With all the action recently on the financial sector bailout, it almost slipped our notice that Congress has finalized the FY 2009 appropriations process, at least through March 6 of next year. Last week, on Wednesday (Sept. 24), the House passed its package of three appropriations bills (Defense, Homeland Security, and Military Construction-VA), along with a continuing resolution (CR) that will cover all the other sections of the government until March 6, 2009. The vote was 370-58. The Senate passed the House proposal over the weekend on Saturday by a vote of 78-12.

The CR was put together and passed in less than a week, with little transparency or time to review specific provisions, earmarks, and funding levels. The bill level-funds most government programs outside of the three individual security bills that were included and a few select programs and priorities in need of more immediate funding. These include the Low Income Home Energy Assistance Program (LIHEAP), which received a $5.1 billion increase. This is more than double the $2.5 billion appropriated in FY 2008 and finally brings the program up to its authorized funding level. There is also $22.9 billion in emergency funding for disaster relief and $7.5 billion to support a $25 billion loan to the U.S. auto industry.

Even though this was the result of the appropriations process that everyone was expecting for most of this year, the result that Democratic leaders themselves had announced early on as a deliberate strategy, it is still pretty disappointing. In fact, it might be more disappointing because it was pre-ordained by Reid, Pelosi, and others on the Hill early on this year. Congress is supposed to pass appropriations bills on time. In fact, it is their primary responsibility. They have repeatedly failed to do this over the last decade regardless of circumstances, regardless of who controls Congress, and this year we've reached the point where they aren't even trying anymore. How can we expect them to enact a solution to the financial sector crisis if they can't even complete their basic job responsibilities?

Congressional leaders were left scratching their heads, contemplating what to do next after the House failed, by a vote of 205-228 to approve a $700 billion plan to buy up troubled financial assets that are purportedly threatening the financial markets.

CQ Politics reports that although the House voted to adjourn, they will return Thursday to continue working on assuaging the angst of financial markets. Calling the issue "much too important to simply let fail," Treasury Secretary Henry Paulson vowed to return to working out a plan to bailout Wall Street. However, legislators have been at best vague in spelling out what to expect in the next few days. As Speaker of the House Nancy Pelosi said, "stay tuned."

Members of the House Democratic Leadership, from left, House Majority Leader Rep. Steny Hoyer, D-Md., House Speaker Nancy Pelosi, House Democratic Caucus Chair Rep. Rahm Emanuel, D-Ill. and House Majority Whip James Clyburn, D-S.C. meet reporters on Capitol Hill in Washington, Monday, Sept. 29, 2008. (AP Photo/Lawrence Jackson)

This post is an updated version of our previous post on a summary of the $700 billion Wall Street bailout plan that the House rejected (205-228) this afternoon.

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the presidentt, which Congress could reject within 15 days . The rejection could then be vetoed by the president.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets and their derivatives. With support from the Fed, it could also purchase other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, if the firm becomes profitable.
• Participating firms would be subject to executive pay restrictions, implemented through the tax code. The plan would also bar firms from giving "golden parachutes" to executives leaving participating firms for reasons other than retirement
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• If, after five years, the Congressional Budget Office and the Office of Management and Budget agree that the government has not profited from the sale of troubled assets, the president must submit to Congress a plan to recuperate the cost of the plan from the financial industry

Foreclosure Protection
• Treasury can encourage mortgage servicers to modify troubled mortgages
• Requires federal entities that own mortgages to develop a plan to mitigate the foreclosure rate
• Relaxes requirements for eligibility for the Hope for Homeowners program

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Executive Power Enhancement
• An affirmation of the SEC head to suspend mark-to-market accounting, thus allowing firms to report asset values different from what the market believes them to be
• Allows Treasury Secretary to suspend federal contracting rules

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

Media reports and a press release from House Speaker Nancy Pelosi (D-CA) indicate that Congressional leaders and the White House have agreed to a package of measures designed to prevent a financial market meltdown. An official announcement of agreement is expected tonight, and final details of the plan remain unsettled. Here are the package's main provisions:

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the president. Media reports, however, are inconsistent on this. Some are reporting says that the money would be available "only upon action by Congress," while others say it would be available upon presidential request, which Congress could reject. The rejection could then be vetoed.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock.
• Participating firms would be subject to executive pay restrictions, although the details remain vague
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• A fee may be imposed upon the banking industry to pay for the bailout if the government loses money on the purchase of these toxic assets. Reports on this provisions vary, an no details have been announced

