INTRODUCTION

By Alison Acosta Fraser

Director, Thomas A. Roe Institute for Economic Policy Studies

 

Before Thanksgiving recess, the House and Senate passed budget reconciliation bills aimed at reducing mandatory spending. While both bills would reduce spending and share some other similarities, they are very different, and conferees will face difficult decisions as they hammer out the final version. However, difficult decisions are necessary: returning to fiscal sanity means setting priorities and making tough choices, as the policy recommendations made below illustrate. A summary of these recommendations can be found here.

Many have excoriated these savings as huge cuts, but the truth is that both bills take only a small step toward reining in the unbridled entitlement spending that threatens America’s future prosperity.

 

Overview

The House bill would save $49.9 billion through 2010, while the Senate bill would save $34.6 billion. The House bill would trim mandatory spending growth by just over one-half of 1 percent over the next five years. Currently, this spending is projected to increase by 39 percent; under the House bill, it would increase by 38 percent. This is hardly a devastating cut, but it does set the stage for future reforms that will be needed to address the 70 percent increase in spending over the long term projected by the Congressional Budget Office (CBO).[1]

 

While both bills would make only very small cuts, they also contain additional spending on new or expanded programs such as additional higher education grants, subsidies for purchasing digital television converter boxes, new assistance for hurricane victims, and additional winter heating relief. This further exacerbates the long-term spending outlook because some of these initiatives are likely become more expensive in future years.

 

Moreover, as small as their cuts are, both the House and Senate bills overstate the reduction in spending because they rely substantially on new and additional revenues to arrive at projected savings. The House bill contains $16 billion in revenues—nearly one-third of the $49.9 billion savings. The Senate bill contains $19 billion in revenues—over half of the total savings! These new revenues are generated from important policies that Congress should consider, but most would do little to reduce the burden from long-term spending.

 

Someof the savings in these bills, most notably the changes in Medicaid and food stamps, have been maligned as devastating to the poor. In fact, these reforms are good first steps that lay important groundwork for future reform efforts and ensure that our most vulnerable citizens still have a safety net. The recommendations presented below, made by a team of Heritage Foundation experts that analyzed both bills, encompass $52.8 billion in savings. When recommendations for Medicare are factored in, total savings are $98.8 billion. The conferees should give serious consideration to these recommendations and aim to achieve as much in savings as possible as they begin the difficult work of forging the conference report.

 

 

MEDICAID

By Nina Owcharenko

Senior Policy Analyst, Center for Health Policy Studies

 

Medicaid is a central issue for conferees. The House and Senate take similar approaches towards making administrative changes to prescription drug reimbursement and long-term care eligibility. Most House and Senate efforts are similarly aimed at improving the efficiency and administration of the program. These changes would result in modest savings, cutting 1.7 percent from the program. But with projected Medicaid spending set to reach nearly $2.8 trillion by 2015[2], neither administrative adjustments nor improved efficiency alone will achieve serious Medicaid reform or long-term financial stability for the program.

 

The Senate bill includes $8 billion in Medicaid savings over 5 years but spends an additional $3.6billion on Medicaid and the State Children’s Health Insurance Program (SCHIP), leading to net savings of about $4 billion over five years.[3] The Senate Medicaid/SCHIP provisions are projected to reduce outlays by $4.2 billion over the 2006 to 2010 period and by $15.2 billion over the 2006 to 2015 period, according to the CBO.[4]

 

The House bill includes about $13 billion in Medicaid savings but also $3.6billion in new spending, leading to net savings of about $9 billion over five years.[5] The House Medicaid/SCHIP provisions are projected to reduce outlays by $8.9 billion over the period 2006 to 2010 and by $43.7 billion over the period 2006 to 2015.[6]

 

New Spending

From a budgetary standpoint, the changes to Medicaid are modest. Indeed, both the House and Senate add roughly $3.6 billion in new spending to Medicaid and SCHIP to boost federal matching rates for the states hit by Hurricane Katrina—Alabama, Louisiana, and Mississippi—and to help pay for Medicaid coverage for disabled children.[7] The Senate bill also includes a two-year increase in the federal matching rate boost for the state of Alaska, which unjustifiable.

 

Conferees should, on policy grounds, adopt the House approach. The House changes contain important policy tools for states and for the future of Medicaid.

