By Alexander Bolton and Jay Heflin - 05/21/10 12:21 AM EDT
The Gulf oil spill that began flooding Louisiana marshlands Wednesday is creating billions of dollars in ghost money for tax writers on Capitol Hill.
Democrats are proposing a tax increase on oil to pay for cleanup efforts, but an accounting loophole also allows them to use the extra revenue to offset the cost of a massive economic aid package.
The existing trust fund of $1.5 billion won’t cover the estimated $14 billion in Gulf Coast damages, the Democrats say, so it has to be boosted.
But since the fund will save the government some of the cost of the cleanup, Washington can turn around and use the saved money to pay for summer jobs and municipal bonds.
The accounting gimmick is possible because the Congressional Budget Office (CBO) only scores acts of Congress. Payments from the oil liability trust fund are merely administrative actions and therefore will not be counted by the CBO.
So while the Joint Committee on Taxation, which tallies government revenue, will count the excise tax on oil as income, the CBO won’t count expected expenditures from the trust fund.
The result — an offset worth between $5 billion and $10 billion.
Republicans are crying foul.
“They’re double-counting the money, they’re counting it as an increase to the oil liability trust fund and counting it as something that can be used to pay for other programs,” said a GOP aide. “You can’t have it both ways.”
House Ways and Means Committee Chairman Sany Levin (D-Mich.) disagrees.
“I don't think it's counting twice. We often have provisions in there that are counted towards meeting your requirements,” he said.
President Barack Obama has declared that BP will pay for cleaning up the Gulf but Democratic lawmakers are skeptical. The bill would remove the $1 billion liability cap on the oil spill trust fund in anticipation that the $14 billion in estimated costs aren’t fully covered by the private sector.
Republicans argue that if the government raises taxes to pay for the oil spill, it should not then use the money that would have otherwise come from the general treasury to pay for a cleanup on summer jobs and other spending programs.
Democrats, however, argue the offset will help lawmakers enact programs vital to economic recovery — programs that may help them in an election year.
One such proposal is the Build America Bonds program, which would subsidize municipal building projects around the country at a cost of $4 billion.
Democratic leaders are desperate for offsets because centrist lawmakers within their own party — not to mention Republicans — are balking at the prospect of more deficit spending.
The newest economic aid bill, known as the extenders package because it would extend a series of expiring provisions including unemployment insurance and various tax credits, would add another $140 billion onto the federal deficit.
This has set off waves of anxiety among Senate and House Democrats.
“I think that will be problematic for our caucus,” said Sen. Byron Dorgan (D-N.D.) when he heard of the bill’s price tag. “We have to find ways to start paying for more of these things.”
Sen. George Voinovich, a Republican from economically ravaged Ohio, said: “I’ve got a problem with it.”
House Democratic leaders postponed a vote on the package after centrists in their caucus panned it.
“As currently drafted, I cannot support this bill — even though I support everything substantively in the bill — but it’s not paid for,” said Rep. Gerry Connolly (D-Va.).
Rep. Chris Van Hollen (Md.), a member of the Democratic leadership, predicted that Speaker Nancy Pelosi (D-Calif.) would round up enough votes to pass the bill.
“I think when people have a chance to review it, they’ll like what they see,” he said.
Senate Majority Leader Harry Reid (D-Nev.) plans to pass the legislation by Memorial Day, but he has to contend with the deficit worries of centrist Democrats as well as a revolt led by Sen. John Kerry (D-Mass.) over a plan to raise taxes on venture capital firms.
Kerry said Thursday that he had not yet had a chance to review the latest proposal to tax private equity groups and other firms that earn carried interest, the 20 percent slice of profits earned from a successful investment.
Investors such as Warren Buffett pay low tax rates on income because most of it is subject to the 15 percent capital gains tax.
The bill would tax 75 cents of every dollar earned as carried interest at ordinary income tax rates, which can be as high as 35 percent. The remaining 25 cents on the dollar would be taxed at the capital gains rate.
The Democratic architects of the bill, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Levin, argue it is necessary to raise taxes and spend billions of dollars to help people affected by the recession.
The problem is there are few options for paying for the expensive proposals, such as extending unemployment benefits and increasing federal Medicaid assistance to states.
A preliminary Democratic estimate put the cost of a package of expiring tax provisions and economic assistance at $198 billion, according to Senate Budget Committee Chairman Kent Conrad (D-N.D.).
Only $54 billion of that cost is offset by tax increases or savings, Conrad said.
The most expensive items in the bill would not need to be paid for with offsets under congressional budget rules because of various exceptions.
Extending various unemployment compensation programs through the end of this year would cost $47 billion. An extension in federal subsidies to pay for COBRA benefits through December would cost $7.8 billion. A six-month extension of increased federal Medicaid assistance to states would cost $24 billion.
These programs are all considered emergency spending and therefore do not require offsets because they are not subject to pay-as-you-go budget rules.
The other major spending provision of the bill is a three-and-a-half-year freeze in scheduled cuts to doctors’ Medicare payments. The provision would avoid a 21.3 percent cut in Medicare physician rates set to kick in June 1.
The so-called “doc fix” does not require an offset under pay-go rules because it costs less than $88.5 billion.
But that has given little comfort to Democrats concerned about the budget.
The CBO is still analyzing the proposal, which is estimated to cost more than $60 billion and would give doctors a 1.3 percent payment boost through the end of the year.
Julian Pecquet contributed to this report.