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Posted at 6:34 AM ET, 02/ 9/2011

Wonkbook: White House throws states a lifeline. But will the GOP let them catch it?

By Ezra Klein

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Next week's budget will include a complicated, two-pronged proposal to forgive the states some debt and give them access to more tax revenues after 2014. It's evidence that the White House s pretty worried about both the long and short-term fiscal position of the states. Worried enough to propose a policy that'll be called a "job-destroying" tax hike on a Hill (actually, it's already been called that, as you'll see in a moment). But this won't necessarily be easy on the Republicans, either. Post-election, the GOP controls a lot of governor's mansions and statehouses. And they're looking at budget projection that frankly terrify them. A bit of help from the Feds may be ideologically unwelcome, but it also might be a lifesaver.

Here's how it works: First, the federal government will free the states from $3.6 billion in interest payments to the federal government over the next two years. Second, the Feds the payroll tax that funds the unemployment system only applies to the first $7,000 in income. The Feds will raise that to $14,000, but they'll give up their share of the new revenues. The states can take them or, if they don't want to raise taxes on employers, leave them. "This is the kind of slick fiscal policy that staff stay up nights trying to think up," writes Pete Davis, a former Senate Budget Committee staffer.

Washington's Republicans are not impressed. "Any plan that relies on more than doubling the tax base and then raising payroll taxes in perpetuity isn't going anywhere in the House," said Rep. Dave Camp. "I strongly urge the White House to reconsider this job-destroying proposal," said Sen. Orrin Hatch. That reaction was perhaps to be expected: There is, after all, a tax increase -- albeit an optional one -- in this legislation. But there's also relief for states that desperately need it -- and if you want to see a real job-killing outcome, watch what happens if a state defaults on its debt. The question going forward is whether Republican governors and state legislators begin calling their friends in Washington and asking them to hold enough fire on this. After all, it might be easy for the national GOP to bash it, but in a state like Texas, where the projected 2012 budget shortfall is more than 30 percent, it likely has a bit more appeal.

Top Stories

Obama will propose debt relief for states as part of the budget, report Lori Montgomery and Brady Dennis: "States that have borrowed billions of dollars from the federal government to cover the soaring cost of unemployment benefits would get immediate relief from the Obama administration under a plan to suspend interest payments for the next two years. The proposal, which will be included in the budget request President Obama will send to Congress next week, would allow states to avoid raising taxes on employers to cover the payments - which are projected to total $3.6 billion through 2012, according to independent estimates. Obama also would suspend automatic hikes in the federal unemployment tax scheduled to hit employers in nearly half of the states by the end of next year."

The GOP is not supportive: http://on.wsj.com/fHMmwM

On the bright side, the states are in a better financial position than some have been predicting, reports Michael Corkery: "States find their revenues are on the upswing as the economy grows and as inflation, while modest, helps to buoy the incomes and corporate profits that many states tax. During the 2010 fourth quarter, state tax revenues were up 6.9% from a year earlier, according to preliminary data from the Nelson Rockefeller Institute of Government in Albany, N.Y. This isn't to say that cash-strapped states won't face higher borrowing costs, which could prove excruciating for some governments that rely on debt to fund their operations. Analysts also said that it is possible that the historically low rate of defaults could rise somewhat. What many analysts and investors do doubt is a scenario outlined by one independent analyst, Meredith Whitney, who has publicly predicted '50 to 100 sizable defaults' amounting to 'hundreds of billions of dollars.'"

The administration is proposing greater high-speed rail investment, reports Ashley Halsey: "The Obama administration wants to invest $53 billion in high-speed and intercity rail service in the next six years, expanding a signature transportation initiative it already has targeted with $10.5 billion. The plan to spend billions more on a vast high-speed-rail network was cast by the administration as vital to keeping the United States competitive with world markets that already use the technology. 'Public infrastructure investment raises private-sector productivity,' Vice President Biden said Tuesday, continuing a theme struck by the president in his State of the Union speech last month...Obama's budget for fiscal 2012, which will be sent to Congress next week, includes $8 billion for the plan."

