[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
PRESIDENT'S FISCAL YEAR 2007 BUDGET WITH
U.S. DEPARTMENT OF THE TREASURY
SECRETARY JOHN SNOW
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
FEBRUARY 15, 2006
__________
Serial No. 109-53
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
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C O N T E N T S
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Page
Advisory of January 31, 2006 announcing the hearing.............. 2
WITNESS
U.S. Department of the Treasury, Hon. John Snow, Secretary....... 6
SUBMISSION FOR THE RECORD
Advanced Medical Technology Association (AdvaMed), statement..... 53
PRESIDENT'S FISCAL YEAR 2007 BUDGET WITH
U.S. DEPARTMENT OF THE TREASURY
SECRETARY JOHN SNOW
----------
WEDNESDAY, FEBRUARY 15, 2006
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:35 a.m., in
room 1100, Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Committee) presiding.
[The advisory and revised advisories announcing the hearing
follow:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 31, 2006
FC-16
Thomas Announces Hearing on
President's Fiscal Year 2007 Budget with
U.S. Department of the Treasury
Secretary John Snow
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
President Bush's budget proposals for fiscal year 2007 within the
jurisdiction of the Committee on Ways and Means. The hearing will take
place on Tuesday, February 7, 2006, in the main Committee hearing room,
1100 Longworth House Office Building, beginning at 1:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from the Honorable John Snow,
Secretary of the Treasury. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
On February 6, 2006, President George W. Bush is expected to
deliver his fiscal year 2007 budget to Congress. The President's budget
includes numerous tax proposals and other issues that fall under the
jurisdiction of the Department of the Treasury and the Committee.
In announcing the hearing, Chairman Thomas stated, ``The
President's budget includes tax and other issues related to the
Department of the Treasury functions and the Committee. I look forward
to reviewing the President's budget and discussing the relevant
proposals with Secretary Snow.''
FOCUS OF THE HEARING:
Secretary Snow will discuss the details of the President's budget
proposals that are within the Committee's jurisdiction.
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* * * CHANGE IN DATE AND TIME * * *
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 03, 2006
FC-16 Revised
Change in Date and Time for Hearing on
President's Fiscal Year 2007 Budget with
U.S. Department of the Treasury
Secretary John Snow
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee hearing on President
Bush's budget proposals for fiscal year 2007 with U.S. Department of
the Treasury Secretary John Snow, previously scheduled for 1:00 p.m. on
Tuesday, February 7, 2006, in the main Committee hearing room, 1100
Longworth House Office Building, will now be held at a future date and
time to be determined.
All new details for the hearing will be announced in a subsequent
advisory, including details for providing a submission for the record.
All previously-received submissions will be carried over and should not
be resubmitted. (For more information, see Full Committee Advisory No.
FC-16, dated January 31, 2006).
* * * CHANGE IN DATE AND TIME * * *
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 06, 2006
No. FC-16 Revised #2
Change in Date and Time for Hearing on
President's Fiscal Year 2007 Budget with
U.S. Department of the Treasury
Secretary John Snow
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee hearing on President
Bush's budget proposals for fiscal year 2007 with U.S. Department of
the Treasury Secretary John Snow, previously scheduled for 1:00 p.m. on
Tuesday, February 7, 2006, in the main Committee hearing room, 1100
Longworth House Office Building, will now be held on Wednesday,
February 15, 2006, beginning at 10:30 a.m.
The deadline to provide a submission for the record will now be
close of business, Wednesday, March 1, 2006. All other details for the
hearing remain the same. (See Full Committee Advisory No. FC-16, dated
February 1, 2006).
Chairman THOMAS. Good morning. This is the third in a
series of hearings examining President Bush's proposed budget
for fiscal year 2007. The Chair would like to welcome Secretary
John Snow of the United States Treasury Department.
As the Secretary knows, we were scheduled to hold this
hearing last Tuesday, but the hearing was quite properly
postponed due to the funeral of Coretta Scott King. Mr.
Secretary, we thank you for accommodating our schedule and look
forward to your testimony.
As the President noted in his address to the Nation last
month, the economy is growing at a very healthy rate. The
economy created 2 million jobs last year. Average economic
growth for the year was 3.1 percent. Unemployment is down to
its lowest level since pre-9/11, 4-7 percent. Inflation remains
contained.
Due to the strong growth in the economy, tax receipts in
the past 2 years have been increasing faster than expected. The
Chair believes timely tax relief enacted in recent years--and I
believe many prominent economists agree--has been an important
contributing factor to this growth.
While this hearing is geared to look to the future and the
next budget, I want to note that the House and the Senate are
now in conference on a tax reconciliation package which would
maintain tax policies that have helped keep the United States
economy strong. Congress is also working on a bill to
strengthen the security of Americans' pension plans, but the
Senate has not yet seen fit to do the necessary procedures to
reach conferenceable level.
The President's fiscal year 2007 budget proposal continues
to focus on deficit reduction. Last week, the President signed
the Deficit Reduction Act. I look forward to hearing about some
of the President's proposals from you, Mr. Secretary, on how we
can continue this trend of fiscal responsibility.
Before I turn to the gentleman from New York, the Chair
would like to advise members that immediately following this
hearing, we will be marking up the views and estimates letter
to the Budget Committee on aspects of the Federal budget that
fall within the Committee's jurisdiction.
The Chair recognizes the gentleman from New York for any
comments he may wish to make.
[The opening statement of Chairman Thomas follows:]
Opening Statement of The Honorable Bill Thomas, Chairman, and a
Representative in Congress from the State of California
Good morning. This is the third in a series of hearings examining
President Bush's proposed budget for Fiscal Year 2007. The Chair would
like to welcome Secretary John Snow of the U.S. Treasury Department. As
the Secretary knows, we were scheduled to hold this hearing last
Tuesday, but postponed it due to the funeral of Coretta Scott King. Mr.
Secretary, we thank you for accommodating our schedule and look forward
to your testimony.
As the President noted in his address to the nation last month, the
U.S. economy is growing at a healthy rate. This economy created two
million jobs last year; average economic growth for the year was 3.1
percent; and unemployment is down to its lowest level since July 2001
at 4.7 percent and inflation remains contained.
Due to the strong growth in the economy, tax receipts in the past
two years have been increasing faster than expected. Timely tax relief
enacted in recent years is, in my view and the view of many prominent
economists, an important contributing factor to this growth.
While this hearing is geared to look to the future and the next
budget, I want to note that the House and Senate are [preparing for a
conference/currently in conference] on a tax reconciliation package
which would maintain the tax policies that have helped keep the U.S.
economy strong. Congress is also working on a bill to strengthen the
security of Americans' pension plans.
The President's Fiscal Year 2007 budget proposal continues to focus
on deficit reduction by keeping the economy strong and cutting
unnecessary spending. Last week, the President signed the Deficit
Reduction Act. That legislation, which reduced the deficit by almost
$40 billion over the next five years, is part of our ongoing efforts to
put our fiscal policies in order. I look forward to hearing about some
of the President's proposals on how we can continue this trend of
fiscal responsibility.
Before I turn over the time to the Gentleman from New York, the
Chair would like to advise Members that immediately following this
hearing, we will be marking up the views and estimates letter to the
Budget Committee on aspects of the Federal budget that fall within the
Committee's jurisdiction.
I now recognize the gentleman from New York, Mr. Rangel, for any
opening statement he may have.
Mr. RANGEL. Thank you, Mr. Chairman.
Mr. Secretary, let me first publicly thank you for the many
courtesies that you have extended to me by giving me some type
of heads up as to things that the administration is considering
doing. I am not used to it here in the House, and so I
appreciated even more the fact that the President indicated
that he was really looking forward to a less partisan approach
to some of the programs that he was proposing. So I hope if
time permits--and I know your schedule is limited--that you
might go directly to the tax conference that we expect to have
where the Senate appears to have said that they want tax cuts
to include the alternative minimum tax as well as the corporate
dividend and capital gain tax cuts. The President said that he
wants that to be made permanent, and if possible, I would like
to know what direction you might give the conferees.