Foreclosure Protection
• Treasury can renegotiate mortgages purchased by the federal government with borrowers
• A "tax holiday" for homeowners facing foreclosure will be extended

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

This information has been compiled from the following news sources:
The Wall Street Journal
The New York Times
The Washington Post
McClatchy Newspapers
Congressional Quarterly ($)

Senate Finance Committee Chairman Max Baucus (D-MT) has released a statement calling for a special Inspector General to oversee whatever program is put in place at the Treasury Department to bailout failing Wall Street banks and investment houses. Baucus's letter is signed by 32 other Senators and really makes a lot of sense, which is something we don't often say about Sen. Baucus's proposals.

So hats off to Baucus! Let's hope this proposals is integrated into the final plan being developed.

Congressional Budget Office (CBO) director Peter Orszag testifying before House Budget Committee on Wednesday:

At this time, given the lack of specificity regarding how the program would be implemented and even what asset classes would be purchased, CBO cannot provide a meaningful estimate of the ultimate net cost of the Administration's proposal. The Secretary would have the authority to purchase virtually any asset, at any price, and sell it at any future date; the lack of specificity regarding how that authority would be implemented makes it impossible at this point to provide a quantitative analysis of the net cost to the federal government.

That's no way to run a government. Let's hope that whatever plan Congress comes up with that it gives the CBO at least a vague notion of how much a Wall Street bailout is going to cost.

Image by Flickr user Criterion used under a Creative Commons license

As the clock winds down on the 110th Congress, legislators are working at a furious pace this week, vetting financial bailout proposals, passing tax and spending legislation, holding oversight hearings, etc. All the things that Congress is supposed to do on a regular basis. It's just quite shocking to see them actually doing it.

So, here's a quick rundown on where things stand.

Senate
Yesterday the Senate took three votes on tax cut proposals (see details in this Watcher article), passing two of them. The first was compiled by both Senate Finance Committee Chairman Max Baucus (D-MT) and his counterpart on the committee Sen. Chuck Grassley (R-IA) and is a $68.1 billion package to extend tax cuts and provide an Alternative Minimum Tax patch. This proposal also included $25.2 billion in revenue raising offsets. This bill passed 93-2. The second proposal was $18.3 billion in energy tax incentives that was full paid for by increasing taxes on the oil and gas industry. This also passed 93-2. These bill were both sent to the House today. While it originally looked as though the House would break apart the first proposal and pass AMT relief seperately, House Ways and Means Chairman Charles Rangel (D-NY) announced this afternoon he would postpone consideration of the tax bills to attempt to make some changes that will "take more time than just today."

House
The House finished off their work yesterday by passing a reconciled version of the FY 2009 Defense Authorization bill that passed the Senate last week. House and Senate leaders dropped provisions in the bill that drew a veto threat from President Bush, including restrictions on using private contractors for security functions in combat zones and allowing contract employees to participate in detainee interrogations. The bill will now be sent back to the Senate for final approval, which is expected.

While the House was voting on the authorization bill on the floor, appropriators were busy drawing up the details of a massive appropriations bill that combines three bills (Defense, Homeland Security, and Military Construction-VA) into one bill, includes a continuing resolution funding the rest of the government through March 6, 2009, and also includes $22.9 billion in emergency funding for disaster relief. The House Rules Committee approved the bill for consideration Tuesday night by a vote of 9-4. The total pricetag for this bill is $600.6 billion, almost 60 percent of the entire discretionary budget outlined in this year's budget resolution. The proposal includes limited additional items, but does appropriate $5.1 billion for the Low-Income Home Energy Assistance Program and $7.5 billion to support a $25 billion loan program to U.S. automakers.

Given the current status of this jumbling of legislation and the pending action needed on some kind of fiscal bailout, I can't see any way at all that Congress will adjourn on Friday (the 26th) as they have planned to hit the campaign trail. I've seen snippets of rumors that the House and Senate are thinking about hanging around for the weekend, but they really need more time than that. Now that McCain is suspending his campaign outside of Washington so he can come to Washington and continue to campaign, don't you think members of Congress could stick around at least one more week?

