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Tuesday, June 29, 2010

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of the provisions of the GSA that imposed affiliation restrictions between banks and securities firms, which were repealed by the Gramm-Leach-Bliley Act (GLBA) in 1999.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. The bills 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 both the House- and Senate-passed financial reform bills. Appendix A and Appendix B of the report provide the full legislative language from both bills.



Date of Report: June 22, 2010
Number of Pages: 26
Order Number: R41298
Price: $29.95

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The Size and Role of Government: Economic Issues


Marc Labonte
Specialist in Macroeconomic Policy


The size and role of the government is one of the most fundamental and enduring debates in American politics. Economics can be used to analyze the relative merits of government intervention in the economy in specific areas, but it cannot answer the question of whether there is "too much" or "too little" government activity overall. That is not to say that one cannot find many examples of government programs that economists would consider to be a highly inefficient, if not counterproductive, way to achieve policy goals. Reducing inefficient government spending would benefit the economy; however, reducing efficient government spending would harm it, and reducing the size of government could involve either one. Government intervention can increase economic efficiency when market failures or externalities exist. Political choices may lead to second-best economic outcomes, however, and some argue that, for that reason, market failures can be preferable to government intervention. In the absence of market failures and externalities, there is little economic justification for government intervention, which lowers efficiency and probably economic growth. But government intervention is often based on the desire to achieve social goals, such as income redistribution. Economics cannot quantitatively value social goals, although it can often offer suggestions for how to achieve those goals in the least costly way.

The government intervenes in the economy in four ways. First, it produces goods and services, such as infrastructure, education, and national defense. Measuring the effects of these goods and services is difficult because they are not bought and sold in markets. Second, it transfers income, both vertically across income levels and horizontally among groups with similar incomes and different characteristics. Third, it taxes to pay for its outlays, which can lower economic efficiency by distorting behavior. Not all taxes are equally distortionary, however, so there are ways of reducing the costs of taxation without changing the size of government. Furthermore, deficit spending does not allow the government to escape the burden of taxation since deficits impose their own burden. Finally, government regulation alters economic activity. The economic effects of regulation are the most difficult to measure, in terms of both costs and benefits, yet they cannot be neglected because they can be interchangeable with taxes or government spending.

There are many different ways to measure the size of the government, making its economic effects difficult to evaluate. Budgeting conventions are partly responsible: tax expenditures, offsetting receipts and collections, and government corporations are all excluded from the budget. But some governmental functions, like regulation, simply cannot be quantified robustly. Discussions about the overall size of government mask significant changes in the composition of government spending over time. Spending has shifted from the federal to the state and local level. Federal production of goods and services has fallen, while federal transfers have grown significantly. In 2009, nearly two-thirds of federal spending is devoted to Social Security, Medicare, Medicaid, and national defense. Thus, there is limited scope to alter the size of government without fundamentally altering these programs. The share of federal spending devoted to the elderly has burgeoned over time, and this trend is forecast to continue.

The size of government has increased significantly since the financial crisis of 2008 as a result of the government's unplanned intervention in financial markets and subsequent stimulus legislation. Much of the increase in government spending is temporary and could be reversed when financial conditions return to normal, although many question how easy it will be for the government to extricate itself from new commitments it has made.


Date of Report: June 14, 2010
Number of Pages: 30
Order Number: RL32162
Price: $29.95

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Monday, June 28, 2010

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.

Major House- and Senate-passed financial regulatory reform bills that are now in conference contain proxy access provisions. H.R. 4173, as passed by the House in December 2009, would authorize the SEC to prescribe rules for proxy access. As passed by the Senate in May 2010, it included the text of S. 3217, which provided that the SEC "may" prescribe rules giving shareholders proxy access.



Date of Report: June 18, 2010
Number of Pages: 18
Order Number: R41247
Price: $29.95

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Surplus Lines Insurance: Background and Current Legislation


Baird Webel
Specialist in Financial Economics


In general, insurance is a highly regulated financial product. Every state requires licenses for insurance companies, and most states closely regulate both company conduct and the details of the particular insurance products sold in the state. This regulation is usually seen as important for consumer protection; however, it also creates barriers to entry in the insurance market and typically reduces to some degree the supply of insurance that is available to consumers. Rather than requiring consumers who may be unable to find insurance from a licensed insurer to simply go without insurance, states have allowed consumers to purchase insurance from non-licensed insurers, commonly called nonadmitted or surplus lines insurers. Although any sort of insurance could be sold by a surplus lines insurer, most such transactions tend to be for rarer and more exceptional property and casualty risks, such as art and antiques, hazardous materials, natural disasters, amusement parks, and environmental or pollution risks.

Although surplus lines insurance is sold by insurers who do not hold a regular state insurance license, it is not unregulated. The sale of this insurance is regulated and taxed by the states largely through requirements placed on the brokers who usually facilitate the insurance transactions. The varying state requirements for surplus lines insurance have led to calls for greater harmonization between the states' laws and for federal intervention to promote uniformity. Such federal intervention is the central focus of the Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571/S. 1363), which passed the House by voice vote on September 9, 2009. This act was also added as an amendment to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) when it was considered on the House floor. H.R. 4173 passed the House on December 11, 2009. The Restoring America's Financial Stability Act of 2010 (S. 3217) includes nearly identical language as well. This legislation was reported by the Senate Committee on Banking, Housing, and Urban Affairs on April 15, 2010, and subsequently brought to the Senate floor for consideration. On May 20, 2010, the Senate finished consideration, inserting the amended text of S. 3217 into H.R. 4173 and passing the amended H.R. 4173. In addition, the National Insurance Consumer Protection Act (H.R. 1880), whose central focus is the creation of a federal charter for the insurance industry, includes provisions aimed at harmonizing state laws regarding surplus lines insurance.