I am pretty confident that I will be selected as a
conferee. I am not certain I will know where the conference
will be held.
Also, there is a concern about the report that you received
as relates to tax reform. I hope you might include what, if
anything, you intend to do with that.
The President seemed to have revisited Social Security, and
he is referring that to some type of a Committee or commission
or something that I assume would look like it is bipartisan. To
the extent that you can, we would like some help with that.
Of course, everyone is concerned about the deficit, and I
am certain that you believe that is no major problem to the
United States. But I do not know whether you can do anything
with this partisanship that we have. But it is abundantly clear
that you should not expect Democrats just to support anything
that is given to us. To the extent possible--and I know you are
restricted, being in the executive branch--it would be helpful
if you can make some suggestions as to those areas that we may
have agreement how we can be supportive on at least some of the
things that the President would want.
Thank you once again for adjusting your schedule to meet
with us.
Chairman THOMAS. I thank the gentleman.
Any member that may have a written statement can place it
in the record, without objection.
Mr. Secretary, we have received your written statement, and
without objection, it will be placed in the record, and you can
address us any way you see fit.
STATEMENT OF THE HONORABLE JOHN SNOW, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary SNOW. Thank you very much, Mr. Chairman. I will
be brief.
It is always an honor and a privilege to appear before the
Committee on Ways and Means, the Committee that has such effect
on the lives of our country and means so much to the well-being
of our country. I commend you for the work you do on this
Committee.
This is, Mr. Chairman, my fourth appearance before you. I
thank Mr. Rangel for his comments. I would comment that
appearing here today is far different than when I appeared 3
years ago. Today, as you noted, Mr. Chairman, the economy is on
a good path. Then it wasn't. Then growth was sluggish, capital
spending was anemic, jobs were not being created at a
sufficient rate. Today we have the other side of that. Today we
have an economy that is growing an expanding. We have business
confidence high. We have consumer confidence high. We have
capital spending strong, and we have lots of good jobs being
created, and we are seeing real wages rise. We are also seeing
government revenues rise to the highest level in American
history.
I would urge you to continue to sustain the policies,
support the policies that have made this possible, and at the
center of those policies are the lower tax rates on capital and
dividends that were enacted, Mr. Chairman, very much with your
leadership back in May of 2003.
The lower tax rates that were put in effect then have
really put the American economy on the right path. They are at
the center of this strong recovery we are enjoying, and it is
awfully important to sustain that lower tax environment.
The President's budget reflects his commitment to do just
that, to keep the American economy growing and expanding. It
also reflects the commitment to bringing the deficit down. We
are all concerned about the deficit, but there are only two
ways to deal with the deficit: one is to continue to have a
strong, growing, expanding economy, creating more jobs and
profitable businesses because that raises the tax receipts to
the government; and, of course, the other side of the equation
is to continue to be tightly attuned to controlling spending,
spending constraint. Both of those ideas are embraced in the
President's budget, along with the priorities of homeland
security and prosecuting the war on terror effectively.
With that, Mr. Chairman, I again thank you for the
opportunity to appear before you and look forward to your
questions.
[The prepared statement of Secretary Snow follows:]
Statement of The Honorable John Snow, Secretary, U.S. Department of the
Treasury
Good morning. Thank you Chairman Thomas and Ranking Member Rangel
for having me here this morning.
I'm pleased to be here today to talk with you about the President's
Fiscal Year 2007 budget. This budget represents the President's
dedication to fiscal discipline, an efficient federal government and
the continuation of a thriving U.S. economy.
Across the board, agencies were asked by the President to look
closely at their budgets and make tough decisions, because fiscal
restraint is not only necessary for deficit reduction, it is a
necessary component of government that is responsible to the people who
employ it.
Those tough decisions were made at all levels of government
management, and as a result the President's budget holds the growth of
discretionary spending below the rate of inflation and cuts spending in
non-security discretionary programs below 2006 levels.
The Administration has identified 141 programs that should be
terminated or significantly reduced in size because they aren't
performing or could perform better with consolidation; they aren't
giving taxpayers their money's worth. The savings for the American
taxpayer would be 14 billion dollars.
Cutting the programs that aren't working and improving the
efficiency of the ones that are is all part of accountability to the
taxpayer. To assist lawmakers in this shared effort, the Administration
launched ExpectMore.gov, a website that provides candid information
about programs that are successful and programs that fall short, and in
both situations, what they are doing to improve their performance next
year. I encourage the members of this Committee and those interested in
our programs to visit ExpectMore.gov, see how we are doing, and hold us
accountable for improving.
This budget, with its policies of economic growth and spending
restraint, keeps us on track to meet the President's steadfast goal of
cutting the deficit in half by 2009.
[GRAPHIC] [TIFF OMITTED] T1493A.001
[GRAPHIC] [TIFF OMITTED] T1493A.002
The budget also seeks to avoid a tax increase by making the
President's tax cuts permanent; I want to take a moment to explain why
that is entirely consistent with our deficit-cutting goals.
In short, lower tax rates are good for the economy and a growing
economy is good for Treasury receipts. Indeed, our rate of economic
growth led to record levels of Treasury receipts in 2005. And, going
forward, we project that receipts will rise every year. In 2011 we will
again reach, as a percentage of GDP, the levels we've seen over the
average of the last 40 years.
And there can be no question today that well-timed tax relief,
combined with responsible leadership from the Federal Reserve Board,
created an environment in which small businesses, entrepreneurs and
workers could bring our economy back from its weakened state of just a
few years ago. Tax relief encouraged investment, which has ultimately
led to job growth. The American economy is now unmistakably in a trend
of expansion, and those trend lines can clearly be traced to the
enactment of the tax relief.
[GRAPHIC] [TIFF OMITTED] T1493A.003
[GRAPHIC] [TIFF OMITTED] T1493A.004
Since May of 2003, the economy has created 4.7 million jobs, two
million of them in the last year alone.
[GRAPHIC] [TIFF OMITTED] T1493A.005
That's a lot of job growth, and there are a lot of very good jobs
in that number. Industries with above-median hourly earnings and
particularly large jobs gains since August 2003 include: specialty
trade contractors (463,000 workers paying an average hourly wage of
$19.55), ambulatory health care services (394,000 workers $17.86), and
building construction (167,000 paying $19.05).
[GRAPHIC] [TIFF OMITTED] T1493A.006
We found out the week before last that unemployment has fallen from
4.9 percent to 4.7 percent, running lower than the average for the
1970s, 1980s and 1990s. GDP growth was three and a half percent last
year.
[GRAPHIC] [TIFF OMITTED] T1493A.007
U.S. equity markets have risen, and household wealth is at an all-
time high.
Additionally, real per capita disposable (after-tax) income has
risen by 7.3 percent from 2000 to 2005 and that's very good news for
workers.
The U.S. is, as the President often notes, the economic envy of the
world.
When we look at the underlying fundamentals of the economy, its
strength proves deep and solid, and we can see that businesses and
workers have every reason to be optimistic about the future.
For example, we see that productivity growth remains strong. Output
per hour in the non-farm business sector has risen at an average annual
rate of 3.2 percent since the end of 2000, faster than any five-year
period in the 1970s, 1980s or 1990s.
Household net worth--that's assets minus debts--is a record high,
and not just because of housing. Deposits--the money in checking
accounts, savings accounts, and money market funds--are at a record
high and are larger as a share of disposable income than at any time
since 1993. Defaults on residential mortgage loans at commercial banks
are at historic lows.