Budget afficionado Stan Collender says that a $700 billion Wall Street bailout will define the budget and, ultimately, the next president's spending priorities for several years.

That would increase the deficit to $1 trillion or more. (My apologies for the italics, but it's hard not to use them in this situation.) If what's left of the $700 billion is spent in 2010 and activities in Iraq and Afghanistan continue that year, the deficit for two consecutive years could be close to that level.

[...]

But it's also hard to see how the 2001 and 2003 tax cuts, which expire at the end of 2010, get extended as easily or completely as they might have before. In fact, nothing else that might be considered in the next few years has the potential to reduce the dramatically increased deficit by as much as quickly as scaling back on these cuts or letting them expire.

Some provisions, like marriage penalty relief and the $1,000-per-child tax credit, might still be a slam dunk. But others, like the top marginal tax rate, capital gains, dividends, estate and gift taxes, and small business expensing, are clearly in jeopardy now.

I don't know, Stan. One should never underestimate the appetite Republicans have for tax cuts. In their world, there's never a bad time for a tax cut. From a BNA email:

A group of House Republicans proposed Sept. 23 temporarily suspending the capital gains tax as a way to coax capital back into sluggish lending markets and offset the cost of a proposed government bailout of the U.S. financial system.

"We have a liquidity crisis and this would bring as much as a trillion dollars in capital sitting on the sidelines, we believe, back into the market," Rep. Jeb Hensarling (R-Texas), chairman of the Republican Study Committee, told reporters at a press conference.

At least Hensarling just skipped the "tax custs pay for themselves" nonsense and went straight for a bold new baseless assertion.

It strains the imagination to believe that investors are "sitting on the sidelines" because the capital gains tax rate is too high. They didn't seem to mind it in the late 90s when capital gains rates were nearly twice what they are today and the stock market saw a 34% increase from 1997 to 2000. It is my understanding, however, that the stock market has been declining the past year, which means the average investor has been paying nothing in capital gains taxes. In fact, because investors can claim capital losses as an income tax deduction, they have an incentive to gamble on the market as their actual losses will be reduced by the amount their income taxes are reduced. Cutting the cap gains rate to zero might induce even more people to wait until market conditions improve, because the average investor would see his tax bill increase.

Update: Oops. Capital losses are offset gains, and in the event of net capital losses, they are deducted from income. So, the capital gains tax rate does not affect net capital losses, just gains.

Image by Flickr user sea_bass used under a Creative Commons license

With all the news of the massive Wall Street bailout, I've heard really nothing about how this $700 billion gamble is supposed to be paid for (other than more borrowing, which is to say paid for by later). And what I have read, makes me real nervous. In a "dear colleague" letter, former chair of the Republican Study Committe Rep. Mike Pense (R-IN) pleads with colleagues (MS Word doc) to avoid raising revenue or the national debt.

If Congress decides to spend nearly 1 trillion dollars on a corporate bailout, it must find budget savings to prevent that cost from being passed along to the American people.

[...]

[Republicans] should demand consideration of free market alternatives to massive government spending and we should fight to pay for the solution through budget cuts and reform instead of more debt or taxes.

Surely Rep. Pense knows that the entire FY 2009 discretionary budget is $1.01 trillion. Of that, $350 billion funds non-defense, domestic discretionary programs. I don't know what Pense has in mind, but there simply isn't $700 billion to be found in "budget savings" that would prevent an increase in the national debt.

Just a little perspective on the size of this bailout.

Image by Flickr user dharma communications used under a Creative Commons license.

As Wall Street collapses under the weight of its greed, bad luck, and basic stupidity, the Free Market^TM crusaders of the Bush White House have come out of the pro-regulation, big-government closet. This morning, Treasury Secretary Henry Paulson said that the federal government will ride to the rescue of the investors in distress. And everyone seems to agree: Wall Street must be given a handout hand up.

Matthew Yglesias notices the asymmetry of concern:

It'd be absurd for the government to be moving hundreds of billions of dollars around amidst an economic crisis while doing nothing for, say, janitors who get laid off from Lehman Brothers. The problems to worry about here are in the "real" economy. Propping up the financial sector can help accomplish that, but we also need to prop up normal people trying to pay the bills and weather the storm.

And Isaiah J. Poole at Campaign for America's Future reminds us that providing aid to working or out-of-work families benefits more than just those families.