Past Congresses have also taken up legislation on surplus lines insurance. Versions of the Nonadmitted and Reinsurance Reform Act were passed by the House in both the 109th and 110th Congresses, but the Senate did not act on surplus lines legislation in either case. Provisions on surplus lines insurance similar to those in H.R. 1880 were included in the National Insurance Act of 2007, but that bill was not acted on in the 110th Congress.



Date of Report: June 16, 2010
Number of Pages: 9
Order Number: RS22506
Price: $29.95

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Friday, June 25, 2010

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 has accounted for approximately 20% of the economy (GDP) and federal revenues averaged 18% of GDP. In FY2009, the U.S. government collected $2.1 trillion in revenue (15% of GDP) and spent almost $3.5 trillion (25% of GDP). Between FY2008 and FY2009, outlays increased by $535 billion, while revenues fell by $419 billion. The deficit in FY2009 was $1,414 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. The House Budget Committee has not yet reported an FY2011 budget resolution. In the event that the House and Senate do not reach agreement on a budget resolution in a timely manner, each chamber may adopt a "deeming resolution."

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: June 17, 2010
Number of Pages: 24
Order Number: R41097
Price: $29.95

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Insurance and Financial Regulatory Reform in the 111th Congress


Baird Webel
Specialist in Financial Economics


In the aftermath of the recent financial crisis, broad financial regulatory reform legislation has been advanced by the Obama Administration and by various Members of Congress. Under the McCarran-Ferguson Act of 1945, insurance regulation is generally left to the individual states. For several years prior to the financial crisis, some Members of Congress have introduced legislation to federalize insurance regulation along the lines of the regulation of the banking sector, although none of this legislation has reached the committee markup stage.

The financial crisis, particularly the role of insurance giant AIG and the smaller monoline bond insurers, changed the tenor of the debate around insurance regulation, with increased emphasis on the systemic importance of insurance companies. While it could be argued that insurer involvement in the financial crisis demonstrates the need for full-scale federal regulation of insurance, to date the broad financial regulatory reform proposals have not included language implementing such a system. Instead, broad reform proposals have tended to include the creation of a somewhat narrower federal office focusing on gathering information on insurance and setting policy on international insurance issues. Legislation proposed by the Obama Administration, Representative Paul Kanjorski (H.R. 2609 as incorporated into H.R. 4173), and Senator Christopher Dodd (S. 3217), all contain slightly differing versions of such an office.

The broad reform proposals could also affect insurance through consumer protection or systemic risk provisions, though insurance is largely exempted from these aspects of the legislation as well. The Obama proposal exempts insurance from the proposed federal consumer protection agency's oversight, except for title, credit, and mortgage insurance whereas Representative Barney Frank's H.R. 4173 as passed by the House exempts all insurance from the federal consumer protection agency's purview and S. 3217 would do so as well. In all three proposals, large insurers could be considered systemically significant and be subject to oversight by a systemic risk council and the Federal Reserve as well as federal resolution authority.

H.R. 4173 and S. 3217 also include narrower insurance reform language regarding surplus lines insurance and reinsurance similar to H.R. 2572/S. 1363, which had previously passed the House.

The House of Representatives passed H.R. 4173 on December 11, 2009, by a vote of 223-202. The Senate considered S. 3217 through April and May 2010. On May 20, 2010, the Senate finished the amendment process to S. 3217, substituted this bill as amended into H.R. 4317, and passed the Senate version of H.R. 4173 by a vote of 59-39. The conference committee to reconcile the two versions of H.R. 4173 convened for its first meeting on June 10, 2010.



Date of Report: June 16, 2010
Number of Pages: 10
Order Number: R41018
Price: $29.95

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Small Business: Access to Capital and Job Creation


Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in 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 expired on May 31, 2010, including H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, which would provide $505 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: June 17, 2010
Number of Pages: 29
Order Number: R40985
Price: $29.95

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Thursday, June 24, 2010

Industrial Loan Companies/Banks and the Separation of Banking and Commerce: Legislative and Regulatory Perspectives


N. Eric Weiss
Specialist in Financial Economics


Industrial Loan Companies (ILCs) are state-chartered and state-regulated depository institutions. The Federal Deposit Insurance Corporation (FDIC) may insure them. Their owners include nonfinancial companies that cannot own (hold stock of) a bank under the Bank Holding Company Act (i.e., cannot be a bank or financial holding company). Their primary federal regulator is not the Federal Reserve, which regulates bank holding companies, but the FDIC. Although prominent large ILCs include subsidiaries of securities firms, their owners also include automotive and retailing companies. The ILC form reflects a persistent tendency to combine the financing of a business with its operations. While this practice is standard in many countries, notably Germany and Japan, it has been in disfavor in America. ILCs, therefore, have developed against a long U.S. two-way tradition of the separation of banking and commerce: (1) Ownership interests that nonfinancial firms may have in banks are generally 25% or less. (2) Commercial banks may generally hold only nominal amounts of corporate stock.