In the past two years, the economy has generated about 170,000 jobs
per month, and that includes the two-month slowdown in job growth in
the aftermath of Hurricanes Katrina and Rita. In the past 32 years, new
claims for unemployment insurance have almost never been as low as they
have been recently, the only exception being the peak of the high-tech
bubble from November 1999 to June 2000.
Core inflation remains low, and that's good news for everyone.
Independent private-sector forecasts point to continuing good news,
and inflation-adjusted hourly wages grew 1.6 percent between September
and December and this trend should continue.
We are, it appears, witnessing the tipping point on wages--when
incomes rise for workers and business combined, but workers once again
increase their incomes faster than businesses. Once businesses have
been doing well for a while, they ultimately compete those increases in
income away by competing harder for labor. The result is higher wages
and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the
American economy proves to be on solid footing. The question that those
of us in government must look at now is this: why is our economy
performing so well and what can we do to continue these positive
trends?
It is a sweeping and important question, so today we'll ask a more
focused question: what can our budget do, or not do, to keep the
economy on track?
The answer to that is twofold: first, control spending. Second,
don't increase taxes--let taxpayers keep as much of their money as
possible to invest and spend.
And of course I use the term ``taxpayer'' quite broadly. I ask you
to think of the individual and family budgets that benefit from lower
taxes, but also of the small-business budgets. Lower marginal rates,
for example, help small firms because they tend to file their taxes as
individuals, not as corporations. We are proposing to allow small
businesses to be able to deduct up to $200,000 of business-expanding
investment as a permanent feature of the tax code, for example. This
tax benefit encourages expansion and job creation in the sector that
produces three-quarters of the nation's net new jobs.
Lower rates and a degree of certainty in the system are absolutely
critical to keeping our economy, and our excellent rate of job
creation, on track. And I cannot say this strongly enough: we can't
beat the budget deficit without a strong economy. Tax increases carry
an enormous risk of economic damage and I can tell you today that the
President will not accept that risk. He will not accept a tax increase
on the American people.
Fiscal discipline, combined with economic growth, is the correct
path to deficit reduction, period, and we cannot let difficult
decisions run us off of that path that we know is right.
Our government does, of course, face economic demands that are
exceptional, from fighting the war on terror to helping the victims of
devastating hurricanes put their lives back together. These are costly
events that lead to unwelcome, brief deficits. They should be regarded
as temporary as they are entirely surmountable with continued economic
strength and spending restraint in the areas where it is possible and
appropriate.
The second way for the budget to help keep the economy on track is
to focus the taxpayers' precious resources on things that we know will
make a difference.
In order for America to continue to be a dynamic engine of growth,
President Bush is outlining action in three key areas: healthcare,
energy, and America's competitiveness.
Affordable and Accessible Health Care. The President's reform
agenda will help to make health care more affordable and accessible.
Health Savings Accounts--putting patients in charge of their health
care--will contribute to this goal. We need to make health insurance
portable, make the system more efficient, and lower costs. We also need
to level the playing field for individuals and the employees of small
business by allowing small businesses to form Association Health Plans.
The expansion of high deductible health plans and HSAs is something
I'd particularly like to emphasize. Combined with a high deductible
health plan, HSAs allow people to save for future health care expenses
while providing immediate protection against catastrophic health
expenses. Furthermore, by giving people more control over their health
care spending, they offer a more affordable alternative to traditional
health insurance.
Today, millions of Americans--many of whom were previously
uninsured--are enjoying access to more affordable health insurance
because of the increased availability of HSA-qualified HD health plans.
These plans are more available and becoming more popular, because
saving for health care needs in an HSA now has the same tax advantages
as a traditional health insurance plan.
It only makes sense to expand the scope of HSA qualified health
insurance by making their premiums deductible from income taxes and
payroll taxes when purchased by individuals. This is an important
innovation that will significantly reduce the cost of health insurance
purchased by individuals, particularly important for working people who
don't have a federal income tax liability. As many of my friends on the
Democratic side of the aisle have pointed out to me--payroll taxes are
one of the most significant tax burdens for the poor. This innovation
will enable more individuals to purchase affordable health insurance.
Expanding HSAs so that policy holders and their employers can make
annual contributions to cover all out-of-pocket costs under their HSA
policy will further encourage adoption of qualified HDHP plans.
All told, the President's HSA proposals are projected to increase
the number of HSAs from the current projected for 14 million to 21
million.
Advanced Energy Initiative. The President has said that the best
way to break America's dependence on foreign sources of energy is
through new technology. So the President announced the Advanced Energy
Initiative, which provides for a 22 percent increase in clean-energy
research at the Department of Energy. This initiative also builds on
the energy legislation finally passed by the Congress last year that
encourages and rewards energy conservation activity.
American Competitiveness Initiative. This ambitious strategy by the
President will significantly increase federal investment in critical
research, ensure that the U.S. continues to lead the world in
opportunity and innovation, and provide American children with a strong
foundation in math and science.
This budget also gives us an opportunity to look at the other
ways--in addition to keeping tax rates low--that the Federal Government
can make adjustments that add to a growth-friendly environment for the
businesses, entrepreneurs and workers that produce that economic
growth. Tax code reform remains a priority for this President and the
President's Advisory Panel on Federal Tax Reform provided us this year
with a strong foundation for a national discussion on ways to ensure
that our tax system better meets the needs of our dynamic,
21st century economy. I appreciate the fine work of Senators
Mack and Breaux, for their outstanding leadership of the Panel.
You'll notice that the budget provides for a one-year patch to
protect the middle class from the AMT. It is a temporary fix because
the AMT needs to be resolved through broader tax reform.
This issue is also reflected in the budget through the proposed
creation of a new Dynamic Analysis Division within Treasury's Office of
Tax Policy. Understanding the full range of behavioral responses to tax
changes, including how tax changes affect the size of the economy and,
subsequently, tax revenues, is critical to designing meaningful,
effective tax reform, and we believe this small expenditure will have
an enormous pay-off for the American taxpayer.
With a focus on these and other good policies, we'll keep America
competitive in the world and keep our economy strong as it has been for
some time now.
In closing, I want to point out that a lot of good can come from a
smart federal budget, and a considerable amount of harm can come from a
bad one. Let's use the FY 2007 budget to make good policy--restrained
as the circumstances dictate on spending but aggressive on the
expansion of opportunity.
I look forward to working with all of you on enacting this budget.
Thank you for having me here today; I'm pleased to take your questions
now.
Chairman THOMAS. Thank you, Mr. Secretary, and the Chair is
acutely aware of the truncated nature of this particular
hearing. We usually have the privilege of an open-ended hearing
with you. Later this afternoon we will have the U.S. Trade
Representative, our former colleague, Mr. Portman. Because of
that, the Chair will indicate, with the acceptance of the other
members on the majority side, that the Chair will go in reverse
order and that the Chair would then recognize the gentleman
from California, Mr. Nunes.
Mr. NUNES. Thank you, Mr. Chairman. It is a pleasure to get
to go first for a change. Normally----
Chairman THOMAS. The gentleman is on the clock.
[Laughter.]
Mr. NUNES. Normally, Mr. Secretary, by the time it gets to
me, this Committee room is empty, and you and I would be the
only ones left here with the Chairman.
One of the attacks that I have heard over and over again is
that the tax cuts have increased the budget deficit. I think it
is important for the American people to hear this time and time
again because I do not think they hear it enough: that, in
fact, the numbers and the projections that you have given is
that the tax cuts have actually decreased the size of the
deficit. I wondered if you could talk about this again because
I think it is important for the American people to hear this,
that, in fact, the tax cuts have increased revenue to the
Federal Government.
Secretary SNOW. Congressman Nunes, when the tax cuts, the
tax relief of 2003, were being proposed, we saw the tax
revenues of the United States in a steep decline. Today, we see
them in a steep ascendancy, and the tax revenues of the United
States are today higher than they have ever been at any time in
our history, and the reason is the economy is growing and
expanding. The economy is performing well.
