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Thursday, May 27, 2010

Small Business: Access to Capital and Job Creation

Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in Economic Development Policy

The Small Business Administration's (SBA) authorization is due to expire on July 31, 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 examines legislation to extend SBA loan modifications and fee subsidies that were initially enacted under ARRA and are scheduled to expire on May 31, 2010, including H.R. 2847, the Jobs for Main Street Act of 2009, which would provide $325 million to extend those loan modifications and fee subsidies through September 30, 2010, and H.R. 4213, the American Workers, State, and Business Relief Act of 2010, which would provide $560 million to extend those loan modifications and subsidies through December 31, 2010. It also examines 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; and H.R. 5297, the Small Business Lending Fund Act of 2010, which would authorize the Secretary of the Treasury to create a $30 billion Small Business Lending Fund to encourage community banks to provide small business loans
.


Date of Report: May 21, 2010
Number of Pages: 29
Order Number: R40985
Price: $29.95

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Wednesday, May 26, 2010

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. One proposed amendment to H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, would treat a portion of carried interest as ordinary income. 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:May 21, 2010
Number of Pages: 9
Order Number: RS22689
Price: $29.95

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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 while a proposed amendment to H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, would treat a portion of carried interest 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:May 21, 2010
Number of Pages: 7
Order Number: RS22717
Price: $19.95

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Business Tax Issues in 2010

Donald J. Marples
Specialist in Public Finance

Mark P. Keightley
Analyst in Public Finance

In 2009, congressional debate focused primarily on stimulating the economy, health care reform, and climate change. These issues are not only interrelated, but are also intimately linked with the taxation of businesses. For example, in February, Congress enacted the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Two of the act's business tax provisions provided for a temporary increase of small business expensing and temporary "bonus" depreciation limits, while other provisions allow a delayed recognition of cancelation of debt income and five-year carryback of net operating losses for small businesses. The act also modified several renewable energy provisions, including the Renewable Energy Production Tax Credit, the Investment Tax Credit, and tax credit for Alternative Fueling Property. 

Congressional debate in 2010 has focused on extending selected expired tax provisions and reforming health care. In particular, the Tax Extenders Act of 2009, H.R. 4213, passed the House on December 9, 2009, and the Senate on March 10, 2010. In addition, the debate on health care reform is ongoing and the President's Fiscal Year 2011 Budget Proposal calls for the modification of selected business taxes, the removal or restriction of several oil and gas tax provisions, and reforming international taxation. 

As the year progresses, it is anticipated that congressional deliberations will consider the extension of several expiring business tax provisions, energy taxation, tax shelters, and international taxation, while continuing to examine opportunities for economic stimulus.


Date of Report:May 21, 2010
Number of Pages: 17
Order Number: R41117
Price: $29.95

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Monday, May 24, 2010

Social Security Retirement Earnings Test: How Earnings Affect Benefits

Dawn Nuschler
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Under the Social Security Retirement Earnings Test (RET), the monthly benefit of a Social Security beneficiary who is below full retirement age (FRA) is reduced if he or she has earnings that exceed an annual threshold. In 2010, a beneficiary who is below FRA and will not attain FRA during the year is subject to a $1 reduction in benefits for each $2 of earnings above $14,160. A beneficiary who will attain FRA in 2010 is subject to a $1 reduction in benefits for each $3 of earnings above $37,680. The annual exempt amounts ($14,160 and $37,680 in 2010) generally are adjusted each year according to average wage growth. 

If a beneficiary is affected by the RET, his or her monthly benefit may be reduced in part or in full, depending on the total applicable reduction. For example, if the total applicable reduction is greater than the beneficiary's monthly benefit amount, no monthly benefit is payable for one or more months. If family members also receive auxiliary benefits based on the beneficiary's work record, the reduction is pro-rated and applied to all benefits payable on that work record (including benefits paid to spouses who are above FRA). For example, in the case of a family consisting of a worker beneficiary who has earnings above the annual exempt amount and a spouse and child who receive benefits based on his or her work record, the benefit reduction that applies under the RET is charged against the total family benefit. 

The RET has been part of the Social Security program in some form throughout the program's history. The original rationale for the RET was that, as a social insurance system, Social Security protects workers from certain risks, including the loss of earnings due to retirement. Therefore, benefits should be withheld from workers who show by their earnings that they have not "retired." The RET does not apply to Social Security disability beneficiaries who are subject to separate limitations on earnings. 

If a beneficiary is affected by the RET, his or her monthly benefit is recomputed, and the dollar amount of the monthly benefit is increased, when he or she attains FRA. This feature of the RET, which allows beneficiaries to recoup benefits "lost" as a result of the RET, is not widely known or understood. The benefit recomputation at FRA is done by adjusting (lessening) the actuarial reduction for retirement before FRA that was applied in the initial benefit computation to take into account months for which benefits were reduced in part or in full under the RET. Any spousal benefits that were reduced because of the RET are recomputed when the spouse attains FRA. For a spouse who has already attained FRA, however, there is no subsequent adjustment to benefits to take into account months for which no benefit or a partial benefit was paid as a result of the RET. 

The Social Security Administration estimates that elimination of the RET for individuals aged 62 or older would have a negative effect on the Social Security trust fund in the amount of $81 billion from 2012 to 2018, although it would have no major effect on Social Security's projected long-range financial outlook. 

This report explains how the RET works under current law. In addition, it provides benefit examples to illustrate the effect of the RET on Social Security beneficiaries who are below FRA and family members who receive benefits based on their work records. It also briefly discusses policy issues, including recent research on the effect of the RET on work effort and the decision to claim Social Security benefits.


Date of Report: May 17, 2010
Number of Pages: 29
Order Number: R41242
Price: $29.95

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Economic Development Administration: A Review of Elements of Its Statutory History

Eugene Boyd
Analyst in Federalism and Economic Development Policy

As the 111th Congress considers legislation reauthorizing the Public Works and Economic Development Act of 1965 (PWEDA; P.L. 89-136), which created the Economic Development Administration (EDA) and its programs, the PWEDA's statutory evolution may inform Congress in its deliberation. In reviewing the evolution of the PWEDA's statutory authority, several observations are worth making: 

• Congress has consistently used unemployment as the primary criterion to determine eligibility for EDA assistance, but it has authorized the inclusion of other criteria, resulting in up to 80% of counties being deemed eligible for assistance. 

