April 2006

Federal Tax Cuts Mean Significant Program Cuts

by Jon Peacock

In early February, Congress finally wrapped up work on the federal budget for fiscal year (FY) 2006, and almost immediately began working on the President's FY 2007 budget proposal. The latter document, like the budget the President recently signed, would make substantial cuts in a wide range of programs for children and families.

Republican leaders in Congress have taken great pains to try to separate the budget cuts from the tax cuts being advanced in other legislation. Yet clearly the tax and spending cuts are closely related. In this article we will take a look at the FY 2006 and 2007 budget bills, as well as the tax cutting that is driving the spending choices.

Making Room for Tax Cuts

The first stage of the federal budget process is the adoption each spring of a resolution setting the general parameters for the more detailed budget decisions that will be made in the summer and fall. The goal is to finish the budget process by the start of the fiscal year on October 1, but recent budgets have typically taken much longer than that to be completed.

The resolution for FY 2006, which was narrowly approved by Congress in early May 2005, required cuts in entitlement spending of at least $35 billion over a five-year period (FY 2006 through 2010) and tax cuts of between $70 billion and $106 billion over that period. Once those budget parameters were set, the remaining work for Congress was largely a matter of deciding which taxes would be cut and which specific programs would bear the brunt of the spending cuts.

Ultimately, the final FY 2006 budget bill cut spending by about $39 billion. Some members of Congress have argued that those cuts were necessary to help reduce the federal deficit, but that argument is undermined by the tax cuts. Although the reductions in entitlement programs like Medicaid are very substantial, they are far surpassed by the tax cuts. Thus, the deficit will grow significantly larger.

Once the budget resolution was approved in May 2005, Congressional leaders took great pains to separate the appropriations bills from the tax cuts. Doing so is part of the strategy for maintaining the fiction that the spending cuts will reduce the deficit. In addition, keeping spending and revenue bills separate prevents Congress and the public from having a clear debate about the tradeoffs between tax and spending choices.

Spending cuts could have been avoided either by not renewing some of the expiring tax breaks for the wealthy or by not phasing in new tax breaks authorized by Congress several years ago. However, Congress allowed two new tax breaks to begin phasing in gradually on January 1, 2006. These tax breaks are projected to reduce federal revenue by $27 billion over the next five years and about $15 billion per year thereafter. According to an analysis by the Urban Institute-Brookings Institution Tax Policy Center, those tax breaks will almost exclusively benefit the very wealthy:

  • The 0.2 percent of households with annual incomes over $1 million will get 54 percent of the benefits.
  • 97 percent of the benefits will go to the 4 percent of households with incomes above $200,000.
  • The 85 percent of households making less than $100,000 per year would get just one tenth of one percent of the benefit of these new tax breaks.

Although those new tax breaks are starting to take effect, the final form of the tax cut legislation for FY 2006 was still being debated as this article was being written. The primary items under consideration, such as special tax treatment for capital gains and dividend income, also disproportionately benefit the wealthy. The 2006

Deficit Reduction Act

Congressional action on the FY 2006 spending bill, named the Deficit Reduction Act (DRA) was finally completed on February 1, 2006, four months into the budget period. It was approved by a razor-thin margin of 214 to 212, when virtually all of the House Democrats and a small group of Republicans balked at voting for the measure that emerged in late December from a House-Senate conference committee.

The DRA is an outstanding example of the need for campaign finance reform. The budget plan that had initially been passed by the Senate had the same level of total spending, but it avoided cutting important programs for children, such as child support enforcement, Medicaid, and child care. Yet when House and Senate negotiators met behind closed doors to work out the final version of the bill, in almost every instance they came down on the side of powerful interests like the drug companies, and making cuts instead in programs for kids and vulnerable families.

The list of important programs that are cut is lengthy, but some of the more troublesome aspects of the DRA include:

  • cutting Medicaid funds by $18 billion over the next decade, primarily by allowing states to increase Medicaid premiums and co-pays charged to low-income families;
  • reducing funding for child support enforcement, which the Congressional Budget Office estimates will reduce child support collections by $8.4 billion over the next decade;
  • eliminating TANF performance bonus funds, which creates a $10 million hole in Wisconsin's budget for W-2 and related programs;
  • imposing more stringent requirements for states on the portion of the remaining people in welfare reform programs who must be working;
  • cutting child welfare funding for programs serving abused and neglected children;
  • increasing the cost of student loans; and
  • making people with severe disabilities wait longer to receive the federal benefits they are due.

One of our chief concerns is the cut in funding for local child support enforcement programs. This is one of the most cost-effective government programs, and the county-run child support collection programs in Wisconsin have been among the best nationally. Perhaps in some states it will be possible to raise taxes to replace some of the lost funding, but property tax limits imposed on Wisconsin counties will make it nearly impossible for them to offset these federal cuts.

Based on figures from the Congressional Budget Office, the cuts are expected to reduce child support collections for Wisconsin children by about $548 million over the next decade. The result will be hardship for thousands of Wisconsin children, and many of the lower income households will probably have to turn to welfare, which only causes higher government costs in the long run.

Another very onerous provision is a new requirement that all participants in Medicaid and related programs, such as BadgerCare and SeniorCare, will have to provide proof of their citizenship, beginning in July 2006. In the past, Medicaid participants had to declare that they were citizens, and those declarations were subject to spot checks, but documentation was not routinely required.

