Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues

Kathleen S. Swendiman
Legislative Attorney

Thomas J. Nicola
Legislative Attorney

Calculations indicating that in the long run the Social Security program will not be financially sustainable under the present statutory scheme have fueled the current debate regarding Social Security reform. This report addresses selected legal issues which may be raised regarding entitlement to Social Security benefits as Congress considers possible changes to the Social Security program, and in view of projected long-range shortfalls in the Social Security Trust Funds. 

Social Security is a statutory entitlement program. Beneficiaries have a legal entitlement to receive Social Security benefits as set forth under the Social Security Act. The fact that Social Security benefits are financed by taxes on an employee's wages, however, does not limit Congress's power to fix the levels of benefits under the Social Security Act, or the conditions upon which they may be paid. Congress's authority to modify provisions of the Social Security program was affirmed in the 1960 Supreme Court decision in Flemming v. Nestor, wherein the Court held that an individual does not have an accrued "property right" in his or her Social Security benefits. The Court has made clear in subsequent court decisions that the payment of Social Security taxes conveys no contractual rights to Social Security benefits. 

Congress has the power to legislatively promise to pay individuals a certain level of Social Security benefits, and to provide legal evidence of Congress's "guarantee" of the obligation of the federal government to provide for the payment of such benefits in the future. While Congress may decide to take whatever measures necessary to fulfill such an obligation, courts would be unlikely to find that Congress's unilateral promise constitutes a contract which could not be modified in the future. In addition, a congressional promise not to reduce a specific level of Social Security benefits payable to certain eligible individuals would likely not overcome the constitutional principle, subject to due process considerations, that one Congress may not bind a subsequent Congress to legislative action or inaction. 

The calculations concerning the possible future insolvency of the Social Security Trust Funds raise a question whether that result would affect the legal right of beneficiaries to receive full Social Security benefits. While an entitlement by definition legally obligates the United States to make payments to any person who meets the eligibility requirements established in the statute that creates the entitlement, a provision of the Antideficiency Act prevents an agency from paying more in benefits than the amount available in the source of funds available to pay the benefits. The Social Security Act states that Social Security benefits shall be paid only from the Social Security Trust Funds, and the act appropriates all payroll taxes to pay benefits. Although the legal right of beneficiaries to receive full benefits would not be extinguished by an insufficient amount of funds in the Social Security Trust Funds, it appears that beneficiaries would have to wait until the Trust Funds receive an amount sufficient to pay full benefits in the case of a shortfall, unless Congress amends applicable laws.


Date of Report: August 11, 2010
Number of Pages: 15
Order Number: RL32822
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Unemployment Insurance: Available Unemployment Benefits and Legislative Activity

Katelin P. Isaacs
Analyst in Income Security

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. Unemployment benefits may be extended for up to 53 weeks by the temporarily authorized Emergency Unemployment Compensation (EUC08) program and extended for up to a further 13 or 20 weeks by the permanent Extended Benefit (EB) program under certain state economic conditions. 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 authorization for the EUC08 program expires on November 30, 2010. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before November 27, 2010, 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 November 27, 2010. See the section in this report on "Policy Proposals that Target Unemployment Benefit Exhaustees" for additional measures to address the needs of the long-term unemployed. 

The American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, contained several provisions affecting unemployment benefits. ARRA temporarily increased benefits by $25 per week (Federal Additional Compensation, or FAC); extended the EUC08 program through 2009; temporarily provided for 100% federal financing of EB; and allowed states the option of temporarily easing EB eligibility requirements. ARRA also suspended income taxation on the first $2,400 of unemployment benefits received in 2009. In addition, states do 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 as well as transferred $500 million to the states for administering unemployment programs. P.L. 111-92 expanded the number of weeks available in the EUC08 program through the creation of two additional tiers. P.L. 111-118 and P.L. 111-144 extended the EUC08 program, 100% federal financing of EB, and the FAC through the end of February 2010 and April 5, 2010, respectively. P.L. 111-157 extended these three UC provisions through the week ending on or before June 2, 2010. 

On July 22, 2010, the President signed P.L. 111-205, the Unemployment Compensation Extension Act of 2010, into law. P.L. 111-205 extends the availability of EUC08 and 100% federal financing of EB until November 30, 2010. P.L. 111-205 does not, however, extend the authorization for the $25 FAC benefit, which expired on May 29, 2010 (May 30, 2010, in New York state).


Date of Report: August 9, 2010
Number of Pages: 37
Order Number: RL33362
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China’s Currency: An Analysis of the Economic Issues

Wayne M. Morrison
Specialist in Asian Trade and Finance

Marc Labonte
Specialist in Macroeconomic Policy

Over the past several years, the Chinese government has maintained a policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB) against other major currencies, especially the U.S. dollar. This policy appears to be largely intended to keep China's export industries competitive internationally and to attract foreign direct investment (FDI), which have been major factors behind China's rapid economic growth. Critics charge that this policy constitutes a form of currency manipulation that is intended to make Chinese exports cheaper, and imports into China more expensive, than they would be under a floating exchange system. Some claim that China's currency policy is a major cause of the large U.S. trade imbalance with China and the loss of numerous U.S. jobs. Many Members of Congress have urged the Obama Administration to designate China as a "currency manipulator" in order to pressure it to let the RMB appreciate, and several bills have been introduced (including H.R. 2378, S. 1254, S. 1027, and S. 3134) which seek to address China's currency policy. 

The current global economic crisis has further complicated the currency issue for both China and its trading partners. From July 2005 to July 2008, the RMB was allowed to gradually appreciate against the dollar, rising by about 21% over this period. However, once the effects of the global economic crisis began to become apparent, China halted appreciation of the RMB to the dollar in an effort to limit job losses in industries dependent on trade. From July 2008 to late June 2010, China kept the exchange rate of the RMB at roughly 6.83 yuan (the base unit of the RMB) to the dollar. On June 19, 2010, the Chinese central bank stated that, based on current economic conditions, it had decided to "proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility." Events following the announcement demonstrate that a flexible RMB exchange rate could move both up and down over short periods of time. On June 22, the RMB appreciated by 0.43% against the dollar to 6.80 yuan over the previous day, the largest daily rise since reforms were implement in 2005, but it depreciated to 6.81 the next day. 

Many economists have argued that RMB appreciation is an important factor in helping to rebalance the world economy. They have also urged China to implement policies to make consumer demand, rather than exports and fixed investment, the main sources of economic growth. Some see RMB appreciation as a way of boosting China's imports, which could contribute to a faster global economic recovery. While Chinese officials acknowledge the need to rebalance the economy, they have strongly resisted international pressure to appreciate and reform the currency, calling it "protectionism." Some attribute this policy to concerns by the Chinese government that implementing policy changes too rapidly could lead to social instability. 

The U.S. federal budget deficit has increased rapidly since FY2008, causing a sharp increase in the amount of Treasury securities that must be sold. While the Obama Administration has pushed China to appreciate its currency, it has also encouraged it to continue purchasing U.S. Treasury securities. China is the largest foreign holder of U.S. Treasury securities, which totaled $900 billion as of April 2010. Some analysts contend that, although an appreciation of China's currency could help boost U.S. exports to China, it could also lessen China's need to buy U.S. Treasury securities, which could push up U.S. interest rates. It could result in higher prices of Chinese made goods for U.S. consumers, as well as for Chinese-made inputs that U.S. firms use in their production. Many economists contend that, even if China significantly appreciated its currency, the United States would still need to increase its savings and reduce domestic demand (particularly the budget deficit), and China would have to lower its savings and increase consumption, in order to reduce trade imbalances in the long run.