• Although Congress has cast a wide net in terms of the criteria for EDA eligibility, it has remained focused on a singular mission: supporting private sector job creation in economically depressed areas primarily through the financing of infrastructure projects, including technology enhancements. 

• Congress has continued to promote multi-jurisdictional regional planning as a core activity in support of EDA's job creation mission. 

• The use of EDA public works-based assistance as an anti-recession tool has generally been opposed by some in Congress and viewed as slow and costly in generating jobs for the unemployed during a recession. 

During its 45-year history, EDA has evolved from a cluster of programs targeted primarily to rural communities experiencing long-term economic depression to an agency that has also been called upon to target assistance to urban areas and to address issues confronting communities experiencing sudden economic dislocation caused by factory shutdowns, foreign competition, base closures, and disasters. Although Congress initially approved legislation that used unemployment rates as the primary determinant of eligibility, it has also used per capita income and other criteria to qualify areas for assistance. Supporters contend that this allows EDA to be responsive to areas experiencing population outmigration, natural disasters, natural resource depletion, military base closures, the sudden loss of manufacturing jobs, and other special needs, while detractors contend that this broad targeting has diffused the agency's resources. 

As the programs of EDA evolved, Congress enacted legislation that standardized matching fund requirements among programs, simplified the application process, encouraged regional cooperation, established performance measures, and provided additional performance-based funding to grant recipients. The 1998 amendments standardized the federal cost share at 50% of a project's cost, but allowed EDA to provide supplemental assistance to increase the EDA contribution to no more than 80% of a project's cost. The 2004 amendments allowed EDA to waive completely the cost share requirements based on an EDA finding of insufficient taxing or borrowing capacity. 

In an effort to encourage regional cooperation, Congress conditioned the receipt of public works and economic adjustment assistance on the development and implementation of a Comprehensive Economic Development Strategy (CEDS) and required each grantee's CEDS to be consistent with local and district plans. Congress also directed EDA to award additional funds for outstanding performance in the execution of grant activities. Most recently, with the passage of American Recovery and Reinvestment Act (ARRA; P.L. 111-5), Congress returned to the practice of using EDA assistance as a countercyclical tool.


Date of Report: May 19, 2010
Number of Pages: 21
Order Number: R41241
Price: $29.95

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Proxy Access Reform Being Considered by the SEC: An Overview

Gary Shorter
Specialist in Financial Economics

Members of public company boards are supposed to play key fiduciary and management watchdog roles for the shareholders. At annual public company shareholder meetings, incumbent boards submit slates of board nominees for shareholder consideration as part of the official corporate proxy materials and statement sent to shareholders in advance of the meeting. Whereas states like Delaware (the home of a large proportion of sizeable public firms) have largely governed substantive corporate matters for firms that they incorporate, the Securities and Exchange Commission (SEC) oversees matters related to the content of proxy materials. 

Historically, the SEC has interpreted applicable federal securities laws as allowing companies to exclude from proxy materials shareholder proposals involving the nomination of persons to their boards, thus denying shareholders proxy access. Shareholders interested in pushing an alternative slate of nominees for fellow shareholder consideration must bear the printing and distribution costs themselves, which many believe poses a significant obstacle to such proxy fights: there are fewer than 100 a year in a universe of several thousand U.S. public companies. 

In May 2009, for the third time in seven years, the SEC proposed proxy access reforms. The most controversial proposal would amend federal securities laws to give shareholders with certain levels of stock holdings the right to include the names of their director nominees in company proxy materials. The agency observed that it needed to "structure the proxy rules to better facilitate the exercise of shareholders' rights to nominate and elect directors ... " 

The proposal has earned the support of several union and pension funds, including the Council of Institutional Investors, a large investor advocacy group. Opposition to the proposal has come from various U.S. corporations, business advocacy groups such as the U.S. Chamber of Commerce, the Business Roundtable, and the American Bar Association. 

Supporters argue that public company boards, many of whom have chairs who also serve as CEOs, too often display a management bias, inadequately discharging their duty as the shareholders' champions and fiduciaries. By helping to produce boards with greater numbers of directors who are more sensitive to shareholders' needs, and by injecting greater competition into board elections, many supporters of proxy access characterize it as a much needed development. 

By contrast, opponents of the proxy access proposal express concerns that it would usurp traditional state-based corporation laws, ignore strides that have been made in empowering shareholders (including the growing adoption of majority voting), undermine collegiality that is arguably critical to the viability of corporate boards, and subject corporations to a uniform and inflexible regime of proxy access that would be insensitive to their differences. Concerns over the alleged inefficiencies of a "cookie cutter" federal proxy access regime have led many of the opponents of the SEC's access proposal to advocate an "opt out" feature: companies, through shareholder action, would be allowed to adopt bylaw amendments that provided for more restrictive proxy access provisions than are in the SEC access proposal. 

H.R. 4173, the financial regulatory reform bill that passed the House in December 2009, would authorize the SEC to prescribe rules for proxy access. S. 3217, the financial regulatory reform bill currently under consideration in the Senate, says that the SEC "may" prescribe rules giving shareholders proxy access.


Date of Report: May 20, 2010
Number of Pages: 17
Order Number: R41247
Price: $29.95

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Friday, May 21, 2010

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 the impact of these government-sponsored enterprises (GSEs) on the housing and finance markets and their ability to return to financial viability. To date, the federal government has purchased more than $125 billion in stock in the two companies, with pending requests from Fannie Mae to Treasury to purchase an additional $8.4 billion and from Freddie Mac for $10.6 billion. Once these transactions are completed, the Treasury will have purchased $144.9 billion in senior preferred stock. Both companies are required under terms of the federal support to pay the government dividends of $14 billion annually (10% of the support). Housing, mortgage, and even general financial markets remain 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 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 themselves against losses. 