The administration could unveil its plan for Fannie and Freddie as soon as Friday, reports Binyamin Appelbaum: "The Obama administration and House Republicans are settling into a game of chicken over Fannie Mae and Freddie Mac, with each side daring the other to advance a plan for replacing the two housing finance companies. The White House missed a deadline at the end of January for telling Congress what it wants to do. That report will be released as early as Friday, people with knowledge of its contents said, but it will present a range of options without stating a preference. One possibility favored by some of President Obama’s economic advisers, and by many Republicans, would not create any federal replacement for Fannie and Freddie, leaving the private markets to provide mortgages for most Americans."

Movie geek indie pop interlude: First Rate People's "Charlie Kaufman".

Got tips, additions, or comments? E-mail me.

Still to come: The financial industry is constructing far fewer securities than it did pre-crisis; the House GOP is working on defunding health care reform; the recession is hurting access to community colleges; the Senate GOP is fighting to save oil and gas subsidies; and a hamster in an armored mecha suit.

Economy

Securitization has still not recovered from the crash, reports Zachary Goldfarb: "In total, there was $145.3 billion in securitizations in 2010, compared with $875.5 billion in 2005, and far below the number even a decade ago, according to industry newsletter Asset-Backed Alert. During the crisis, the federal government unveiled numerous programs to support securitization, but the longer-term decline of this market has not fazed officials...Several factors are reducing the interest in securitization. For starters, before the crisis there was an insatiable global appetite for securities backed by U.S. loans. But today, banks hold trillions of dollars in cash...Other factors include the still sluggish economy - in which banks are wary of loaning to borrowers who might not pay them back - and the many new regulations facing securitization."

The Fed has settled on an expansive definition of "systemically important" financial institutions: http://nyti.ms/ggiGWE

Some Republicans are voting against budget cuts they view as too modest, reports David Rogers: "Facing a two-front war on the left and right, the House Appropriations Committee voted, 27-22, Tuesday evening to move ahead with Republican plans for cutting close to $40 billion from domestic and foreign aid spending over the last seven months of this fiscal year. Democrats were united in their opposition, but more important for Republicans was the loss of two of their own Western-state conservatives - Arizona Rep. Jeff Flake and Rep. Cynthia Lummis of Wyoming -- who voted 'no' to protest the cuts being too small...In a striking display of defiance, Flake exercised his right to file alternative views in the committee report -- something rarely done in Appropriations by a member of the majority party."

"Social impact bonds" allow low-cost government investment, writes David Leonhardt: "David Cameron’s Conservative government in Britain is already testing it, at a prison 75 miles north of London. The Bloomberg administration in New York is also considering the idea, as is the State of Massachusetts. Perhaps most notably, President Obama next week will propose setting aside $100 million for seven such pilot programs, according to an administration official. The idea goes by one of two names: pay for success bonds or social impact bonds. Either way, nonprofit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus -- but only if agreed-upon benchmarks show that the program is working."

Media companies will only keep consolidating, writes Steven Pearlstein: http://wapo.st/hoO2lE

The US' corporate taxes are very low when one takes a broader view, writes Howard Gleckman: "Americans are hardly overtaxed, at least compared to the rest of the developed world. One reason is that the U.S.is about the only major industrialized nation that does not also have a Value-Added Tax or national sales tax. For instance, advocates for low corporate taxes love to talk about Ireland’s 12.5 percent combined corporate rate. But they usually don’t say much about Ireland’s VAT, which has a top rate of 21 percent. Indeed, those countries with the lowest corporate rates, such as the Slovak Republic and Poland, raise a big chunk of their tax revenue though a VAT, where their rates tend to be among the world’s highest."

Adorable animals with mechanical support interlude: A hamster armored mecha suit.