 

Increased spending: $3.6 billion through 2010

 

Prescription Drugs

Both the House and the Senate proposals attempt to establish more accurate prices for prescription drug reimbursement by adjusting the prescription drug formula for pharmacy reimbursement and rebate calculations.

 

Conferees should accept the House’s prescription drug provisions. House and Senate negotiators should recognize Medicaid’s structure and its price controlled system are the real problem. Medicaid politicizes drug pricing—as evident in conferees’ debates over differential pricing for drugs used to treat mental illnesses—and distorts and complicates the administration of the program. The proposed adjustments to prescription drug reimbursement simply highlight the fundamental problems of a centrally planned, micromanaged, government-run program that is constantly struggling to determine the “right” reimbursement for different classes of pharmaceuticals.

 

Conferees should also add a provision to require the Secretary of Health and Human Services (HHS) to develop and present a report to Congress on the best options for injecting a dose of serious market competition into Medicaid drug pricing rather than simply readjusting an inherently flawed government pricing mechanism.

 

Savings: $2.1 billion through 2010

 

Long-Term Care

Both the House and the Senate bills aim to close existing loopholes, such as unscrupulous asset transfers, that some seniors use to qualify for Medicaid long-term care services. Proposed changes in the Senate bill aim save $335 million over five years. The House bill takes a more aggressive approach to eliminate these gimmicks and anticipates saving about $2 billion over five years.

 

Conferees should adopt the House provision. While both the House and Senate provisions are designed to fix the problem, the House’s is more responsible overall. The federal government, working with the states, should improve enforcement of existing eligibility rules and enact new restrictions to prevent those employing clever estate-planning techniques from qualifying for long-term care services under Medicaid. These loopholes enable and encourage middle- and upper-class individuals and families to shelter their assets while leaving the cost of their care to the taxpayer. Stricter standards are also necessary to ensure that Medicaid is protected for those who need it most. Once again, the congressional proposals are minimal. For example, under the House version of the legislation, Medicaid beneficiaries would be able to protect up to $750,000 in home equity and still qualify for taxpayer funded nursing home care.

 

Savings: $2.1[8] billion through 2010

 

State Flexibility

By far, the most critical differences between the House and the Senate proposals are the provisions of the House bill that would provide states with greater flexibility in cost-sharing and the design of benefit packages. The House anticipates that this will save Medicaid about $6 billion over five years. The Senate bill would not to provide states with such flexibility.

 

Conferees should accept the House provisions. Flexibility is a crucial feature for future Medicaid reform. Over the years, states have expanded eligibility above the federal floor and beyond the basic categories but have little ability to distinguish between various groups and categories. Flexibility in benefit packages and cost-sharing will allow states to differentiate between the truly indigent and those with some financial means. A family earning $32,000 per year with a child enrolled in Medicaid should share in the costs, while a family earning below the poverty level should be protected. Moreover, these changes would allow state officials to adopt innovative financing and delivery options for Medicaid enrollees. Hopefully, such changes would enable states, where appropriate, to mainstream enrollees’ into the private health care system that covers the taxpayers who fund the program.

 

Savings: 6.5 billion through 2010

 

Other Provisions

The House included a number of other administrative provisions to achieve savings, such as targeted case management, third-party recovery, and transformation grants.

 

Conferees should adopt these provisions from the House bill.

 

Savings: $1.8 billion through 2010

 

 

MEDICARE

By Robert E. Moffit

Director, Center for Health Policy Studies

 

Medicare’s looming financial problems are enormous.[9] They are aggravated by the addition of a massive Medicare drug entitlement—adding an estimated $8.7 trillion to the unfunded liability of the program—set to go into effect on January 1, 2006.

 

The House bill contains no Medicare provisions at all.

 

The Senate bill contains several Medicare changes. Most of these are administrative adjustments and modifications to existing law, such as changes in hospital payments under existing formulas, reductions in payments to skilled nursing facilities for bad debt, changes in risk adjustment payments to the new Medicare Advantage plans, and updates to physician payments. For example, physician payments would be updated by no less than 1 percent for the year 2006, thus avoiding a scheduled 4.3 percent reduction in physician fees under current Medicare payment formulas. The Senate bill, however, would also reinforce some of the most undesirable features of Medicare payment policy, specifically with regard to physician payment and incentives for the new Medicare Advantage program.

