Erika K. Lunder
Legislative Attorney
L. Paige Whitaker
Legislative Attorney
In the 2010 midterm election cycle, tax-exempt § 501(c)(4) social welfare organizations are reportedly spending millions of dollars in an attempt to influence the elections. These organizations are permitted to engage in campaign activity under federal law, subject to regulation under both the Internal Revenue Code (IRC) and the Federal Election Campaign Act (FECA).
Some had predicted that § 501(c)(4) groups would be more active in this election cycle than in past ones because of the Supreme Court’s recent decision in Citizens United v. FEC. In that case, the Court invalidated long-standing prohibitions in FECA on corporations and labor unions using their general treasury funds to make independent expenditures and electioneering communications. Since many § 501(c)(4) organizations are incorporated, they had been subject to these prohibitions unless qualifying for an exception. In addition, prior to Citizens United, no § 501(c)(4) organizations—regardless of corporate status—could serve as conduits for corporate or labor union treasury funds to pay for independent expenditures and electioneering communications. In the 2010 election cycle, § 501(c)(4) organizations are among the entities operating with less restriction due to the Supreme Court’s recent ruling in Citizens United v. FEC.
At the same time, it is important to realize that § 501(c)(4) social welfare organizations are still subject to regulation under FECA and the IRC. For example, under FECA, incorporated § 501(c)(4) organizations are prohibited from making political contributions and would still be required to establish a political action committee (PAC) in order to do so. One requirement under the IRC is that the organization must have the promotion of social welfare as its primary activity. Thus, a group that wants to maintain its § 501(c)(4) status cannot have campaign activity (along with any other activity that does not serve its exempt purpose) as its primary activity. Furthermore, § 501(c)(4) organizations engaging in campaign-related activities may be required to report information to the Federal Election Commission (FEC) and the Internal Revenue Service (IRS).
In the 111th Congress, numerous bills have been introduced responding to the Citizens United decision. Many would affect § 501(c)(4) organizations. For example, the primary legislative response to Citizens United, the DISCLOSE Act (H.R. 5175, as passed by the House, and S. 3628) would generally subject § 501(c)(4) organizations to the act’s disclosure and disclaimer provisions, although there would be an exception for qualifying large groups.
Date of Report: October 21, 2010
Number of Pages: 13
Order Number: R40183
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Baird Webel
Specialist in Financial Economics
The Troubled Asset Relief Program (TARP) was created by the Emergency Economic Stabilization Act (EESA; P.L. 110-343) in October 2008. EESA was passed by Congress and signed by President Bush to address an ongoing financial crisis that reached near-panic proportions in September 2008. The act granted the Secretary of the Treasury authority to either purchase or insure up to $700 billion in troubled assets owned by financial institutions. This authority was granted for up to two years from the date of enactment and was very broad. In particular, the definitions of both “troubled asset” and “financial institution” allowed the Secretary wide leeway in deciding what assets might be purchased or guaranteed and what might qualify as a financial firm.
The financial crisis grew out of an unprecedented housing boom that turned into a housing bust. Much of the lending for housing during the boom was based on asset-backed securities, which used the repayment of housing loans as the basis for repaying these securities. As housing prices fell and mortgage defaults increased, these securities became illiquid and fell sharply in value, causing capital losses for financial firms. Uncertainty about future losses on illiquid and complex assets led to some firms having reduced access to private liquidity, with the loss in liquidity being in some cases catastrophic. September 2008 saw the government takeover of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, and the near collapse of AIG, which was saved only by an $85 billion loan from the Federal Reserve. There was widespread suspicion in the financial markets as participants were unsure which firms might be holding so-called toxic assets that might now be worth much less than previously estimated, and thus might be unreliable counterparties in financial transactions.
