February 10, 2004

• Republican Moderates and Conservatives Continue to Voice Concerns Over President's Budget Request
• Aid to State and Local Governments, A Brief Overview
• CBO Confirms Its Medicare Cost Estimate
• Legislation of Interest

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Republican Moderates and Conservatives Continue to Voice Concerns Over President's Budget Request

Since the Administration submitted its proposed FY2005 budget to the Congress early this month, the overwhelming response from House and Senate Republican moderates and conservatives has been frustration and opposition, leaving many to wonder whether Congress will, once again, for the second consecutive year, fail to pass a budget resolution. Republican moderates view the proposal as not funding domestic priorities enough, and conservatives assert that the bill continues to increase new spending and increase debt.

Adding to the intra-party tension over the spending conflicts and the ballooning $500+ annual deficit and $7 trillion national debt are the recent actions concerning the administration's proposals on immigration reform, the increased projected cost of the Medicare reform and prescription drug narrowly passed by the congress last year, and the proposed termination of 65 "major" programs and funding reduction of roughly 63 programs.

Grant programs on the administration's chopping block include the Dept. of Commerce's Advanced Technology Program (funded at approximately $171 million in FY 2004) and the Dept. of Education's Even Start Program (funded at approximately $247 million in FY 2004).

Senate Energy Committee Chairman Domenici (R-NM) stated "I am disappointed that the Office of Science took a two percent cut, especially in light of specific guidance from my energy and water development appropriations subcommittee to do just the opposite. I also consider the decision to decimate nuclear energy research and development short-sighted."

Finance Committee Chairman Grassley (R-UT) voiced his concern that the administration did not propose an increase in certain agriculture funding, stating earlier this week that "I intend to be an advocate for value-added agriculture."

Senate Budget Committee Chairman Nickles (R-OK) stated that he will not support making the 2001 and 2003 tax cuts permanent and he will encourage his colleagues to allow all of the tax cuts to expire on schedule.

In the House, a coalition of more than 90 House conservatives issued a release on February 4th stating that the FY 2005 request does not go far enough in reining in spending. Rep. Myrick, head of the conservative Republican Study Committee, stated in the release that "while [the president] showed restraint in several areas, the total spending is still too high." Myrick went on to assert that she "will continue to work with the President to reduce spending on existing programs, and eliminate duplicitous, obsolete, and non functioning programs."

House Appropriations Committee Chairman Young praised the president for proposing fiscal restraint, but believes the FY 2005 request does not go far enough to tackle the deficit. "While I am dedicated to developing fiscally conservative budgets, no one should expect significant deficit reduction as a result of austere non-defense discretionary spending limits. The numbers simply do not add up." Chairman Young promised to find additional cuts without sacrificing "traditional Congressional priorities."

OMB Director Josh Bolten, during last week's House Budget Committee hearing, stated that the administration's proposed program cuts will not be good news all around, and expects complaints from "almost every member." Bolten went on to justify the cuts by stating that defense and homeland security demands require Congress to tighten its belt in other areas.

House and Senate Budget Committee Chairmen Nussle and Nickles believe that the president's proposed cuts are a good starting point, but will also look into all spending (discretionary and mandatory) for funding reductions. "We should look in every nook and cranny when it comes to looking to save money, to reduce spending, to reform programs, make them better," stated Nussle earlier this week.

Chairman Nickles reiterated Nussle's goal, stating that "unless we do something on mandatory spending, which frankly I think every dollar of the federal government should be on the table, we need to look and see if we can find savings everywhere."

The administration's budget assumptions include a projection that the on and off budget receipts will increase by 13 percent in FY2005, compared to a 10.5 percent decline between FY2001 and FY2003 and a 1 percent increase between FY2004 and FY2003. The budget proposal also projects a continued increase in federal receipts of 6.5 percent through 2009. These increases are projected even with the assumption that the expiring child tax credit, expansion of the 10 percent income tax bracket, expansion of the standard deduction and 15 percent tax bracket for married couples filing a joint return, and maximum 15 percent income tax on capital gains and dividends for certain taxpayers will be made permanent.