Mr. NUNES. But despite the tax cuts, tax revenue is higher
than it has ever been in our history.
Secretary SNOW. I think what we have demonstrated here is
that lower tax rates are consistent with more tax revenue.
Mr. NUNES. How important is the extension of the capital
gains tax cut to this continued growth in revenue?
Secretary SNOW. It is absolutely essential. It is
absolutely essential because what the lower rates on invested
capital did was to promote investment. When you get higher
investment, you get businesses hiring and creating jobs, and
you get stronger labor market conditions.
Mr. NUNES. I think you also have people who are making
business decisions now based on--and I think they are worried
about what the capital gains tax is going to be. So I think it
is important that this Committee act on enacting these as
quickly as possible.
Secretary SNOW. Failure to do so can only have a negative
effect.
Mr. NUNES. Right. I want to talk a little bit about
Medicare Part D because there is a lot of misnomers out there
in the world and in my local press back home that Medicare Part
D has been a disaster. But I have another opinion on that. I
think if you look at it now, it is 20 percent less in terms of
the spending that is actually taking place. We went from a
projected $38 billion in spending on Medicare Part D to about
$30 billion, and that is the projection for 2006. In fact,
despite everything that you hear about Medicare Part D, my
office in California has not received any calls with complaints
on Medicare Part D. We have had some questions, but we have not
taken any calls from people who had a serious problem with
Medicare Part D.
Could you talk about the current projections and future
projections for Medicare Part D?
Secretary SNOW. Yes, Congressman Nunes, I can. There were
clearly some start-up issues in some places, but most people,
most seniors, found that things went fairly smoothly, and they
are now enjoying benefits they did not have before. Millions of
Americans have access to prescription drugs through Medicare
that did not have it before, and a testimony to the power of
markets and competition, the cost is lower than the original--
by 20 percent, as you said, than the original estimates.
Secretary Leavitt and his colleagues are working to clear
up the remaining problems, but in talking to him recently, he
was confident that the projections of reaching some 28 to 30
million new people covered by the program would be achieved.
Mr. NUNES. The final question that I will talk about is
last year the President made a strong attempt to fix Social
Security for the long term, and I was very disappointed at the
State of the Union address when the President discussed Social
Security and it seemed to be fixed and that the Congress had
failed to act and you saw the minority party stand up in unison
and cheer that, in fact, we had not fixed Social Security.
My first Committee hearing here in the Ways and Means room,
we sat through several people who had spoken about ideas and
plans to fix Social Security long term, and the minority
criticized nearly every person that was up there discussing
possible fixed for Social Security.
I have been disappointed in that, and I hope that the
American people realize and I know you realize that Social
Security is going broke. Could you just discuss the future of
Social Security----
Chairman THOMAS. The Chair will indicate that any questions
that run over the time, the Chair would hope that the Secretary
would respond in writing. It will be more difficult for members
because our electronic timing is not working. But I can assure
those junior members who only know digital time there are ways
to tell time.
[Laughter.]
Chairman THOMAS. That is not tied to some electric
structure.
Mr. NUNES. Mr. Chairman, I am used to the colors, and I
didn't see the----
Chairman THOMAS. I understand that it just went red if that
will help you. The Chair has the time here, and the gentleman
from New York and I are practicing what we first learned in
terms of the big hand and the little hand.
[Laughter.]
Mr. NUNES. Thank you, Mr. Secretary. Thank you, Mr.
Chairman. I yield back.
Chairman THOMAS. The gentleman's time has expired.
The ranking member informs me that to facilitate movement
on their side of the aisle, he has requested and my assumption
is it has been cleared with his members, they will each have
2\1/2\ minutes and we will take two members at a time so that
we would accommodate two members within each 5-minute window.
Does the gentleman want a show of hands?
Mr. RANGEL. I don't think so. Then we would have the
opportunity to come back again, but it will give us----
Chairman THOMAS. Maybe. The gentleman from New York is
recognized under his rules.
Mr. RANGEL. Thank you, and we will have somebody check the
clock, you know, to see whether or not it----
Chairman THOMAS. We can always vote on it.
Mr. RANGEL. Okay. Mr. Secretary, could you share how many
people would get a tax increase this year and how much that
would be if we did not improve the alternative minimum tax?
Have you got any idea of the impact of not doing anything on
the alternative minimum tax?
Secretary SNOW. Oh, yes, Mr. Rangel. I think the number is
very sizable. We very much support--the administration very
much supports addressing that issue this year. It is 18 million
or so. It is a very large number.
Mr. RANGEL. If we don't do the capital gains cut or the
corporate dividend cut, how many people would receive a tax
increase?
Secretary SNOW. The number there--let me see.
Mr. RANGEL. I would gather it would be none since it does
not expire until 2008.
Secretary SNOW. Well, in that sense, yes, but----
Mr. RANGEL. Well, that is the sense that I am talking
about, is that I would hope that Treasury would--you see, the
Chairman believes that I am trying to help just the rich people
in the United States by supporting very strongly the
alternative minimum tax and trying to give a priority over the
others. What is your opinion about the priority, or the
President's opinion?
Secretary SNOW. Well, I think clearly sustaining the--
extending the dividend and cap gains cuts are critical.
Mr. RANGEL. No question about that, but in terms of
priority and the limited scope that we have to work with, what
would the priority be of you and----
Secretary SNOW. Well, I would do both. I think that both--
--
Mr. RANGEL. You support the Senate's position that both
should be done?
Secretary SNOW. I think both. I think it is important to do
both, yes.
Mr. RANGEL. You would advise the conferees to do both?
Secretary SNOW. Well, I would certainly think Congress
needs to get both done this year, yes.
Mr. RANGEL. Then you would advise the conferees--would you
suggest to them how they could pay for it since the President
wants these things permanent?
Secretary SNOW. Well, these come in within the President's
budget numbers.
Mr. RANGEL. Okay. I don't think they do.
Mr. Stark, I yield 2\1/2\ minutes.
Mr. STARK. Thank you, Chair, and welcome, Mr. Secretary.
Mr. Secretary, I wanted to follow up on an issue on health
care. On page 8 of your testimony you herald the coming of
health savings accounts, and you suggest that it will make
health care more affordable, and you say we need to lower
health care costs. You say that HSAs are an important
innovation that will significantly reduce the cost of health
insurance purchased by individuals.
Now, we checked this out with Mr. Bolten and Secretary
Leavitt, and they both concur that in your budget, you spend
$156 billion over 10 years on health savings accounts. That is
the lost revenue and some minor distribution on outlays.
So, we have that in writing. You are going to spend $156
billion over 10 years for the health savings accounts. But
nowhere can we find any health care savings.
You claim that it is more affordable and that the costs
will go down, but if that were the case, it would show up in
the budget in increased revenues because of savings to
employers. So, can you tell me what cost savings there are and
where you have any figures that indicate that in your budget?
Secretary SNOW. Mr. Stark, the savings will come to
millions of people----
Mr. STARK. Stop. Mr. Secretary, expenses are in the budget,
and they are clearly defined. Something, faith-based savings in
the long-distant future you and I may not be around to see.
What, if any, savings are in your budget as a result of the
$156 billion expenditures?
Secretary SNOW. Congressman, as I was saying, the savings
show up in the improvements in the overall health care system
in the coverage of millions of people who otherwise wouldn't
have access to low-cost health care coverage. That is a real--
--
Mr. STARK. That is just shifting costs, Mr. Secretary. That
is not--where does it--if there are savings of any more than
$100, it has to show up in your budget. Where is it?
Secretary SNOW. Well, the savings will be for that small
business that cannot afford to make health care available today
who, because of the tax advantage of health savings accounts--
--
Mr. STARK. Then he would pay more in taxes, wouldn't he,
that small business, and it would show up in your budget. Come
on. Where are the savings?