 

Medicare “Pay for Performance”

Section 6110 of the Senate bill creates a “values-based purchasing” system in the Medicare program. Medicare payment for physicians and other medical professionals would henceforth be tied to new “quality” reporting and compliance requirements. If a doctor, for example, did not submit government-required “quality data,” the doctor’s payment would be reduced by 2 percent for certain services. The Senate bill’s provisions would also apply to hospital inpatient services and the services of home health agencies and skilled nursing facilities.

 

Payment reductions from non-compliant physicians and providers would fund a pool of bonus money for physicians and other medical providers that do comply with the government’s requirements. The CBO estimates that this provision, as adopted by the Senate Finance Committee, would reduce total Medicare spending by $4.5 billion over the 2006 to 2010 period.[10]

 

Conferees should strike this provision. The very last thing Congress should do is to impose a new set of government guidelines for the practice of medicine.[11] Despite the attractive rhetoric surrounding “pay for performance” and “values-based purchasing,” that is what the Senate bill would do.

 

Incentives for the Medicare Advantage Program.
With the enactment of the Medicare Modernization Act of 2003, Congress provided special incentives to private health plans to participate in the coverage of senior citizens and the disabled, particularly in areas of the country where plan participation had been low. To this end, Congress created the Medicare Advantage Regional Plan Stabilization Fund, with an initial authorization of $10 billion to be available during the period from 2007 to 2013. The authorization also included additional incentives, to be funded from a small portion of the savings from health plans that price their product below the government’s annual benchmark payment. Section 6112 of the Senate bill, as reported by the Finance Committee, would eliminate this temporary incentive program and secure projected savings of $5.4 billion over the 2006 to 2010 period and $10.2 billion over the 2006 to 2015 period.[12]

 

Conferees should strike this provision. The Senate bill would unwisely end the new Medicare Advantage incentive system even before it took effect. Congress should recognize the importance of re-building a partnership with health plans in the Medicare program. The Senate sends an unwelcome signal to health plans and reinforces the well-founded perception that the federal government is an unreliable business partner. Not surprisingly, the White House has threatened a veto over this provision.

 

Delaying Provider Payment

Under Section 6112 of the Senate bill, the Senate would delay payment for hospital and physicians services for “six business days” at the end of fiscal year 2006. As the CBO reports, this provision would shift spending from 2006 to 2007 but would not affect total Medicare spending.[13]

 

Conferees should. Conferees should strike this Senate provision. It is merely an accounting gimmick and an insult to doctors and other medical professionals.

 

What’s Missing

In light of the looming financial crisis facing Medicare, the Senate Medicare provisions fall far short. The conferees should get serious and take the bold steps proposed by their courageous and fiscally responsible colleagues. Two of the best short term measures have been proposed by Senator John McCain (R-AZ) and his colleagues on the Senate’s “Fiscal Watch Team.”

 

Conferees should delay the Medicare drug entitlement for a period of two years. The conferees, as Senator McCain and his colleagues have suggested, could retain the Medicare drug discount card and double subsidies for low-income seniors while enacting such a delay. Meanwhile, Congress could design a rational and responsible Medicare drug benefit.

 

Savings: $40 billion (Estimates range from $40 to $80 billion over the two-year period.[14])

 

Conferees should accelerate Means Testing in Part B. Today, taxpayers subsidize 75 percent of Medicare Part B premiums, which cover physician and outpatient medical services. Under current law, high-income seniors (individuals making $80,000 and couples making $160,000 annually) would pay higher Medicare Part B premiums beginning in 2007. The Senate Fiscal Watch Team proposal would start the process in 2006.

 

Savings: $6 billion (Estimates range from $6 to $9 billion.[15])

 

 

EMERGENCY EDUCATION AID FOR KATRINA VICTIMS

By Dan Lips

Policy Analyst for Education

 

The Senate bill includes an amendment offered by Sen. Michael Enzi (R-WY) that calls for $1.66 billion in education aid for the estimated 372,000 students who were displaced by Hurricane Katrina. The Enzi amendment also provides $450 million in immediate aid to restart schools in the affected region and $1.2 billion in temporary emergency impact aid for displaced students throughout the nation.