Against this background, the questions being raised are:

1. Will Congress be able to adopt a final budget resolution that sets the blueprint for FY2005? and,
2. Will there be sufficient time for other legislation due to expire on September 30, 2004 be reauthorized during the short Session?

At this point the conflicts within the majority party and between the parties seem to be serious enough to slow the process and limit what this Session of the congress will do to passing the FY2005 appropriations bills.

It is too early to speculate, but Chairman Nussle conceded that the answers are up in the air, stating that "I'm going to begin working with conservatives and moderates and anyone who wants to work on bringing this budget into balance and a much more fiscally responsible position, if, in fact, we can come up with the votes to do that."

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Aid to State and Local Governments, A Brief Overview

According to OMB's Analytical Perspectives, Budget of the United States Government, FY 2005 (page 113), the administration is requesting that total federal grant outlays be reduced by $1.6 billion between FY 2004 and FY 2005, citing "temporary grant increases in 2003 and 2004 for Medicaid and fiscal assistance that were enacted as part of the economic recovery proposals."

Below is a breakdown of federal grant outlays by agency (in billions of dollars):

Agency	FY2003	FY2004 Estimate	FY2005 Estimate
Agriculture	23.2	23.9	24.0
Commerce	.6	.9	.6
Education	32.5	38.6	39.1
Energy	.3	.3	.3
HHS	222.0	240.0	245.6
DHS	8.0	7.2	7.0
HUD	31.8	34.1	34.1
Interior	3.0	3.2	3.5
Justice	4.1	3.8	3.6
Labor	8.9	7.8	6.8
DOT	41.0	43.5	44.9
Treasury	5.4	5.5	.4
VA	.4	.4	.5
EPA	3.9	4.3	3.8
Other Agencies	2.0	4.4	3.8
Total	387.3	418.1	416.5

As the table above shows, federal grant outlays are estimated to rise $30.8 billion between FY 2003 and FY 2004, largely attributed to an estimated $18.7 billion increase in DHS grant funding over this period.

OMB estimates that 65 percent of total FY 2005 state and local grant outlays will be for individuals (e.g., Medicaid payments).

Analytical Perspectives contains analyses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective. The Analytical Perspectives volume includes:

• Economic and accounting analyses
• Information on Federal receipts and collections
• Analyses of Federal spending
• Detailed information on Federal borrowing and debt
• Baseline or current services estimates
• A list of federal programs by agency, account, and budget function

Also included in the "Aid to State and Local Governments" chapter for the first time is information on the performance of selected grant programs based on the Program Assessment Rating Tool (PART), which provides state-by-state estimates of major grant programs. Included in the PART section, are critiques of the allocation formula used to disburse student aid campus-based funds, the Perkins Loan Program, the TRIO Upward Bound programs, and the Federal Direct Loan Program.

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CBO Confirms Its Medicare Cost Estimate

In a letter to House Budget Committee Chairman Nussle, CBO reiterated its ten-year, $395 billion cost estimate of last year's enacted Medicare reform bill (H.R. 1). Nussle's request comes on the heels of the administration's recently released estimate that H.R. 1 would total $534 billion through FY 2013. "To date, we have not received any additional data or studies that would lead us to reconsider our conclusions," the February second letter stated. "Therefore, CBO believes its estimate is sound and has no reason, at present, to revise it." CBO attached to its letter a summary of major differences between the CBO and administration estimates. One difference, accounting for about $47 billion, is that the administration assumes higher participation in the low-income subsidy.

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Legislation of Interest

S. 2048 — make permanent the deduction for qualified tuition and related expenses and to repeal the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 with respect to such deduction.

S. 2050 — repeal the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 with respect to the affordable education provisions of such Act.

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For more information, contact:

TG Congressional and Legislative Relations
(512) 219-4503
P.O. Box 83100
Round Rock, TX 78683-3100