As EESA was moving through Congress, most attention focused on the idea of the government purchasing mortgage-related toxic assets, thus alleviating the widespread uncertainty and suspicion. The initial TARP Capital Purchase Program, however, directly added capital onto banks’ balance sheets through preferred share purchases, rather than removing assets that had become liabilities through purchasing mortgage-related assets. Several other TARP programs followed, including an asset guarantee program; programs designed to spur consumer and business lending; financial support for companies such as AIG, GM, and Chrysler; and programs to aid homeowners at risk of foreclosure. Eventually, the Public-Private Investment Program did result in the purchase of some mortgage-related assets from banks, but this has remained a relatively small part of TARP.
With the immediate crisis subsiding through 2009, congressional attention in financial services turned largely to consideration of broad regulatory changes. The resulting Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) amended the TARP authority, including (1) reduction of the overall amount to $475 billion; (2) removal of the ability to reuse TARP funds that had been repaid; and (3) removal of the authority to create new TARP programs or initiatives. The original TARP authority to purchase new assets or enter new contracts expired on October 3, 2010. Outlays under the existing contracts, however, may continue through the life of these contracts. Overall budget cost estimates for TARP have decreased significantly since the passage of EESA, with August 2010 Congressional Budget Office estimates foreseeing $67 billion in costs and October 2010 Treasury estimates foreseeing $51 billion in costs. Most of these costs are from aid to homeowners and the automakers. The assistance to banks is generally showing a profit for the government. .
Date of Report: October 26, 2010
Number of Pages: 12
Order Number: R41427
Price: $29.95
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Thomas L. Hungerford
Specialist in Public Finance
A series of tax cuts were enacted early in the George W. Bush Administration by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27). These tax cuts, which are collectively known as the Bush tax cuts, are scheduled to expire at the end of 2010. Beginning in 2011, many of the individual income tax parameters (such as tax rates) will revert back to 2000 levels. The major tax provisions in EGTRRA and JGTRRA that are part of the current debate over the Bush tax cuts are the reduced tax rates, the reduction of the marriage penalty (and increase in the marriage bonus), the repeal of the personal exemption phaseout and the limitation on itemized deductions, the reduced tax rates on long-term capital gains and qualified dividends, and expanded tax credits. This report examines the Bush tax cuts within the context of the current and long-term economic environment.
The U.S. economy entered into a recession in December 2007. Between the fourth quarter of 2007 and the second quarter of 2009, the economy shrank with real gross domestic product (GDP) falling by 4.1%. The unemployment rate increased from 4.9% in December 2007 to 10.1% by October 2009, and is currently still over 9%. As a result of reduced economic activity and government efforts to stimulate the economy, the federal budget deficit increased from 1.2% of GDP in FY2007 to 9.9% of GDP in FY2009. Most economic forecasts suggest the economic outlook over the next few months is not bright and will likely be characterized by high unemployment and sluggish economic growth. The long-term fiscal situation is unsustainable.
There are several options that Congress can consider regarding the Bush tax cuts, and each of the options strikes a different balance between fostering economic growth and restoring fiscal sustainability. Allowing the Bush tax cuts to expire as scheduled will somewhat improve the fiscal condition, but could stifle the economic recovery. At the other extreme, permanently extending all of the Bush tax cuts would not undercut the economic recovery, but would worsen the longer-term fiscal outlook and possibly signal a lack of progress in dealing with the long-term fiscal situation. The Obama Administration has proposed allowing the Bush tax cuts to expire for high income taxpayers and permanently extending the tax cuts for middle class taxpayers. Compared to permanently extending all of the Bush tax cuts, this proposal is projected to increase tax revenues by $252 billion over five years and by $678 billion over 10 years, but still leaves federal debt on an unsustainable path. A temporary extension of the Bush tax cuts could provide time for Congress to consider tax reform and also provide a deadline to complete deliberations. Furthermore, allowing the tax cuts targeted to high income taxpayers to expire as scheduled could help reduce budget deficits in the short-term without stifling the economic recovery.
