Budget Debate Turns into a Tax Fight

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The House and Senate both passed their budget resolutions on Thursday. The Senate budget plan (S. Con. Res. 70) was approved by a vote of 51 to 44, while the House budget plan (House Con. Res. 312) was approved by a vote of 212 to 207.

All 100 Senators showed up Thursday for what is often called "vote-a-rama," an avalanche of amendments that members offer each year to the budget. These amendments generally are not binding, but they put Senators on record as supporting or opposing key tax and spending policies. Lawmakers often offer them to force the opposing party to take votes that might be politically difficult.

Slashing the Estate Tax and Other Tax Cut Promises

The budget resolutions project surpluses in fiscal years 2012 and 2013, although the math used to project these surpluses is questionable. Senator Max Baucus (D-MT) offered an amendment which was adopted by a vote of 99-1 and which shows that the Senate intends to spend this "surplus" on extending parts of the Bush tax cuts that he describes as focused on the "middle-class." While these do include keeping the lowest income tax rate at 10 percent and keeping the $1,000 child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

The amendment, while not binding, puts the Senate on record as supporting a change in the estate tax that is understood to involve freezing in place the estate tax rules that are scheduled to take effect in 2009 (an exemption of $3.5 million per spouse and a top estate tax rate of 45 percent). Under current law, the estate tax rules get more generous each year until the estate tax disappears entirely in 2010, and then in 2011 revert to the rules that were in place during the Clinton years.

CTJ's recent figures on the estate tax show that it affected less than one percent of estates during 2005 and 2006. And those estates were subject to an exemption of $1.5 million per spouse. Now the exemption is $2 million and in 2009 it will be $3.5 million.

Throughout the day on Thursday, Democrats in the Senate used a strategy of countering Republican amendments to provide new deficit-financed tax breaks with very similar amendments that were equally regressive but deficit-neutral.

Alternative Minimum Tax

For example, Senator Arlen Specter (R-PA) offered an amendment that would have repealed a change in the Alternative Minimum Tax (AMT) that was enacted in 1993. The 1993 law increased the AMT for some relatively well-off taxpayers, to correspond with increases in the ordinary income tax. The Specter amendment therefore would cut the AMT from its current level for those well-off taxpayers, and this cut would be deficit-financed. Before members were allowed to vote on this, the body voted on an amendment offered by Senator Kent Conrad (D-ND) to do the exact same thing except with the costs offset. The Conrad amendment didn't specify just how those costs would be offset, and neither amendment would be binding. But apparently enough Senators felt that they would be credited with voting to "do something" about the AMT if they voted for the Conrad amendment, which was approved 53 to 46, instead of the Specter amendment, which failed, 49-50.

(The amendment by Senator Specter seems to be part of a long-term strategy by the Republicans to convince opinion leaders and the public that the expanding reach of the AMT is due to policies enacted during the Clinton administration. To find out why that is NOT the case, read the post on our blog that addressed this last year.)

More Estate Tax

A similar pattern played out in more ominous ways when the Senate turned its attention back to the estate tax. Senator Jon Kyl (R-AZ) offered an amendment that would slash the estate tax further than the Baucus amendment would. The Kyl amendment would have put the Senate on record in support of raising the estate tax exemption to $5 million, or $10 million for married couples, and lowering the top rate to 35 percent. As the Center on Budget and Policy Priorities points out, this would cost about 77 percent as much as fully repealing the estate tax. Before members were allowed to vote on this, a vote was held on an amendment offered by Senator Ken Salazar (D-CO) to make the exact same changes, but with the costs offset in some unspecified way.

Slashing the estate tax any further than it already has been would be an entirely unwarranted boon for America's richest families and is bad policy even if it is done in a deficit-neutral way. If less than one percent of estates were affected by the estate tax when the exemption was $1.5 million, as CTJ has found, it's very hard to imagine why the exemption would need to be raised to $5 million.

Disturbingly, the Salazar amendment got 13 more votes this year than an identical amendment offered by Senator Ben Nelson (D-NE) last year. While the Salazar amendment failed this year, it failed by a vote of 38 to 62, whereas last year it failed 25-74.

Even more disturbing, the Kyl amendment -- the amendment to slash the estate tax WITHOUT offsetting the costs -- nearly passed, with a vote of 50-50. This vote is a signal to organizations working on tax fairness that we must redouble our efforts to educate lawmakers and the public about the extremely regressive effects of repealing or greatly reducing the estate tax.

Social Security

As he has in the previous couple years, Senator Jim Bunning (R-KY) offered an amendment to repeal the tax increase on Social Security benefits that was enacted in 1993. Bunning decided to offset the costs in his amendment with across the board cuts in discretionary spending. His amendment failed, 47-53.

The federal government began taxing a portion of Social Security benefits in 1984, and increased the amount that can be included in taxable income to a maximum of 85 percent in 1993. The idea was to treat Social Security benefits more like other retirement income, such as pensions and IRA distributions. For most retirees, the vast majority of Social Security benefits are income that has never been taxed. Most beneficiaries still pay no federal income taxes on their benefits, but above certain income levels benefits gradually become taxable. For the best off, 85 percent of benefits must be included in taxable income.

Repealing the 1993 provision would do nothing to help the majority of Social Security beneficiaries. Nonetheless, the Democrats offered an alternative amendment that would make the same change as Bunning's amendment, but which also called for some unspecified offsets. That amendment was approved 53-46.

Meanwhile, in the House of Representatives...

Over in the House, the Republicans offered an alternative budget resolution that would make the Bush tax cuts permanent and eventually repeal the AMT. These measures would be paid for with large cuts in Medicare, Medicaid, and other programs, while increasing defense spending. This alternative failed, 157-263.

The Democrats' budget resolution in the House was approved by a vote of 212 to 207. One way the House version differs from the Senate version is the use of what is called "reconciliation." A budget resolution can include "reconciliation instructions" that instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

This year, the House plan includes reconciliation instructions to produce a couple revenue-neutral bills. One would delay a scheduled reduction in payments by Medicare to doctors while another would provide another year of relief from the Alternative Minimum Tax (AMT), without increasing the budget deficit. Negotiations that will take place in conference will determine whether reconciliation instructions will survive in the final budget resolution.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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