The Treasury agreed to buy mortgage-backed securities (MBSs) from the GSEs and to 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 an April 4, 2010, FHFA report, together the Fed and Treasury have purchased $1,356.7 billion in MBSs.


Date of Report: May 11, 2010
Number of Pages: 23
Order Number: RL34661
Price: $29.95

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Thursday, May 20, 2010

Post-Employment, “Revolving Door,” Laws for Federal Personnel

Jack Maskell
Legislative Attorney

Federal personnel may be subject to certain conflict of interest restrictions on private employment activities even after they leave U.S. government service. These restrictions, applicable when one enters private employment after having left government service, are often referred to as revolving door laws. For the most part, other than the narrow restrictions specific to procurement officials, these laws restrict only certain "representational" types of employment activities such as lobbying or advocacy directed to, and which attempts to influence, current federal officials. 

Under federal conflict of interest law, at 18 U.S.C. § 207, federal employees in the executive branch of government are restricted in performing certain post-employment "representational" activities for private parties, including (1) a lifetime ban on "switching sides," that is, representing a private party on the same "particular matter" involving identified parties on which the former executive branch employee had worked personally and substantially for the government; (2) a two-year ban on "switching sides" on a somewhat broader range of matters which were under the employee's official responsibility; (3) a one-year restriction on assisting others on certain trade or treaty negotiations; (4) a one-year "cooling off" period for certain "senior" officials barring representational communications to and attempts to influence persons in their former departments or agencies; (5) a new two-year "cooling off" period for "very senior" officials barring representational communications to and attempts to influence certain other high ranking officials in the entire executive branch of government; and (6) a one-year ban on certain former high-level officials performing certain representational or advisory activities for foreign governments or foreign political parties. This law also applies the one-year "cooling off" periods, and the restrictions on representations on behalf of official foreign entities and assistance in trade negotiations, in the legislative branch to Members of the House and to senior legislative staff, and applies the two-year "cooling off" period to former U.S. Senators lobbying the Congress. 

Under the provisions of an executive order issued by President Obama on January 21, 2009, fulltime, non-career presidential and vice-presidential appointees in the executive branch, including non-career appointees in the Senior Executive Service, and excepted service confidential, policymaking appointees, will be subject to more extensive post-government-employment "lobbying" restrictions. All such appointees will be barred from "lobbying" any executive branch official "covered" by the Lobbying Disclosure Act (2 U.S.C. § 1602(3)), or any non-career SES appointee, for the remainder of the current Administration. Additionally, all such appointees who are "senior" officials subject to the current one-year "cooling off" period on lobbying and advocacy communications to their former agency, must now abide by such "cooling off" period for two years. 

Further limitations are placed upon post-government private employment activities of "procurement personnel" in federal agencies. These restrictions go beyond the prohibitions on merely representational, lobbying, or advocacy activities on behalf of private entities before the government after leaving government service, and extend also to any compensated employment for or on behalf of certain private contractors for a period of time after a former procurement official had been responsible for procurement action on certain large contracts for the government.



Date of Report: May 12, 2010
Number of Pages: 16
Order Number: 97-875
Price: $29.95

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Social Security Benefits Are Not Paid for the Month of Death

Dawn Nuschler
Specialist in Income Security

Social Security benefits are not paid for the month in which a beneficiary dies. In most cases, the check that an individual receives in a given month represents payment for the preceding month. In other words, by design, the check (or direct bank deposit) arrives after the month for which it applies. In cases where a beneficiary dies late in the month, the Social Security Administration often is not notified of the death in time to stop the payment. When family members are informed that the check must be returned, they often complain that the policy is unfair and creates a financial hardship because the deceased beneficiary incurred expenses for part (or even most) of the month. 

Legislation is introduced routinely that would pay a full benefit for the month of death or a prorated benefit based on the proportion of the month that the beneficiary was alive. Supporters of such legislation argue that withholding benefits for the month of death does not make sense given that a person's bills do not stop at the beginning of the month in which they die. They argue that the public views the policy as anomalous in a system designed to provide monthly income to retirees, the disabled, and survivors of deceased workers. 

Critics of such legislation argue that paying full benefits for the month of death would cost an estimated $1.6 billion annually (excluding administrative costs). They point out that a deceased beneficiary's spouse and children can collect survivor benefits for the month of death, regardless of when the death occurred; that survivors may be entitled to a $255 lump-sum death payment; and that those seeking to have benefits paid for the month of death have little appreciation for the administrative difficulties involved in determining who should get the more than 2 million final benefit checks issued each year.


Date of Report: May 11, 2010
Number of Pages: 6
Order Number: 93-792
Price: $19.95

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Wednesday, May 19, 2010

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, and P.L. 111-157. Although the most recent legislation, P.L. 111-157, extended the authorization of the EUC program, it 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 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 six weeks of EUC08 benefits (for a total of 53 weeks of EUC08 benefits in certain states). There are no proposals that would create a Tier V of benefits. 

All tiers of EUC08 benefits are temporary and will expire on June 2, 2010. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before May 29, 2010 (May 30, 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 May 30, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier I benefit after May 30, 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 November 6, 2010. 

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 extended 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 Senate passed version must now go back to the House for consideration. 

On April 15, 2010, the President signed P.L. 111-157, the Continuing Extension Act of 2010 into law. P.L. 111-157 extends the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before June 2, 2010.


Date of Report: May 13, 2010
Number of Pages: 17
Order Number: RS22915
Price: $29.95

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Saturday, May 15, 2010

Long-Term Unemployment and Recessions

Gerald Mayer
Analyst in Labor Policy

Linda Levine
Specialist in Labor Economics

The recession that began in the United States in December 2007 has been one of the deepest and longest since World War II. One feature that distinguishes the recent recession from its postwar predecessors is the historically high percentage of unemployed persons without jobs for more than six months (the long-term unemployed). This report analyzes the trend in long-term unemployment over the postwar period and offers explanations for its unusually high incidence during the most recent postwar recession. It compares the individual, job, and household characteristics of the long-term unemployed during the latest recession (2007-2009) with the long-term unemployed at the end of the two previous recessions (1990-1991 and 2001). 

