Dems OK Spending $2 Now For Each $1 In Long-Term Taxes

By JED GRAHAM, INVESTOR'S BUSINESS DAILY, 28 May 2010 -- As European governments take out their meat cleavers to spending and raise taxes across the board, Washington has adopted a gentler version of austerity: Congress is ready to pick up the tab for about half of the next round of stimulus punch it's ordering, provided it can pay over 10 years.

The flare-up among House Democrats last week that saw one stimulus measure after another jettisoned from spending bills was largely symbolic:

To lower the cost of a jobless-benefit and tax-credit extension, for example, Democrats stripped a $23 billion provision to avoid a cut in Medicare physician payments. But the "doc fix" passed separately, making the net cost the same.


Taxes, Spending, Deficit Hiked

Together, the two bills have a $113 billion short-term cost and would be partially paid for with $60 billion in long-term tax increases on investment funds, oil companies and multinational corporations.

Separately, the Senate approved $47 billion in deficit spending, mostly tied to ongoing operations in Afghanistan and Iraq.

While lawmakers showed that they are still willing to pass unfunded measures, the bar for such spending is rising and fiscal policy is beginning to tighten.

Political resistance to deficits has grown to the point that keeping current policies in place now requires at least some offsets to be passed, notes Daniel Clifton, head of policy research at Strategas Research Partners.

Thus far Democrats in Congress have only embraced tax increases, not spending cuts, as offsets. But the cupboard of potential tax hikes that can make it through the Senate is growing bare, Clifton said.

"The key take-away here is that we are out of money, and we are out of money for existing programs," he said.

Just one obvious offset remains — President Obama's proposed $90 billion financial crisis responsibility fee on banks.

"I think a bank tax is inevitable," said Greg Valliere, chief political strategist at institutional adviser Potomac Research.


State Aid Will Be Back

Clifton agrees and expects it to be packaged with other stimulus measures that didn't make the cut last week. Those include $24 billion to cover increased state Medicaid costs, $23 billion to help avoid teacher layoffs and $8 billion to help the jobless with Cobra health care premiums.

Clifton thinks Democrats may end up packaging the bank tax and stimulus extensions with renewal of middle-class tax cuts passed under President Bush that are set to expire at year-end.

An extra $47 billion in aid for states would close about one-third of the budget deficits faced by states this year and next, said Nicholas Johnson, state fiscal director at the liberal Center on Budget and Policy Priorities

If none of those funds are forthcoming, he warns that it could lead to 900,000 public- and private-sector layoffs and "threaten the economic recovery."

Clifton notes that extra Medicaid aid was approved along with the 2003 tax cuts. Republicans are of two minds about extra teacher aid, with some worried about education and others unwilling to give states an excuse to delay reforming generous public-sector benefit packages.

The Senate will take up the jobless-benefit package after a week-long Memorial Day break. In the interim, extended jobless benefits of up to 99 weeks passed under the original stimulus bill will expire June 2.

Senate negotiators are reportedly looking at scaling back a $19 billion tax hike on investment fund managers. That increase, along with others already passed, could raise the tax rate on fund manager compensation from 15% to 38.5%.