Washington Update: Part II – FY 2016 Federal Budget: What You Need to Know

Both the House and Senate Budget Committees last week introduced and marked up initial drafts of their respective budget resolutions for fiscal year 2016.Each year Congress decides − or is supposed to decide − how much to spend for the next fiscal year and on what programs. More importantly, members mustdecide how to raise the revenue to pay for that spending. The Congressional Budget Act of 1974 lays out a formal framework for developing and enforcing abudget resolution to guide the process. Congress has seldom completed action on the budget resolution by the April 15 target date specified in the BudgetAct, and it failed to complete action on a resolution for fiscal years 1999, 2003, 2005, 2007, and each year from 2011 through 2014.

For a crash course on the federal budget process, read McGuireWoods Consulting’s“A Primer on the Federal Budget Process: What it is and Why it is Important.”

Reconciliation

If the 114th Congress successfully passes a budget resolution, it likely willauthorize a “reconciliation” process, which provides for expeditedconsideration of legislation related to Medicare and Medicaid spending, taxes and the Affordable Care Act.

The budget resolution is not a law, but a blueprint to guide Congress. A reconciliation bill is a single piece of legislation that typically includesmultiple provisions (generally developed by several committees), all of which affect the federal budget − whether on the mandatory spending side, the taxside or both. A reconciliation bill, like the budget resolution, cannot be filibusteredin the Senate, so it requires only a majority vote to pass. Unlikethe Budget Resolution, the President can sign or veto a reconciliation bill. Reconciliation originally was designed as a deficit-reduction tool, forcingcommittees to produce spending cuts or tax increases required in the budget resolution. However, it was used to enact tax cuts several times during theGeorge W. Bush Administration, which increased the deficit. Senate rules now prohibit using reconciliation for deficit-increasing legislation, while Houserules prohibit using reconciliation to increase mandatory spending.

What’s in the FY 2016 House and Senate Budget Blueprints?

Both the House and Senate Budget Committees approved their respective budget plans for fiscal year 2016 on March 19 by roll-call votes, which fell sharplyalong partisan lines. Floor consideration in both chambers is expected the week of March 23.

The budget plans provide a clear look into Republican policy priorities in both the short and long term. Despite differences between the House and Senateproposals, they articulate a set of common goals – reduce spending, avoid net tax increases, and balance the budget.

Key aspects of the House and Senate proposals for fiscal year 2016 are summarized below.

Overview of the Budgetary Effects of the House and Senate FY 2016 Budget Resolutions

House	Senate
Balances the budget by 2024 Proposes $5.5 trillion in spending cuts Increases deficit by $1.3 trillion over 10 years No net tax increases	Balances the budget in 10 years Proposes $5.1 trillion in spending cuts Increases deficit by $1.6 trillion over 10 years No net tax increases

Health Care

• Both the House and Senate Budget Committees would use the reconciliation process to overturn the Affordable Care Act. The Senate bill also calls on the Senate Finance and Health, Education, Labor and Pensions Committees to find at least $1 billion each in deficit reduction savings from the Affordable Care Act by July 31. House Republicans use reconciliation to repeal the Affordable Care Act “in its entirety” and would shift some savings to Medicare’s solvency.
• The House Budget would repeal the Independent Payment Advisory Board (IPAB), which was intended to advise Congress on Medicare cuts but was never staffed. It would reform Medicare by changing the program to a premium support model, starting for beneficiaries in 2024, and combining Parts A and B so there would be a single premium for seniors. The budget also appears to call for some risk adjustment of premiums, and it provides a catastrophic cap on annual out-of-pocket expenses for Medicare beneficiaries
• The House Budget would reform Medicaid, repealing the ACA’s expansion of Medicaid and substituting State Flexibility Grants instead, and would unify Medicaid and the Children’s Health Insurance Program (CHIP) while providing funds to extend CHIP.
• The Senate Budget Committee, in contrast, stops short of moving Medicare to a premium support model, but seeks $430 billion in Medicare cuts and would move Medicaid more toward a CHIP model.