Long-term unemployment varies across individuals based on demographic and job characteristics. In each of the last three recessions, older unemployed workers were more likely than younger workers to have been unemployed for over six months. While an equal share of unemployed men and women were unemployed for over half a year during the last two recessions, unemployed women were less likely than men to have been out of work for 27 or more weeks at the end of the 1990-1991 recession. Unlike the two previous recessions, in 2009, unemployed workers with less than a high school education were more likely than unemployed workers with more education to have been out of work for at least six months. Also in 2009, workers laid off from the financial activities and information industries were the most likely to have been jobless longer than 26 weeks. Workers displaced from management, business, and financial occupations were most at risk of long-term unemployment during recent recessions. 

Unemployment affects both the individuals who are without work and their families. Households of the long-term unemployed have lower earnings and income than other households (where households include married couples, single parents, and single individuals). In 2008, the most recent year for which data are available, the long-term unemployed were more likely than all unemployed workers to live in households with incomes below the official poverty line. They were more likely than other unemployed workers to receive benefits from the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp program) or be covered by Medicaid. In 2008, only 2.7% of the long-term unemployed received public assistance. 

Slightly over half (55%) of the long-term unemployed had some type of health insurance coverage at some time during 2008, compared to a larger majority (84%) of employed workers. Although a small majority (58%) of the long-term unemployed were homeowners in 2008, they were less likely than employed workers (72%) to own their own homes. 

As the economy recovers and employers increase hiring to meet the growing demand for goods and services, many currently unemployed workers will be able to find new jobs. However, finding work may be more difficult for the long-term unemployed if, for example, employers think their skills have deteriorated during their lengthy time away from the workplace. The longterm unemployed displaced from industries in which restructuring has occurred may also have a hard time finding new jobs in other industries, especially if the jobs require skills different from those they possess. Policies to encourage employers to hire the long-term unemployed include wage and training subsidies. Offering wage insurance and reemployment bonuses to unemployed workers may encourage them to accept jobs sooner than they otherwise might have.


Date of Report: May 3, 2010
Number of Pages:29
Order Number: R41179
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Disaster Unemployment Assistance (DUA)

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

The Disaster Unemployment Assistance (DUA) program provides income support to individuals who become unemployed as a direct result of a major disaster and who are not eligible for regular Unemployment Compensation (UC) benefits. DUA is funded through the Federal Emergency Management Agency (FEMA) and is administered by the Department of Labor (DOL) through each state's UC agency. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA, or "the 2009 stimulus package") contained one provision affecting unemployment DUA benefits. ARRA temporarily increased unemployment benefits by $25 per week for all recipients of regular UC, Extended Benefits (EB), Emergency Unemployment Compensation (EUC08), Trade Adjustment Assistance (TAA) programs, and DUA. DUA beneficiaries are not eligible to receive EUC08 benefits. 

This report contains information on how to ascertain if an individual is eligible for DUA benefits


Date of Report: May 6, 2010
Number of Pages:9
Order Number: RS22022
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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. On March 10, 2010, the Senate passed H.R. 4213, which added several relatively low-cost tax extenders to the House-passed H.R. 4213. The main difference between these two bills is the use of different offsets to pay for the tax extenders. Currently, Members are negotiating to resolve differences between these bills. 

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: May 7, 2010
Number of Pages:26
Order Number: RL32367
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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 options 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. The bill would extend the sales tax deduction option and the property tax deduction for non-itemizers through 2010.


Date of Report: May 7, 2010
Number of Pages:15
Order Number: RL32781
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The Tax Deduction for Classroom Expenses of Elementary and Secondary School Teachers

Linda Levine
Specialist in Labor Economics

A temporary, above-the-line deduction for certain classroom expenses paid or incurred during the school year by eligible elementary and secondary school (K-12) teachers, among other educators, was authorized in the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) and extended to December 31, 2009, in the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, which is Division C of the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). In December 2009, the House passed H.R. 4213, which includes among other provisions a package of tax extenders of which the classroom expense deduction is a part. In March 2010, the Senate passed an amended version of the bill. An otherwise unchanged classroom expense deduction would be extended to December 31, 2010.


Date of Report: May 7, 2010
Number of Pages:7
Order Number: RS21682
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Should Credit Unions Be Taxed?

James M. Bickley
Specialist in Public Finance

Credit unions are financial cooperatives organized by people with a common bond; they are the only depository institutions exempt from the federal corporate income tax. As financial cooperatives, credit unions only accept deposits of members and make loans only to members, other credit unions, or credit union organizations. Many Members of Congress advocate a reliance on market forces rather than tax policy to allocate resources. Furthermore, some Members of Congress are interested in additional sources of revenue in order to either reduce the deficit, offset the cost of higher federal outlays, or make up for tax cuts elsewhere. Consequently, the exemption of credit unions from federal income taxes has been questioned. If this exemption were repealed, both federally chartered and state-chartered credit unions would become liable for payment of federal corporate income taxes on their retained earnings but not on earnings distributed to depositors. For FY2010 (October 1, 2009, through September 30, 2010), the Joint Committee on Taxation estimates that federal taxation of credit unions would yield revenue of approximately $1.6 billion. 

Credit unions differ in some aspects from other providers of financial services, but financial deregulation continues to lessen these differences. Deregulation has resulted from new legislation and decisions of regulatory agencies. Proponents of the taxation of credit unions argue that deregulation has led to vigorous competition between credit unions and other depository institutions. They maintain that the tax exemption gives credit unions an unfair competitive advantage over other depository institutions, and there is no market failure that justifies government intervention with a tax subsidy. Supporters of the tax exemption claim that, despite deregulation, credit unions are still unique depository institutions. They assert that the purpose of credit unions is to serve the financial needs of their members rather than to maximize profits. They argue that taxation would eliminate this service character of credit unions. 