 

The House bill does not include a provision for emergency education funding for students displaced by Hurricane Katrina. The House Education and Workforce Committee failed to pass the important reforms contained in the Family Education Reimbursement Act, which was sponsored by Committee Chairman John Boehner (R-OH) and Rep. Bobby Jindal (R-LA).[16]

 

Conferees should view the $1.6 billion proposal as a ceiling for emergency education aid. As the students displaced by Hurricane Katrina continue to return to their original schools, the overall cost of education aid should decrease. The Conference Committee should revise this spending downward as more children reenroll in their former schools.

 

Conferees should also ensure that aid is delivered effectively and efficiently to displaced families[17]:

 

Make the delivery mechanism work for parents whose children are attending non-public schools. In the Senate bill, every layer of the public school bureaucracy would handle emergency funds before they reach parents whose children attend private schools. Each local school district would have to set up a distribution system. This is inefficient and would cause unnecessary duplication of effort, delay assistance, and create practical hurdles for private school families. A better alternative would be a single national mechanism for administering family education reimbursement accounts (as outlined in the Boehner-Jindal bill) or statewide systems for establishing family education reimbursement accounts, as outlined in Sen. Ensign’s proposed amendment to the Enzi amendment.

 

Emergency aid should be available to religious schools educating displaced children. The Senate bill would create serious problems for religious schools, both in practice and in bad precedent. Because of the legislation’s extensive restrictions on the use of funds in religious schools, most would be unable to participate. These restrictions should be removed. Whether children are attending religious private schools under this provision should be of no concern to Congress; the U.S. Supreme Court has upheld funding of this sort, combined with parental choice, as constitutional.

 

Families should have the opportunity to choose a private school for their children after enactment of this legislation.The Enzi amendment allows only children attending non-public schools at the time of its enactment to be reimbursed for their tuition. Displaced families’ transient situations demand the freedom to choose private schools at any time during the period of their displacement.

 

 

HIGHER EDUCATION PROGRAMS

By Dan Lips (Policy Analyst for Education) and Kirk Johnson (Senior Policy Analyst, Center for Data Analysis)

 

The Senate bill includes a number of changes to federal higher education programs that would reduce federal outlays. According to the CBO, these savings would amount to $9.7 billion over the first five years.

 

The House bill also includes a number of changes to federal higher education programs that would result in significant savings. According to CBO, these savings would amount to $14.3 billion over five years.

 

The main difference between the House and Senate provisions is that the House package would extend the variable-rate formula for borrowers in the guaranteed-rate federal student loan program, which is currently scheduled to shift to a fixed rate in 2006. Congress should not attempt to set arbitrary interest rates, as the Senate version would do. The Senate recommendations would set fixed rates for student loans at 6.8 percent and increase the arbitrary fixed rate for parent loans from 7.9 percent to 8.5 percent.

 

Conferees should maintain the variable interest rates in the House version and allow market-based interest rates, not artificial levels dictated by Congress, to prevail in the student loan program.

 

Savings: $11.2 billion over 5 years

 

Conferees should also:

 

Follow the House’s recommendations to shift a greater burden of risk from the government onto lenders and reduce lender subsidies by cutting insurance to lenders (from 98 percent to 96 percent) and eliminating “9.5 percent loans.” The conferees should also follow the Senate’s provision to eliminate “exceptional lender” status, which grants 100 percent insurance to lenders that meet certain criteria. These changes would shift more risk onto lenders and eliminate unnecessary federal government subsidies.
Savings $2.7 billion through 2010

 

Eliminate provisions in the House and Senate bills to reduce origination fees. Origination fees are similar to points on a mortgage loan for a home.In addition to saving money, reducing origination fees would put private lenders at a disadvantage, further crowding them out of the student loan market.
Reduce new spending by $2.3 billion through 2010

 

Reconsider some expansions of grant programs, particularly the Provisional Grant Assistance (ProGAP) program.The Senate would increase these grant programs without a strong justification for the additional spending.[18]
Reduce new spending by $8.0 billion through 2010

 

 

TEMPORARY ASSISTANCE TO NEEDY FAMILIES (TANF)

By Robert Rector

Senior Research Fellow, Domestic Policy Studies

 

The 1996 welfare reform act which replaced the failed Aid to Families with Dependent Children (AFDC) program with the new Temporary Assistance to Needy Families (TANF) program is widely seen as one of the great legislative successes of recent decades. The TANF law was scheduled for reauthorization in 2002. While the House passed TANF reauthorization in 2002 and in each subsequent year, the Senate has failed to act during the same period. Due to this inaction, key features of the original TANF law, especially the federal work requirements for recipients, have lapsed. To a considerable degree, welfare reform is now moribund.