This stimulus effort was resisted by the White House and by congressional conservatives, one of whom—House Minority Whip Roy Blunt, R-Mo.—groused that "bailing out the states on their Medicaid problems or providing $25 billion worth of infrastructure spending are not stimulative and everyone knows that."

"Everyone knows that?" No. What "everyone knows" is that when ordinary people have good jobs—whether they are created by private investment or public investment—they are able to buy the houses, cars and other goods and services that help keep the economy afloat. In particular, a program of spending public dollars on a range of job-producing activities—from fixing roads and bridges to "greening" our public buildings with renewable energy and conservation—would go a long way toward stabilizing the faltering middle class of this country. What "everyone knows," or ought to realize, is that doing nothing to interrupt the falling dominoes of spending cutbacks at the federal, state and local levels is a recipe for continued economic erosion.

Image by Flickr user oblivion9999 used under a Creative Commons license

Federal News Radio posted a short report from earlier this week about efforts at the Internal Revenue Service (IRS) to collect over $3.5 billion in back taxes from federal employees.

The Internal Revenue Service is trying to collect billions of dollars in unpaid taxes from nearly half a million federal employees. According to IRS records, 171,549 current federal workers did not voluntarily pay their federal income taxes in 2007. The same is true for 37,752 active duty military and nearly 200,000 retired civilian and military personnel.

Documents obtained by WTOP through the Freedom of Information Act show 449,531 federal employees and retirees did not pay their taxes for a total of $3,586,784,725 in taxes owed last year.

Best of all is that Federal News Radio made the data set they obtained under FOIA available to everyone else. You can download the excel file from their site. Nice work Federal News Radio!

(h/t Tax Foundation)

Earlier this week, we highlighted two hearings in the House of Representatives that were focusing on issues of waste, fraud, and abuse and federal contracting. Our friends over at the Project on Government Oversight (POGO) have had their A-game this week. They not only testified at one of those hearings, but have provided some excellent previews, commentaries, analysis and reports, and summaries on the hearings this week. All of the POGO materials are worth at least glancing through, if not reading thoroughly.

I also wanted to share POGO's perspective on the passage of the contractor responsibility misconduct database this week as part of the defense authorization bill in the Senate. POGO has championed this proposal from the beginning and long ago created a prototype of the database for the public.

POGO regularly harps on the deficiencies of the proposed database, but it's still a positive accomplishment. The database would only include defense contractors and would be accessible only to Department of Defense procurement officials and Congress. The database may be made available to other government officials at the discretion of the Under Secretary of Defense for Acquisition, Technology, and Logistics, but it's off-limits to the public. It would also include only instances involving the award or performance of contracts, and only those occurring in the most recent 5-year period.

Kudos to POGO for being on top of their game this week.

We'll be shutting down the BudgetBrigade a bit early today to head off to OMB Watch's 25th Anniversary celebration. Yup, that's right. OMBW is 25 years young this year and we're primed and ready for our quarter life crisis! We're taking some time to celebrate tonight with friends and supporters and remember 25 years of fighting for a more transparent and accountable federal government.

While we are looking back over some of our accomplishments of the last quarter century (and honoring the unsung work of some of our public sector colleagues), we are also looking forward to the challenges we'll face over the next 25 years and beyond.

You will be a key part of overcoming those future challenges, just as you've been crucial to our past accomplishments. Your involvement, along with hundreds of thousands of people just like you has helped to make us the success we are today. So thank you for your commitment to the open and accountable ideals that have helped guide OMBW over the past 25 years.

And if you want to help make sure those ideals continue to be realized, consider making a small donation to OMB Watch in honor of our 25th birthday. Your contribution will join with hundreds of others who want to ensure we are able to continue our mission and the important work we do everyday.

There have been lots of stories today I was thinking about throwing up on the blog (DCAA shenangians, Interior Department MMS shenangians), but I settled on an article you might have overlooked in the Wall Street Journal about the continuing investigations Sen. Carl Levin (D-MI) and the Senate Permanent Subcommittee on Investigations (PSI) have been conducting on offshore tax evasion.

I've posted a few times (see here and here too) over the last few weeks about corporate tax evasion. One blog in particular detailed another investigation of the PSI that found that foreign banks were recruiting wealthy American citizens to buy into their U.S. tax evasion schemes.