In the 111th Congress, as of May 7, 2010, no legislation specifying the elimination or curtailment of the tax-exempt status of credit unions has been introduced. In the 111th Congress, legislation has been introduced to expand credit unions' ability to make business loans. Banking trade associations argue that the proposed expansion of credit unions' lending authority further reduces the distinction between banks and credit unions, and consequently lessens the justification for the tax-exempt status of credit unions. 

In the future, technological change and regulatory changes may further increase competition between credit unions and other depository institutions. The income tax exemption for credit unions, therefore, may be the subject of further debate.


Date of Report: May 7, 2010
Number of Pages:20
Order Number: 97-548
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Corporate-Owned Life Insurance (COLI):Insurance and Tax Issues

Baird Webel
Specialist in Financial Economics

Donald J. Marples
Specialist in Public Finance

Life insurance policies taken out by and payable to companies on their employees, directors, officers, owners, and debtors are commonly known as corporate-owned life insurance (COLI) policies. (COLI is also known as company-owned life insurance.) Such policies are separate and distinct from typical group life insurance policies offered to many employees as an employment benefit. In general, only the company, not the employee's family or other beneficiary, receives any benefit from a COLI policy. In some cases, employees or their families have no knowledge of any policy being taken out. Concerns about people "gambling" on the deaths of strangers has led to "insurable interest" laws in most states that require some possibility of financial loss as the result of an insured's death as a prerequisite for the purchase of life insurance. Although employment has generally been accepted to fulfill the need for an insurable interest, many have expressed concern about employers holding policies on lower-paid employees and continuing to hold policies after a worker has left employment. 

Although the chief historical justification for the favorable tax treatment of life insurance focuses on individuals, not companies, COLI policies enjoy the same basic preferences as other life insurance. As a result, a corporation enjoys either tax-deferred or tax-free growth of funds invested in COLI plans. These tax preferences are a large reason for companies to choose COLI policies rather than simply investing the money in a more straightforward way. Moreover, under certain circumstances, companies have taken loans using the cash value of the life insurance policy as collateral, used the loan proceeds to pay for the premiums of the life insurance policies, and then deducted the interest expense from their taxable income, further enhancing the advantages of COLI-related transactions. In the past, Congress has restricted the tax advantages of COLI, including limiting instances in which loan interest is allowed to be tax deductible. The 108th and 109th Congresses saw several bills introduced as well as floor and committee amendments on COLI. Language limiting COLI's tax advantages to policies taken out on the highest-paid 35% of employees and linking tax advantages to employee notice and consent was agreed to in the Senate Finance Committee in 2004 and ultimately incorporated into P.L. 109-280, which was passed by the 109th Congress in 2006. 

In the 111th Congress, the Life Insurance Employee Notification Act (H.R. 251), introduced by Representative Gene Green, would require employee notice of COLI, similar to those enacted in 2006, but would enforce these requirements through the Federal Trade Commission Act, rather than the Internal Revenue Code. Representative Luis Gutierrez's Employer-Owned Life Insurance Limitation Act (H.R. 3669) would require disclosure of COLI policies to employers and limit COLI policies to employees with a salary of more than $1 million per year. H.R. 3669 includes a civil private right of action and criminal penalties. 

This report begins with a general background on COLI, followed by current proposals on COLI. It then addresses federal limitations on COLI from previous years, discusses state approaches to the issue, and concludes with an analysis of the issue from a public-finance perspective. An appendix provides a detailed discussion of legislation addressing COLI from the 108th through 110th Congresses. 
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Date of Report: May 4, 2010
Number of Pages:15
Order Number: RL33414
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Loss Exposure and the Federal Deposit Insurance Corporation

Darryl E. Getter
Specialist in Financial Economics

The Federal Deposit Insurance Corporation (FDIC) was established as an independent government corporation under the authority of the Banking Act of 1933, also known as the Glass- Steagall Act (P.L. 73-66, 48 Stat. 162, 12 U.S.C.), to insure bank deposits. The FDIC is funded through insurance assessments collected from its member depository institutions and held in what is now known as the Deposit Insurance Fund (DIF). The proceeds in the DIF are used to pay depositors if member institutions fail. 

Beginning in 2008, the number of bank failures has increased substantially, and the DIF is currently below its statutory minimum requirement. As a result, the FDIC has raised assessments on member depository institutions during a banking downturn, which has drawn attention to a procyclical bias in assessments. The FDIC, therefore, has made efforts to revise deposit insurance assessments to better reflect the total loss exposure to the DIF. 

This report begins with an overview of the FDIC, followed by an explanation of the loss exposure and total risk to the DIF. Next, the report discusses issues regarding the setting of deposit insurance premiums and presents changes to the assessment system proposed by the FDIC to address some of the issues. Finally, recent efforts proposed by Congress to support the DIF are discussed. H.R. 2897, the Bank Accountability and Risk Assessment Act of 2009 (Representative Luis Gutierrez et al.); H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 (Representative Barney Frank et al.); and S. 3217, the Restoring American Financial Stability Act of 2010 (Senator Christopher Dodd) address modifications to the deposit insurance assessment system. Appendices to this report provide information regarding the FDIC's efforts to support the DIF during the recent period of financial distress, which includes information about the Temporary Liquidity Guarantee Program.


Date of Report: May 6, 2010
Number of Pages:15
Order Number: R41126
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Financial Regulatory Reform: Consumer Financial Protection Proposals Under the Obama Administration Plan, H.R. 4173(Formerly H.R. 3126), and S. 3217

David H. Carpenter
Legislative Attorney

Mark Jickling
Specialist in Financial Economics

In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the Obama Administration has proposed sweeping reforms of the financial services regulatory system, the broad outline of which has been encompassed in a nearly 90-page document called the Administration's White Paper (the White Paper or the Proposal). The Proposal seeks to meet five objectives: 

(1) "Promote robust supervision and regulation of financial firms"; 

(2) "Establish comprehensive supervision and regulation of financial markets"; 

(3) "Protect consumers and investors from financial abuse"; 

(4) "Improve tools for managing financial crises"; and 

(5) "Raise international regulatory standards and improve international cooperation." 