Date of Report: August 18, 2010
Number of Pages: 37
Order Number: RS21625
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Small Business Administration HUBZone Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers several programs to support small businesses, including the Historically Underutilized Business Zone Empowerment Contracting (HUBZone) program. The HUBZone program is a small business federal contracting assistance program "whose primary objective is job creation and increasing capital investment in distressed communities." It provides participating small businesses located in areas with low income, high poverty rates, or high unemployment rates with contracting opportunities in the form of "setasides," sole-source awards, and price-evaluation preferences. 

In FY2009, the federal government awarded contracts valued at $13.1 billion to HUBZone certified businesses, with $3.4 billion of that amount awarded through the HUBZone program. The program's total administrative cost is an estimated $11.7 million. In FY2010, it received an appropriation of $2.2 million, with the additional cost of administering the program provided by the SBA's appropriation for general administrative expenses. 

Congressional interest in the HUBZone program has increased in recent years, primarily due to U.S. Government Accountability Office reports of fraud in the program. Some Members have called for the program's termination. Others have recommended that the SBA continue its efforts to improve its administration of the program, especially its efforts to prevent fraud. 

This report examines the arguments presented both for and against targeting assistance to geographic areas with specified characteristics, such as low income, high poverty, or high unemployment, as opposed to providing assistance to people or businesses with specified characteristics. It then assesses the arguments presented both for and against the creation and continuation of the HUBZone program, starting with the arguments presented during consideration of P.L. 105-135, the HUBZone Act of 1997 (Title VI of the Small Business Reauthorization Act of 1997), which authorized the program. 

The report also discusses the HUBZone program's structure and operation, focusing on the definitions of HUBZone areas and HUBZone small businesses and the program's performance relative to federal contracting goals. The report concludes with an analysis of the (1) SBA's administration of the program, (2) SBA's performance measures, (3) potential consequences of a recent U.S. Court of Federal Claims ruling that federal contract set-asides for HUBZone small businesses have precedence over those for the SBA's 8(a) program small businesses when two or more federal contract set-aside programs could potentially be used, and (4) potential effect of the 2010 decennial census on which areas qualify as a HUBZone. 

Several bills are also discussed, including S. 3020, the HUBZone Improvement Act of 2010, which would require the SBA to implement several GAO recommendations designed to improve the SBA's administration of the program and extend for three years HUBZone eligibility for firms that lose their HUBZone eligibility due to the release of 2010 decennial census economic data. Also, S. 3190, the Small Business Programs Parity Act of 2010; S. 1489, the Small Business Contracting Programs Parity Act of 2009; H.R. 3729, a bill to amend Section 31 of the Small Business Act, and S.Amdt. 4594, an amendment in the nature of a substitute for H.R. 5297, the Small Business Jobs and Credit Act of 2010, are examined. They would amend the Small Business Act to create parity for the HUBZone program and other small business contracting programs.


Date of Report: August 11, 2010
Number of Pages: 31
Order Number: R41268
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Small Business Management and Technical Assistance Training Programs

Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in Economic Development Policy

The Small Business Administration (SBA) has provided "technical and managerial aides to smallbusiness concerns, by advising and counseling on matters in connection with Government procurement and on policies, principles and practices of good management" since it began operations in 1953. Initially, the SBA provided its own small business management and technical assistance training programs. However, over time, the SBA has relied increasingly on third parties to provide that training. 

The SBA's FY2010 budget for management and technical assistance training for small business owners is $181.1 million. The SBA expects more than one million aspiring entrepreneurs and small business owners to receive training from an SBA-supported resource partner in FY2010. 

The SBA has argued that these programs have contributed "to the long-term success of these businesses and their ability to grow and create jobs." It currently provides funding to about "14,000 resource partners including about 900 small business development centers, more than 100 women's business centers and more than 350 chapters of the mentoring program, SCORE." 

The Department of Commerce also provides management and technical assistance training for small businesses. For example, its Minority Business Development Agency provides training to minority business owners to assist them in becoming suppliers to private corporations and the federal government. 

For many years, a recurring theme at congressional hearings concerning the SBA's management and technical assistance training programs has been the perceived need to improve program efficiency by eliminating duplication of services and increasing cooperation and coordination both within and among SCORE, women's business centers, and small business development centers. Congress has also explored ways to improve the SBA's measurement of the programs' effectiveness and to address the impact of national economic conditions on women's business center and small business development center finances and their capacity to meet federal matching requirements and to maintain client service levels. 

This report examines the historical development of federal small business management and technical assistance training programs; describes their current structures, operations, and budgets; and assesses their administration and oversight, the measures used to determine their effectiveness, and women's business center and small business development center finances and their capacity to meet federal matching requirements and to maintain client service levels. 

This report also examines provisions in S.Amdt. 4594, an amendment in the nature of a substitute for H.R. 5297, the Small Business Jobs and Credit Act of 2010, which was introduced on August 5, 2010, and H.R. 2352, the Job Creation Through Entrepreneurship Act of 2009, which has passed the House. They would authorize several changes to the SBA's administration and oversight of its management and technical assistance training programs, the measures used to access the programs' effectiveness, and funding for women business centers and small business development centers.


Date of Report: August 11, 2010
Number of Pages: 33
Order Number: R41352
Price: $29.95

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Major Tax Issues in the 111th Congress

James M. Bickley, Coordinator
Specialist in Public Finance

The major focus of congressional tax deliberations in early 2009 was on an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5; ARRA), which was enacted with a projected cost of $787 billion over the next few years, with about 40% of the cost reflecting tax cuts. The new law included a number of individual income tax provisions targeted at lower and middle income families. Business provisions included accelerated depreciation, net operating loss carrybacks for small businesses, deferral of tax on the discharge of indebtedness, and energy provisions. 

Other tax-related activity included the President's the FY2010 budget request, proposed tax changes estimated to cost $2.8 trillion over the next 10 years. Most of the revenue losses would arise from making most of the 2001-2003 tax cuts permanent (with the exception of certain provisions affecting high-income individuals) and extending or making permanent other expiring provisions including the alternative minimum tax (AMT) revision in ARRA. In 2009, the budget resolutions in the House and Senate (H.Con.Res. 85, S.Con.Res. 13) provided for many of the tax proposals included in the Obama Administration's budget outline. 

The extension and expansion of the first-time home buyer tax credit and net operating losses, were included in the Worker, Homeownership, and Business Act (H.R. 3548, P.L. 111-92), which was signed into law on November 6, 2009. 

Health care reform was the subject of widespread debate in 2009. In the second session of the 111th Congress, the Patient Protections and Affordable Care Act (P.L. 111-148) was signed into law on March 23, 2010. The Joint Committee on Taxation estimated that this law included revenue provisions that would raise a total of $409.2 billion in the period 2010-2019. Over onehalf of this additional revenue ($210.2 billion) would result from a broadened Medicare hospital insurance tax base for high-income taxpayers—an additional FICA-HI (hospital insurance) tax of 0.9% on earned income in excess of $200,000 [single taxpayer]/$250,000 [married taxpayers] (unindexed), and an unearned income Medicare contribution on 3.8% on investment income for taxpayers with adjusted gross income (AGI) in excess of $200,000/$250,000 (unindexed). 

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847) became P.L. 111-147. Title I, "Incentives for Hiring and Retaining Unemployed Workers," included two new tax benefits available to employers hiring workers who were previously unemployed or only working part time. 

In the 111th Congress, provision for the extension of certain expiring provisions has been debated. On December 9, 2009, the House passed H.R. 4213, the Tax Extenders Act of 2009. The Joint Committee on Taxation (JCT) estimated that this bill included tax extenders that would cost $31.164 billion over 10 years. On March 10, 2010, the Senate passed an amended H.R. 4213, the American Workers, State, and Business Relief Act of 2010. On May 28, 2010, the House passed a revised H.R. 4213 titled the American Jobs and Closing Tax Loopholes Act. Congress is expected to resume its consideration of tax extenders legislation in September 2010. 