Energy

As part of overall efforts to reduce the deficit, congressional Republicans are using their budget proposal to push cuts to renewable energy incentives andthe President’s climate change agenda. In conjunction with efforts to streamline domestic energy programs, they aim to eliminate regulatory redundancy andwaste for the benefit of lowering Americans’ energy costs. Both chamber budget blueprints note that the United States is at the center of an energyrenaissance, and the federal government should do what it can to help increase domestic oil and gas exploration (on both public and private lands) andbuild a robust energy infrastructure in order to enhance U.S. energy security and promote economic opportunities.

Key differences between the two chambers’ FY2016 budgets include the following:

House of Representatives

• Calls to immediately end the green energy loan programs, starting with the American Recovery and Reinvestment Act of 2009 (ARRA), and remove regulations and subsidies that favor some industries over others. The budget blueprint notes that the Department of Energy’s research and development efforts “should focus solely on breakthrough innovations,” rather than the application or commercialization of new technologies.
• Identifies climate change funding at Department of Defense and the Central Intelligence Agency as “examples of areas where there should be room to cut waste, eliminate redundancies, and end the abuse and misuse of taxpayer dollars.”
• Following lengthy oversight of various Obama Administration regulatory proposals, including the Environmental Protection Agency’s (EPA) Clean Power Plan, the budget mirrors longstanding Republican policy proposals related to regulatory reform. It includes a bid to mandate congressional approval of any administrative rule that would levy more than $100 million in annual economic costs on the economy, a classification applicable to much of the regulatory portfolio at EPA and the Department of Interior, among other agencies.
• Denounces the notion of establishing a carbon tax as a means to cutting carbon emissions.

Senate

• Leverages private-sector resources to make energy upgrades to federal buildings and lower energy costs by directing Congressional Budget Office to more accurately account for the long-term budgetary effects associated with Energy Savings Performance Contracts (ESPC) and Utility Energy Savings Contracts (UESC).
• Fully funds wildfire suppression operations and healthy forest management activities and encourages increased timber production from national forests.

Tax

While neither budget resolution completely quashes the possibility of using reconciliation for comprehensive tax reform, it appears increasingly unlikely.That doesn’t mean, however, that piecemeal changes to the tax code won’t be included in a potential reconciliation package. In fact, many of the changesinherent in repealing the Affordable Care Act − the presumed target of Republicans’ reconciliation language − would necessarily impact taxes, including themedical device tax and the ACA’s surtax on net investment income. Interestingly, the budgets appear to assume the revenue from those taxes (about $2trillion) continues to come in over the next decade − a critical component of balancing the budget, as both resolutions claim to do.

The House resolution is more aggressive in calling for comprehensive tax reform to create a“fairer, simpler tax code,” although it remains scant on details. The Senate resolution is even more vague about tax reform, but it does open the doorby including a “deficit-neutral reserve fund,” to allow for changes to the tax code, so long as they do not increase the deficit. Both resolutionsinclude language embracing, to varying degrees, the use of macroeconomic scoring, also known as dynamic scoring, in assessing the budgetary impacts of tax proposals.

Other key differences between the two chambers’ FY2016 budgets include the following:

House of Representatives

• Calls for reduced corporate and individual rates, including pass-through businesses, but does not mention specific rates.
• Repeals the alternative minimum tax (AMT) and “transition[s] away from a worldwide tax system to a more competitive international tax system,” presumably shifting to a territorial system or hybrid territorial system.
• Calls for “broadening the tax base by closing special interest loopholes that distort economic activity” but does not identify any specific provisions.
• Calls for permanent extension of certain expired tax provisions (“extenders”) without having to offset them with new revenue or spending cuts.

Senate

• Gives the Senate Finance Committee some flexibility to reform the tax code but does not lay out a blueprint for an overhaul.
• Nods approvingly, without endorsing as a policy matter, the continued extension of certain expiring tax provisions known as extenders.
• Calls for the repeal of the medical device tax.
• Calls for the budget resolution to include the cost of tax expenditures. This was an amendment offered by Sen. Sheldon Whitehouse (D-RI) during the Budget Committee’s markup and was adopted with the help of six Republican senators.
• Open to offer more tax-related amendments during the Senate’s floor consideration of the resolution, although none of these amendments, or the resolution itself, will have the force of law.