Secretary SNOW. The savings, as I say, are in the budgets
of millions of families all across----
Mr. STARK. But they are not in your budget, are they?
Chairman THOMAS. The gentleman's time----
Secretary SNOW. The important thing is to improve health
care.
Chairman THOMAS. --has expired.
The Chair is wondering if that is a call for dynamic
scoring, but that will be left to other questioners to clarify
that.
Does the gentleman from Indiana wish to inquire?
Mr. CHOCOLA. Yes, I do. Thank you, Mr. Chairman. Thank you,
Mr. Secretary, for being here.
Last week, OMB Director Josh Bolten was here testifying
before the Committee, and he talked about the fact that the
growth in entitlement spending is one of the greatest
challenges our country faces in the future. I think that in
order to solve a problem, we have to find a way to define the
problem, and like you, I used to work for a publicly traded
company, and we had extensive reporting and disclosure
requirements of our unfunded long-term liabilities for
transparency and planning purposes.
Do you think it would be helpful for us to face up to these
challenges by clearly stating what the unfunded liabilities of
the Federal Government are? Some estimate it is in excess of
$43 trillion. Do you think that the there's annual financial
report of the Federal Government would be a good place to
include such a statement?
Secretary SNOW. Yes, I do. I think we need more
transparency on these unfunded obligations going forward. They
are reflected to some degree in the trustees' Report of Social
Security and the trustees' Report of the Medicare and Medicaid
systems.
Mr. CHOCOLA. Going back to your previous life in the public
company setting, we used to go through budget processes, and
division managers would come in, and we would have discussions
about actual cuts in spending. There would always be complaints
and we were always going to lose all our customers, we were
going to lose all our employees, the business was going to
fail. But what we found, when we found ways to do more with
less, we actually improved our customer service, we improved
our products, we improved the financial shape of the business
and the security of the employees.
When we go through these budget discussions at the
Government level, when we have smaller increases, we hear those
same cries of despair.
Do you think government is so different that we cannot
actually spend money better, have better government at a lower
cost, especially when it comes to entitlement spending?
Secretary SNOW. Oh, absolutely not, Congressman. I think we
have the capacity to manage better in government. I know we are
trying to do that. I think these programs can be managed
better, and that is the premise of the President's budget. It
is to streamline and manage better and give better results to
the taxpayers for their expenditures.
Mr. CHOCOLA. Again, going back to OMB Director Josh
Bolten's testimony--I think you had an op-ed in the Wall Street
Journal today--he had one last week where he again talked about
entitlement spending. In fact, his quote was, ``No plausible
amount of tax increases could possibly close the enormous gap
that will be created by the unsustainable growth in entitlement
programs.''
Do you agree with that?
Secretary SNOW. Oh, absolutely. Absolutely. The
consequences on the economy of trying to borrow our way through
that or raise taxes to cover those expenditures would be
devastating.
Mr. CHOCOLA. If we do nothing to effectively address the
growth in entitlement spending in the near future, what would
you estimate the long-term consequences of that would be?
Secretary SNOW. Well, Congressman, I don't think we would
ever let that happen. As I think it was Winston Churchill once
said, ``America always gets it right after it has tried
everything else.''
I think we will find a way through this. That is one reason
for the bipartisan commission on Medicare and Medicaid and
Social Security and aging and retirement that the President
proposed in his State of the Union. We just have to find an
answer to this. We cannot allow those consequences to occur.
Mr. CHOCOLA. So, you think it is our responsibility to stay
focused on this, and we would not be doing our responsibility
to the American people and future generations if we don't act
seriously with reform measures in the near future?
Secretary SNOW. Congressman, I agree with you. All of us in
public life, in Congress and in the administration, have that
obligation.
Mr. CHOCOLA. Thank you, Mr. Secretary.
Mr. Chairman, I yield back.
Chairman THOMAS. The gentlewoman from Pennsylvania.
Ms. HART. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being with us again. I want
to commend your office for putting out information immediately
when the health savings account law went into place. We spent a
significant amount of time distributing information to
employers and some small businesspeople who were looking to try
to accommodate both themselves and some of their employees by
providing HSAs. We saw some statistics that show that I think
37 percent of the purchasers of HSA had previously been
uninsured. The Employee Benefits Research Institute noted that
a third of the people with HSAs have household incomes of less
than $50,000. These numbers are actually flying in the face of
what the naysayers said about HSAs.
Could you talk to me a little bit more about what we see as
the prospect with some of the changes the President has
proposed for future success of the HSA and how that will help
to impact health care costs?
Secretary SNOW. Yes, Congresswoman Hart. The argument
against the HSAs is that they are for the wealthy and the
young, the healthy. The argument against the HSAs is that they
are not fair, they somehow represent a threat to the
established employer-based health care system, and that they
won't be taken advantage of by lower-income people and by
people in lower-income categories.
The evidence just plain does not support that. All the
evidence we have seen, in fact, points in the other direction.
The numbers I have got indicate that some 42 percent of all the
HSA plan purchases are with people with earnings of less than
$50,000. That is not the rich and the wealthy of America.
Forty-five percent are at least 40 years old. Something like 25
percent are----
Ms. HART. Not that 40 is old, Mr. Secretary, but----
Secretary SNOW. No, but they are not 21.
Ms. HART. Right, and that is what we were told by the
naysayers when we first passed the law.
Secretary SNOW. And 20 percent are at least 50. So, what we
are getting here--and one-third, I think--one-third, a number
approaching one-third or around one-third--did not have
insurance before. So, clearly, these HSAs are meeting a real
marketplace need.
Ms. HART. That having been said, we are encouraged
obviously by that because we are helping to cover some people
who were uninsured and what we thought about sort of freeing up
the insurance market and providing different opportunities for
product is a good thing, obviously, for the American people.
But the concern about--and we discussed it initially when we
were looking at the law, when we were writing the law, that
HSAs could also exert downward pressure on health care costs.
Have we seen any of that at this point? Or is that something
that we think we will see a little bit more of in the future?
Secretary SNOW. The experience is still fairly fresh, but
the evidence I have seen suggests that the premiums are rising
more slowly for HSA policies than they are for general health
care insurance policies, which does suggest that the HSAs will
help to hold down health care costs in the future, yes.
Ms. HART. With the changes that the President announced,
how do you think that will improve the product and people's
participation in purchasing them?
Secretary SNOW. I think it is going to be very positive for
the HSAs because what it does is raise the contribution limits.
It is targeted--the changes are targeted on lower-income and
middle-income people by making the payment of the premiums an
above-the-line tax deduction, by taking payroll taxes, and
providing a credit for payroll taxes on the HSAs. Payroll taxes
are generally thought to be quite regressive, so if you get a
credit for payroll taxes, you are making the system more
progressive.
I think it is going to lead to millions of Americans who
today cannot afford health care, people who are working for
small businesses where the small business employer cannot
afford to make the policy available. Millions of self-employed
people who cannot quite afford it will now find that it is
affordable, and the refundability feature will make it
available to many lower-income people.
Ms. HART. Actually, that point you made about small
businesspeople and entrepreneurs is the one I think that is key
for the communities I represent. I spent all January hearing
about that issue, so thank you for that, and we will work with
you to make sure this happens.
Secretary SNOW. Thank you.
Chairman THOMAS. Does the gentleman from Michigan wish to
inquire?
Mr. LEVIN. Thank you.
Welcome Mr. Secretary. On page 4, you talk about the
increase in jobs, 4.7 million since May of 2003. Do you know
how many manufacturing jobs have been lost in this country
since May of 2003?
Secretary SNOW. Yes, Congressman. We have lost
manufacturing jobs over that period, and for a long period,
regrettably, before that.
Mr. LEVIN. But do you know how many?
Secretary SNOW. Yes, I think it is well over a million.
Mr. LEVIN. Since May of 2003? It is large.
Secretary SNOW. It is large.