The Administration subsequently offered specific legislative proposals that would implement each of the five objectives of the White Paper, including the Consumer Financial Protection Agency Act of 2009 (the CFPA Act or the Act). The Act would establish a new executive agency, the Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of financial products and services. On July 8, 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, introduced similar legislation, H.R. 3126, which also is entitled the CFPA Act of 2009. H.R. 3126 was marked up and ordered to be reported by both the House Financial Services Committee and the House Energy and Commerce Committee. H.R. 3126 was incorporated as Title IV of H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, which passed the House by a vote of 223-202 on December 11, 2009. On March 22, the Senate Banking Committee also approved a comprehensive financial reform bill, which ultimately was reported as S. 3217, the Restoring American Financial Stability Act of 2010 (RAFSA). Title X of RAFSA would create a Bureau of Consumer Financial Protection within the Federal Reserve System, which would be provided similar authorities over consumer financial products and services as proposed for the CFPA by H.R. 4173, with some significant differences. 

This report provides a brief summary of the Administration's CFPA Act and delineates some of the substantive differences between it and H.R. 4173, Title IV, as it passed the House, and S. 3217, Title X, as it passed the Senate Banking Committee. It then analyzes some of the policy implications of the proposal, focusing on the separation of safety-and-soundness regulation from consumer protection, financial innovation, and the scope of regulation. The report then raises some questions regarding state law preemption, sources of funding, and rulemaking procedures that the Act does not fully answer.


Date of Report: April 27, 2010
Number of Pages:17
Order Number: R40696
Price: $29.95

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Surplus Lines Insurance: Background and Current Legislation

Baird Webel
Specialist in Financial Economics

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 Neighbor Works 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: April 30, 2010
Number of Pages:9
Order Number: RS22506
Price: $29.95

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Friday, May 14, 2010

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: April 29, 2010
Number of Pages:44
Order Number: R40210
Price: $29.95

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Financial Regulatory Reform: Systemic Risk and the Federal Reserve

Marc Labonte
Specialist in Macroeconomic Policy

The recent financial crisis contained a number of systemic risk episodes, or episodes that caused instability for large parts of the financial system. The lesson some policymakers have taken from this crisis is that a systemic risk or "macroprudential" regulator is needed to prevent similar episodes in the future. But what types of risk would this new regulator be tasked with preventing, and is it the case that those activities are currently unsupervised? 

Some of the major financial market phenomena that have been identified as posing systemic risk include liquidity problems; "too big to fail" or "systemically important" firms; the cycle of rising leverage followed by rapid deleverage; weaknesses in payment, settlement, and clearing systems; and asset bubbles. The Federal Reserve (Fed) already regulates bank holding companies and financial holding companies for capital and liquidity requirements, and it can advise their behavior in markets that it does not regulate. In addition, the Fed directly regulates or operates in some payment, settlement, and clearing systems. Many too big to fail firms are already regulated by the Fed because they are banks, although some may exist in what is referred to as the shadow banking system, which is largely free of federal regulation for safety and soundness. The Fed's monetary policy mandate is broad enough to allow it to use monetary policy to prick asset bubbles, although it has not chosen to do so in the past. Neither the Fed nor other existing regulators have the authority to identify and address gaps in existing regulation that they believe pose systemic risk. 

Opponents of a systemic risk regulator argue that regulators did not fail to prevent the crisis because they lacked the necessary authority, but because they used their authority poorly and failed to identify systemic risk until it was too late. They fear that greater government regulation of financial markets will lead to moral hazard problems that increase systemic risk. On the other hand, the current crisis has demonstrated that government intervention may become unavoidable, even when firms or markets are not explicitly regulated or protected by the government. 

If policymakers choose to create a systemic risk regulator, those duties could be given to the Fed or a new or existing regulator in the executive branch. The Fed's political independence has been used as an argument for and against giving it systemic risk regulatory responsibilities. Another consideration is that the Fed's existing responsibilities already have some overlap with systemic risk regulation. These responsibilities include a statutory mandate to maintain full employment and stable prices and the role of lender of last resort, as well as being the institution with the broadest existing financial regulatory powers. 

The Financial Stability Improvement Act of 2009 (H.R. 4173) passed the House on December 11, 2009. The Restoring American Financial Stability Act (S. 3217) was ordered to be reported out of the Senate Banking Committee on March 22, 2010. Provisions of these bills involving the Federal Reserve and systemic risk are discussed in this report, including the creation of a Financial Services Oversight Council and the regulation of systemically significant firms by the Fed. Neither bill creates a "systemic risk regulator"; nonetheless, many of the potential duties that could be assigned to a systemic risk regulator discussed in this report are included in both bills. The bills spread these duties among multiple regulators, although many of the important ones are assigned to the Fed. Although this could be portrayed as an expansion of the Fed's powers, the bills also strip the Fed of certain powers and creates new checks on other powers.


Date of Report: April 30, 2010
Number of Pages:28
Order Number: R40877
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Thursday, May 13, 2010

Structure and Functions of the Federal Reserve System

Pauline Smale
Analyst in Financial Economics

In 1913, Congress created the Federal Reserve System to serve as the central bank for the United States. The Federal Reserve formulates the nation's monetary policy, supervises and regulates banks, and provides a variety of financial services to depository financial institutions and the federal government. The System comprises three major components, the Board of Governors, a network of 12 Federal Reserve Banks, and member banks. 

Congress created the Federal Reserve as an independent agency to enable the central bank to carry out its responsibilities protected from excessive political and private pressures. At the same time, by law and practice, the Federal Reserve is accountable to Congress. The seven members of the board are appointed by the President with the advice and consent of the Senate. Congress routinely monitors the Federal Reserve System through formal and informal oversight activities. 

This report examines the structure and operations of the major components of the Federal Reserve System and provides an overview of congressional oversight activities. In addition, the report discusses the provisions of one of the pending pieces of legislation (S. 3217, the Restoring American Financial Stability Act of 2010) that would affect the structure and operations of the System.