As part of its proposals for financial regulatory reform, the Obama Administration has proposed shifting regulation of ILCs from the FDIC to the Federal Reserve. Opponents of the change have stated that during the current recession, ILCs have not created problems for the financial system.

ILCs evoke at least two policy issues. First, could the combination of state and FDIC regulation provide oversight comparable to that for nationwide banks, especially for bank holding companies? Second, should Congress grant ILCs powers that would allow them to be nationwide banks while in competition with community banks? Arguments over the separation of banking and commerce go back to the Glass-Steagall Act as revised by a series of laws, including the Gramm-Leach-Bliley Act.

Previously, interest shown by Wal-Mart and Home Depot in controlling an ILC with nationwide potential heightened industry and congressional interest in these issues.

The conference committee for H.R. 4173, the Restoring American Financial Stability Act of 2010, has released text that it intends to use as the basis for negotiation. In general the text follows the language adopted by the Senate concerning ILCs. Specifically, the base text would create a three-year moratorium on the FDIC's approval of new ILCs controlled by commercial firms and prohibit transferring control of ILCs except to prevent default; the bill would direct the Government Accountability Office (GAO) to study the implications of eliminating ILCs (and also credit card banks and trust banks). The House language for H.R. 4173 (and the earlier H.R. 3996) would require ILCs to be owned by bank holding companies that are regulated by the Federal Reserve; the Obama Administration has made a similar proposal.

This report (1) provides an historical overview of the separation of banking and commerce; (2) examines the nature of ILCs and their regulation; and (3) identifies and analyzes the relevant legislation in Congress.



Date of Report: June 17, 2010
Number of Pages: 13
Order Number: RL32767
Price: $29.95

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The Economic Effects of Capital Gains Taxation


Thomas L. Hungerford
Specialist in Public Finance

One provision of the 1913 individual income tax that generated a great deal of confusion was the taxation of income from the sale of property (i.e., capital gains income). This initial confusion has led to almost 100 years of legislative debates over capital gains. Beginning in 1922 capital gains were first subject to lower tax rates than ordinary income. This preferential treatment has continued throughout most of the history of the income tax. Proposals dealing with the taxation of capital gains have ranged from the outright elimination of capital gains taxation to the reduction of capital gains tax rates for certain classes of taxpayers to the elimination of the preferential tax treatment.

Overall, capital gains tax revenues have been a fairly small, but not trivial, source of government revenue. Since 1954, revenue from the capital gains tax as a share of total income tax revenue has averaged 5.2%. It reached a peak of 12.8% in 1986 and a low of 2.0% in 1957. Nonetheless, the 2007 capital gains tax revenue of $123 billion was equal to 75% of the FY2007 budget deficit.

Some argue that reducing capital gains tax rates will increase tax revenues by dramatically increasing capital gains realizations. While the effect of changes in the capital gains tax rate continue to be debated and researched, the bulk of the evidence suggests that reducing the capital gains tax rate reduces tax revenues.

Higher income households are substantially more likely to own assets that can generate taxable gains than lower income households. Additionally, high income households own most of these assets, realize most of the capital gains, and pay most of the capital gains taxes at preferential rates.

Capital gains tax reductions are often proposed as a policy that will increase saving and investment, provide a short-term economic stimulus, and boost long-term economic growth. Capital gains tax rate reductions appear to decrease public saving and may have little or no effect on private saving. Consequently, many analysts note that capital gains tax reductions likely have a negative overall impact on national saving. Furthermore, capital gains tax rate reductions, they observe, are unlikely to have much effect on the long-term level of output or the path to the longrun level of output (i.e., economic growth). A tax reduction on capital gains would mostly benefit very high income taxpayers who are likely to save most of any tax reduction. A temporary capital gains tax reduction possibly could have a negative impact on short-term economic growth.


Date of Report: June 18, 2010
Number of Pages: 17
Order Number: R40411
Price: $29.95

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Unemployment Insurance Provisions in the American Recovery and Reinvestment Act of2009


Alison M. Shelton
Analyst in Income Security

Julie M. Whittaker
Specialist in Income Security


The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, also known as ARRA or the 2009 stimulus package) contained several provisions affecting unemployment benefits, described below.

• ARRA temporarily increased unemployment benefits by $25 per week for all recipients of regular unemployment compensation (UC), extended benefits (EB), emergency unemployment compensation (EUC08), Trade Adjustment Assistance (TAA) programs, and Disaster Unemployment Assistance (DUA).

• The act extended the temporary EUC08 program through December 26, 2009 (with grandfathering), to be financed by federal general revenues. The EUC08 program's expiration date has since been further extended.

• It provided for temporary 100% federal financing of the EB program, to be financed by the federal government through the Unemployment Trust Fund.

• ARRA allowed states the option of changing temporarily the eligibility requirements for the EB program to expand the number of persons eligible for EB benefits, to end before June 1, 2010.

• It provided for an additional 13 weeks to the maximum amount of time railroad workers may receive extended unemployment benefits.

• The legislation suspended income taxation on the first $2,400 of unemployment benefits received in 2009, for taxable years beginning after December 31, 2008.

• It provided relief to states from the payment and accrual of interest on federal loans to states for the payment of unemployment benefits, from enactment of the stimulus package on February 17, 2009, through December 31, 2010.