Mr. LEVIN. I think the total loss since 2000 is about 3
million. Of that, since May 2003, it has been about 335,000. We
have lost that many manufacturing jobs. You described this rosy
scenario, Mr. Secretary. I wish you would also talk about the
less rosy scenario for families.
In that regard, I want to ask you, earlier in your
testimony you laud the program cuts, 141 program cuts. Let me
just read to you a list of those that are cut or eliminated and
ask if you support that.
Cuts in funding for the National Cancer Institute, do you
support those cuts?
Secretary SNOW. I support the President's budget.
Mr. LEVIN. Those cuts are in the budget, so you support
those cuts.
All right. I was at a meeting yesterday, 750 people working
on anti-drug programs. There was reference to the elimination
of grants for the Safe and Drug-Free Schools program, $347
million. So, you support that because you support the
administration's position.
Vocational education cut $1.3 billion. You want to comment
on that? You support that, too?
Secretary SNOW. That is part of the President's budget.
Mr. LEVIN. Okay. Clean Water, which is of such concern in
our State and many others, a reduction in the revolving fund
program by $199 million. This is for water projects. You
support that also.
Secretary SNOW. I support the President's budget, which has
that, but much more in it as well, Congressman.
Mr. LEVIN. The manufacturing education partnership, that is
cut $55 million. You support that also. All right. I think that
is part of the problem, Mr. Secretary. Thank you. Mr. Cardin is
going to take the over 2\1/2\.
Mr. CARDIN. Mr. Secretary, the Chairman indicated that
Ambassador Portman will be with us this afternoon, and every
time I asked him about China and currency, he says I have to
ask you. So, let me ask you the question.
The trade imbalance has been reported for 2005 at $726
billion, about $200 billion with China. We know that China ties
its currency to the U.S. dollar, which does not allow it to
seek its true economic level.
We know that China made a commitment on July 21st, 7 months
ago, to allow its currency to be increased by 2.1 percent, a
modest, very modest amount, certainly not anywhere near the
discount that we believe is somewhere between 15 and 20
percent--15 percent and 40 percent, excuse me, and that the
appreciation has been but 0.6 percent since they made their
announcement. So, U.S. producers and manufacturers and farmers
are fighting an uphill battle based upon the value of the
Chinese currency.
We put on top of that the dependency upon the China
currency ourselves. They buy U.S. dollars. They now have a
foreign currency amount in about--the dollars I have now is
that they are over $800 billion in holding foreign currency.
So, the question becomes: What are we doing about it? What
steps are we taking in order to become less dependent upon
Chinese buying U.S. dollars? What are we doing to get the
exchange at a fair rate?
Secretary SNOW. Congressman, we are disappointed there has
not been more progress in this arena. As you know, I have had a
number of trips to Beijing, many consultations with
counterparts in the government of the Republic of China. They
did make the step of delinking, but since then there has been
inadequate movement. We remain committed to getting movement.
We need to see movement. We are disappointed in the failure to
get movement. We are going to continue to press them. Now----
Mr. CARDIN. I just hope we have a time schedule. You do not
have to announce it to me today, but I do hope we have a time
schedule as to when our patience runs out.
Secretary SNOW. We are not satisfied.
Chairman THOMAS. Does the gentleman from Colorado wish to
inquire?
Mr. BEAUPREZ. Thank you, Mr. Chairman.
Secretary Snow, great to have you here again. I actually
want to follow a little bit the line that was established by
the gentleman from California, Mr. Stark. I am looking at a
press report, National Review Online, that highlights this
issue of capital gains, revenue receives from capital gains and
actually going back to projections made in 2003 prior to the
tax cuts that estimated in 2004 and 2005 we anticipated under
the old revenue mechanism, standard, that we would have
received at the Federal Treasury about $125 billion over those
2 years, 2004 and 2005. We, of course, cut the tax rate, and it
was estimated that there would be, in the gentleman from
California's words, lost revenue of about $27 billion.
What we actually found out, apparently, is that instead of
the original estimate of $125 billion, the revised estimate
downward of $98 billion, we actually have received in your
Federal Treasury, our Federal Treasury, a combined $151 billion
or a net gain of about $53 billion from that lost revenue
number.
Do you care to opine on that?
Secretary SNOW. Well, I have learned to be modest in making
revenue projections, but what the experience of the last 3
years suggests is something the Chairman alluded to, and that
is that when you get the American economy performing better,
you get the macroeconomic variables of jobs and GDP and
employment rising, it has a powerful effect on the Federal
revenue stream, the government receipts stream. We have seen
this play out, and we frankly underestimated the power of the
strengthening of the economy on the government receipts stream.
Mr. BEAUPREZ. Well, for purposes of this Committee and
Congress's, I guess, obligations, it raises that whole issue of
dynamic scoring that we talk about, and I also noticed in some
of the materials that have come to us on behalf of this budget,
that under your direction, under the Treasury's direction, you
are proposing a dynamic analysis division within Treasury. I am
intrigued by that idea and would love to hear from you about
that.
Secretary SNOW. Congressman, what that involves is creating
the capacity inside the Treasury Department to understand how
changes, big changes in the Code, like changes on marginal tax
rates or changes in corporate tax rates or changes in cap gains
and dividends rates, affect the whole economy. Once we can get
a better connection between big tax changes and the whole
economy, then we can go to what I think we all want to be and
having a better understanding of how to score those changes for
revenue purposes.
I think we will find, if we do this analytically, that we
are going to have bigger playbacks, feedbacks into the revenue
stream of the Federal government than we have probably foreseen
in the past.
Mr. BEAUPREZ. Well, in the private sector, I certainly put
together a few budgets myself in my past lives, and we always
used something that resembled the dynamic scoring theory in
trying to project ahead if we make investment today, what the
revenue results of that investment might be tomorrow and in the
out-years. So, that makes perfect sense to me.
In the time I have got remaining I want to inquire about
maybe another issue, and it relates really to your op-ed in the
Wall Street Journal, which I have read, that I think is in
today's paper. You say in there that, according to the
Securities Industry Association, people that are actually
investing in equities are typically middle-class persons saving
for retirement with a household income of about $65,000
annually. You got on later to say that about 91 million
Americans actually own equities.
Here is my question: I am looking at another table that
says that about 96 percent of the income tax actually paid in
this country is paid by 50 percent of the people that file tax
returns, or a little over 64 million tax returns--some of those
joint returns, I am sure--with an adjusted gross income over
$28,000.
I am going to guess then that most of the people that are
paying the freight in this country also own equities.
Secretary SNOW. Yes, you are right. You are correct.
Chairman THOMAS. The gentleman's time has expired.
Mr. BEAUPREZ. Thank you, Mr. Secretary.
Chairman THOMAS. The gentleman from Georgia.
Mr. LINDER. Thank you, Mr. Chairman.
Mr. Secretary, nice to see you again. Thanks for coming. I
want to move a little bit further on the dynamic scoring. On
the weekend after Thanksgiving this past year, Wal-Mart, which
knows something about retailing, cut their prices 10 percent
across the board. If they had been in Government, they would
have had everybody jumping up and down saying you are going to
lose 10 percent of your revenues and more than percentage of
your profits. But it didn't happen that way. Why can't you just
call in some of those folks who have been doing this throughout
their lives? I can just imagine a Vice President for government
Affairs telling the chief executive officer of Wal-Mart you are
going to lose 10 percent of your revenues, and the Wal-Mart guy
looking at him saying, ``Son, we have been doing this a long
time. You can go back to Washington.''
Why can't you bring in some of those folks and see what
they do?
Secretary SNOW. Well, Mr. Linder, the point you are making
is a good one. There clearly is a feedback cycle between
investments and revenues in the private sector, and in the
public sector there is a feedback cycle between lower tax
rates, a larger economy, and the government revenue stream.
