29
Order Number: R40999
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Qualified Charitable Distributions from Individual Retirement Accounts: A Fact Sheet

John J. Topoleski
Analyst in Income Security

A provision of the Pension Protection Act of 2006 (P.L. 109-280) allows tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes. This fact sheet describes the IRA Qualified Charitable Distribution (QCD) provision. The provision had expired on December 31, 2007; it was extended until December 31, 2009, by H.R. 1424/P.L. 110-343, signed by President George W. Bush on October 3, 2008. In the 111th Congress, the following bills would extend the provision beyond December 31, 2009: H.R. 4213, H.R. 2435, H.R. 1250, and S. 864. H.R. 4213, the Tax Extenders Act of 2009, would extend the provision until December 31, 2010. This bill passed the House on December 9, 2009. The Senate passed the bill (with amendments) on March 10, 2010.


Date of Report: March 15, 2010
Number of Pages: 5
Order Number: RS22766
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Fannie Mae’s and Freddie Mac’s Financial Problems

N. Eric Weiss
Specialist in Financial Economics

The conservatorship of Fannie Mae and Freddie Mac raises questions about their impact on the housing and finance markets and their ability to return to financial viability: the federal government has purchased more than $110 billion in the two companies with a request from Fannie Mae to Treasury to purchase an additional $15.3 billion pending. Once this transaction is completed, the Treasury will have purchased $125.9 billion in senior preferred stock. Both companies are required under terms of the federal support to pay the government dividends of $11 billion annually (10% of the support). Housing, mortgage, and even general financial markets continue in an unprecedented situation. 

The Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship after turmoil in the housing, mortgage, and financial markets raised doubts about the future of these enterprises, which are chartered by Congress as government-sponsored enterprises (GSEs) and whose debts are widely believed to be implicitly guaranteed by the federal government. The FHFA replaced the Office of Federal Housing Enterprise Oversight (OFHEO) as the GSEs' safety and soundness regulator. OFHEO repeatedly assured investors that Fannie and Freddie had adequate capital, but as highly leveraged financial intermediaries, Fannie Mae and Freddie Mac had limited capital to cushion them against losses. 

The Treasury agreed to buy mortgage-backed securities (MBSs) from the GSEs and raise funds for them. Initially, each GSE gave Treasury $1 billion in senior preferred stock and warrants to acquire, at nominal cost, 80% of each GSE. Treasury has purchased slightly more than $112.6 billion of preferred stock in the two GSEs, and has agreed to invest whatever is required to maintain GSE solvency through calendar year 2012. Now the formerly implicit guarantee is nearly explicit. 

In addition to Treasury's purchases of senior preferred stock, the Federal Reserve (Fed) has purchased GSE bonds and MBSs. According to a March 4, 2010, FHFA report, together the Fed and Treasury have purchased $1,323.4 billion in MBSs.


Date of Report: March 10, 2010
Number of Pages: 23
Order Number: Rl34661
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Limiting Central Government Budget Deficits: International Experiences

James K. Jackson
Specialist in International Trade and Finance

The global financial crisis and economic recession spurred national governments to boost fiscal expenditures to stimulate economic growth and to provide capital injections to support their financial sectors. Government measures included asset purchases, direct lending through national treasuries, and government-backed guarantees for financial sector liabilities. The severity and global nature of the economic recession raised the rate of unemployment, increased the cost of stabilizing the financial sector, and limited the number of policy options that were available to national leaders. In turn, the financial crisis negatively affected economic output and contributed to the severity of the economic recession. As a result, the surge in fiscal spending, combined with a loss of revenue, has caused government deficit spending to rise sharply when measured as a share of gross domestic product (GDP) and increased the overall level of public debt. Recent forecasts indicate that should the current economic rebound take hold, budget deficits on the whole likely will stabilize, but are not expected to fall appreciably for some time. 

The sharp rise in deficit spending is prompting policymakers to assess various strategies for winding down their stimulus measures and to curtail capital injections without disrupting the nascent economic recovery. This report focuses on how major developed and emerging-market country governments, particularly the G-20 and Organization for Economic Cooperation and Development (OECD) countries, limit their fiscal deficits. Financial markets support government efforts to reduce deficit spending, because they are concerned over the long-term impact of the budget deficits. At the same time, they are concerned that the loss of spending will slow down the economic recovery and they doubt the conviction of some governments to impose austere budgets in the face of public opposition. Some central governments are examining such measures as budget rules, or fiscal consolidation, as a way to trim spending and reduce the overall size of their central government debt. Budget rules can be applied in a number of ways, including limiting central government budget deficits to a determined percentage of GDP. To the extent that fiscal consolidation lowers the market rate of interest, such efforts could improve a government's budget position by lowering borrowing costs and stimulating economic growth. Other strategies include authorizing independent public institutions to spearhead fiscal consolidation efforts and developing medium-term budgetary frameworks for fiscal planning. Fiscal consolidation efforts, however, generally require policymakers to weigh the effects of various policy trade-offs, including the trade-off between adopting stringent, but enforceable, rules-based programs, compared with more flexible, but less effective, principles-based programs that offer policymakers some discretion in applying punitive measures.