• ARRA 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. All incentive payments must be made before October 1, 2011. States do not need to repay these sums to the federal government. Any changes that states make to state unemployment programs as a result of ARRA's modernization provisions would be permanent.

• Finally, the act transferred a total of $500 million to the states for administering their unemployment programs, within 30 days of enactment of the 2009 stimulus package. States do not need to repay these sums to the federal government.

This report addresses some of the more common questions about unemployment insurance in the 2009 stimulus package as Congress approved it in February 2009. The report does not provide operational details of unemployment insurance programs such as UC, EB, or EUC08, nor does it address the TAA or DUA programs.

Since ARRA's passage, certain elements of the package have been authorized for additional months and the EUC08 program has been expanded to include additional benefit tiers. For more information, see CRS Report RL33362, Unemployment Insurance: Available Unemployment Benefits and Legislative Activity, by Julie M. Whittaker, Alison M. Shelton, and Katelin P. Isaacs. This report will not be updated. 



Date of Report: June 17, 2010
Number of Pages: 32
Order Number: R40368
Price: $29.95

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Unemployment Insurance: Available Unemployment Benefits and Legislative Activity


Julie M. Whittaker
Specialist in Income Security

Katelin P. Isaacs
Analyst 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 expired 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 30, 2010. If an individual is eligible to continue to receive any remaining EUC08 tier I benefit after May 30, 2010, that individual would not be entitled to tier II benefits after exhaustion of tier I. There are no proposals that would create a tier V of EUC08 benefits (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 the end of 2009; temporarily provided for 100% federal financing of the EB program; 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 the EB program, and the $25 FAC benefit through the end of February 2010 and through April 5, 2010, respectively.

On April 15, 2010, the President signed P.L. 111-157, the Continuing Extension Act of 2010, into law. P.L. 111-157 extended the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefit until the week ending on or before June 2, 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 benefit, through the end of December 2010. This version went back to the House where it was amended to extend these three unemployment compensation provisions through the end of November 2010. The latest House version of H.R. 4213 was passed on May 28, 2010. This legislation must now go back to the Senate for consideration.


Date of Report: June 18, 2010
Number of Pages: 37
Order Number: RL33362
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Leave Benefits in the United States


Linda Levine
Specialist in Labor Economics


In addition to their jobs, workers have obligations—civic, familial, and personal—to fulfill that sometimes require them to be absent from the workplace (e.g., to serve on a jury, retrieve a sick child from day care, or attend a funeral). The U.S. government generally has allowed individual employers to decide whether to accommodate the nonwork activities of employees by granting them leave, with or without pay, rather than firing them. In other countries, national governments or the international organizations to which they belong more often have developed social policies that entitle individuals to time off from the workplace (oftentimes paid) for a variety of reasons (e.g., maternity and vacations).

Public policies specifically intended to reconcile the work and family lives of individuals—which include leave benefits, child-care subsidies, and flexible work arrangements—have garnered increased attention among countries in the Organization for Economic Cooperation and Development (OECD). In the United States, which is an OECD member, congressional interest has coalesced around family-friendly paid leave proposals (e.g., H.R. 2460/S. 1152 and H.R. 1723). Typically, they would entitle workers to time off with pay to accomplish parental and caregiving obligations to help women in particular balance work and family responsibilities because they are the typical unpaid family caregiver and most women work for pay, with both spouses employed in about one-half of married-couple families.

Currently, there are few federal statutes that pertain directly or indirectly to employer provision of leave benefits for any purpose. This report begins by reviewing those policies, including the Pregnancy Discrimination Act and the Family and Medical Leave Act. Temporary Disability Insurance (TDI) programs, which five states have established to compensate for lost wages while workers are recovering from nonoccupational illnesses and injuries, are discussed as well. So too are the California and New Jersey family leave insurance programs, which essentially extend the TDI programs of the two states to employees caring for family members. The Obama Administration has requested $50 million as part of the Labor Department's FY2011 budget for grants to states to help them plan and set up paid family leave programs.

The report then examines the incidence of different types of paid leave that U.S. employers voluntarily provide as part of an employee's total compensation. For example, vacations and holidays are the most commonly offered leave benefits: more than three-fourths of employees in the private sector receive paid time off for these reasons. Access to leave by various employee and employer characteristics also is analyzed. Particular attention is focused on paid sick leave, which was offered to 61% of private sector employees in June 2009, according to the latest data from the U.S. Bureau of Labor Statistics.

The report closes with results from a federal government survey of the average direct cost to businesses of different types of leave. Indirect employer costs that might arise in connection with some types of leave more than others (e.g., the greater likelihood of hiring and training temporary replacements for employees absent because of maternity versus bereavement reasons) are not included. Neither are estimates of potential gains to employers (e.g., a more stable, experienced workforce) and society (e.g., improved public health and broader participation in civic affairs).



Date of Report: June 17, 2010
Number of Pages: 25
Order Number: RL34088
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Tuesday, June 22, 2010

Auction-Rate Securities


D. Andrew Austin
Analyst in Economic Policy

Many municipalities, student loan providers, and other debt issuers borrowed funds using auction-rate securities (ARSs), whose interest rates are set periodically by auctions. ARSs combine features of short- and long-term securities; ARSs couple longer maturities with interest rates linked to short-term money markets. Most ARSs are bonds, although some are preferred equities. ARS issuance volumes grew rapidly since they were introduced in the mid-1980s. By 2007, ARSs comprised a $330 billion market. The credit crunch of 2007-2008, however, exposed major vulnerabilities in the design of ARSs.