Health Care

The House GOP will conduct a vote on defunding health care reform, reports Janet Hook: "House Republicans will use a stopgap spending bill coming to the floor next week as a vehicle to block money for the new health-care law, a top lawmaker said Tuesday...The spending bill, needed to fund the government through the end of the fiscal year on Sept. 30, is being drafted by the House Appropriations Committee, which is seeking deep spending cuts. The current stopgap bill expires March 4. While the initial version isn't expected to include the health-law funding ban, Republicans plan to introduce it as an amendment to the bill, Mr. Cantor said. It is expected to block the use of money in the bill to carry out the law, for example by preventing the Department of Health and Human Services from hiring more workers to oversee the new benefits."

A Constitutional challenge to health care reform in Ohio is being fast-tracked: http://nyti.ms/dUfvK7

Vermont has unveiled its single-payer proposal, reports Aimee Miles: "Vermont Gov. Peter Shumlin, who was elected last November after promising to reform health care in the state, unveiled a bill today that would abolish most forms of private health insurance and move state residents into a publicly funded insurance pool. His much anticipated proposal lays out a strategy that leaves a number of key details--including how to pay for the system--open for debate. Under Shumlin's 'single-payer' system, Vermont residents would receive health benefits paid for by the state, regardless of their employment status or income... Shumlin's strategy seeks to take advantage of federal resources that will kick in under the new health law in 2014."

Cost control requires more than insurance reform, writes Austin Frakt: http://bit.ly/hJk4Hq

Domestic Policy

The recession is hurting access to community colleges, reports Kevin Helliker: "Community colleges, long regarded as the most accessible realm of higher education, are becoming more difficult to access thanks to record enrollments combined with belt-tightening by state legislatures...In a survey to be released Wednesday by the Pearson Foundation, a nonprofit educational think tank in Mill Valley, Calif., about 20% of 1,434 community college students interviewed in November reported difficulty enrolling in required courses for the fall semester. About one in three had trouble winning a spot in desired classes...Budget cuts in California could force its community-college system--the biggest collegiate system in the U.S., serving about 2.76 million students--to turn away about 350,000 applicants next year."

Democrats can do more to push along judicial nominees, writes Jonathan Bernstein: "Democrats share a large part of the blame as well. For one thing, the president has named only nine judges for the 17 appeals court vacancies and only 41 judges for the 85 open district court seats. That’s significantly fewer nominations than Presidents George W. Bush or Bill Clinton had sent to Congress by this time in their first terms. Moreover, unlike President Bush, President Obama has not used his bully pulpit to push for Senate confirmation of his nominations...Senate Democrats have also refused to respond to the Republicans’ obstructionism with their own aggressive use of the rules. Though almost all of President Obama’s nominees have had enough support to overcome a filibuster, the Republicans have managed to slow the process to a crawl by deploying an array of delaying tactics."

Great moments in Japanese cuisine interlude: Sushi made out of powder and water.

Energy

The Senate GOP is fighting to preserve oil and gas subsidies, reports Siobhan Hughes: "U.S. Senate Democrats took an opening shot by pushing an effort to take away $20 billion of tax breaks for oil and gas companies, portraying the move as a way to reduce the widening federal deficit. Republicans responded that raising taxes would hurt economic growth. 'We don't really believe you cut spending by raising taxes,' Senate Minority Leader Mitch McConnell (R., Ky.) told reporters. In his State of the Union address, President Barack Obama said he wanted to eliminate $4 billion of oil and gas incentives to help pay for clean-energy initiatives. Such proposals are expected to be included in the White House's fiscal-year 2012 budget later this month. Oil and gas companies, represented by the American Petroleum Institute, are trying to preserve the tax incentives."

House energy chair Fred Upton won't hold hearings on climate science: http://politi.co/e0ebvk

The Bush EPA had its own climate change plan, reports Darren Samuelsohn: "The Environmental Protection Agency administrator under George W. Bush mapped out aggressive rulemaking plans for greenhouse gases before the White House ultimately shut him down. Stephen Johnson outlined in a January 2008 letter to Bush a three-phase plan for tackling climate change that included strict new restrictions on power plants and transportation fuels. Johnson's ideas - spelled out in a document classified as 'privileged: communication the president' - were released Tuesday by House Energy and Commerce Committee ranking member Henry Waxman. The California Democrat said the materials put a new spin on the GOP-led legislative hearing planned for Wednesday that's aimed at undoing the Obama administration EPA's authority to address the pollution that scientists have linked to climate change."