Well, the latest from the PSI is a report about how U.S. banks (namely Morgan Stanley, Lehman Brothers Holdings Inc., Citigroup Inc. and Merrill Lynch ∓ Co.) are recruiting foreign hedge-fund investors to sell them abusive tax-avoidance transations (see the PSI press release). From the Wall Street Journal:

The yearlong probe, which relied in part on internal bank documents and emails, concludes that Wall Street firms actively competed with one another in dreaming up complex transactions that allowed hedge funds to avoid withholding taxes imposed on dividends paid by U.S. companies.

Is it me, or does this feel like a "if you scratch my tax evasion plan, I'll scratch yours?" First foreign banks are helping Americans avoid U.S. taxes. Now it turns out American banks are helping foreign individuals avoid U.S. taxes. No wonder we've got hundreds of billions of dollars in taxes that go uncollected every year - Uncle Sam is getting screwed from both sides of the ocean.

The PSI report also took the time to rightly criticize both the Internal Revenue Service (IRS) and the Treasury Department:

The Department of Treasury and the IRS have failed to take effective action to stop dividend tax abuse. They have failed to publish for ten years final regulations to address abusive stock loans, failed to clarify existing regulations related to abusive equity swaps, and failed to take enforcement actions against participating financial institutions or their clients. The silence and inaction of the Treasury Department and the IRS in the face of a growing problem have encouraged the spread of offshore dividend tax abuse.

OMB Watch has certainly been very critical of IRS enforcement practices and it looks like we haven't even scratched the surface. Everyone is helping everyone else cheat to get a discount on their taxes and our tax enforcement agency has done nothing. Why am I still paying full price?

In perusing CBO's latest budget forecast, I am once again taken by the magnitude of the 2001-2003 tax cuts (AKA the Bush tax cuts). But I nearly choked on my Atomic FireBall spicy cinnamon hard candy while reading Table 1-8, "The Budgetary Effects of Selected Policy Alternatives Not Included in CBO's Baseline," because I had forgotten how much more expensive the Bush tax cuts make fixing the Alternative Minimum Tax (AMT).

If the Bust tax cuts expire, it will cost $875 billion (including debt service) to index the AMT for inflation. But, the Bush tax cuts were designed such that the AMT would affect more families and bring in a lot more revenue than it otherwise would. The upshot is that if Congress extends the Bush tax cuts, it will cost $1.6 trillion to and index the AMT for inflation.

The Congressional Budget Office (CBO) has released its update to the Budget and Economic Outlook for Fiscal Years 2008 to 2018.

The report anticipates that at the end of the current fiscal year (Sept. 30), the federal deficit for FY 2008 will be $409 (about 3 percent of GDP), $51 billion more than it predicted in March.

That change is almost entirely the result of higher spending than projected in the March baseline. Much of that spending increase was expected, however, because it results from supplemental appropriations for military operations in Iraq and Afghanistan, which were pending at the time. Added spending for deposit insurance and unemployment benefits also contributes to the increase in overall spending in 2008.

For FY 2009, CBO expects the federal budget deficit to hit $438 billion (also 3 percent of GDP), but this figure does not include an $83 billion reduction in revenue as the result of an expected AMT patch next fiscal year. The anticipated $521 billion deficit would best the deficit record set in FY 2004 by about $108 billion. When the Bush Administration released its Mid Session Review in July, it predicted that the budget deficit would be $389 billion in FY 2008 and $482 billion in FY 2009.

And, CBO reminds in the opening paragraph of the report what fiscal policy makers need to keep their eyes on:

Over the longer term, the fiscal outlook continues to depend mostly on the future course of health care costs as well as on the effects of a growing elderly population.

The Congressional Budget Office (CBO) released their Monthly Budget Review on Friday last week, showing lots of red ink for the federal government in FY 2008.

CBO estimates that the federal budget deficit was $486 billion in the first 11 months of the fiscal year, $212 billion more than the shortfall recorded over the same period last year. CBO anticipates that the government will realize a surplus in September, stemming from quarterly payments of estimated income taxes. The result will be a deficit in the vicinity of $400 billion for the fiscal year.

CBO will release a new estimate of the 2008 deficit and updated baseline projections for fiscal years 2009—2018 on September 9 and we'll be sure to post that release on the BudgetBlog.

CBO: Monthly Budget Review