 

The House bill contains TANF reauthorization provisions that strengthen work requirements and includes a new “healthy marriage initiative” to strengthen marriage in low-income communities.

 

The Senate bill contains no TANF provisions.

 

The pre-reform AFDC program gave aid unconditionally. By contrast, the new TANF program, created in 1996, made aid conditional: a certain portion of TANF recipients were required to work or prepare for work as a condition of receiving aid. TANF work requirements led to a 60 percent drop in caseloads. Unfortunately, the pivotal TANF work requirements have now lapsed. Effectively, there is no longer a federal mandate insisting that state welfare agencies engage recipients in work or other constructive activities. As a consequence, state bureaucracies are slowly drifting back into the pre-reform mode of handouts and check writing. The future of reform is in jeopardy.

 

The House reconciliation bill salvages and reinvigorates welfare reform. It updates and strengthens the work requirements of the original bill. Another feature of the House bill is the creation of a “healthy marriage initiative.” This provision represents the next critical step in welfare reform. Today, one child in three is born out of wedlock. The collapse of marriage is a major cause of welfare dependence; some three-quarters of all means-tested aid to families with children goes to single-parent families. The House bill would create a new initiative to strengthen marriage by providing low-income couples with information concerning the benefits of marriage to children and adults; providing marriage skills training that has been shown to improve the quality and longevity of relationships; and experimenting with reductions in the penalties against marriage implicit in means-tested aid programs.

 

The 1996 welfare reform resulted in substantial reduction in the growth of welfare spending. By placing an emphasis on self-reliance and personal responsibility, TANF reduced the political impetus to expand conventional welfare. For example, in the seven years prior to reform, means-tested spending on cash, food, and housing assistance rose by 37 percent after adjusting for inflation; in the seven years after reform, this spending rose by only 11 percent. Congressional failure to reauthorize TANF will mean a rejection of the principles of welfare reform. In the long term, this would lead to substantial increases in means-tested spending.

 

Conferees should accept the House TANF provisions, especially the healthy marriage initiative, which is paid for with existent funding. Unless the House TANF provisions are included in reconciliation, it is very likely that welfare reform will, effectively, die.

 

New Spending: $0.9 billion through 2010

 

 

FOOD STAMPS

By Alison Acosta Fraser

Director, Thomas A. Roe Institute for Economic Policy Studies

 

The House bill eliminates a quirk in the law that allows people who would not otherwise be eligible for food stamps to qualify for benefits automatically. These are people whose incomes are too high to qualify for food stamps, but because they receive other forms of TANF benefits, such as job referral services, they are deemed eligible for food stamps under current law. The House bill ends these automatic benefits for “categorically” eligible recipients who receive substantial and ongoing benefits and moves toward parity with others at the same income levels who do not receive TANF substantial services. The bill maintains eligibility for child nutrition programs such as school breakfast and lunch programs for children from affected households.

 

The House also extends residency requirement for legal immigrants from five to seven years before they can become eligible for food stamps. Legal immigrants are required to have sponsors who sign an oath that they will be responsible for the immigrants should they need assistance and thus be a burden on taxpayers.[19]

 

The Senate bill contains no relevant provisions.

 

Conferees should adopt the small changes to the food stamp program contained in the House bill.

 

Savings: $0.6 billion through 2010

 

 

CHILD SUPPORT

By Robert Rector

Senior Research Fellow, Domestic Policy Studies

 

The House bill makes a number of changes to the operation and financing of the child support program. The most significant of these changes would reduce the federal share of administrative spending for the program from its current uncapped level of 66 percent to 50 percent in 2010. During FY 2004, child support program payments amounted to $5.3 billion, with the federal government paying $3.5 billion and states paying $1.8 billion. This change would not decrease support levels to individual recipients of child support.

 

The legislation yields further savings through changes that eliminate the federal match for state spending on federal child support incentive payments; in other words, federal funds provided to states as incentives under this program will not be counted in the calculation of the amount of federal matching funding. Other changes require child support orders to be periodically updated and better child support enforcement. These changes will improve the integrity and performance of the child support program.

 

The Senate bill includes no such provisions.