Date of Report: October 27, 2010
Number of Pages: 19
Order Number: R41393
Price: $29.95
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Jim Hahn
Analyst in Health Care Financing
Alison M. Shelton
Analyst in Income Security
On October 15, 2010, the Social Security Administration announced there will be no Social Security cost-of-living adjustment (COLA) in 2011. In addition, there was no Social Security COLA in 2010. The last positive Social Security COLA took effect in January 2009 and was 5.8% for all of 2009. Meanwhile, over the past five years, Medicare Part B program costs have increased an average of 8.3% per year and are expected to continue to grow. By statute, Part B premiums, which are automatically deducted from Social Security checks for those who receive Social Security, must cover 25% of projected Part B costs for aged beneficiaries. The Social Security Act includes a provision that holds most Social Security beneficiaries harmless for increases in the Medicare Part B premium: affected beneficiaries’ Part B premiums are reduced to ensure that their Social Security checks do not decline from one year to the next. In a typical year, the hold harmless provision affects a small fraction of beneficiaries and has a limited impact on program finances. However, in a year when Medicare Part B premiums increase but Social Security benefits do not, the effects of the hold harmless provision are larger and more complex.
The absence of a Social Security COLA affects Medicare Part B premiums in two ways under current law. For about three-quarters of Part B participants, the hold harmless provision prevents their Part B premiums from increasing and so the amount of their Social Security checks remains flat, all other things being equal. Under current law, the only way to collect the 25% of Part B costs that are required to be covered by beneficiary premiums is to increase Part B premiums on beneficiaries who are not protected by the hold harmless provision. The one-quarter of beneficiaries who are not held harmless therefore shoulder the entire beneficiary share of the increase in Part B costs. In other words, their collective premium increase can be nearly four times greater than if there were no hold harmless provision.
The one-quarter of Part B enrollees to whom the hold harmless provision does not apply can be divided into three groups: (1) low-income beneficiaries whose Part B premiums are not withheld from their Social Security benefits but instead are fully paid by the Medicaid program (currently about 17.5% of Part B enrollees, expected to increase); (2) high-income beneficiaries who are subject to income-related Part B premiums (about 5% of Part B enrollees); and (3) beneficiaries for whom there is insufficient history of Social Security payments with corresponding deductions for the Part B premium (about 5% of Part B enrollees), which would include both new enrollees to either Social Security or Medicare and Part B enrollees who do not participate in Social Security. The substantial majority of Part B enrollees (17.5%) not held harmless in 2010 were low-income beneficiaries whose Part B premiums are paid by Medicaid. As a result, in the absence of any intervention by Congress, most of the cost of the increase in Part B premiums in 2010 and 2011 will be paid by the federal-state Medicaid program, not directly by beneficiaries.
As of the date of this report, Congress has not passed legislation to address this issue. Speaker of the House Pelosi has announced that she will ask the House to consider H.R. 5987, which would provide a one-time, $250 payment to Social Security beneficiaries (including persons on Social Security disability) and retired veterans and railroad workers, when Congress returns after the November elections. Senate Majority Leader Reid has announced he will ask the Senate to consider legislation to provide a one-time, $250 payment when Congress returns after the elections. On October 15, 2010, the White House press office announced that the President supports efforts to provide a $250 payment to seniors, veterans, and people with disabilities.
Date of Report: October 29, 2010
Number of Pages: 18
Order Number: R40561
Price: $29.95
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Dawn Nuschler
Specialist in Income Security
The Social Security Act has always required surplus Social Security revenues (revenues in excess of the program’s expenditures) to be invested in U.S. government securities (or U.S. governmentbacked securities). In recent years, however, attention has been focused on alternative investment practices in an effort to increase the interest earnings of the trust funds, among other goals. This report describes trust fund investment practices under current law.
Date of Report: October 27, 2010
Number of Pages: 6
Order Number: RS20607
Price: $29.95
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