What we don't yet have is the ability to quantify that
sufficiently, and what we want to do is put ourselves in the
position to be able to do just that. I agree with you. I agree
with you.
Mr. LINDER. You mentioned in your statement that Tax Code
reform remains a priority for this President. We did not hear
him mention in the last State of the Union address. You
mentioned to me privately up here that there was going to be an
aggressive pursuit. Can we have a rough idea of when that might
happen?
Secretary SNOW. We are not putting ourselves under any
artificial timeline. What we are doing, though, at the Treasury
is carefully considering all options, including, I must say,
your well-thought-through proposal, along with others, and the
tax panel's recommendations to us.
You only get to do tax reform about once every 20 years.
You know, in my lifetime it was JFK in the early 1960s, and
then it was Ronald Reagan in the mid-1980s, and now it is
George Bush in the first decades of the 2000s, a new century.
We have got to make sure we do it right, and I have told
the President and told the White House we are going to work on
this very hard and we are going to send him our very best
thinking, but without any artificial timeline on it.
Mr. LINDER. China has been raised here recently during this
hearing, and because most nations that float their currencies
wash out the relative tax components within the price system at
the borders in the currency exchanges, if we wanted a pure
consumption tax with no tax on income at all, China would
either have to float its currency or suffer a 22-percent legal
WTO-compliant tariff vis-a-vis the United States. Are we
looking at that?
Secretary SNOW. Yes, we are looking at the whole idea of
border adjustability, the relationship between flexibility of
rates and taxes. All of that is part of this broad review that
we are doing, very much.
Mr. LINDER. Thank you, Mr. Secretary.
Mr. Chairman, I yield back.
Mr. SHAW. [Presiding.] Mr. McDermott?
Mr. McDERMOTT. Thank you, Mr. Chairman.
Mr. Snow, every couple years you come up here with another
fraudulent proposal from the President. This HSA proposal is
about as fraudulent one as I have ever seen.
Now, you say you have evidence--at page 8, you say, ``The
President's proposal is projected to increase the number of
HSAs from the current projected 14 million to 21 million.''
Where did the study come from? Who did it? Did Treasury do it?
Secretary SNOW. Congressman, that work is a combination of
places inside the Executive Branch.
Mr. McDERMOTT. Did you look at the study and okay it?
Secretary SNOW. People----
Mr. McDERMOTT. You are not calling it a Treasury study.
Secretary SNOW. Right.
Mr. McDERMOTT. You are just saying it is sort of----
Secretary SNOW. You know, the----
Mr. McDERMOTT. How do I get a hold of it?
Secretary SNOW. Well, there are people--you know, the
competence on this subject isn't entirely within the Treasury.
There is some competence at the Department of Health and
Human----
Mr. McDERMOTT. But you are making the proposal, and----
Secretary SNOW. Yes.
Mr. McDERMOTT. --it is going to have an impact on the
budget of this country and on the individual budgets of
Americans.
We watched what happened with 401(k)s, and what every
employer did was drop his guaranteed benefit program and give
an HSA to people--or, excuse me, a 401(k). The same is going to
happen here. If you have read the Wall Street Journal article a
couple of weeks ago, they say: I think what employers are
really after is that they are moving the risk from their
balance sheet to the employees.
Do you disagree with that statement?
Secretary SNOW. Oh, absolutely.
Mr. McDERMOTT. You think--what is there that is going to
require employers to stay giving the benefit package they are
giving today?
Secretary SNOW. The desire to attract and retain their
workforce?
Mr. McDERMOTT. But you have no studies that make any
estimate of how many people are being moved one way or another
in this process?
Secretary SNOW. Well, we have--as I said, we do have an
estimate. Treasury has done an estimate of the----
Mr. McDERMOTT. A written estimate where I can look at the
parameters?
Secretary SNOW. Well, I think to make an estimate we would
have to write it down somewhere and run the math on it.
Mr. McDERMOTT. Why don't you make it available to us. Mr.
Chairman, I ask that it be made available to the Committee, and
also that we put into the record, I ask unanimous consent, the
Wall Street Journal article.
[The article follows:]
February 3, 2006
Health Accounts Have Benefits For Employers
By THEO FRANCIS and ELLEN E. SCHULTZ
Staff Reporters of THE WALL STREET JOURNAL; Page B1
Amid the debate over whether health-savings accounts will fix
America's health-care problems, another important effect has received
less notice: The accounts are generating savings on payroll taxes for
companies that adopt them, and they could hasten a shift of health-care
costs from companies to employees.
Trade groups cheered President Bush's call in his State of the
Union address Tuesday to expand key elements of health-savings
accounts, or HSAs. The President's proposals could make it more
attractive for millions of people to sign up for HSAs, either on their
own or at the growing number of companies that are adopting them.
The growing acceptance of HSAs accelerates a transition in health-
care benefits, from employers providing a safety net to employees
taking on more risk. The shift parallels a similar trend away from
traditional pensions in retirement benefits. Indeed, HSAs may be poised
to become the 401(k)s of health care: a low-cost substitute for a once-
standard workplace-provided benefit, which can offer employees greater
flexibility but also can increase their financial burdens and risk.
``I think what [employers] are really after is that they're moving
the risk from their balance sheet to the employees,'' said Richard T.
Evans, a health-care analyst with Sanford C. Bernstein & Co. in New
York. ``The risk is being transferred without the consumer really
realizing it,'' he said.
Just as the 401(k)--invented as a supplemental benefit--ended up
supplanting pensions, HSAs could do the same to traditional employee
health insurance. Already, companies with HSAs are enjoying savings on
payroll taxes that mirror gains they made in the shift to 401(k)s.
``Employers are saying they want some certainty'' in health-care
costs, says Daniel Halperin, a Harvard University law professor.
Although HSAs don't place the full burden of paying for health care on
employees, ``it's a movement in that direction,'' he said.
But employers see this trend as simply reflecting the changing
nature of the employment relationship, says James Klein, president of
the American Benefits Council, a trade group for employers and the
benefits industry. ``It's a positive trend in our view--it's not a
panacea, but it's something that ought to be encouraged.''
Health-savings accounts enable workers to set aside pretax pay--
sometimes combined with contributions from their employer, if the
company chooses to contribute--to pay for certain health-care costs.
The account can be applied to health-care costs up to a minimum
deductible of $1,050 for an individual and $2,100 for a family in 2006.
After that, costs are covered by a catastrophic insurance policy that
users must purchase.
Established in 2003, HSAs are flexible in ways many experts have
long sought. Money in the accounts can be rolled over from year to
year, taken with the employee to a new job and spent on non-health-
care-related items after age 65. They also are available to people who
don't have insurance through their employers or who are unemployed. Mr.
Bush is proposing that such people be allowed to contribute with pretax
money.
Business groups generally hailed Mr. Bush's proposals, including
the National Association of Manufacturers, the insurance industry and
the financial-services industry, which is poised to reap billions of
dollars in fees from managing money squirreled away in HSAs. Among the
major companies offering employees an HSA option are Wal-Mart Stores
Inc., DaimlerChrysler AG's Chrysler Group and General Motors Corp.
Chrysler Group says it contributes an annual $500 to single
employees' accounts and $1,000 for families. ``Most companies do it
because it makes sense economically for the company and the employee,''
says spokesman Dave Elshoff. A Wal-Mart spokesman declined to comment
on specifics of Mr. Bush's proposals but says the company has
``advocated that there be more latitude in HSAs.''
About three million people have taken out the high-deductible
insurance that qualifies them to open an HSA, about triple the number
of a year ago, according to America's Health Insurance Plans, the
insurance trade group. Of those, about one million consumers have
actually opened an HSA, the group says. The White House has said it
intends its proposals to expand the number of Americans using HSAs to
21 million by the end of the decade.
Proponents say HSAs will help rein in health costs because
employees will be more careful about how they spend their money.