Turmoil in global financial markets that erupted in summer 2007, combined with vulnerabilities in the structure of ARSs, put mounting pressure on the ARS market. In addition, downgrades of some bond insurers increased stress on segments of the ARS market. In early February 2008, major ARS dealers withdrew their support for ARS auctions, most of which then failed. Widespread auction failures in the ARS market left many investors with illiquid holdings and sharply increased interest costs for many issuers, such as student lending agencies, cities, and public authorities. In particular, ARS failures, according to some, have made it more difficult for student lenders that had used ARSs to raise funds. CRS Report RL34578, Economics of Guaranteed Student Loans, by D. Andrew Austin, discusses these issues.

Many major investment banks, in the wake of lawsuits filed by state attorneys general as well as pressure from state and federal regulators, have announced plans to repurchase outstanding ARSs for certain relatively smaller investors and to make efforts to liquidate ARS holdings of larger and institutional investors. The U.S. Securities and Exchange Commission (SEC) reached several settlements with broker-dealers in late 2008 and early 2009. Lawsuits alleged that some investment banks sold ARS products as cash equivalents, but failed to disclose liquidity risks and the extent of bank support for auctions—the main liquidity channel for ARSs. Many major investment banks involved in the ARS market reached settlements and agreements to buy back ARSs from some investors, typically certain individual investors, non-profit organizations, and small businesses. Some large firms and high-wealth individuals, however, have not been covered by these settlements. Some large firms have called for federal help to sell their ARS holdings, whose market valuations have dropped sharply.

Some segments of the ARS market, such as municipal issues and closed-end mutual funds, have restructured much of their debt, as issuers have redeemed ARS securities and switched to other financing strategies. Only a small portion of existing student-loan-backed ARS (SLARS) debt issues have been refinanced.

In the past, Congress has expressed concern about policy areas that the ARS market's collapse has affected. For example, the House Financial Services Committee held a March 2008 hearing to examine how financial market developments may have increased interest and other financing costs of state and local governments, followed by another hearing in September 2008 on ARSs. In April 2008, Congress passed the Ensuring Continued Access to Student Loans Act of 2008 (H.R. 5715, P.L. 110-227) to allow the Secretary of Education to provide capital to student lenders, whose ability to borrow in some cases had been constricted by ARS failures. One proposed Senate amendment (S.Amdt. 4261) to a supplemental appropriations measure (Disaster Relief and Summer Jobs Act, H.R. 4899) would let the government buy certain federally guaranteed loans, which could affect the SLARS market.


Date of Report: June 9, 2010
Number of Pages: 33
Order Number: RL34672
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Payment Card Interchange Fees: An Economic Assessment

Walter W. Eubanks
Specialist in Financial Economics


Interchange fees in the processing of credit and debit cards have become controversial. An interchange fee is paid by the merchant's bank to a cardholder's bank (that issued the card) after the cardholder purchases goods or services with a payment (credit or debit) card. Merchants and cardholders assert that they must accept excessive and increasing interchange fees set by the card associations such as Visa and MasterCard and member card-issuing banks. Interchange fees have been rising since the 1990s, despite diminishing fraud losses and technological advances in communications that lower the costs of accessing the electronic payment system. Merchants argue that the card associations have not negotiated these fees with them but instead present the fees as "take it or leave it" offers. 

Economists who have studied the payment card markets attribute the higher interchange fees to the nature and structure of the market. This is not the traditional market, they point out, but a twosided market where suppliers compete for two types of customers with different demand responses, like a newspaper that must attract both readers and advertisers. In the payment card market, banks must attract cardholders and merchants, and a transfer of revenues is usually necessary to provide card-issuing banks an incentive to issue more cards, which provide more payment card users to merchants. This is similar to newspapers, where the lower the subscription rates, the higher the readership and the higher the advertiser revenues. For a payment card system that needs more cardholders to achieve the optimal benefits to cardholders and merchants, more revenue transfers may be needed to offset the cost of issuing more cards to cardholders. There could be cases, however, where the revenue transfers are excessive, which would mean that the interchange fees are providing excess profits to issuer banks. 

Even though interchange fees were not considered a contributing cause of the 2007-2009 financial crisis, S. 3217 as amended by the full Senate and incorporated into the Senate-passed version of H.R. 4173, which addresses the regulatory causes of the crisis, also contains provisions on interchange fees. The Durbin Amendment (S.Amdt. 3989) on interchange fees was adopted. The amendment mandated specific regulations to applied debit cards to ensure that small businesses and other entities that accept debit cards pay a reasonable and proportional price for the use of the payment card network, and limit the payment card network from imposing anticompetitive restrictions on small businesses and other entities that accept payment cards. The amendment does not address what some believe to be a critical part of the interchange fee issue that relates to legal or regulatory caps on the fees. Specifically, presently there is not a mechanism that could be used to ensure that merchants lower their prices to pass the excess revenues back to the cardholders. In countries where interchange fees are capped, the governments have been relying on merchants to voluntarily lower prices. Yet, there is no evidence that merchants have done so. 