This report includes contributions from James M. Bickley, Craig K. Elwell, Jane G. Gravelle, Thomas L. Hungerford, Mark P. Keightley, Mindy R. Levit, Megan Suzanne Lynch, Steven Maguire, Nonna A. Noto, and Christine Scott. It will be updated as legislative and economic events occur.


Date of Report: August 6, 2010
Number of Pages: 40
Order Number: R40004
Price: $29.95

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Temporary Extension of Unemployment Benefits: Emergency Unemployment Compensation (EUC08)

Katelin P. Isaacs
Analyst in Income Security

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, P.L. 111-144, P.L. 111-157, and P.L. 111-205. The most recent legislation, P.L. 111-205, extended the authorization of the EUC08 program, but did not change the structure of the program or augment benefits. 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 up to 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 up to 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 six weeks of EUC08 benefits (for a total of up to 53 weeks of EUC08 benefits in certain states). 

All tiers of EUC08 benefits are temporary and expire on the week ending on or before November 30, 2010. Those beneficiaries receiving tier I, II, III, or IV of EUC08 benefits before November 27, 2010 (November 28, 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 November 27, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 benefit tier after November 27, 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 April 30, 2011. 

P.L. 111-92 expanded benefits available in the EUC08 program, creating two new tiers of benefits (bringing total benefit tiers to four) and adding 20 weeks of EUC08 benefits (for a total of up to 53 benefit weeks). P.L. 111-118 extended the EUC08 program, the 100% federal financing of the Extended Benefit (EB) program, and the $25 Federal Additional Compensation (FAC) weekly benefit through February 28, 2010. P.L. 111-144 and P.L. 111-157 extended these same three measures until April 5, 2010, and June 2, 2010, respectively. 

On July 22, 2010, the President signed P.L. 111-205, the Unemployment Compensation Extension Act of 2010, into law. P.L. 111-205 extends the availability of EUC08 and 100% federal financing of EB until November 30, 2010. P.L. 111-205 did not, however, extend the authorization for the $25 FAC benefit, which expired on May 29, 2010 (May 30, 2010 for New York). 

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. The U.S. Department of Labor maintains a website with links to each state's agency at http://www.workforcesecurity.doleta.gov/map.asp.


Date of Report: August 9, 2010
Number of Pages: 18
Order Number: RS22915
Price: $29.95

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Worker Safety in the Construction Industry: The Crane and Derrick Standard

Linda Levine
Specialist in Labor Economics

The safety of construction workers who toil in close proximity to cranes garnered congressional attention after tower cranes were involved in multiple fatalities at buildings under construction in 2008 (e.g., nine deaths in two incidents in New York City). Additional crane-related fatalities have occurred since the House Education and Labor Committee held a hearing on construction worker safety in June 2008. 

Construction has historically been the most hazardous industry as measured by number of fatalities. Most construction fatalities involving cranes have been caused by contact with objects and equipment (e.g., struck by a falling object being transported by a crane, contact with power lines). An analysis of the Occupational Safety and Health Administration's (OSHA) files of construction fatalities involving cranes most frequently found violations of the following federal construction safety standard: 29 CFR 1926 Subpart N—Cranes, Derricks, Hoists, Elevators and Escalators. 

OSHA's crane and derrick standard had been virtually unchanged since its promulgation in 1971. In a July 2002 notice of intent to create a negotiated rulemaking committee, OSHA acknowledged that industry consensus standards had been updated and crane technology had changed considerably over three decades. The Crane and Derrick Negotiated Rulemaking Advisory Committee (C-DAC) voted favorably on an extensive revision to the standard and submitted draft regulatory language to OSHA in July 2004. After proceeding through the rulemaking process for four years, OSHA submitted a draft proposed rule for review to the Office of Management and Budget (OMB). OMB completed its review on August 28, 2008. The proposed rule that was published in October 2008 largely reflected C-DAC's recommendations (e.g., certification of crane operators). The public comment period ended in January 2009. A public hearing was held in March 2009. The period for post-hearing submissions and briefs closed in June 2009. 

Although most of the 21 states that operate their own safety and health programs for private sector workers have adopted OSHA's standards, some have established more stringent regulations for specific hazards in certain industries (e.g., certification of crane operators). Similarly, some non-state-plan states and localities have adopted crane regulations in their building codes to protect the safety and property of their residents. Because this raised questions about the Occupational Safety and Health Act's preemption of the laws in localities other than state-plan states, the final rule differs from the proposed rule by making clear they are not preempted. 

Most of the final rule will go into effect in November 2010, 90 days after its publication on August 9. The rule's requirement that crane operators be qualified or certified generally is delayed for four years because there currently are a limited number of training facilities accredited by OSHA. However, the requirement is not delayed in those states and localities that already have operator licensing requirements that meet the rule's minimum criteria. Another difference between the proposed and final rule is a requirement that towers be inspected before they are moved to a site and erected. And, as a result of the frequency with which construction workers have been injured or killed when cranes come into contact with power lines, the final rule requires work to be performed in accordance with the power transmission and distribution standard.



Date of Report: August 5, 2010
Number of Pages: 14
Order Number: RL34658
Price: $29.95

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Federal Deductibility of State and Local Taxes

Steven Maguire
Specialist in Public Finance

Under current law, taxpayers who itemize can deduct state and local real estate taxes, personal property taxes, and income taxes from federal income when calculating taxable income. In addition, a temporary deduction for sales taxes in lieu of income taxes is available, though it expired December 31, 2009. The federal deduction for state and local taxes results in the federal government paying part of these taxes through lower federal tax collections. Theory would suggest that taxpayers are willing to accept higher state and local tax rates and greater state and local public spending because of lower federal income taxes arising from the deduction. In addition, there is some evidence that state and local governments rely more on these deductible taxes than on nondeductible taxes and fees for services. 

Repealing the deductibility of state and local taxes would affect state and local government fiscal decisions, albeit indirectly. Generally, state and local public spending would decline, although the magnitude of the decline is uncertain. And, repealing the deduction for state and local taxes would shift the federal tax burden away from low-tax states to high-tax states. Maintaining the current deductibility would continue the indirect federal subsidy for state/local spending. 

Expanding deductibility, such as extending the sales tax deduction option or allowing nonitemizers to deduct taxes paid, would likely increase the subsidy for state and local spending. The sales tax deduction option would primarily benefit taxpayers in states without an income tax that are already itemizing. The effect of allowing non-itemizers to deduct taxes paid would depend on the type of deductible tax. For example, property taxes are only paid (directly) by property owners whereas all consumers pay sales taxes in states that levy a sales tax. The 110th Congress expanded the deduction for property taxes paid by allowing non-itemizers to deduct up to $500 ($1,000 for joint filers) of property taxes paid for the 2008 and 2009 tax years. 

In the 111th Congress, P.L. 111-5, the American Recovery and Reinvestment Act, provides for an above-the-line deduction for sales and excise taxes paid on new vehicle purchases for nonitemizers. The FY2010 budget resolution, S.Con.Res. 13, includes a deficit neutral reserve fund for the permanent extension of the general sales tax deduction option. The President's FY2010 proposed budget included an extension of the sales tax deduction option for the 2010 tax year. The President's FY2011 budget does not include an extension of the sales tax deduction option and proposes a limit on the tax rate at which itemized deductions would reduce tax liability. 

On December 9, 2009, the House approved H.R. 4213, the Tax Extenders Act of 2009, which would extend the sales tax deduction option and the property tax deduction for non-itemizers through 2010. A revised H.R. 4213, The American Jobs and Closing Tax Loopholes Act of 2010, would also extend the sales tax deduction option and the property tax deduction for non-itemizers through 2010.


Date of Report: August 2, 2010
Number of Pages: 14
Order Number: RL32781
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The Dodd-Frank Wall Street Reform and Consumer Protection Act: Insurance Provisions

Baird Webel
Specialist in Financial Economics

In the aftermath of the recent financial crisis, broad financial regulatory reform legislation was advanced by the Obama Administration and by various Members of Congress. Ultimately Congress passed, and the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203). 

