Sonnenschein Client Alerts

On February 1, 2010, in what it characterized as an effort to build a new foundation for long-term prosperity, the Obama Administration released its $3.834 trillion budget proposal for FY 2011.  As part of its efforts to address the national deficit, the budget proposal contains spending limits to reduce federal outlays and tax provisions to raise additional revenue over the next decade.

As the U.S. economy stabilizes, but elevated levels of unemployment persist, the Administration's budget proposal aims to spur job creation through a new jobs bill.  The budget proposal also focuses federal funding and tax structures to reform America's education system, encourage clean energy development, and expand investment in transportation and infrastructure.

With the release of the Administration's FY 2011 budget proposal, attention now turns to Congress, where the final shape of federal spending will be decided.  Key committees in both chambers began their review of the FY 2011 budget this week.

In an effort to help outline the Administration's priorities for 2011, this Alert highlights key areas of the FY 2011 budget proposal.  Major areas of focus include: tax and revenue provisions, a freeze on discretionary spending, new legislation aimed at job creation, investments in education, investments in energy and scientific research, and investments in transportation and infrastructure.

In addition to these budget proposals, the President restated his commitment to legislation that will achieve comprehensive health care reform and financial regulatory reform.  The Administration also reaffirmed its commitment to a sweeping climate change bill that will mitigate CO2 emissions and invest in clean energy.

Tax and Revenue Provisions

As part of the Obama Administration's effort to reduce the deficit, the FY 2011 budget includes new revenue measures and eliminates or discontinues certain existing tax incentives.

Tax Provisions - The Administration's proposal calls upon Congress to establish a Financial Crisis Responsibility Fee to recoup the net costs incurred from the Troubled Assets Relief Program (TARP).  This fee, which was recently proposed by President Obama, would be assessed to the largest financial institutions and is expected to raise $90 billion over the next ten years.

Specifically, this fee would be placed on financial firms with more than $50 billion in consolidated assets and is intended to raise up to $117 billion to repay the current projected net cost of TARP.  Affected firms would pay 15 basis points (0.15%) on their covered liabilities each year.  If enacted, the fee would take effect on June 20, 2010 and would last at least ten years; however, if the fee does not repay the net cost of TARP after this time period, it would continue applying until it does so.

The FY 2011 budget proposal will generate $39 billion over ten years by eliminating certain tax preferences and incentives for oil, gas, and coal companies.  Additionally, it will raise $678 billion over the next decade by allowing the Bush Administration's 2001 and 2003 tax cuts to expire for households making more than $250,000.

In addition to these proposals, the Administration would also raise revenue by closing international corporate tax preferences, reducing itemized deductions for families with income greater than $250,000, and ending certain capital gains tax preferences.

Discretionary Spending Freeze - The Administration's budget proposal would impose a three-year spending freeze on non-security domestic discretionary spending, which, if enacted, would save approximately $250 billion during the next ten year period.  This spending freeze would not affect defense spending or mandatory programs such as Social Security, Medicare, and Medicaid.

This proposed spending freeze has already encountered significant skepticism, if not outright opposition, from both sides of the aisle.  Many Democrats, including House Speaker Nancy Pelosi (D-CA), have argued that any proposed spending freeze should also apply to certain types of defense spending that they believe are laden with contractor cost overruns and poor performance.  Many Republicans contend that this proposed spending freeze does not go nearly far enough in cutting federal spending.

Bipartisan Fiscal Commission - With the FY 2011 budget proposal, the Administration plans to create, by Executive Order, a Bipartisan Fiscal Commission focused on financial sustainability and the debt-to-GDP ratio.  This Commission would review fiscal proposals that enhance the long-term fiscal outlook and would begin balancing the national budget by 2015.

Additional Revenue Sources - Along with these proposals, the Administration also seeks to increase revenue by eliminating programs they deem ineffective, reducing improper outlays, and minimizing the number of Congressional earmarks through increased transparency and accountability requirements.

Key Priorities and Investments for FY 2011

The Administration's  key priorities for FY 2011 are reflected in the budget proposal's focus on allocating federal funding for job creation legislation, education and student lending, energy and scientific research, and transportation and infrastructure.

Job Creation Legislation - Amid increasing clamor on Capitol Hill for legislation to extend certain tax cuts and a growing interest among key Members of Congress in providing additional incentives to save or create jobs, the Administration's budget proposal allocates $100 billion for a new jobs bill.

The Administration envisions such a bill as a package of tax cuts to promote wage increases and small business hiring.  The Administration also seeks legislation to expand investment incentives in infrastructure and clean energy.

The budget proposal would extend for one year the Making Work Pay Tax Credit created by the American Recovery and Reinvestment Act.  In addition, the budget proposal would eliminate the capital gains tax on new investments in small business and extend through 2010 the Recovery Act measure that permits small business to expense immediately up to $250,000 of qualified investment.