Financial Services

At the start of the 114^th Congress, Republican legislators made clear their desire and intention to roll back certain provisions in theDodd-Frank Act, which they perceive as burdensome. Last year, Republican lawmakers introduced several pieces of legislation to modify various parts ofDodd-Frank and bring regulatory relief to both small and large financial institutions. This year will be no different. For example, Republicans in bothhouses have already hinted at possibly changing the designation process for systemically important financial institutions (SIFIs) and ending theconservatorship of Fannie Mae and Freddie Mac.

Though the House and Senate budget plans do not provide much in terms of financial regulatory reforms, they do broadly outline the policy direction towardwhich the congressional Republicans are headed.

House of Representatives

• FDIC Orderly Liquidation Authority (OLA). The House plan proposes to prevent the Federal Deposit Insurance Corporation from using taxpayer dollars to pay the creditors of financial institutions that have been designated as systemically important.
• CFPB Funding. The House plan proposes to change the way the Consumer Financial Protection Bureau receives its annual funding. Currently, the bureau is funded by remittances to Treasury from the Federal Reserve. The budget plan would subject the bureau to the regular annual appropriations process.
• Privatization of Fannie Mae and Freddie Mac . The plan proposes to privatize Fannie Mae and Freddie Mac, putting an end to the two oft-criticized government-sponsored enterprises (GSEs).

Senate

• The Senate plan provides even less in the area of financial services. It proposes the creation of a spending-neutral reserve fund for financial regulatory system reform. Reserve funds in budget resolutions simply make it easier for lawmakers to move related legislation later on in the session as long as the legislation adheres to the criteria set forth in the resolution. The Senate budget reserve fund would support legislation aimed toward providing regulatory relief to small and large financial firms, improvements to the regulatory framework, improvements to the oversight of the Federal Reserve, and improvements to capital access.

Defense

Debate over defense spending proved to be the most divisive among congressional Republicans. At the heart of the debate was the House’s attempt to getaround the 2011 caps on defense spending by increasing funds for the Overseas Contingency Operations account (OCOs), which pays for military operationsabroad (e.g., Iraq and Afghanistan). The disagreement between fiscal conservatives and defense hawks led House Budget Chairman Tom Price to delay the finalvote until last Thursday.

Despite disagreements between the House and Senate on OCO funding and the overall level of spending for defense, the budget committees reported similar totals for defense spending in their revised plans. Total defense spending provided in the House plan stands at $617 billion. The Senate plan provides a total of $619 billion.

Here is a breakdown of the differences:

House of Representatives

• The initial budget maintains the 2011 spending caps on base defense spending, but proposes $94 billion for Overseas Contingency Operations – $20.5 billion of which would be contingent upon an offset, however. Republican defense hawks balked at this caveat and attempted a failed amendment that would have removed the offset requirement.
• The version of the House budget, approved by a 22-13 vote, leaves the original OCO funding amount and offset requirement in place. However, House Speaker John Boehner has indicated that the $20.5 billion offset requirement would be stripped before floor consideration.
• Thus, total defense spending provided in the House plan stands at $617 billion. The total may be raised further during floor consideration.

Senate

The House Budget Committee’s attempt to get around the defense caps by funneling money through OCO received early criticism from Senate members.

• The initial Senate blueprint calls for $58 billion for OCO funding, matching President Obama’s request for fiscal year 2016.
• After complaints from pro-defense Senate Republicans, the committee adopted an amendment by Senator Lindsey Graham, which increased OCO funding to $96 billion.
• Thus, total defense spending provided in the revised Senate plan stands at $619 billion.

This update was prepared byRuss Sullivan. If you have any questions, please contactRuss at rsullivan@mcguirewoods.com or another member of McGuireWoodsConsulting’sFederalPublic Affairs team.