The Dodd-Frank Act largely responded to the financial crisis that peaked in September 2008, but other efforts at revising the state-based system of insurance regulation also pre-date this crisis. Members of Congress previously introduced both broad legislation to federalize insurance regulation along the lines of the regulation of the banking sector, as well as more narrowly tailored bills addressing specific perceived flaws in the state-based system. 

The financial crisis, particularly the role of insurance giant American International Group (AIG) and the smaller bond insurers, changed the tenor of the existing debate around insurance regulation, with increased emphasis on the systemic importance of some insurance companies. Although it could be argued that insurer involvement in the financial crisis suggested a need for full-scale federal regulation of insurance, the Dodd-Frank Act did not implement such a federal regulatory system for insurance. 

Title V of the Dodd-Frank Act addressed specifically insurance, with a subtitle creating a Federal Insurance Office (similar to language originally contained in H.R. 2609) and a subtitle streamlining the existing state regulation of surplus lines and reinsurance (similar to language originally contained in H.R. 2572/S. 1363). The Federal Insurance Office is to monitor all aspects of the insurance industry and coordinate and develop policy relating to international agreements. It also has limited authority to preempt state laws and regulations when these conflict with international agreements. The act harmonizes, and in some cases reduces, regulation and taxation of surplus lines insurance by vesting the "home state" of the insured with the sole authority to regulate and collect the taxes on a surplus lines transaction. For reinsurance transactions, the act vests the home state of the insurer purchasing the reinsurance with the authority over the transaction while vesting the home state of the reinsurer with the sole authority to regulate the solvency of the reinsurer. 

In addition to Title V's specific insurance provisions, various other parts of the act may affect insurers and the insurance industry, including provisions addressing systemic risk, consumer protection, investor protection, and securities regulation. 

This report explains how insurance markets were affected by the financial crisis and summarizes the provisions of the Dodd-Frank Act that pertain to insurance.


Date of Report: August 17, 2010
Number of Pages: 8
Order Number: R41372
Price: $19.95

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Federal Trust Funds and the Budget

Thomas L. Hungerford
Specialist in Public Finance

Federal trust funds are an important part of the budget. About 40% of all federal outlays are through trust funds and about 45% of all federal receipts come to trust funds. This importance is further highlighted by the considerable congressional interest in trust funds; as of July 1, 2010, over 580 bills had been introduced in the 111th Congress to create or modify federal trust funds. 

A federal trust fund often represents a long-term commitment to use specific funds for a certain purpose. It has been argued that the creation of a trust fund is one way for Congress to "commit" future Congresses to fund a specific program or "to make long-term promises stick." Dedicated revenues are used to fund the program and the revenues usually come from the beneficiaries of the program. 

There are about 200 federal trust funds, but most trust funds are relatively small with balances of less than $100 million. The 12 largest trust funds account for over 98% of income to all trust funds, outgo from all trust funds, and balances of all trust funds. 

The trust funds surplus (i.e., revenues minus outgo) in FY2009 amounted to $127.3 billion. This surplus is mostly invested in government obligations and transferred to the general fund for spending. The federal funds deficit for FY2009 was $1,540.0 billion, but because of the trust funds surplus, the unified federal budget deficit (what is widely reported in the press) was $1,412.7 billion. Receipts in excess of outlays are added to the balance of the trust funds. By law, all trust funds except the Railroad Retirement fund must invest balances in government obligations. The government securities held by trust funds are part of federal debt that is subject to the statutory federal debt limit. At the end of FY2009, the trust funds held $4,013.8 billion in government securities. 

From time to time, it is reported that one trust or another is on the verge of bankruptcy. In the context of trust funds the term "bankruptcy" is meaningless. It is true that a trust fund's outgo can be greater than its income and trust funds can have a zero balance, but the federal government is not in danger of "going out of business" or having its assets seized by creditors. Congress has often taken actions to increase a trust fund's revenues or reduce its outgo when it has faced imminent insolvency or exhaustion of its balances. 

Some observers have argued that trust fund programs increase the federal deficit and reduce national saving. The evidence supports the claim that trust fund surpluses reduced the federal government deficit and increased public saving. This becomes important at the time when a trust fund's revenues are less than its outgo and the Treasury securities held by the trust fund need to be redeemed to cover outgo. The Treasury securities in the trust fund are claims on the government and the government will to find real resources (by raising revenue, decreasing spending, or issuing more debt) to cover these claims when the obligations are redeemed.


Date of Report: August 6, 2010
Number of Pages: 18
Order Number: R41328
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Covered Bonds: Issues in the 111th Congress

Edward V. Murphy
Specialist in Financial Economics

Covered bonds are a relatively common method of funding mortgages in Europe, but uncommon in the United States. A covered bond is a recourse debt obligation that is secured by a pool of assets, often mortgages. The holders of the bond are given additional protection in the event of bankruptcy or insolvency of the issuing lender. Covered bonds have some features, such as pooled mortgages, that resemble securitization, but the original lenders maintain a continuing interest in the performance of the loans. Because some believe that the subprime mortgage turmoil may have been influenced by poor incentives for lenders using the securitization process, some policymakers have recommended covered bonds as an alternative for U.S. mortgage markets. Although covered bond contracts are not prohibited in the United States, some policymakers believe that legislation and agency rulemaking could facilitate the growth of a domestic covered bond market. 

In some countries, covered bonds conforming to statutorily prescribed features may receive enhanced protections or greater regulatory certainty. A statutory framework for covered bonds often includes four elements: (1) the bond is issued by (or bondholders otherwise have full recourse to) a credit institution that is subject to public supervision and regulation; (2) bondholders have a claim against a cover pool of financial assets in priority to the unsecured creditors of the credit institution; (3) the credit institution has the ongoing obligation to maintain sufficient assets in the cover pool to satisfy the claims of covered bondholders at all times; and (4) in addition to general supervision of the issuing institution, public or other independent bodies supervise the institution's specific obligations to the covered bonds. 

Compared with securitization, covered bonds may be less susceptible to poor underwriting standards because issuers maintain risk exposure or "skin in the game," perhaps minimizing problems of the "originate to distribute" model of lending. Institutions that issue covered bonds may be less susceptible to investor panic because the status of covered bonds on their balance sheet is transparent. On the other hand, reliance on covered bonds may reduce aggregate lending because it ties up more capital than does securitization. 

Some features of American banking regulations may have to be clarified to facilitate the use of covered bonds. Covered bonds could affect potential recovery for the Federal Deposit Insurance Corporation (FDIC) when banks fail. The FDIC issued two new policy statements in 2008, Financial Institution Letter (FIL) 34-2008 and FIL 73-2008, clarifying its obligations to the holders of covered bonds if an FDIC-insured institution is placed in FDIC receivership or conservatorship. 

In the 111th Congress, Representative Garrett has introduced three versions of a bill to establish a statutory regime for covered bonds in the United States. These are H.R. 2896, H.R. 4884, and H.R. 5823. H.R. 5823, the United States Covered Bonds Act of 2010, was marked-up in the House Committee on Financial Services on July 27, 2010. H.R. 5823 designates the Office of the Comptroller of the Currency as the covered bond regulator. It establishes minimum requirements for over-collateralization, monthly reporting, and an asset coverage test. It also requires an independent monitor for the coverage pool, which would allow U.S. covered bonds to meet the international definition of a statutory framework.


Date of Report: July 29, 2010
Number of Pages: 15
Order Number: R41322
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Real Property Disposition: Overview and Issues for the 111th Congress

Garrett Hatch
Analyst in American National Government

Federal executive branch agencies hold an extensive real property portfolio that includes nearly 900,000 buildings and structures, and 41 million acres of land worldwide. These assets have been acquired over a period of decades to help agencies fulfill their diverse missions. The government's portfolio encompasses properties with a range of uses, including barracks, health clinics, warehouses, laboratories, national parks, boat docks, and offices. As agencies' missions change over time, so, too, do their real property needs, thereby rendering some assets less useful or unneeded altogether. 