 

Conferees should adopt House provisions.

 

Savings: $4.9 billion through 2010

 

 

TRADE: THE BYRD AMENDMENT

By Daniella Markheim

Senior Policy Analyst, Center for International Trade and Economics

 

While trade remedies afford a layer of protection for firms facing stiff foreign competition and bring the government some additional revenue, both households and businesses suffer from higher import prices. Imports may even be unavailable to consumers if duties are high enough to prohibit trade. This tax on America’s households and import-consuming firms reduces economic growth and lowers living standards. Furthermore, trade barriers reduce incentives to find innovative ways to use resources more efficiently.

 

The House bill repeals the Continued Dumping and Subsidies Offset Act (CDSOA) of 2000, infamously known as the Byrd Amendment. Since CDSOA was implemented, the President and proponents of free trade in Congress have tried several times to repeal it, each time failing to overcome protectionist sentiment in Congress. Now, however, Congress may have a viable opportunity to overturn this epitome of bad trade policy.

 

The Senate bill includes no such provision.

 

CDSOA enriches inefficient companies, not the government. Under CDSOA, all proceeds from antidumping duties and countervailing duties are paid to those firms that filed, or publicly supported, requests for protection against foreign producers. Consequently, companies eligible for payouts are subsidized against both foreign competitors and those unlucky U.S. firms that either can effectively compete against foreign producers or were unable to meet eligibility requirements for government handouts. The Byrd Amendment rewards inefficient and rent-seeking firms at the expense of companies that use resources more efficiently, are able to better face the rigor of competition, or were unable to secure eligibility for subsidies.

 

Subsidies paid to U.S. companies under CDSOA have been substantial. The Government Accountability Office (GAO) reports that between 2001 and 2004, $1 billion was transferred to 770 firms that were allegedly harmed by unfair trade practices. The CBO estimates that $3.2 billion in duty revenue could be collected and distributed to firms between 2005 and 2010.

 

In January 2003, after 11 countries filed complaints against the Byrd Amendment, the World Trade Organization (WTO) ruled that it was in violation of U.S. trade obligations. Consequently, eight of the complaining countries have been awarded the right to impose retaliatory duties against U.S. exports equal to 72 percent of the actual annual payments from antidumping and countervailing duties on their exports. Thus, the higher the CDSOA payments to select U.S. firms, the more America’s trade partners can retaliate against U.S. goods and the more U.S. consumers suffer.

 

The Byrd Amendment is in violation of WTO trade remedy rules and imposes costly distortions on the U.S. economy. It undermines U.S. competitiveness, imposes unnecessary costs on households and import-consuming businesses, and undermines America’s ability to innovate, grow, and prosper.

 

Conferees should make every effort to end the Byrd Amendment’s toll on America by accepting the House provision that would eliminate the Byrd Amendment once and for all.

 

Savings: $3.2 billion through 2010

FARM PROGRAMS

By Brian Riedl

Grover M. Hermann Fellow in Federal Budgetary Affairs

 

The House bill would shave $2.9 billion off the $102 billion scheduled to be spent on farm subsidies and conservation payments over the next five years. Because farm subsidies harm the economy while enriching large farms and agribusinesses, these small reforms represent a positive first step towards reining in these programs.

 

The Senate bill, in return for shaving $3.0 billion off the $102 billion scheduled to be spent on farm subsidies and conservation payments over the next five years, extends the farm subsidy programs of the 2002 farm bill—currently scheduled to expire in 2007—through 2011. A spokesperson for Senate Agriculture, Nutrition, and Forestry Committee Chairman Saxby Chambliss said that the Senator still plans to write new farm subsidy provisions in 2007 but that extending the farm bill through 2011 is necessary to guarantee that the budget reconciliation reforms designed to save $3 billion between 2006 and 2010 come to an end in 2011. This alone should be a reason to oppose the extension. Entitlement reforms should create permanent savings by permanently altering program spending formulas. By reverting to the old farm subsidy formulas in 2011, spending growth rates will spike back to their pre-2006 levels and much of the permanent savings will be lost.[20]

 

Furthermore, if lawmakers plan to write a new farm bill in 2007, there is no reason to extend current law through 2011. Surely they could enact whatever changes they want to the 2011 baseline while writing the 2007 bill.