Currently, Senate Democratic leadership is drafting a new jobs bill that is expected to be responsive to the Administration's plans for such legislation.  In December, the House passed a similar jobs bill, H.R. 2847.  The bill, among other things, would invest in transportation infrastructure, authorize funds to state governments to prevent future public sector layoffs, and extend certain unemployment benefits.  It is unclear which of these provisions the Senate will address as legislation has not yet been introduced.

Education and Student Lending - The President's budget requests a substantial increase in funding for education.  The budget includes a range of spending provisions and other measures to drive education reform, increase the number of effective teachers and principals, expand innovative student achievement efforts, enhance science education, and make college more accessible.  It would also drastically curtail the role of private lenders with regard to student loans.

• The budget requests $28 billion for programs authorized by the Elementary and Secondary Education Act, with up to $1 billion in supplementary funding if Congress fundamentally overhauls the Act.
• $1.35 billion is provided to continue the President's Race to the Top initiative, and to expand these competitive grants from states to school districts that meet various reform benchmarks.
• $900 million is requested for School Turnaround Grants.
• The budget allocates $950 million for a new competitive fund for states and districts to recruit, develop, retain, and reward effective teachers, particularly in high-need schools.
• The budget requests a $17 billion increase in Pell Grant funding from 2010 levels.
• The Administration's budget also sets simplifying student aid as a two-year "high-priority performance goal" for the Department of Education.  This includes making sure that all participating higher education institutions and loan servicers are operationally ready to originate and service Federal Direct Student Loans.
• The budget also seeks to strengthen income-based repayment plans for student loans by reducing monthly payments and shortening the repayment period. Overburdened borrowers would pay only 10% of their discretionary income in repayments and have their remaining debt forgiven after 20 years.

Energy and Scientific Research - The FY 2011 budget proposal focuses substantial resources on encouraging the use of innovative energy technologies, spurring investment in clean energy, and expanding basic scientific research.  The budget provides significant new incentives for nuclear power, and it phases out funding for fossil fuel subsidies.  The Department of Energy's (DOE) two-year high priority performance goals include doubling renewable energy generating capacity (excluding conventional hydropower) by 2012; supporting the development and deployment of advanced battery manufacturing capacity; working with HUD to enable cost-effective energy retrofits; and conditionally committing to loan guarantees for two nuclear power facilities to add new low-carbon emission capacity of at least 3,800 megawatts in 2010.

• $36 billion in new loan authority for DOE loan guarantees for nuclear power facilities.
• $500 million in credit subsidies to support $3 billion to $5 billion in loan guarantees for innovative energy efficiency and renewable energy projects.
• $144 million for grid modernization and smart grid research, development, and demonstration.
• $4.7 billion for DOE clean energy investments, including:
  • $2.4 billion for energy efficiency and renewable energy programs (consisting of $302 million for solar energy.
  • $220 million for biofuels and biomass, $325 million for advanced vehicle technologies, and $231 million for energy efficient building technologies).
  • $545 million for advanced coal climate change technologies, including carbon capture.
  • $300 million for the Advanced Research Projects Agency-Energy (ARPA-E).
  • $793 million for clean energy activities and civilian nuclear energy programs, including includes a new research program to address technology needs for all aspects of nuclear energy production.
• $5.1 billion for DOE's Office of Science, including $1.8 billion for basic energy sciences research to discover new ways to generate, store, and use energy.

Transportation and Infrastructure - The Administration's budget proposal includes several billion dollars of new federal investments in transportation and infrastructure.  It Tthe Administration also supports an extension of the current Surface Transportation Authorization Act through March 2011.

• The budget requests $4 billion to create a National Infrastructure Innovation and Finance Fund to leverage non-federal capital and support investments in national and regional projects.
• $1 billion for high-speed rail.
• $530 million through the President's Partnership for Sustainable Communities to support state and local government investments in sustainable transportation infrastructure that is integrated with affordable housing.

Additional Department Funding for FY 2011

In addition to the Administration's key proposals for FY 2011 listed above, the budget proposal outlines spending requests and priorities across the government.  In an effort to make good on the President's promise to reduce the national deficit and focus on efficient, quality programs,, the budget proposal calls for Congress to expand funding for some initiatives and to reduce or eliminate funding for others.

Set forth below are the Administration's proposed funding levels for certain federal departments in FY 2011.  We have also included the specified department's funding level in 2010 along with key snapshots of the Administration's budget proposal.

As noted above, this is just a highlight of some of the President's proposed funding levels for FY 2011.  The complete budget proposal can be found at: http://www.gpoaccess.gov/usbudget/fy11/index.html.

For more information on the subject matter of this alert, please contact your regular Sonnenschein attorney or professional.

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