Real property disposition is the process by which federal agencies identify and then transfer, donate, or sell facilities and land they no longer need. Disposition is an important asset management function because the costs of maintaining unneeded properties can be substantial, consuming billions of dollars that might be applied to pressing real property needs, such as acquiring new space and repairing existing facilities, or to other policy issues, such as reducing the national debt. 

Audits of agency real property portfolios have found that the government holds thousands of unneeded properties, and must spend hundreds of millions of dollars annually to maintain them. Agencies have said that their disposal efforts are often hampered by legal and budgetary disincentives, and competing stakeholder interests. In addition, Congress is limited in its capacity to conduct oversight of the disposal process because it lacks access to reliable, comprehensive real property data. The government's inability to efficiently dispose of its unneeded property is a major reason that federal real property management has been identified by the Government Accountability Office (GAO) as a "high-risk" area since 2003. 

This report begins with an explanation of the real property disposal process, and then discusses some of the factors that have made disposition inefficient and costly. It then examines real property legislation introduced in the 111th Congress that would address those problems, including the Federal Real Property Disposal Enhancement Act of 2009 (H.R. 2495), S.Amdt. 1042, and the President's FY2011 budget request. The report concludes with policy options for enhancing both the disposal process and congressional oversight of it.


Date of Report: July 27, 2010
Number of Pages: 17
Order Number: R41240
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The Department of Housing and Urban Development (HUD): FY2011 Appropriations

Maggie McCarty, Coordinator
Specialist in Housing Policy

Libby Perl
Specialist in Housing Policy

Bruce E. Foote
Analyst in Housing Policy

Katie Jones
Analyst in Housing Policy

Eugene Boyd
Analyst in Federalism and Economic Development Policy

The Department of Housing and Urban Development (HUD) is the federal agency charged with administering a number of programs designed to promote the availability of safe, decent, and affordable housing and promote community development. The agency submits a budget as a part of the President's formal budget request each year, and then Congress, through the appropriations process, decides how much funding to provide to the agency. Funding for HUD is under the jurisdiction of the Department of Transportation, HUD, and Related Agencies subcommittees of the House and the Senate appropriations committees. 

For FY2011, the President's budget requested about $45.6 billion in net new budget authority for HUD, a decrease of about 1% from the FY2010 enacted level. However, the requested decrease in net new budget authority would actually include a 3% increase in appropriations for HUD programs in aggregate. The overall increase in appropriations would be more than offset by a substantial increase in offsetting collections and receipts, which are estimated to come from proposed changes to the Federal Housing Administration (FHA) mortgage insurance programs. 

The two Section 8 rental assistance programs would receive the largest increases, followed by increases for programs for the homeless and for HUD's research and technology needs. Other programs would receive decreased funding, such as programs providing housing for persons who are elderly or disabled and capital repairs in public housing, and the brownfields redevelopment program would no longer be funded. 

Both the House and the Senate appropriations subcommittees have held hearings on the FY2011 HUD budget, although legislation has not been introduced or marked-up in committee. Generally, appropriators wait until a budget resolution is passed before they begin their process, since the budget resolution contains the overall spending allocations and caps to which the subcommittees must adhere. To date, neither the full House nor the full Senate has passed a budget resolution. .


Date of Report: July 26, 2010
Number of Pages: 30
Order Number: R41233
Price: $29.95

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The FY2011 Federal Budget

Mindy R. Levit
Analyst in Public Finance

While considering the FY2011 budget, Congress faces very large budget deficits, rising costs of entitlement programs, and significant spending on overseas military operations. In FY2008 and FY2009, the enactment of financial intervention and fiscal stimulus legislation helped to bolster the economy, though it increased the deficit. While GDP growth has returned in recent quarters, unemployment remains elevated and government spending on "automatic stabilizer" programs, such as unemployment insurance and income support, remains higher than historical averages. 

Between FY2000 and FY2009, federal spending accounted for approximately 20% of the economy (GDP) and federal revenues averaged 18% of GDP. In FY2009, the U.S. government spent almost $3.5 trillion (25% of GDP) and collected $2.1 trillion in revenue (15% of GDP). Between FY2008 and FY2009, outlays increased by $535 billion, while revenues fell by $419 billion. The deficit in FY2009 was $1,413 billion, or 9.9% of GDP, sharply higher than deficits in recent years. 

The current economic climate poses a challenge to policymakers shaping the federal budget. Numerous actions taken by the federal government in FY2008 and FY2009 have had major effects on the budget, including two major economic stimulus measures and a variety of programs within the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC). The impact of this legislation, along with any additional legislation enacted, will influence deficit levels in FY2010 and beyond. The final costs of federal responses to this turmoil will depend on the pace of economic recovery, how well firms with federal credit guarantees weather future financial shocks, and government losses or gains on its asset purchases. 

While many economists concur on the need for short-term fiscal stimulus despite adverse impact on the deficit, concerns remain about the federal government's long-term fiscal situation. Rising costs of federal health care programs and baby boomer retirements present further challenges to fiscal stability. Operating these programs in their current form may pass substantial economic burdens to future generations. 

The Obama Administration released its FY2011 budget on February 1, 2010. The main policy initiatives emphasized in the President's Budget include the creation of a fiscal commission tasked with improving the fiscal stability over the long term, other deficit-reduction proposals, ongoing economic recovery, and a continuation of health care reform, clean energy, and education initiatives. 

On April 22, 2010, the Senate Budget Committee reported the FY2011 budget resolution (S.Con.Res. 60) by a vote of 12-10. The resolution provided for revenue levels of $1,838 billion and outlays of $3,191 billion in FY2011 for a deficit of $1,260 billion, or approximately 8.4% of GDP. On July 1, 2010, the House adopted a budget enforcement resolution (H.Res. 1493), which established top line discretionary spending levels for FY2011 for House appropriators. 

This report provides an historical overview of the budget trends through the most recently completed fiscal year (2009). It discusses major budgetary challenges over the past several fiscal years given the current economic conditions and provides an in-depth discussion of the FY2011 budget process. Finally, it provides context for the issues facing the country's federal budget over the long term.


Date of Report: August 4, 2010
Number of Pages: 24
Order Number: R41097
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The TANF Emergency Contingency Fund

Gene Falk
Specialist in Social Policy

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) created a $5 billion Emergency Contingency Fund (ECF) within the Temporary Assistance for Needy Families (TANF) block grant to help states, Indian tribes, and the territories pay for additional economic aid to families during the current economic downturn. It was part of a package of tax and benefit program provisions aimed at stemming the decline in family incomes and purchasing power caused by increased unemployment. The ECF is a temporary fund for two years, FY2009 and FY2010, and thus is scheduled to expire on September 30, 2010. 

TANF is best known for funding cash welfare payments for low-income families, but it actually provides funds for a wide range of benefits and services to ameliorate the effects of, or address the root causes of, economic disadvantage among families with children. While TANF funds a wide range of both economic aid and human services to families with children, the ECF is limited to funding three categories of expenditures: basic assistance, a category that most closely resembles traditional cash welfare; non-recurrent short-term (e.g., emergency) aid; and subsidized employment. These categories typically are those that provide direct aid to families, rather than fund services. States, Indian tribes, and the territories are reimbursed 80% of the costs of increased expenditures in these categories. To qualify for ECF grants for increased basic assistance expenditures, a state, tribe, or territory must aid more families on its assistance rolls than it did in FY2007 or FY2008. Qualification of states, tribes, and territories for ECF grants supporting short-term aid or subsidized employment is dependent only on increased expenditures from FY2007 or FY2008. ARRA placed a limit on total ECF and other TANF contingency fund payments to states, at a combined 50% of a state's basic block grant over the two years, FY2009 and FY2010. 