Date of Report: May 4, 2010
Number of Pages: 10
Order Number: RS20826
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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

Katelin P. Isaacs
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 additionally extended for up 13 or 20 weeks by the permanent Extended Benefit (EB) program if certain economic situations exist within the state. 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 June 2, 2010. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before May 29, 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 May 29, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier benefit after May 29, 2010, that individual would not be entitled to tier II benefits once those tier I benefits were exhausted. 

The American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, contained provisions affecting unemployment benefits: temporarily increased benefits by $25 per week (Federal Additional Compensation, or FAC); extended the EUC08 program through the end of 2009; 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 also 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 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 extended the EUC08 program, 100% federal financing of the EB program, and the $25 FAC benefit through the end of February 2010. P.L. 111-144 extended 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 April 15, 2010, the President signed P.L. 111-157, the Continuing Extension Act of 2010, into law. P.L. 111-157 extends the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before June 2, 2010.


Date of Report: May 5, 2010
Number of Pages:35
Order Number:RL33362
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Wednesday, May 12, 2010

The Federal Housing Administration (FHA)and Risky Lending

Darryl E. Getter
Specialist in Financial Economics

The Federal Housing Administration (FHA), an office within the Department of Housing and Urban Development (HUD), is a federally operated mortgage insurance program that primarily serves first-time and less-creditworthy homeowners. Home buyers pay mortgage insurance premiums to FHA, which insures lenders against homeowner mortgage default risk. FHA has recently seen a surge in its guarantee volume. HUD estimates that its share of the single-family mortgage market, which includes both purchases and refinances of single-family homes, increased from 1.9% in 2005 to 24.0% by the fourth quarter of 2008. The increasing market share and absolute level of business may be explained by FHA having the lowest down payment requirements in the industry as well as by the contraction of financial sector mortgage lending capacity in 2008. 

Recent developments raise concerns about FHA's ability to insure loans that may be relatively more risky, given the lower down payment requirements. The FHA guarantee is backed by the U.S. federal government, and risky loans could possibly translate into large losses for the program and for taxpayers if a large number of borrowers default. Consequently, on October 1, 2009, Representative Scott Garrett introduced H.R. 3706, the FHA Taxpayer Protection Act of 2009, which would require FHA single-family borrowers to make down payments of at least 5% and would prohibit financing of closing costs under such mortgages. On March 10, 2010, Representative Shelley Moore Capito introduced H.R. 4811, the FHA Safety and Soundness and Taxpayer Protection Act of 2010, which would require FHA to appoint a Deputy Assistant Secretary for Risk Management and give FHA the authority to increase annual insurance premiums. 

This report reviews factors such as underwriting practices to determine the extent to which they may contribute to non-performing FHA-insured loans. The first section describes features of traditional subprime lending and makes comparisons to FHA-insured loans. Next, FHA and very high- risk mortgage underwriting practices are compared. Recent information on FHA underwriting practices and the performance of its insured loans follows.


Date of Report: April 19, 2010
Number of Pages: 13
Order Number: R40937
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Monday, May 3, 2010

Small Business Administration 7(a) Loan Guaranty Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs designed to encourage lenders to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions." The SBA's 7(a) loan guaranty program is considered the agency's flagship loan guaranty program. It is named from section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended), which authorized the SBA to provide business loans and loan guaranties to American small businesses. In FY2009, the program guaranteed 38,307 loans amounting to about $9.2 billion. 

Congressional interest in small business access to capital, in general, and the SBA's 7(a) program, in particular, has increased in recent years for three interrelated reasons. First, small businesses have reportedly found it more difficult than in the past to access capital from private lenders. Second, there is evidence to suggest that small business has led job formation during previous economic recoveries. Third, both the number of SBA 7(a) loans funded and the total amount of 7(a) loans guaranteed have declined. The combination of these three factors has led to increased concern in Congress that small businesses might be prevented from accessing sufficient capital to enable small business to assist in the economic recovery. 

A number of congressional proposals would amend the SBA's 7(a) program in an effort to increase the number, and amount, of 7(a) loans. These proposals include increasing the program's current limit on the amount of the loan guaranty; increasing the maximum percentage of the guaranty; expanding the eligible uses for the loan proceeds; and continuing the temporary subsidization of 7(a) program fees and an increase in the program's loan guaranty rate to 90%. These loan modifications and subsidies were initially enacted under P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA) and have been extended by law four times. These loan modifications and fee reductions are currently scheduled to expire on May 31, 2010. 

This report opens with a discussion of the rationale provided for the 7(a) program, the program's borrower and lender eligibility standards and program requirements, and program statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction and borrower demographics. 

It then examines previous congressional action taken to assist small businesses gain greater access to capital, including the temporary subsidization of 7(a) program fees and an increase in the program's loan guaranty rate to 90%. It also examines issues raised concerning the SBA's administration of the 7(a) program, including the oversight of 7(a) lenders and the program's lack of outcome-based performance measures. 

The report concludes with an assessment of the Obama Administration's proposals and pending legislation, including H.R. 3854, Small Business Financing and Investment Act of 2009, and S. 2869, Small Business Job Creation and Access to Capital Act of 2009, which would authorize changes to the 7(a) program that are designed to enhance small business access to capital.


Date of Report: April 20, 2010
Number of Pages: 30
Order Number: R41146
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Tax Benefits for Families: Adoption

Christine Scott
Specialist in Social Policy

The federal government provides assistance for the adoption of children through federal grants to states and through the tax code. Although federal assistance programs for adoption focus primarily on children adopted out of foster care, federal adoption tax provisions are available for all adoptions (except for adoptions of stepchildren). 

Congress created federal tax assistance for adoption by enacting the Small Business and Job Protection Act of 1996 (P.L. 104-188). The act added tax incentives for adoption to the existing federal adoption assistance grant programs by creating a tax credit and an income tax exclusion of up to $5,000 per adoption and $6,000 per adoption of a special needs child. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) increased qualified expenses for the credit (and the income tax exclusion) to $10,000 (indexed for inflation), but with a sunset period. 