Date of Report: March 11, 2010
Number of Pages: 20
Order Number: R41122
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The OECD Initiative on Tax Havens

James K. Jackson
Specialist in International Trade and Finance

Since the 1990s, the Organization for Economic Cooperation and Development (OECD) has pursued the issues of bribery and tax havens, resulting in changes to certain U.S. laws. In addition, the OECD, under the direction of its member countries, spearheaded an international agreement to outlaw crimes of bribery, and it continues to coordinate efforts aimed at reducing the occurrence of money laundering, corruption, and tax havens. Also, the OECD is a pivotal player in promoting corporate codes of conduct that attempt to develop a set of standards for multinational firms that can be applied across national borders. On May 4, 2009, President Obama outlined his Administration's policy to "crack down on illegal tax evasion" and to close loopholes. In the 111th Congress, companion legislation was introduced in the House (H.R. 1265) and the Senate (S. 506) to restrict the use of tax havens. Some estimates indicate that tax havens cost the United States $100 billion each year in lost tax revenues (The Christian Science Monitor, Tax Havens in U.S. Cross Hairs, by David R. Francis, June 9, 2008).


Date of Report: March 11, 2010
Number of Pages: 18
Order Number: R40114
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Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal

James K. Jackson
Specialist in International Trade and Finance

This report provides an overview of the role foreign investment plays in the U.S. economy and an assessment of possible actions a foreign investor or a group of foreign investors might choose to take to liquidate their investments in the United States. Concerns over the potential impact of disinvestment have grown as national governments have become more active investors in the U.S. economy and as innovation in creating financial instruments has increased volatility in financial markets. Such concerns seem out of step with the experience of the 2008-2009 financial crisis, during which the dollar became the preferred safe haven investment for foreign investors. If some foreign investors were to liquidate their holdings, these actions could affect the U.S. economy in a number of ways due to the role foreign investment plays in the United States and due to the current mix of economic policies the United States has chosen. The impact of any such action on the economy would also depend on the overall condition and performance of the economy and the financial markets. If the economy were experiencing a strong rate of economic growth, the impact of a foreign withdrawal likely would be minimal, especially given the dynamic nature of credit markets. If a withdrawal occurred when the economy were not experiencing a robust rate of growth or if credit financial markets were under duress, the withdrawal could have a stronger effect on the economy. 

The particular course of action foreign investors might choose to take and the overall strength and performance of the economy at the time of their actions could affect the economy in different ways. Congress likely would become involved as a result of its direct role in making economic policy and its oversight role over the Federal Reserve. In addition, the actions of foreign investors could complicate domestic economic policymaking. Foreign investors who decide to liquidate their holdings of one particular type of investment would normally need to look for other types of assets to acquire. While there are a multitude of possible strategies foreign investors could pursue, this analysis assesses the impact of four of the most likely strategies a single large foreign investor or a group of foreign investors could choose to employ to reduce or withdraw entirely their holdings of U.S. financial assets: 

• A rapid liquidation of U.S. Treasury securities. 

• A shift in the make-up of foreign investors' portfolios among various dollardenominated assets. 

• A rapid shift from dollar-denominated assets to assets denominated in other currencies. 

• A slow shift in the make-up of future accumulations of assets away from dollardenominated assets to assets denominated in currencies other than the dollar.


Date of Report: March 9, 2010
Number of Pages: 18
Order Number: RL34319
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Running Deficits: Positives and Pitfalls

D. Andrew Austin
Analyst in Economic Policy

Governments run deficits for several reasons. By running short-run deficits, governments can avoid raising taxes during economic downturns, which helps households smooth consumption over time. Running deficits can stimulate aggregate demand in the economy, thus giving policymakers a valuable fiscal policy tool to help support macroeconomic stability. In particular, short-run deficits may help boost economic activity when monetary policy loses its potency. When interest rates fall to low levels during an economic downturn, banks can become reluctant to lend when they perceive the risks of lending outweigh the gains, while fewer firms and consumers demand new loans. In such a situation, known as a liquidity trap, a monetary authority such as the Federal Reserve can do little to expand the money supply. Thus, while the monetary authority can cut short-term interest rates to nearly zero—or even to zero—lower interest rates or other monetary policy initiatives may do little to encourage new consumer spending or business investment. During a liquidity trap situation, fiscal policy tools such as increased government spending or tax cuts, which increase deficits, may be an important complement to monetary policy. So-called "fresh-water" economists have questioned the logic of these fiscal policies. Socalled "salt-water" economists, who have sought to put Keynesian fiscal theories on a more modern foundation, contend that government interventions can mitigate economic downturns. Most professional economic forecasters find that deficits and fiscal policy measures can stimulate economic activity when the economy operates well below its potential. 

In better economic times, deficits may crowd out private investment or worsen trade deficits. But long-run deficits may transfer economic resources from younger to older generations, allowing older generations to enjoy anticipated benefits of future economic growth—long-run deficits may also impose large burdens on future generations. Some have argued this allows politicians to act opportunistically by providing benefits to current constituents while leaving future generations, an unrepresented constituency, with substantial fiscal burdens. 