Through July 29, 2010, a total of 47 states, the District of Columbia, Puerto Rico, and the Virgin Islands had their applications for ECF grants approved. Additionally, 17 tribes and tribal organizations had approved ECF applications. Total awards from these approved applications were $4.1 billion. Of the total, $1.4 billion was for basic assistance, $1.7 billion for short-term aid, and $1.0 billion for subsidized employment. Of the awards, 45 jurisdictions were drawing funds for increased basic assistance expenditures, 40 for increased short-term aid, and 36 for subsidized employment. Eight states (Colorado, Delaware, Michigan, Nevada, New Mexico, New York, North Carolina, and Washington state) received their maximum ECF grants. 

Though the economy grew in the last half of 2009 and the first half of 2010, unemployment remained high. Historically, the trends in cash welfare caseload have sometimes followed economic conditions, but sometimes not. After the 1990-1991 recession, welfare caseloads actually peaked in March 1994, before beginning their decline. President Obama's FY2011 budget proposed continuing emergency funds through FY2011. H.R. 5893 would extend emergency funds through FY2011. Under the proposal, states could receive up to 30% of their basic TANF block grants for emergency fund expenditures. H.R. 5893 was debated on the House floor on July 29, 2010, but not brought to a vote. Previously, the House twice approved extensions of the ECF through the end of FY2011, though the Senate has yet to approve such an extension.


Date of Report: August 4, 2010
Number of Pages: 13
Order Number: R41078
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Tax Deductible Expenses: The BP Case

Molly F. Sherlock
Analyst in Economics

Following the release of BP's second quarter earning statement, which showed a $10 billion reduction in tax liability for oil spill related cleanup and expenses, media headlines have generated public concern, and in some cases outrage, over these tax savings. Further, the ability of BP to realize these tax savings has generated a number of inquiries as to how and why BP is entitled to this reduction in tax liability. 

BP's reduction in tax liability is the result of standard business expense deductions and the general ability of taxpayers to claim refunds for previously paid taxes when realizing a net operating loss (NOL) or carrying the loss forward to offset future tax liabilities. Business expense deductions and NOLs play a significant role in enhancing economic efficiency by reducing business-cycle induced fluctuations and spreading risk. BP has reportedly incurred, or expects to incur, $32 billion in cleanup related costs and settlements over a multiyear period. Under current law, these costs can be used to offset business income and reduce tax liability. To the extent that these costs generate a NOL, these costs can be used to collect a refund for taxes paid in previous years or carried forward to offset tax liability in future years. 

The $10 billion "credit" that appears on BP's second quarter earnings statement is a financial account of BP's anticipated tax savings associated with legitimate cleanup related expenses. The figure does not reflect a tax credit as typically defined in the tax code. The $10 billion reduction in tax liability relates to a multiyear period, over which the $32 billion will be spent. The $32 billion was reported in 2010 for financial reporting purposes, but reflects cleanup spending costs in the current year as well costs the company expects to incur in future years. The financial account and financial reports do not directly correspond to current year tax liabilities. Actual oil spill related expenditures will be made over multiple years. Consequently, the associated tax savings will not be realized until the year expenditures are made.


Date of Report: August 11, 2010
Number of Pages: 9
Order Number: R41365
Price: $29.95

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Capital Gains Tax Options: Behavioral Responses and Revenues

Jane G. Gravelle
Senior Specialist in Economic Policy

Among the expiring Bush tax cut provisions is a lower 15% rate for long-term capital gains and dividends, with a 0% rate for taxpayers with ordinary tax rates of 15% or less. With no change, capital gains tax rates will revert to a top rate of 20% (10% for those with a 0% rate). Dividends will be taxed at ordinary rates. For FY2010 (for example), Treasury has projected revenue gains from these provisions to be $16 billion for capital gains and $30 billion for dividends. 

President Obama has proposed to retain the 15% and 0% rates for lower- and middle-income taxpayers, but to tax both dividends and capital gains at 20% for married couples with income of $250,000 or more and single taxpayers with income of $200,000 or more. Because the increase in dividend tax rates was limited, about 80% of the projected $15 billion gain from this revision (for FY2019) is estimated to be from capital gains tax increases. 

Compared with most other tax provisions, the potential revenue gain scored for an increase in capital gains taxes is strongly affected by behavioral responses assumed by the Joint Committee on Taxation (JCT) and the Treasury Department. The analysis in this study suggests that the Administration's projections and those of the JCT, absent a change in their realizations response, may likely understate revenue gains from allowing lower capital gains tax rates to expire. 

Realizations responses were first added to revenue projections by the revenue estimating agencies (Joint Committee on Taxation and the Treasury) at the end of the 1980s, in the midst of a contentious debate. The larger the absolute value of the elasticity (the percentage change in realizations divided by the percentage change in taxes) the smaller the revenue gain, and with elasticities larger than one in absolute value, a loss would occur. Estimated elasticities in the literature prior to 1990 ranged from 0.3 to almost 3.8, leaving limited guidance for revenue estimating agencies. JCT used an elasticity of 0.76, whereas Treasury used an elasticity of one. 

Concerns were raised at that time that there were serious problems with this evidence. Perhaps the most significant concern was that the larger results from studies of individuals reflected a timing or transitory response (high income taxpayers with variable income chose to realize gains during times that tax rates were temporarily low). This transitory response is not appropriate for assessing a permanent change. 

Evidence and studies since that time suggest that the permanent elasticity is considerably lower than what appeared to be the case in 1990. The surge in realizations in 1986 as a capital gains tax rate increase was preannounced provided compelling evidence of the importance of a transitory response. A study of the limits of realizations (which cannot exceed accruals in the long run) suggested the elasticity could be no more than 0.5. And a number of new econometric studies, using new techniques to isolate the permanent response, suggested elasticities of around 0.5 or less. The JCT appears to maintain their original assumption, while the Treasury response has been reduced to be similar to JCT's. 

Although projected revenues for FY2019 would be smaller than that estimated in January 2010 by the Administration, due to the Medicare tax, the revenue gain from allowing the capital gains tax to rise could be up to twice as much as that projected by the JCT for FY2019 if the smaller responses estimated in more recent studies were applied. It is reasonable to expect revenue gains of $28 billion, rather than the $13 billion likely to be projected by JCT if they maintain their current realizations response assumptions, and the gain is unlikely to be less than $18 billion.


Date of Report: August 10, 2010
Number of Pages: 21
Order Number: R41364
Price: $29.95

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Preserving Homeownership: Foreclosure Prevention Initiatives

Katie Jones
Analyst in Housing Policy

The foreclosure rate in the United States has been rising rapidly since the middle of 2006. Losing a home to foreclosure can hurt homeowners in many ways; for example, homeowners who have been through a foreclosure may have difficulty finding a new place to live or obtaining a loan in the future. Furthermore, concentrated foreclosures can drag down nearby home prices, and large numbers of abandoned properties can negatively affect communities. Finally, the increase in foreclosures may destabilize the housing market, which could in turn negatively impact the economy as a whole. 

There is a broad consensus that there are many negative consequences associated with rising foreclosure rates. Both Congress and the Bush and Obama Administrations have initiated efforts aimed at preventing further increases in foreclosures and helping more families preserve homeownership. On February 18, 2009, President Obama announced the Making Home Affordable program, which includes both the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). HARP allows certain homeowners to refinance their mortgages, while HAMP provides incentives for mortgage servicers to modify the loans of borrowers who are in danger of default or foreclosure. Other foreclosure prevention initiatives established prior to the creation of the Obama Administration's foreclosure prevention plan include the Hope for Homeowners program and Congress's appropriation of funding for foreclosure prevention counseling, which is administered by NeighborWorks America through the National Foreclosure Mitigation Counseling Program (NFMCP). Several states and localities have initiated their own foreclosure prevention efforts, as have private companies including Bank of America, JP Morgan Chase, and Citigroup. A voluntary alliance of mortgage lenders, servicers, investors, and housing counselors has also formed the HOPE NOW Alliance to reach out to troubled borrowers. 

