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Federal Budget & Tax Update

February 8, 2000, Vol. 6, No. 1
Federal Budget and Tax Update Archives

Yesterday the White House released the final Clinton administration budget. It proposes $1.8 trillion in federal spending for Fiscal Year 2001, an increase of 2.5% over last year's budget.

Scrapping the Budget Caps. The 2.5 percent increase over last year's budget would scrap the tight budget caps established under the 1997 balanced budget deal and circumvented in last year's budget debate through what both sides have called "budgetary gimmickry". Instead, the President's budget would allow federal government spending to increase at about the rate of inflation. This approach has been criticized by several Republicans, including House Budget Committee Chairman John Kasich, who would prefer to freeze spending at FY 2000 levels and dedicate the balance of the anticipated surplus to funding tax cuts.

The Budget Surplus. The administration's estimates, prepared by the Office of Management and Budget, assume a non-Social Security, on-budget surplus of $746 billion over the next ten years and an off-budget Social Security surplus of $2.173 trillion over ten years. For fiscal year 2001, the OMB estimates a unified (both on- and off-budget) surplus of $184 billion. These estimates are substantially lower than estimates produced by the Congressional Budget Office. The CBO released three budget estimates for congressional review, the lowest of which estimates the on-budget surplus at $839 billion over ten years. CBO estimates the FY 2001 surplus as $11 billion on-budget and $166 billion off-budget.

White House Budget Highlights. The White House maintains that the president's budget proposal is balanced, will eliminate the national debt by 2013, supports the smallest government since 1966 (18.3% of GDP), strengthens Medicaid and Social Security, provides $350 billion in gross tax cuts over ten years, and maintains investments in discretionary spending.

• Debt Reduction. The president's budget devotes the entire Social Security surplus and nearly half of the on-budget surplus to debt reduction. Under the proposal, all of the debt currently held by the public would be redeemed by 2013.
• Strengthening Medicare and Social Security. The president's budget extends the solvency of Medicare to 2025 and includes a new prescription drug benefit (see below). The plan also extends the solvency of Social Security to 2050, and in the out years would allow some investment in equities of general funds transferred to Social Security.
• Prescription Drug Benefit. As proposed, the prescription drug benefit for Medicare will cost $160 billion over ten years. The on-budget surplus and $70 billion in offsets fund the proposal. $40 billion of these offsets would come from reduced payments to health care providers. This proposal has drawn fire from the health care industry and several members of Congress, including Senator Bill Frist (Tennessee), a physician who has put forth his own plan to reform the Medicare system. The administration's plan would cover half of drug costs up to a total annual benefit of $5,000. Monthly premiums would start at $26 and rise to $51 within a few years. The budget also establishes a $35 billion reserve fund to offset "catastrophic drug costs" for those with extremely high drug costs.
• Targeted Tax Cuts. The President's proposal includes $351 billion in targeted tax cuts over ten years. $96 billion of these cuts would be offset through tax increases (including a proposed 25 cent increase in the federal excise tax on cigarettes) and closing tax shelters and loopholes. Our next brief will summarize the administration's tax package and contrast it with Republican plans.

• Temporary Assistance to Needy Families (TANF). The president's budget reduces TANF funding by $250 million in FY 2001, providing $16.4 billion for the program. $240 million of the reduction results from a legislative proposal that would reduce TANF supplemental grant funds in 2001 to the 1998 level for all eligible states. The federal savings created by the reduction in supplemental funds would be used to offset discretionary spending in other programs. The remaining $10 million reduction is attributed to penalties on 12 states for failure to meet two-parent work participation requirements. The budget also would require cost allocation of common state administrative costs between Medicaid and TANF. The budget does not provide a clear picture of the savings that would result from this change. NCSL opposes any reduction to the TANF program and will oppose these reductions throughout the budget negotiation.
• The Social Services Block Grant (Title XX) would be funded at $1.775 billion for FY 2001, an increase in funding of $75 million over FY 2000. However, this amount includes an earmark of $25 million for second-chance homes for unmarried teen parents and their children. NCSL opposes the earmarking of SSBG funds and supports full flexibility in the use of SSBG funds by states. Under the President's plan, there is no change in the scheduled reduction of transferability of TANF funds to SSBG (from 10% to 4.25%) enacted in the TEA-21 Act.
• Child Support. The President's budget includes federal funds for a new state option to pass through child support collections to families and disregard these funds when determining assistance levels for TANF families. The federal government would pay the greater of $100 per month or $50 above the current state effort. The proposal also includes an option for states to simplify the distribution of child support collections. Under the plan, child support collected for families on assistance would still be retained by the federal and state governments, but child support collections for families no longer on assistance would be paid to the family, and the federal government would forgo its share of the collections. States would also be required to review child support orders every three years.