Between 2007 and 2009, federal tax revenues fell by 18.0% and corporate tax revenues fell 62.7%. Government outlays rose during the recession due to "automatic stabilizer" programs such as unemployment insurance and income support programs; federal support provided to Fannie Mae, Freddie Mac, AIG, and other companies; and economic stimulus legislation such as the American Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1, P.L. 111-5). 

Anticipation of changes in partisan control of government can motivate deficits, as current policy makers may wish to restrict their successors' options. Research on state and foreign governments suggests that balanced-budget rules force governments to adjust spending and taxes sharply during economic downturns. Budget enforcement legislation, such as the 1990 Budget Enforcement Act (P.L. 101-508), may have helped preserve budgetary compromises between parties, which may have contributed to a reduction in federal deficits. 

Deficits can seriously harm national economies. In the short run, fiscal overstimulation leads to inflation. In the long term, deficits either reduce capital investment, which retards economic growth, or increase foreign borrowing, which swells the share of national income going abroad. Governments can spend more than they collect in revenues by printing money, which causes inflation, or by borrowing. In the long run, governments risk default and bankruptcy if they fail to repay borrowers, at least to the extent of stabilizing the ratio of government debt to gross domestic product.


Date of Report: March 10, 2010
Number of Pages: 21
Order Number: RL33657
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Trade Agreements: Impact on the U.S. Economy

James K. Jackson
Specialist in International Trade and Finance

The United States is in the process of considering a number of trade agreements, including the recently announced Trans-Pacific Partnership Trade Agreement (TPP). The Congress also may address the issue of trade promotion authority (TPA), which expired on July 1, 2007. The various trade agreements range from bilateral trade agreements with countries that account for meager shares of U.S. trade to multilateral negotiations that could affect large numbers of U.S. workers and businesses. During this process, Congress likely will be presented with an array of data estimating the impact of trade agreements on the economy, or on a particular segment of the economy. 

An important policy tool that can assist Congress in assessing the value and the impact of trade agreements is represented by sophisticated models of the economy that are capable of simulating changes in economic conditions. These models are particularly helpful in estimating the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimation. Barriers to trade in services, however, are proving to be more difficult to identify and, therefore, to quantify in an economic model. In addition, the models are highly sensitive to the assumptions that are used to establish the parameters of the model and they are hampered by a serious lack of comprehensive data in the services sector. Nevertheless, the models do provide insight into the magnitude of the economic effects that may occur across economic sectors as a result of trade liberalization. These insights are especially helpful in identifying sectors expected to experience the greatest adjustment costs and, therefore, where opposition to trade agreements is likely to occur. 

This report examines the major features of economic models being used to estimate the effects of trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition, this report identifies and assesses some of the assumptions used in the economic models and how these assumptions affect the data generated by the models. Finally, this report evaluates the implications for Congress of various options it may consider as it assesses trade agreements.


Date of Report: March 11, 2010
Number of Pages: 26
Order Number: RL31932
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Bisphenol A (BPA) in Plastics and Possible Human Health Effects

Linda-Jo Schierow
Specialist in Environmental Policy

Sarah A. Lister
Specialist in Public Health and Epidemiology

Bisphenol A (BPA) is used to produce certain types of plastic. Containers made of these plastics may expose people to small amounts of BPA in food and water. Some animal experiments have found that fetal and infant development may be harmed by small amounts of BPA, but scientists disagree about the value of the animal studies for predicting harmful effects in people. 

In the United States and elsewhere, scientific disagreement about the possibility of human health effects that may result from BPA exposure has led to conflicting regulatory decisions regarding the safety of food containers, especially those intended for use by infants and children. In the United States, a conclusion of safety by the Food and Drug Administration (FDA) conflicted with earlier findings by one panel of scientific advisors, and was later challenged by a second panel. These events prompted some to question FDA's process for the assessment of health risks such as this, and others to question the agency's fundamental ability to conduct such assessments competently. Recently, FDA expressed concern about possible health effects from BPA exposure and announced that it was conducting new studies on the matter, pending possible changes in its regulatory approach. 

In the 111th Congress, companion bills (S. 593/H.R. 1523) have been introduced that would prohibit the use of BPA in food and beverage containers regulated by the FDA. A different approach to BPA regulation would be taken by a second pair of bills (S. 753/H.R. 4456) that would require Consumer Product Safety Commission (CPSC) prohibition of BPA use in children's food and beverage containers under the Federal Hazardous Substances Act. The House acted July 30, 2009, on a third approach when it approved H.R. 2749, the Food Safety Enhancement Act of 2009. Section 215 of the bill would require FDA to determine whether there was "a reasonable certainty of no harm for infants, young children, pregnant women, and adults, for approved uses of polycarbonate plastic and epoxy resin made with bisphenol A in food and beverage containers ... under the conditions of use prescribed in current [FDA] regulations." FDA would be required to notify Congress about any uses of BPA for which a determination could not be made and how the agency was planning to regulate to protect the public health. Finally, a fourth bill, H.R. 4341, would require a warning label on any food container containing BPA.


Date of Report: March 11, 2010
Number of Pages: 12
Order Number: RS22869
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