Additional efforts to address foreclosures are included in P.L. 111-22, the Helping Families Save Their Homes Act of 2009, signed into law by President Obama on May 20, 2009. The law makes changes to the Hope for Homeowners program and establishes a safe harbor for servicers who engage in certain loan modifications. 

While many observers agree that slowing the pace of foreclosures is an important policy goal, there are several challenges associated with foreclosure mitigation plans. These challenges include implementation issues, such as deciding who has the authority to make mortgage modifications, developing the capacity to complete widespread modifications, and assessing the possibility that homeowners with modified loans will nevertheless default again in the future. Other challenges are related to the perception of fairness, the problem of inadvertently providing incentives for borrowers to default, and the possibility of setting an unwanted precedent for future mortgage lending. 

This report describes the consequences of foreclosure on homeowners, outlines recent foreclosure prevention plans implemented by the government and private organizations, and discusses the challenges associated with foreclosure prevention.


Date of Report: August 3, 2010
Number of Pages: 44
Order Number: R40210
Price: $29.95

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Federal Programs Available to Unemployed Workers

Katelin P. Isaacs, Coordinator
Analyst in Income Security

David H. Bradley
Analyst in Labor Economics

Janemarie Mulvey
Specialist in Aging and Income Security

John J. Topoleski
Analyst in Income Security

Four groups of federal programs target unemployed workers: unemployment insurance, health care assistance, job search assistance, and training. This report presents information on federal programs targeted to unemployed workers specifically, but does not attempt to discuss meanstested programs (such as Medicaid or SSI) that are available regardless of employment status. 

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. Unemployment benefits may be extended for up to 53 weeks by the temporarily authorized Emergency Unemployment Compensation (EUC08) program and additionally extended for up to 13 or 20 weeks by the permanent Extended Benefit (EB) program if certain economic conditions exist within the state. Certain groups of workers who lose their jobs on account of international competition may qualify for additional or supplemental income support through Trade Adjustment Act (TAA) programs or, if they are aged 50 or older, for Reemployment Trade Adjustment Assistance (RTAA). If an unemployed worker is not eligible to receive UC benefits and the worker's unemployment may be directly attributed to a declared major disaster, a worker may be eligible to receive Disaster Unemployment Assistance (DUA) benefits. 

Two federal laws may aid unemployed workers in the purchase of health insurance. The first, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), allows unemployed workers in certain circumstances to continue health insurance coverage from their employers. The second, the Health Coverage Tax Credit (HCTC), allows certain TAA and RTAA participants to receive an advanceable and refundable tax credit for purchasing health insurance. 

Federal support for Americans seeking assistance to obtain, retain, or change employment is undertaken by a national system of local One-Stop Career Centers (One-Stops) that were established by the Workforce Investment Act (WIA) of 1998. A variety of services and partner programs—notably including UC and TAA—are located within or linked to One-Stops, which primarily provide job search assistance, career counseling, labor market information, and other employment services. Core labor exchange services (matching job seekers and employers) are provided by the U.S. Employment Service (ES), which was first established by the Wagner- Peyser Act of 1933 and most recently amended under Title III of WIA. In addition to ES, Title I of WIA authorizes resources for similar core and intensive employment services for youth, adults, dislocated workers, and targeted populations. 

WIA Title I is also the nation's central job training legislation, providing funds for traditional, onthe- job, customized, and other forms of training to individuals unable to obtain or retain employment through other services. 

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, known as ARRA or the 2009 stimulus package), as amended, contains several provisions related to unemployment benefits. ARRA provisions affect unemployment income support as well as health insurance (COBRA and HCTC) programs.


Date of Report: July 26, 2010
Number of Pages: 19
Order Number: RL34251
Price: $29.95

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The Work Opportunity Tax Credit (WOTC)

Linda Levine
Specialist in Labor Economics

The Work Opportunity Tax Credit (WOTC) is meant to induce employers to hire members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program and other groups thought to experience employment problems regardless of general economic conditions (e.g., food stamp recipients and ex-felons). In 1997, Congress passed the Welfare-to- Work (WtW) tax credit to focus specifically on more disadvantaged TANF recipients. The 109th Congress folded the WtW credit into a revised WOTC as part of the Tax Relief and Health Care Act of 2006. 

Provisions to increase the minimum wage and to provide tax relief to small businesses were included in emergency supplemental appropriations during the 110th Congress. The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Act of 2007 (P.L. 110-28) extends the WOTC for three-and-one-half years through August 31, 2011. It also expands the definition of WOTC-eligible veterans to persons entitled to compensation for service-connected disabilities (1) with a hiring date not more than one year after having been discharged or released from active duty in the Armed Forces or (2) having been unemployed for at least six months during the one-year period ending on the hiring date, and doubled (to $12,000) the maximum wage against which the subsidy rate could be applied for this component of the veterans group. Additionally, the law expands the age range of high-risk youth to cover 18- to 39-year-olds and renames the WOTC-eligible group "designated community residents." The act also clarifies the definition of vocational rehabilitation referrals, adds "rural renewal county" to the places of residence for designated community residents, and allows the WOTC and tip credit against the Alternative Minimum Tax. 

Early in the 111th Congress, the WOTC was amended in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). The credit's targeted groups were extended to cover unemployed veterans and disconnected youth who begin working for an employer during 2009 or 2010. Unemployed veterans are persons discharged or released from active duty in the Armed Forces within five years of their hiring date and having received unemployment compensation for not less than four weeks during the one-year period ending on the hiring date. Disconnected youth are 16- to 24-year-olds who are not regularly attending school during the six-month period preceding the hiring date, not regularly employed within the same time frame, and not readily employable because they lack a sufficient number of skills. Other bills have been introduced to further encourage employers to hire veterans, including H.R. 4443, H.R. 5400, and S. 3398.


Date of Report: June 29, 2010
Number of Pages: 20
Order Number: RL30089
Price: $29.95

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The “Volcker Rule”: Proposals to Limit “Speculative” Proprietary Trading by Banks

David H. Carpenter
Legislative Attorney

M. Maureen Murphy
Legislative Attorney

In 1933, during the first 100 days of President Franklin D. Roosevelt's New Deal, the Securities Act of 1933 and the Glass-Steagall Act (GSA) were enacted, setting up a pervasive regulatory scheme for the public offering of securities and generally prohibiting commercial banks from underwriting and dealing in those securities. Banks are subject to heavy, expensive prudential regulation, while the regulation of securities firms is predominately built around registration, disclosure of risk, and the prevention and prosecution of insider trading and other forms of fraud. 

While there are two distinct regulatory systems, the distinguishing lines between the traditional activities engaged in by commercial and investment banks became increasingly difficult to discern as a result of competition, financial innovation, and technological advances in combination with permissive agency and judicial interpretation. 

One of the benefits of being a bank, and thus being subject to more extensive regulation, is access to what is referred to as the "federal safety net," which includes the Federal Deposit Insurance Corporation's (FDIC's) deposit insurance, the Federal Reserve's discount window lending facility, and the Federal Reserve's payment system. 

In the wake of the Great Recession of 2008, there have been calls to reexamine the activities that should be permissible for commercial banks in light of the fact that they receive governmental benefits through access to the federal safety net. Some have called for the reenactment of the provisions of the GSA that imposed affiliation restrictions between banks and securities firms, which were repealed by the Gramm-Leach-Bliley Act (GLBA) in 1999. 