 

Instead, this four-year extension functions as an accounting gimmick that creates a barrier to real agriculture reform. Despite Sen. Chambliss’s good intentions, once subsidy levels have been extended through 2011, there will be no statutory obligation to fix them in 2007. Supporters of the current system will likely consider these baseline levels a floor and refuse to “reopen the farm bill” if the 2007 budget environment is stricter than the free-spending environment that produced the bloated 2002 legislation. Farm subsidy reforms will be difficult enough to enact in 2007 without creating a new $60 billion status quo.

 

These status quo farm policies are bad for farmers, taxpayers, consumers, and even the third world. Despite the rhetoric about helping small farms, farm subsidies are tilted overwhelmingly in favor of large farms and agribusinesses that grow certain crops, while excluding many small farmers and growers of other crops. Subsidies illogically address low crop prices by paying farmers to plant additional crops, effectively driving prices down further. After paying some farmers to plant more crops, other farm policies pay other farmers to grow fewer crops. Finally, farm subsidies undercut third-world farmers and perpetuate trade restrictions between the United States and the rest of the world.[21] For these and many more reasons, a bipartisan consensus recognizes the importance of overhauling the farm subsidy system in 2007.

 

Conferees should adopt the savings recommended by the House and Senate but strongly reject the Senate’s extension of farm programs through 2011.

 

Savings: $3.0 billion through 2010

 

 

MILK SUBSIDIES

By Brian Riedl

Grover M. Hermann Fellow in Federal Budgetary Affairs

 

The Senate bill reinstitutes the temporary Milk Income Loss Contract (MILC) program that was created in 2002 and expired on September 30, 2005. The Senate reconciliation bill would reinstitute this program for two more years at a cost to taxpayers of $998 million. Yet MILC is just one more example of futile government meddling in agriculture that lacks economic sense and fails to assist farmers.

 

The House bill contains no such provision.

 

Dairy farmers have long benefited from the milk price-support program, whereby the federal government purchases dairy products at a pre-determined price whenever the market price drops below that level (currently set at $9.90 per hundred pounds (cwt)). However, MILC works against this program by making direct payments to farmers, based on the amount of the milk they produce, whenever the price falls below a specified level (currently set at the high level of $16.94/cwt).The logical result of these policies is that farmers continue producing excess milk even as prices fall below $16.94/cwt., in hope of maximizing their MILC subsidy check. In doing so, they drive prices down even further, forcing the government to purchase more excess milk under the price-support program. USDA's own research confirms that the milk support program (designed to raise prices) and the MILC program (which stimulates overproduction and therefore lowers prices) effectively cancel each other out, leaving milk prices nearly unchanged from where they would be without either program.[22] These programs’ only lasting impact is the $1 billion they cost taxpayers annually. Not surprisingly, the first round of the MILC program cost taxpayers twice its projected cost.

 

Conferees should help farmers, taxpayers, and consumers by endorsing basic economic literacy and siding with the House to not resuscitate the MILC program.

 

Reduce new spending by $1 billion through 2010

 

 

NEW AND ADDITIONAL REVENUES

The House and Senate bills each achieve budgetary savings through new and additional revenues. While some of these initiatives do nothing to achieve savings in long-term spending, they are important policy issues that conferees should include.

 

 

ENERGY – ANWR

By Ben Lieberman

Senior Policy Analyst, Thomas A. Roe Institute for Economic Policy Studies

 

The Senate bill contains provisions to allow leasing of a small portion of Alaska’s Arctic National Wildlife Refuge (ANWR) for oil exploration and drilling.

 

The House bill dropped a provision to allow leasing in ANWR.

 

Opening ANWR to drilling is a real rarity in Washington—something proponents claim is “win-win” that actually is win-win. First, the federal government would receive an estimated $2.5 billion in oil-leasing revenues, as well as subsequent royalty payments from oil companies once drilling commences. Even more important, the estimated 10 billion barrels of oil there would be an additional source of domestic production and help moderate prices in the future. In addition, opening ANWR poses few risks, as there is ample evidence that the drilling could be done with a negligible environmental impact.[23]

 

Conferees should accept the Senate’s provision to open ANWR, setting the stage for new supplies of oil that would help reduce the future prices at the pump.