This report examines the Visa and MasterCard card associations' systems. The report begins with a discussion of the nontraditional structure of the payment card market. The next section is an analysis of the problem of the optimum level of payment cards to achieve the highest social welfare benefit for cardholders and merchants. The third section discusses the provisions in Senator Durbin's amendment and other legislation in the House that was not acted upon by the full House of Representatives that would grant the payment card stakeholders limited antitrust immunity for negotiating access fees and terms for using electronic payment card system. The last section is a discussion of some implications of the analysis.



Date of Report: June 9, 2010
Number of Pages: 14
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Estate Tax Options

Jane G. Gravelle
Senior Specialist in Economic Policy

The Economic Growth and Tax Relief Act of 2001 (EGTRRA; P.L. 107-16), among other tax cuts, provided for a gradual reduction and elimination of the estate tax. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the rate fell from 55% to 45%. In 2010, the estate tax was eliminated. As with other provisions of EGTRRA, however, the estate tax changes will sunset in 2011; the exemption will become $1 million (as scheduled in pre-EGTRRA law) and the tax rate will return to 55%. 

There is general agreement that some sort of estate tax will be retained. A proposal to make the 2009 rules ($3.5 million exemption and 45% rate) permanent was included in President Obama's 2010 and 2011 budget outlines and was passed by the House in December 2009 (H.R. 4154). Senate Democratic leaders have indicated a plan to enact the 2009 rules permanently (and make them retroactive to 2010). The Senate Republican leadership has proposed a $5 million exemption and 35% rate. 

With any of the exemption levels, few estates are affected by the tax. In 2011, the shares of estates taxed are projected by one study to be 1.76%, 0.25%, and 0.14% for the exemption levels of $1 million, $3.5 million, and $5 million, respectively. These numbers would grow to 3%, 0.46%, and 0.23% by 2019. The revenue yield in 2011 is projected to be $34.4 billion, $18.1 billion, and $11.2 billion for the $1 million exemption/55% rate, $3.5 million exemption/45% rate, and the $5 million exemption/35% rate. The estate tax accounts for a small share of revenue. 

The estate tax is a highly progressive tax; it not only applies to the largest estates, but within the distribution of estates a large share is concentrated in the over $20 million estate level: 62% for the $3.5 million exemption/45% rate and 73% for the $5 million/35% rate. Because of various exemptions and deductions, the effective tax rates on estates are much smaller than the statutory rate, with an average 16% rate on estates over $20 million for the $3.5 million exemption/45% rate and 12% for the $5 million exemption/45% rate. When distributed with respect to income, 96% falls in the top quintile of the income distribution, 72% in the top 1%, and 42% in the top 0.1%, under the $3.5 million exemption/45% rate. 

Although concerns have been raised about the effects of the tax on small businesses and farmers, estimates indicate that the share of estate taxes paid by small business estates under the proposed revisions would be small (16% to 18%) and the share of estates of small business owners taxed is small (about 0.2% of decedents with at least 50% of their assets in businesses). Evidence suggests that the number of returns with inadequate liquid assets to pay the estate tax is negligible. 

Other effects are likely small. The effects on savings are uncertain but likely small relative to the economy because the tax is small. Moving to either the $3.5 million plan or the $5 million plan would be projected to decrease charitable contributions by a small amount: 1% to 2%. Recent evidence suggests that the costs of administration and compliance are around 7% of revenues. 

Structural reforms that might be considered are inheritance of spousal exemptions, and some reforms directed at abuses. A provision to restrict Grantor Retained Annuity Trusts (GRATS), which can be used to virtually eliminate estate tax by providing an annuity with a remainder, is contained in H.R. 4849. Other provisions in President Obama's budget outline include restricting discounts for estates left to family partnerships and conforming fair market value for purposes of the estate tax and future capital gains realizations for heirs. 
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Date of Report: June 8, 2010
Number of Pages: 23
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Friday, June 18, 2010

Small Business Administration 504/CDC Loan Guaranty Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers programs to support small businesses, including several 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 504 Certified Development Company (504/CDC) loan guaranty program is administered through non-profit Certified Development Companies (CDC). It provides long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of the total project costs, a third-party lender must provide at least 50% of the financing, the CDC provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of the financing. It is named from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), which authorized the program. In FY2009, the SBA funded 6,293 504/CDC loans amounting to about $3.8 billion. 

Congressional interest in the 504/CDC program has increased in recent years because of increased concern that small businesses might be prevented from accessing sufficient capital to assist in the economic recovery. Some Members have proposed to amend the 504/CDC program in an effort to increase the number, and amount, of 504/CDC loans. These proposals include increasing the program's current loan guaranty limit of $2 million for regular projects and $4 million for manufacturing projects; expanding the eligible uses for the loan proceeds; and continuing the subsidization of the program's third-party participation fee and CDC processing fee, which were initially enacted on a temporary basis under P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), and expired on May 31, 2010. 

This report opens with a discussion of the rationale provided for the 504/CDC program, the program's borrower and lender eligibility standards, 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 enhance small business access to capital, including the temporary subsidization of 504/CDC program's third-party participation fee and CDC processing fee. It also examines issues raised concerning the SBA's administration of the program, including the oversight of 504/CDC lenders. 