While neither the House- nor the Senate-passed version of H.R. 4173, the comprehensive financial regulatory reform proposals of the 111th Congress, includes provisions that would reenact the GSA, both bills do propose curbs on "proprietary trading" by banking institutions. H.R. 4173, newly titled the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is modeled on the Senate version, would limit the ability of commercial banking institutions and their affiliated companies and subsidiaries to engage in trading unrelated to customer needs and investing in and sponsoring hedge funds or private equity funds. Such an approach has been referred to as the "Volcker Rule," having been urged upon Congress by Paul Volcker, former Chairman of the Board of Governors for the Federal Reserve System and current Chairman of the President's Economic Recovery Advisory Board. 

This report briefly discusses the permissible proprietary trading activities of commercial banks and their subsidiaries under current law. It then analyzes the Volcker Rule proposals under the House- and Senate-passed financial reform bills and under the Conference Report. Appendix A, Appendix B, and Appendix C of the report provide the full legislative language in each.


Date of Report: June 30, 2010
Number of Pages: 60
Order Number: R41298
Price: $29.95

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Who Doesn’t Pay Income Taxes?

Thomas L. Hungerford
Specialist in Public Finance


April 2010, it was widely reported that 47% of American households owed no income tax for 2009. This finding is based on estimates produced by the Urban Institute-Brookings Institution Tax Policy Center. The Tax Policy Center also estimates that 48.5% of tax units paid zero or negative taxes in 2008, and about 38% in 2006 and 2007. This report provides information on the demographic characteristics of people paying no federal income tax in 2008 and compares this group to taxpayers. 

Not everyone with income pays income taxes. In calculating taxable income, taxpayers are allowed to subtract the standard deduction or itemized deductions (e.g., mortgage interest, state income taxes, and charitable contributions) from adjusted gross income (AGI); the standard deduction for a couple in 2008 was $10,900. Taxpayers are also allowed to claim a $3,500 exemption for each person in the tax unit and dependents. Furthermore, some income is excluded from the calculation of AGI, such as public assistance benefits (e.g., Temporary Assistance for Needy Families and Supplemental Security Income), some or all of Social Security benefits, and pension contributions. 

The 2008 tax year was different from the previous few years because of the severe recession beginning in December 2007. During a recession taxable income falls as workers lose jobs or have their work hours reduced. In response to the recession, the Economic Stimulus Act of 2008 (P.L. 110-185) was enacted, which provided for recovery rebates. Recovery rebates were tax credits of up to $600 ($1,200 for joint returns) that were sent to taxpayers in mid-2008. Recovery rebates reduced tax payments for many taxpayers and eliminated tax payments for some tax units. 

The tax units paying no income taxes are likely to be low or moderate income—a majority live in families with income below 200% of the poverty threshold. These tax units are more likely to be elderly and receiving Social Security benefits than tax units paying taxes. Many of these tax units have their tax liability eliminated because of the various tax credits, such as the earned income tax credit (EITC), the child tax credit, and the recovery rebate. It is likely that the proportion of tax units paying no income taxes will remain at about 45% through at least 2010 because of the Making Work Pay tax credit, which was enacted in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Those tax units that legally pay no taxes (the tax units considered in this analysis) do so because of income exclusions, deductions, and tax credits introduced into the tax code over the years.


Date of Report: August 6, 2010
Number of Pages: 11
Order Number: R41153
Price: $29.95

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The TANF Emergency Contingency Fund

Gene Falk
Specialist in Social Policy

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) created a $5 billion Emergency Contingency Fund (ECF) within the Temporary Assistance for Needy Families (TANF) block grant to help states, Indian tribes, and the territories pay for additional economic aid to families during the current economic downturn. It was part of a package of tax and benefit program provisions aimed at stemming the decline in family incomes and purchasing power caused by increased unemployment. The ECF is a temporary fund for two years, FY2009 and FY2010, and thus is scheduled to expire on September 30, 2010. 

TANF is best known for funding cash welfare payments for low-income families, but it actually provides funds for a wide range of benefits and services to ameliorate the effects of, or address the root causes of, economic disadvantage among families with children. While TANF funds a wide range of both economic aid and human services to families with children, the ECF is limited to funding three categories of expenditures: basic assistance, a category that most closely resembles traditional cash welfare; non-recurrent short-term (e.g., emergency) aid; and subsidized employment. These categories typically are those that provide direct aid to families, rather than fund services. States, Indian tribes, and the territories are reimbursed 80% of the costs of increased expenditures in these categories. To qualify for ECF grants for increased basic assistance expenditures, a state, tribe, or territory must aid more families on its assistance rolls than it did in FY2007 or FY2008. Qualification of states, tribes, and territories for ECF grants supporting short-term aid or subsidized employment is dependent only on increased expenditures from FY2007 or FY2008. ARRA placed a limit on total ECF and other TANF contingency fund payments to states, at a combined 50% of a state's basic block grant over the two years, FY2009 and FY2010. 

Through July 22, 2010, a total of 47 states, the District of Columbia, Puerto Rico, and the Virgin Islands had their applications for ECF grants approved. Additionally, 17 tribes and tribal organizations had approved ECF applications. Total awards from these approved applications were $4.1 billion. Of the total, $1.4 billion was for basic assistance, $1.7 billion for short-term aid, and $1.0 billion for subsidized employment. Of the awards, 45 jurisdictions were drawing funds for increased basic assistance expenditures, 39 for increased short-term aid, and 36 for subsidized employment. Seven states (Delaware, Michigan, Nevada, New Mexico, New York, North Carolina, and Washington state) received their maximum ECF grants. 

Though the economy grew in the last half of 2009 and the first quarter of 2010, unemployment remained high. Historically, the trends in cash welfare caseload have sometimes followed economic conditions, but sometimes not. After the 1990-1991 recession, welfare caseloads actually peaked in March 1994, before beginning their decline. President Obama's FY2011 budget proposed continuing emergency funds through FY2011. H.R. 5893 would extend emergency funds through FY2011. Under the proposal, states could receive up to 30% of their basic TANF block grants for emergency fund expenditures. Previously, the House twice approved extensions of the ECF through the end of FY2011, though the Senate has yet to approve such an extension.


Date of Report: July 29, 2010
Number of Pages: 14
Order Number: R41078
Price: $29.95

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Commercial and Residential Mortgages

N. Eric Weiss
Specialist in Financial Economics

Government regulators, investment bankers, and others have testified at congressional hearings that a significant volume of commercial mortgages could default, causing major losses for commercial banks, savings institutions, life insurance companies, government-sponsored enterprises (GSEs), and issuers of commercial mortgage-backed securities (CMBS). These losses, coming after losses on residential mortgages and other loans, have the potential to further reduce the capital of lenders, perhaps leading to additional bank closings. The closings could require the Federal Deposit Insurance Company (FDIC) to honor its insurance on deposits. The FDIC could act in ways that would protect uninsured deposits, but this would cost the government additional money. 

According to recent statistics, there are $3.4 billion in commercial mortgages outstanding with $500 billion maturing in the next few years. One investment banker testified to the Joint Economic Committee that losses for one type of commercial mortgage financing (commercial mortgage-backed securities) could reach 9%-12% or $65 billion to $90 billion; in the real estate bust of the early 1990s, the worst performing groups of mortgages were around 10%. This suggests that commercial mortgage losses could be as bad as those in the early 1990s. 

Some commercial real estate will be more affected by mortgage losses than others. For example, FDIC statistics suggest that small banks (those with less than $1 billion in assets) are relatively more exposed to commercial real estate loans and losses than are large banks. 

Treasury Secretary Timothy Geithner has expressed the belief that the commercial mortgage losses can be handled with the tools available. 

This report discusses the severity of the problems the commercial mortgages may cause the financial system, the tools available to reduce these problems, and some areas for possible congressional oversight.


Date of Report: July 26, 2010
Number of Pages: 16
Order Number: R41046
Price: $29.95

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