The Patient Protection and Affordable Care Act (P.L. 111-148) provided, for tax years 2010 and 2011 only, that the adoption tax credit be refundable. P.L. 111-148 also increased the qualified expenses for the adoption tax credit and the income tax exclusion for employer provided adoption assistance to $13,170 for tax year 2010, with this amount indexed for inflation in 2011. Beginning in 2012, pre-EGTRRA law will be effective—a $6,000 limitation and applicable for special needs adoptions only, no income exclusion for employer provided adoption assistance, and the adoption tax credit will be nonrefundable. 

The tax credit and the income tax exclusion significantly limit who may benefit from the tax provisions. Both provisions are subject to a phase-out rule (which creates an income cap). These provisions, combined with the nonrefundability of the credit in prior years, limited the number of taxpayers who benefit from the credit. As a result, in tax year 2007, very few families with an adjusted gross income of less than $30,000, or with an adjusted gross income of $200,000 or more, claimed the credit. In tax year 2007, approximately 94,200 tax returns, or .07% of all tax returns, included a claim for the adoption tax credit, with a total credit value claimed of $396.0 million. 

Policy issues associated with the tax provisions are the limited availability of the credit resulting from the phase-out rule, more generous provisions for domestic adoptions and for adoptions of special needs children, and whether the tax system is the most efficient means of providing federal assistance for adoption. 

This report outlines the tax benefits for adoption, examines the associated policy issues, and provides a legislative history of the tax provisions for adoption.


Date of Report: April 21, 2010
Number of Pages: 16
Order Number: RL33633
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Sunday, May 2, 2010

A Securities Transaction Tax: Financial Markets and Revenue Effects

Mark P. Keightley  
Analyst in Public Finance  

Maxim Shvedov  
Analyst in Public Finance

A securities transactions tax (STT) is a tax imposed on the buyer and/or seller of a security at the time a securities transaction occurs. An STT can be applied to all security traders or selectively to only certain types. An STT can be applied across the board to all securities transactions, or only those involving specific types of securities, for example, stocks, options, and futures, but not bonds. While an STT can come in many different forms, there are two justifications commonly offered for imposing a tax of some sort on financial transactions: it would improve financial market operations and/or it would be a significant source of revenue. 

A number of domestic policymakers have recently expressed their opinion about imposing an STT. Speaker of the House Nancy Pelosi has expressed interest in the idea of an STT if pursued in coordination with other countries. In addition, several bills proposing an STT have been introduced in the 111th Congress, including H.R. 676, H.R. 1068, H.R. 1703, H.R. 3153, H.R. 3379, H.R. 4191, H.R. 4646, and S. 2927. On the other hand, 36 House Members sent a letter to then-House Committee on Ways and Means Chairman Charles Rangel expressing their opposition to an STT. And, according to press reports, U.S. Treasury Secretary Timothy Geithner has questioned whether an STT would work. 

This report analyzes the general effects of an STT on financial markets and its ability to raise revenue. The analysis examines how the tax could impact the important functions of financial markets—the determination of security prices, the spreading of risk, and the allocation of resources. The analysis of the financial markets then turns to examining how the tax may have an impact on security price volatility and the level of security prices. 

The ability of an STT to raise revenue is dependent on the design of the tax, but illustrative estimates presented in this report suggest that an STT similar to recent proposals offered in the 111th Congress could raise a significant amount of revenue. The analysis in this report highlights the fact that the economic burden of the tax would ultimately fall on individuals, and it would likely fall more heavily on short-term traders than long-term traders. Finally, the analysis suggests that the tax may contribute to the progressivity of the tax code.


Date of Report: April 19, 2010
Number of Pages: 27
Order Number: R41192
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Tax Credit Bonds: Overview and Analysis

Steven Maguire
Specialist in Public Finance

Almost all state and local governments sell bonds to finance public projects and certain qualified private activities. Most of the bonds issued are tax-exempt bonds because the interest payments are not included in the bondholder's (purchaser's) federal taxable income. In contrast, Tax Credit Bonds (TCBs) are a type of bond that offers the holder a federal tax credit instead of interest. This report explains the tax credit mechanism and describes the market for the bonds. 

Currently, there are a variety of TCBs. Qualified zone academy bonds (QZABs), which were the first tax credit bonds, were introduced as part of the Taxpayer Relief Act of 1997 (P.L. 105-34) and were first available in 1998. Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 (P.L. 109-58) and "new" CREBs by the Emergency Economic Stabilization Act of 2008 (EESA P.L. 110-343). Gulf tax credit bonds (GTCBs) were created by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Authority to issue GTCBs has expired. Qualified forestry conservation bonds (QFCBs) were created by the Food, Conservation, and Energy Act of 2008 (P.L. 110-246). Qualified energy conservation bonds (QECBs) and Midwest Disaster Bonds (MWDBs) were created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). 

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA) included several bond provisions that use a tax credit mechanism. Specifically, ARRA created Qualified School Constructions Bonds (QSCBs) and a new type of bond that allows issuers the option of receiving a federal payment instead of allowing a federal tax exemption on the interest payments. These new bonds, Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs), are also unlike other tax credit bonds in that the interest rate on the bonds is a rate agreed to by the issuer and investor. In contrast, the Secretary of Treasury sets the credit rate for the other TCBs based on current market parameters. The authority to issue BABs and RZEDBs expires after 2010. 

Each TCB, with the exception of BABs, is designated for a specific purpose or type of project. Issuers use the proceeds for public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes. 

All of the TCBs are temporary tax provisions. In the 111th Congress, P.L. 111-147 expanded the direct payment option beyond BABs to include issuers of new CREBs, QECBs, QZABs, and QSCBs. The QZAB and QSCB credit rate is set at 100% and the new CREB and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%. H.R. 4849 would extend BABs through April 1, 2013, but reduce the credit rate to 33% in 2011; 31% in 2012; and 30% in 2013. The cost of the extension is estimated at $7.46 billion for the 2010 to 2020 budget window. 

In the FY2011 budget, the Obama Administration has proposed extending the BAB program at a lower direct payment credit rate of 28%. The reduced credit rate is intended to minimize the cost to the Treasury.


Date of Report: April 23, 2010
Number of Pages: 16
Order Number: R40523
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