The report concludes with an assessment of the Obama Administration's proposals and pending legislation, including 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 would authorize changes to the 504/CDC program that are designed to enhance small business access to capital, and H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, which would extend the temporary subsidization of 504/CDC program's third-party participation fee and CDC processing fee through December 31, 2010. 
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Date of Report: June 1, 2010
Number of Pages: 27
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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 expired 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: June 1, 2010
Number of Pages: 30
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An Introduction to the Design of the Low-Income Housing Tax Credit

Mark P. Keightley
Analyst in Public Finance

The low-income housing tax credit (LIHTC) program is one of the federal government's primary policy tools for encouraging the development and rehabilitation of affordable rental housing. LIHTCs are non-refundable tax credits, which are allocated to developers who typically sell them to private tax credit investors to raise capital (or equity) for real estate projects. Selling the tax credits reduces the debt and/or equity that developers would otherwise have to incur. With lower financing costs, tax credit properties can potentially offer lower, more affordable rents. 

In the 111th Congress, the American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111- 5, created a temporary LIHTC-grant exchange program. The program, sometimes referred to as the Section 1602 LIHTC-grant exchange program after Section 1602 of ARRA, allows states to elect to exchange a portion of their 9% LIHTCs for grant funding. Specifically, ARRA allows a state to elect to exchange for grants all of its unused and returned LIHTC allocation from 2008, 40% of its 2009 LIHTC credit allocation, and 40% of any allocation in 2009 made from the national LIHTC pool. LIHTCs may be exchanged for grants at a rate of $0.85 on the dollar. The exchange program was intended to ensure developers were able to obtain the financing needed to complete and support LIHTC projects. Some developers had experienced difficulties selling their tax credits as a result of lower investor demand stemming from the financial crisis and economic downturn. 

The LIHTC has also been included in the congressional debate on extending a package of expiring tax provisions (H.R. 4213), which has passed in both the House and the Senate. H.R. 4213 contains what amounts to a proposed one-year extension of the LIHTC-grant exchange program. The proposal would allow states to exchange a fraction of their annual non-refundable LIHTC allocation for refundable LIHTCs. The portion of tax credits that would be refundable would be the same as the portion of tax credits that could previously be exchanged for grants. The Treasury would then pay each state an amount equal to its refundable LIHTC election. States, in turn, would then use the funds received from Treasury to make grants to developers. Thus, the proposed modification would effectively extend the Section 1602 LIHTC-grant exchange program for one year. H.R. 4213 would also extend the placed-in-service requirement for GO Zone LIHTC developments from January 1, 2011, to January 1, 2013. 

On March 24, 2010, the House passed H.R. 4849, Small Business and Infrastructure Jobs Tax Act of 2010. The bill contains a proposal that would allow LIHTC projects receiving the 4% credit and tax-exempt bond financing to receive a direct payment from the Treasury in lieu of their tax credits. The proposal is similar to the Section 1602 LIHTC-grant exchange program for the 9% credit, although administrative differences and the timing of direct payments creates a substantive discrepancy between the two programs. The 4% direct payment program would apply to buildings placed-in-service through 2010.


Date of Report: June 9, 2010
Number of Pages: 9
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Thursday, June 17, 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 expired on May 31, 2010, including H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, which would provide $505 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
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Date of Report: June 1, 2010
Number of Pages: 29
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Financial Regulatory Reform and the 111th Congress


Baird Webel, Coordinator
Specialist in Financial Economics

David H. Carpenter
Legislative Attorney

Marc Labonte
Specialist in Macroeconomic Policy

Rena S. Miller
Analyst in Financial Economics

Edward V. Murphy
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics


The financial regulatory reform being considered in the 111th Congress is the continuation of a policy debate beginning before the September 2008 financial panic. For example, Treasury Secretary Henry Paulson issued a blueprint for financial reform in March 2008. In September 2008, after this blueprint was issued but before congressional action, the financial system suffered severe distress as Lehman Brothers and AIG failed. This accelerated the review of financial regulation and refocused some of the policy debate on areas that experienced the most distress.

Treasury Secretary Timothy Geithner issued a new reform plan in June 2009. House committees initially reviewed many related bills on an issue-by-issue basis. House Financial Services Committee Chairman Barney Frank then consolidated proposals into a comprehensive bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) and the House passed the bill on December 11, 2009. H.R. 4173 as passed by the House contains elements of H.R. 1728, H.R. 2571, H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996. In April 2010, the Senate began consideration of Senator Christopher Dodd's bill, the Restoring American Financial Stability Act of 2010 (S. 3217). On May 20, 2010, The Senate passed the House companion measure, H.R. 4173, after substituting the Senate's bill language as amended.

One issue in financial reform is the potential reorganization of the financial system regulatory architecture. Currently, the United States has many regulators, some with overlapping jurisdictions, but many believe there are gaps in the oversight of some issues. This structure evolved largely in reaction to past financial crises, with new agencies and rules created to address the perceived causes of the particular financial problems at that time. One option would be to consolidate agencies that appear to have similar missions. Another option would be to remove regulatory authority on a particular topic from the multiple agencies that might address it within their area now, and establish a single agency to address that issue. For instance, a single consumer financial protection agency or a single systemic risk regulator could be created. Both the House and the Senate bills would create a single entity to focus on consumer financial protection and consolidate bank regulators by abolishing the Office of Thrift Supervision. Neither the Housepassed nor the Senate-passed proposals would consolidate the securities and derivatives regulators or create a single systemic risk regulator. Both would create slightly differing councils of existing regulators to address systemic risk with authority to designate any entity as systemically significant and thus subject to oversight by the Federal Reserve.