• Child Care and Early Learning. The FY 2001 budget proposal includes $2 billion for the discretionary Child Care and Development Block Grant (CCDBG), representing an increase of $815 million. Funding at this level will provide subsidies for nearly 150,000 additional children. The $2 billion includes earmarks of $223 million to improve the quality of child care, and $19 million to support school-age child care.
• Early Learning Fund. This new initiative will provide $600 million in mandatory funds for community level challenge grants to improve early learning and the quality and safety of child care for children up to age five. The entitlement program would be authorized at $3 billion over five years.
• Head Start. The President is proposing an increase of $1 billion over 2000. At this funding level, 70,000 more children would be served by Head Start. The Head Start request also supports an additional 10,000 children in Early Head Start.
• The president's budget allows grantees to spend current Welfare-to-Work money for two additional years.
• The president's budget provides a new $225 million grant, Fathers Work/Families Win, designed to put non-custodial parents who owe child support to work and help low-income custodial parents with job advancement.
• Legal Immigrants. The President's FY 2001 budget provides $2.5 billion over five years for assistance to legal immigrants. The proposal would: 1) restore SSI and Medicaid to legal immigrants who entered the U.S. after August 22, 1996, have been here for five years, and became disabled after entry; 2) restore Food Stamps eligibility to legal immigrants who were in the country before August 22, 1996 and either subsequently reached age 65 or have children eligible for Food Stamps; and 3) allow states to provide Medicaid or SCHIP to legal immigrant children and pregnant women regardless of their date of entry to the U.S. and legal immigrant parents of children who are covered by Medicaid or SCHIP under the president's proposed FamilyCare program.
• Food Stamps. The budget contains a proposal for legislation that will offer states the option to conform to federal rules on the resource value of vehicles to the TANF program. TANF often employs more generous rules regarding the value of vehicles. This change may allow recipients to own vehicles that are more reliable. The federal Food Stamp vehicle asset limit is presently $4,650.
• NCSL Contacts: Sheri Steisel, Lee Posey

• TEA-21 Agreement-Support for Highways & Mass Transit. The president's budget proposal provides $54.9 billion for federal transportation programs in FY 2001. The increase is due in great part to increased gas tax revenues (estimated at $3 billion) that, as a result of "firewalls" set in the TEA-21 agreement, must be spent on the TEA-21 program. The president's budget would divert $740 million of these funds, known as revenue aligned budget authority or RABA, to activities inconsistent with TEA-21 formulas. NCSL opposes the spending of RABA for unauthorized activities. Mass transit spending would be set at $6.3 billion-the level guaranteed under TEA-21.
• Aviation funding. The president's budget increases Federal Aviation Administration funding by $11 billion. Support for the Airport Improvement Program is set at FY 2000 levels, or $1.95 billion. The president's proposal assumes the creation of new user fees to supplement spending from the Aviation Trust Fund and provides no general funding for the FAA. NCSL supports general funding for the FAA.
• NCSL Contact: Eileen Doherty

• State Revolving Funds. The president's budget reduces support for the Clean Water SRF by $550 million, providing $800 million in FY 2001 for the program. The Drinking Water SRF is set at $825 million for FY 2001, an increase of $5 million over FY 2000.
• NCSL Contact: Eileen Doherty

• Child Care and Dependent Care Tax Credit. This credit, which would be expanded by increasing the credit for middle income families, makes the credits refundable beginning in 2003.
• Earned Income Tax Credit (EITC). The president's budget provides for a ten-year, $23.6 billion expansion of the Earned Income Tax Credit. Specifically, the proposal would: 1) increase the credit received by larger families (3 or more children) by $500; 2) slow the phase-out for families with two or more children; and 3) provide marriage penalty tax relief to two-earner households.
• Tobacco Taxes. The president's budget accelerates the effective date of a scheduled 5-cent-per-pack increase of the federal excise tax on tobacco, set to take effect on January 1, 2002. The proposal further increases the federal excise tax per pack by 25 cents. Both provisions would take effect on October 1, 2000. "Comparable" taxes on other tobacco products would also be increased proportionately. Beginning in 2003, the administration proposes to fine tobacco companies $3,000 per youth if the youth smoking rate is not reduced by 50%. An increase in the federal excise tax on tobacco would likely reduce payments to states under the State Tobacco Settlement.
• NCSL Contacts: Gerri Madrid, Sheri Steisel, Joy Johnson Wilson (tobacco)

• Our next brief, which will be available later this week, will provide analysis of health, education and tax cut provisions contained in the president's budget.

While the president and Congress seem willing to ignore the discretionary spending caps set in the 1997 Balanced Budget Act, the caps will need to be changed through legislation before new discretionary spending levels can be enforced. House and Senate Republicans are targeting March for enactment of their budget resolution. The resolution is unlikely to provide funding at levels consistent with the president's budget.

BUDGET AUTHORITY, BY APPROPRIATIONS BILL UNDER
THE PRESIDENT'S PROPOSED FY 2001 BUDGET
(in billions) 

1999
actual

2000
est.

2001
prop.

Agriculture
Commerce-Justice-State
Defense
District of Columbia
Energy & Water
Foreign Operations
Interior
Labor-HHS
Legislative Branch
Military Construction
Transportation
Treasury-Postal
VA-HUD

14.5
32.7
253.1
0.6
21.6
13.2
14.4
80.1
2.3
9.2
39.7
13.3
80.4

15.8
37.7
269.8
0.5
21.6
13.8
14.7
90.8
2.6
8.5
43.7
14.1
82.6

15.1
39.3
270.1
0.4
21.7
15.2
15.8
97.8
2.8
8.6
46.8
15.4
86.4

Allowances
Repeal of obligation/pay delays
Designated offsets

1.3

-0.2
-1.3
-7.5

Total, net program level

575.1

617.6

626.4

Source: OMB, Budget Document, Table S-8

Links for further information:

Clinton Administration Budget
House Budget Committee
Administration's Surplus Estimates (see page 379)
Office of Management and Budget
Congressional Budget Office
Congressional Budget Office's Surplus Estimates
White House Budget Highlights
Federal Budget and Taxation Committee (NCSL)
Analysis of Human Services Budget Proposals (NCSL)
Analysis of Health Budget Proposals (NCSL)
Major Discretionary and Mandatory Program Spending (FFIS)

Other Resources on the President's FY 2001 Budget (links)