Obama's budget request includes a $7,500 rebate for electric car purchasers: http://bit.ly/fPgGZS

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams. Photo credit: White House.

By Ezra Klein  | February 9, 2011; 6:34 AM ET
Categories:  Wonkbook  
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Comments

Is this sentence misstated?

"Second, the Feds the payroll tax that funds the unemployment system only applies to the first $7,000 in income."

Posted by: jnc4p | February 9, 2011 9:18 AM | Report abuse

--*Next week's budget will include a complicated, two-pronged proposal to forgive the states some debt and give them access to more tax revenues after 2014.*--

What's wrong with that is the same thing that was wrong about bailing out General Motors. The states have spent way too much, committed themselves to expenditures they'll never be able to cover, and they need to feel the pain for it.

Posted by: msoja | February 9, 2011 9:23 AM | Report abuse

"After all, it might be easy for the national GOP to bash it, but in a state like Texas, where the projected 2012 budget shortfall is more than 30 percent, it likely has a bit more appeal."

But Ezra, let me ask you to just think about this:

Would it be better to not bail out Texas?

To let people see first hand that you can't just always cut taxes on the wealthy with no real consequences. That you can't just always painlessly cut waste. That there are very valuable things that government does that the free market will not do, cannot do, or cannot do as well due to long established in economics market problems. And if you cut those to cut taxes for the rich your state goes to crap, it becomes third world in many ways, like the southern states that are breaking up roads into dirt because they have no money to maintain them.

Would this teaching, this revealing of the Republicans, do more good than bad over the long run?

Posted by: RichardHSerlin | February 9, 2011 11:19 AM | Report abuse

--*Would it be better to not bail out Texas?*--

Yes.

Posted by: msoja | February 9, 2011 11:21 AM | Report abuse

I mean what if we let the Texas Republicans cut the state budget by 30%, as it's never ever ever a good idea to raise taxes, and always a good idea to cut them -- let's see them give a 100% tax cut and have no government at all -- perfection!

Posted by: RichardHSerlin | February 9, 2011 11:24 AM | Report abuse

Spending 53 billion on the greatest boondoggle of the 21st Century, HSR is sheer insanity when everyone agrees that we need a dramatic investment in our deteriorating infrastructure.

They are however popping corks in Europe and Asia. You see the only part of HSR that will be done by American companies is the construction of the track beds.

Vitrually nothing else involved, including the trains themselves, are manufuactured here!

Posted by: johnmarshall5446 | February 9, 2011 11:55 AM | Report abuse

--*I mean what if we let the Texas [...]*--

What if *we* found a way to mind our own business, and didn't worry about letting or not letting "Texas" do something?

Posted by: msoja | February 9, 2011 12:01 PM | Report abuse

"Budget cuts in California could force its community-college system--the biggest collegiate system in the U.S., serving about 2.76 million students--to turn away about 350,000 applicants next year."

EXCELLENT!

Let's face it. If you're not good enough to be one of the top qualifiers even for a CC, then guess what. YOU PROBABLY SHOULDN'T BE GOING TO COLLEGE IN THE FIRST PLACE!!!!!

Get some training in a specialized career, or start working your way up in a big chain like Walmart, Safeway etc. Spend small amounts on a car and clothing, and invest whatever you have left in the stock market, even in something like Sharebuilder.

In five years you'll be at least equal and probably ahead of many of your peers.

Posted by: johnmarshall5446 | February 9, 2011 3:53 PM | Report abuse

NO MORE BAILOUTS, TO EACH, HIS OWN

The states must deal with their own problems.

Posted by: Warof2010 | February 16, 2011 3:29 AM | Report abuse

NO MORE BAILOUTS, TO EACH, HIS OWN

The states must deal with their own problems.

Posted by: Warof2010 | February 16, 2011 3:30 AM | Report abuse

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