Other issues of financial reform address particular sectors of the financial system or selected classes of market participants. For example, both the House-passed and the Senate-passed proposals would require more derivatives to be cleared through a regulated exchange and require additional reporting for derivatives that would remain in the over-the-counter market. There are several proposals to try to increase the amount of information available to regulators, investors, consumers, and financial institutions. Hedge funds would have increased reporting and registration requirements. Credit rating agencies would have to disclose additional information concerning their methodologies and potential conflicts of interest. A federal office would be created to collect insurance information. Institution-level regulatory agencies would have to share information about covered firms with systemic risk regulators. Proposed executive compensation and securitization reforms would attempt to reduce incentives to take excessive risks.

This report reviews issues related to financial regulation. It provides brief descriptions of the two main comprehensive reform bills in the 111th Congress that address these issues.



Date of Report: June 1, 2010
Number of Pages: 22
Order Number: R40975
Price: $29.95

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The “8(a) Program” for Small Businesses Owned and Controlled by the Socially and Economically Disadvantaged: Legal Requirements and Issues


John R. Luckey
Legislative Attorney

Kate M. Manuel
Legislative Attorney

This report provides an overview of the Small Business Administration's (SBA's) Minority Small Business and Capital Ownership Development Program. Based upon authorities given to the SBA by Sections 7(j) and 8(a) of the Small Business Act of 1958, as amended, this program is commonly known as the "8(a) Program." The 8(a) Program provides participating small businesses with training, technical assistance, and contracting opportunities in the form of setasides and sole-source awards. A "set-aside" is an acquisition in which only certain contractors may compete, while a sole-source award is a contract awarded, or proposed for award, without competition. Eligibility for the 8(a) Program is generally limited to small businesses "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of the United States" that demonstrate "potential for success." However, small businesses owned by Indian tribes, Alaska Native Corporations (ANCs), Native Hawaiian Organizations (NHOs), and Community Development Corporations (CDCs) are eligible for the 8(a) Program under somewhat different terms. In FY2008, 9,462 firms participated in the 8(a) Program, and the federal government spent $6.3 billion on contracts with 8(a) firms.

The report surveys the historical development of the 8(a) Program, as well as the legal requirements presently governing (1) eligibility for the 8(a) Program, (2) set-asides and solesource awards under Section 8(a), and (3) related matters. It also discusses potential developments in the 8(a) Program in light of recently proposed legislation, changes in executive branch policies, and legal challenges and decisions. It includes the changes that SBA proposed to the regulations governing the 8(a) Program on October 28, 2009.

The 111th Congress has enacted legislation (P.L. 111-118) that would allow the Department of Defense to convert functions to performance by certain 8(a) firms without conducting the publicprivate competitions normally required under Office of Management and Budget Circular A-76. It is also considering bills that would modify various aspects of the 8(a) Program or otherwise promote contracting with 8(a) firms (e.g., H.R. 456, H.R. 2200, H.R. 2299, H.R. 2682, H.R. 3771, H.R. 4220, H.R. 4253, H.R. 4818, H.R. 4929, H.R. 5109, S. 1167, S. 2862).


Date of Report: June 1, 2010
Number of Pages: 42
Order Number: R40744
Price: $29.95

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Wednesday, June 16, 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 downpayment 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. On April 20, 2010, Representative Maxine Waters introduced H.R. 5072, the FHA Reform Act of 2010, which would also give FHA the authority to increase annual insurance premiums among other things. H.R. 5072 was reported in the House on May 6, 2010.

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: June 4, 2010
Number of Pages: 14
Order Number: R40937
Price: $29.95

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Tuesday, June 15, 2010

Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest

Donald J. Marples
Section Research Manager

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 American Jobs and Closing Tax Loopholes Act of 2010, H.R. 4213, would treat a portion of carried interest as ordinary income, whereas the Tax Extenders Act of 2009, H.R. 4213, H.R. 1935, and the President's 2010 and 2011 Budget Proposals would make carried interest taxable as ordinary income. In addition, in the 110th Congress, H.R. 6275 would have made carried interest taxable as ordinary income. Other legislation (H.R. 2834 and H.R. 3996) made similar proposals. This report provides background on the issues related to the debate concerning the characterization of carried interest.


Date of Report: June 3, 2010
Number of Pages: 7
Order Number: RS22717
Price: $19.95

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Monday, June 14, 2010

Mortgage and Rental Assistance as Disaster Relief: Legislation in the 111th Congress


Francis X. McCarthy
Analyst in Emergency Management Policy

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

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

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

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


Date of Report: June 3, 2010
Number of Pages: 9
Order Number: RS22828
Price: $29.95

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Taxation of Hedge Fund and Private Equity Managers


Mark Jickling
Specialist in Financial Economics

Donald J. Marples
Section Research Manager


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 American Jobs and Closing Tax Loopholes Act (H.R. 4213) would treat a portion of carried interest as ordinary income. Additionally, the Tax Extenders Act of 2009 (H.R. 4213), H.R. 1935, and the President's 2010 and 2011 Budget Proposals would make carried interest entirely taxable as ordinary income. Further, 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: June 3, 2010
Number of Pages: 9
Order Number: RS22689
Price: $29.95

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