 

Revenues: $2.5 billion through 2010

 

 

PENSION BENEFIT GUARANTEE CORPORATION (PBGC)

By David John

Research Fellow, Thomas A. Roe Institute for Economic Policy Studies

 

The Housebill would raise premiums for the PBGC’s single-employer program from the current $19 per participant, per year, to $30 starting in 2006, and would index premiums to growth in wages starting in 2007. In addition, PBGC would be allowed to further increase those premiums by up to 20 percent each year starting in 2007, although Congress could block these additional increases with a joint resolution of disapproval. Finally, the House bill imposes a special termination fee of $1,250 per participant for each of three years on companies that terminate their pension plans when they file for bankruptcy. This fee would start when the employer emerges from bankruptcy. CBO estimates that the House approach would raise about $6.2 billion over five years.

 

The Senatebill would raise PBGC premiums differently. Its bill raises premiums for the single-employer program from the current $19 to $46.75 per participant, per year. It also increases premiums for the multi-employer program from $2.60 to $8.00. Both premiums would be indexed to inflation starting in 2007. In addition, the Senate bill includes the termination fee found in the House bill. CBO estimates that the Senate approach would raise $6.7 billion over five years.

 

The probability of a taxpayer bailout of PBGC is high and rising. There is little difference between the House and Senate bills because both chambers recognize the necessity of reducing the size of a huge taxpayer bailout. The agency’s new 2005 annual report reports that PBGC’s single employer program will have to pay $79.2 billion in pension benefits but has only $56.5 billion in assets, leaving a deficit of $22.8 billion. Events after the September 30 close of the fiscal year raised the agency’s deficit by a further $2.9 billion, and plans underfunded by a total of an additional $108 billion are “reasonably probable” to default. PBGC’s multi-employer program is underfunded by about $335 million, with $1.2 billion in assets available to pay obligations of $1.5 billion.

 

Better pension plan funding would also reduce the size and likelihood of a PBGC bailout. For this reason, if Congress passes a comprehensive reform plan containing stricter funding rules and smaller PBGC premium increases, it would replace the PBGC premium increases contained in the reconciliation bills. Either approach to raising PBGC premiums is acceptable. Unfortunately, some level of PBGC bailout is almost a certainty.

 

Conferees should follow the Senate approach towards raising PBGC premiums because it would reduce the cost of a bailout to taxpayers. This is not a tax increase. Rather, it would require companies to pay the cost for promises that they made to their employees.

 

Additional Revenues: $6.7 billion through 2010

 

 

SPECTRUM AUCTION – THE TRANSITION TO DIGITAL TELEVISION

By James Gattuso

Research Fellow in Regulatory Policy, Thomas A. Roe Institute for Economic Policy Studies

 

The House and Senate bills both would set a firm date for the end of analog television broadcasts and the auction of the spectrum now used for that purpose. This is an important step. The spectrum auctions are expected to raise $10 billion or more. Far more importantly, the auctions will allow these frequencies to be put to valuable use as determined by the marketplace and consumers—such as wireless phones and wireless Internet access.

 

The two bills set slightly different dates for this turnover. The House bill sets December 31, 2008, as the turnover date; the Senate, April 7, 2009. The difference is minor, although the House's earlier deadline is marginally preferable because it would open the frequencies to new uses more quickly.

 

No less important is the funding that the bills allocate to consumer subsidies for the transition to digital television. The Senate would spend some $3 billion to subsidize the purchase of converter boxes for consumers without DTV sets. The House provides $990 million for this purpose. Neither amount is justified. Washington should not subsidize this transition.

 

Conferees should eliminate converter box subsidies and adopt the House date for the spectrum turnover. If subsidies are absolutely necessary, conferees should accept the House’s approach, which would cost over $2 billion less than the Senate’s.

 

 

CONCLUSION

The recommendations contained in this paper combine the best elements of the House and Senate bills and as such represent a bigger, though still modest, step to restrain long-term spending. In addition, there are a number of smaller savings provisions not analyzed in this paper that are worthy of consideration. As conferees hammer out their compromises, some may be tempted to water down the conference report in order to make it as palatable as possible. The better course for the American people would be to take this legislation to the highest common denominator. Previous reconciliation bills have achieved far more savings, and there is no reason that this bill couldn’t be similarly bold. If Congress is serious about restoring fiscal sanity, it should make its first step the biggest one possible.

 

Michelle Muccio, Research Assistant in the Thomas A. Roe Institute for Economic Policy Studies, contributed to this report.