Jobs and tax bill to cost $134 billion

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Congressional budget scorekeepers said that a grab-bag bill of spending and tax measures to be taken up this week would increase federal deficits by $134 billion over a decade.

The bill, which is likely to become a flash point in the debate over the federal debt, would raise $40 billion worth in additional revenue, according to estimates by the Congressional Budget Office and the Joint Committee on Taxation.

But that's not enough to fully offset the $174 billion in additional federal outlays that would occur as a result under the bill. CBO released its cost estimate late Friday.

The legislation would extend a host of tax breaks, give continued relief to the unemployed, delay cuts to doctors' Medicare reimbursements, provide support for job growth and fund disaster relief, among other things.

The bill, a melded version of proposal passed earlier by the House and Senate, won't be free of opposition on either side of the aisle. There is pressure to pay for more of the bill's provisions, and there is strong disagreement over some of the pay-fors that are included.

Fiscally conservative House Democrats, known as the Blue Dogs, met with Democratic leadership on Thursday about the size and cost of the bill.

And a number of Senate Republicans have been pushing for the roughly $79 billion in safety net provisions to be paid for, even though many Democrats deem it emergency spending given the financial hardships facing those who have lost their jobs as a result of the recession. Emergency spending is specifically exempt from the new pay-as-you-go law.

Safety net: The bill offers a number of safety-net provisions for the unemployed and financially strapped. It would extend to the end of this year a program that provides a greater-than-normal number of weeks that an unemployed person may collect federal unemployment benefits. The estimated cost: $47 billion over 10 years.

In addition, the bill would extend through year-end the federal subsidy to help the newly unemployed pay for health insurance under COBRA, which would reduce revenue by $7.8 billion. And it also would provide more federal aid to help budget-strapped states meet the increased demands for Medicaid services through June 30, 2011, at an estimated cost of $24 billion.

Lastly, it would extend through September 2011 emergency funding to states for food stamps and aid for needy families and a subsidized jobs program.

Tax breaks: The bill would extend a series of lapsed tax breaks for businesses and individuals. Such "tax extenders" include the research and development credit for businesses and the choice for individuals to deduct either their state and local income tax or their state and local sales tax. Extending the tax breaks through Dec. 31, 2010, would reduce federal revenue by $32 billion over 10 years.

In recent years it has been typical to pass such extenders annually so constituents don't perceive lawmakers as increasing their taxes, said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

But extending tax breaks one year at a time masks the real cost of what is in essence a long-term or permanent extension, since the price tag is only recorded in 12-month increments.

Small business: The bill contains a small but significant measure that would extend small business lending incentives that otherwise would expire this month.

The program both eliminates fees that the Small Business Administration normally charges for loans made through the agency, and increases the government guarantees on those loans. The provision has bipartisan support and has helped small firms borrow more than $7 billion this year alone in an otherwise grim lending climate.

Medicare payments: The bill contains a contentious measure that would extend the current Medicare reimbursement rate structure for physicians for three and a half years. Otherwise, Medicare reimbursement rates would automatically be cut 21% starting June 1 and by 1% to 6% in future years because of a pre-set formula that dictates Medicare outlays related reimbursements. The estimated cost: $63 billion over 10 years.

Originally the aim was for the "doc fix" to override the cuts for five years, but there has been pushback about the cost of doing so for that long.

Paying the tab

Among the bill's "pay-fors" is a change in the way income paid to hedge fund managers and other managers of investment partnerships are taxed. Currently that income -- so-called "carried interest" -- is taxed at the capital gains rate, which is less than half the top ordinary income tax rate. The bill would instead tax as ordinary income the majority of carried interest that does not reflect returns on invested capital. The measure is estimated to raise $19 billion over 10 years.

House and Senate Democrats differ about just how broadly the carried interest change should be applied. Senate Democrats, for instance, are pushing to exempt venture capital firms, according to Tax Analysts.

Other pay-fors include more than $14 billion worth of changes to corporations' foreign tax credits.

It's not clear yet whether the bill will still be subject to further amendment. But the current plan is for the House to bring the bill to the floor for a vote on Tuesday, according to a spokesman for House Speaker Nancy Pelosi, D-Calif. If it passes, the bill would then be sent to the Senate for a final vote.

The Senate vote could occur before the Memorial Day recess. But there are still other matters that the Senate wants to wrap up before the break, most notably, financial reform and a supplemental spending bill that would, among other things, provide additional funding for U.S. military efforts in Iraq and Afghanistan.

- CNNMoney's Stacy Cowley and CNN's Deirdre Walsh contributed to this report. To top of page

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