The exact rules for citizenship documentation have yet to be determined, but it is expected that all enrollees and applicants - including the frail elderly and the mentally ill - will have to produce a passport or a birth certificate. This is expected to create a severe and expensive burden for caseworkers, and more importantly will knock tens of thousands of people off the program because they simply don't have and cannot easily obtain the required documents. A survey conducted by the Center on Budget and Policy Priorities found that about a tenth of adults with income below $25,000 cannot produce a passport or birth certificate.

Although the FY 2006 budget process is generally thought to have been completed, there is some doubt and controversy about that. There was a relatively small difference between the House and Senate versions of the bill in one of the budget provisions. As a result, the budget might not meet the constitutional requirement that identical versions be approved by both houses. The logical thing to do would have been to send the bill back to the floor in one or both houses to fix the defect, but this budget was so controversial that GOP leaders wanted to avoid another vote on passage. Yet because the problem was not fixed, a lawsuit has already been filed challenging the bill's constitutionality, and more lawsuits are likely.

The President's FY 2007 Budget

Within a week of final House approval of the FY 2006 budget, President Bush introduced his budget plan for FY 2007. Elements of the plan include:

  • making permanent the income tax cuts passed in 2001 and 2003, and adding many additional cuts and tax breaks;
  • totals cuts in entitlements of $65 billion over five years, including a $36 billion reduction for Medicare;
  • $13.6 billion in federal spending reductions for the state-federal Medicaid program over the next five years;
  • cuts of $15 billion from consolidating or eliminating 141 federal programs. More than one-fifth of those reductions ($ 3.5 billion) are in education, including early education; and
  • a shift of $8.6 billion in Medicaid costs to the states over the next decade, by reducing federal matching rates for administration and targeted case management.

Wisconsin Implications of the Next Budget Cuts

In late February, the Center on Budget and Policy Priorities issued a report that shows how the proposed 2007 budget would affect specific programs, as well as each state, over the next five years. That report, available at: http://www.cbpp.org/2-23-06bud.htm, reveals the projected impacts on Wisconsin (calculated in inflation-adjusted dollars), which would include:

  • Cutting federal funding for K-12 education in Wisconsin by $135 million from 2007 to 2011, with the reduction reaching more than 8 percent in 2011. (Nationally, the cut would total nearly $7.7 billion over the five-year period).
  • Slicing Wisconsin's federal funding for the WIC program (the Special Supplemental Nutrition Program for Women, Infants, and Children) by $32 million over the next five years, which would mean 6,700 fewer people could be served in 2011.
  • Cutting federal energy assistance for low-income Wisconsin households by $68 million over five years, or 29 percent in 2011.
  • Slashing Wisconsin's federal funding for vocational education by about 74 percent, or almost $135 million, over the next five years.
  • Cutting Wisconsin's federal child care funding by almost $15 million over five years, translating to a cut of 14 percent in 2011. ·
  • Cutting federal funding received by Wisconsin from the part of the budget that includes Head Start, services for abused and neglected children, and other community and social services by $41.5 million over five years, or a reduction of 19 percent in 2011. This means that at least 1,400 fewer Wisconsin children could participate in Head Start.
  • Dramatically reducing federal funding to repair public housing in Wisconsin by $21 million over five years, a 23 percent reduction in 2011.
  • Sharply paring back Wisconsin's funding for the Community Development Block Grant formula grant program, which funds numerous economic development activities (such as improvements to roads and other infrastructure) and housing-related activities (such as rehabilitation of blighted buildings and assistance for the homeless), by $98 million over five years, or 31 percent in 2011.

Conclusion

When President Bush began pushing a tax cutting agenda in 2001, which has primarily benefited the very wealthy, he argued that tax cuts would not necessitate spending cuts or lead to budget deficits. But six years later the federal deficit is setting new records, and Congress and the President are working to substantially decrease domestic spending for programs that benefit children and vulnerable families.

The recently completed FY 2006 budget bill will cut spending by $39 billion over the next five years and $99 billion over 10 years, with half of the cuts coming from Medicaid and Medicare. Other budget provisions will reduce child support collections by $8.4 billion over the next decade, cut child protective services funding for abused and neglected kids, shrink funding for student loans, and create substantial new barriers to participating in Medicaid and related health care programs. Those cuts could have been avoided if Congress had simply prevented two new tax breaks for the very wealthy from being phased in over the next several years.

Congress is now working on President Bush's FY 2007 budget proposal, which contains more tax breaks and even deeper spending cuts than the previous budget. Wisconsin's share of the proposed cuts would include the loss of about $135 million for K-12 education over the next five years, $98 million from the Community Development Block Grants, and $68 million for federal energy assistance for low-income Wisconsin households. The cuts in the latter two programs would grow to about 30 percent by 2011. Federal support for vocational education would be cut by 74 percent.

Unless Congress rethinks the strategy of providing new and extended tax cuts for the rich, there will be no choice but to make deep cuts in programs like Medicaid, Medicare, food stamps, child care and education. At the very least, we deserve an honest public debate, where policymakers and the media put the tax cut proposals and the spending cuts on the table at the same time and openly debate their relative merits.