Critics say HSAs are unfair because they saddle the sick with the costs
of treating themselves, rather than spreading those costs across large
groups.
Employers decide whether to contribute money to the accounts. Even
if they do contribute, the employer's total cost for each employee in
an HSA is generally lower than for a worker in a traditional health
plan. For example, employers typically pay $3,284 for a single employee
in a traditional insurance plan; covering the same employee in a high-
deductible plan would cost $2,850, according to the Kaiser Family
Foundation.
Even if they don't contribute a cent, employers still get tax
benefits. And the more of their own pay employees set aside each year,
the bigger their employers' tax breaks. That's because employers
ordinarily have to pay a variety of payroll taxes on cash income their
employees earn; these taxes fund Social Security, Medicare and state
and federal unemployment programs. But under at least some HSA
arrangements, employers can skip most of those taxes on employee
contributions to the account, bringing the employer savings of as much
as 7% to 10%, according to some estimates.
For example, for an employer with a thousand workers collectively
setting aside $1.5 million, the employer would save as much as $150,000
a year. Those savings are in addition to the income-tax deduction the
employer gets for contributions it makes to the accounts. At a minimum,
``the [payroll-tax] savings basically pay the administrative costs,''
said Rebecca Miller, a tax specialist with Minneapolis accounting firm
McGladrey & Pullen.
Those tax savings could give employers ``an incentive to encourage
contributions'' from employees, said Princeton University economist Uwe
Reinhardt.
While payroll-tax savings do benefit employers, they are unlikely
to be a decisive factor for employers considering HSAs, said Mr. Klein,
the employer lobbyist. ``In the scheme of what health-care costs are, I
doubt that would be a compelling reason to move to that kind of plan
design.''
Employees also enjoy payroll-tax savings, which helps make the
accounts attractive to them. What's more, the Bush administration
proposal also calls for allowing people to put even more money into the
accounts, enough to cover not only deductibles, as provided by current
law, but also the cost of premiums, copayments and amounts not covered
by their health plan. Currently, maximum annual contributions to an
account are limited to the lesser of the plan's deductible or a fixed
amount: $2,700 for individuals and $5,450 for a family in 2006.
Mr. SHAW. Mr. Lewis?
Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
Thank you, Mr. Secretary, for being here.
Mr. Secretary, I would like to just ask you a general
question. We continue to make the tax cut permanent. We are
engaged in a conflict in Iraq. The tax cut helped those at the
very top. You did not say anything in your statement and the
administration has not said anything about shared sacrifices.
The only people giving up something are our young men and our
young women that are losing their lives or losing their limbs
in this war. What are the American people, what is the
administration asking the American people to give up, to make
some sacrifices? We are all in this thing together. I would
just like to hear you elaborate.
Secretary SNOW. Well, Congressman Lewis, that is a good
question, and the answer, of course, is this budget slows the
growth rate of a number of programs. We think it does it in a
responsible way. We think it does it in a way that long term
will better serve the interests of the country. But I have a
number of fellow Cabinet members who feel quite constrained.
You know, they feel they have been held back on spending that
they otherwise might want to have done.
Mr. LEWIS OF GEORGIA. Mr. Secretary, since you raised the
question of the Cabinet, in Cabinet meetings--maybe you are not
free to say, but do you ever have a discussion, do you ever
talk and say some of us should be prepared to ask the Nation,
to ask the President, to ask the American people to give up
something, to sacrifice?
Secretary SNOW. What this budget, Mr. Lewis, is trying to
do is sustain the growth of prosperity across America,
encourage the job creation process, and raising wage levels and
income levels across America. That is at the heart of what this
budget is seeking to do, and that is why we are asking Congress
to make the tax cuts permanent and----
Mr. LEWIS OF GEORGIA. Well, how can you in God's name ask
to make the tax cuts permanent when we are engaged in a war, we
have men and women, our young people dying in Iraq, dying in
Afghanistan, and then you are going to make the tax cuts
permanent? Is that fair?
Secretary SNOW. Well, yes, it is fair. It is important that
we continue to focus on the well-being of people who are the
citizens of this country. There are 4.7 million Americans that
have jobs today who did not have them 3 years ago. I think that
is an impressive record and something we want to continue. We
want to see real wage rates continue to raise. We want to see
prosperity continue to grow in America. This budget is designed
to make that happen.
Mr. SHAW. The time of the gentleman has expired.
Mr. Ryan? Were you here? Okay. Mr. Cantor?
Mr. CANTOR. Thank you, Mr. Chairman.
Mr. Secretary, it is good to see you again.
Secretary SNOW. Thank you.
Mr. CANTOR. Thank you so much for being here before us, and
just following up on the questioning just before me, you know,
I take a different view. I look at the fact that we do see
objective evidence that the tax rate on dividends and capital
gains being lowered produced phenomenal results. I hear the
gentleman from Georgia's complaint that perhaps we are not
paying enough attention to our men and women in uniform, and I
do know that in the budget being presented by the President, we
are increasing the amount of funds going to defense and our
efforts in the war on terror, including Iraq, Afghanistan, and
other places.
I would ask, in the form of a statement first, that we need
to have a strong and vibrant economy at home, we need to
continue to grow, and we need to produce prosperity so that we
can afford to keep this country safe. I believe that there is
irrefutable evidence that the tax cuts have produced more jobs,
the tax cuts have produced more Federal revenue than, as was
stated before, the CBO estimate ever even imagined.
But on the point of health care and health savings
accounts, we need to be concerned about our competitiveness. We
need to make sure that American business can compete abroad and
at the same time provide the health benefits that American
workers have become accustomed to and, frankly, need. I believe
from the studies that I have seen that health savings accounts
produce a situation where individuals can have more choice at
play in terms of their health care decisions.
I was wondering, Mr. Secretary, if you can talk a little
bit about the President's health savings accounts proposals and
how they would encourage continued use by employers, because we
know that recent studies have indicated 31 percent of those
involved with HSAs now were uninsured previously. So, how are
we improving the use of health savings accounts through the
proposals.
Secretary SNOW. Let me take a minute and go through this
because it is very important, and I appreciate the chance to
respond to that good question.
As you know, there are many, many small businesses in
America today who find it very difficult or impossible to
afford health care. I have talked to many of these employers as
I have traveled the country, and they like to be in a position
to make health care available, but they just cannot afford it.
At the same time, there are many self-employed people who
find it difficult to afford health care, and one reason is the
fact that there is a fundamental inequity today between those
who seek to buy their health care in the private marketplace
and those who get it through their employer. If you get it
through your employer, it is enormously tax-advantaged. It is
excluded from income taxes. It is excluded from payroll taxes.
If you are buying it in the open market, it isn't. You pay for
it with after-tax dollars, making it much more expensive.
What the HSAs at their very heart do is end that inequity.
They make contributions tax deductible. They make the premiums
tax deductible. They give you a credit back for the payroll
taxes. So, in effect, putting the private market, open market
purchases on the same basis as the employer-provided health
care, that is going to lead to a lot more health care there the
private marketplace, and that is a good thing. It is going to
mean lots of people who aren't covered today get coverage, and
that is a good thing. That is showing up in these statistics.
The new proposals the President has made are going to
strengthen the ability of HSAs to meet the need of the
uncovered.
Mr. CANTOR. Thank you.
Mr. SHAW. Does the gentleman yield back the balance of his
time?
Mr. CANTOR. I yield back, Mr. Chairman.
Mr. SHAW. Mr. Neal?
Mr. NEAL. Thank you, Mr. Chairman.
Mr. Secretary, defense spending has gone during the last 5
years, I believe, from about $257 billion to $439 billion. We
have created a Department of Homeland Security, about $40
billion. Medicare Part D was estimated initially to cost about
$400 billion and now it is about $740 billion. We are fighting
two wars--one in Afghanistan for a little bit more than $1
billion a month, and about $1.5 billion a week in Iraq. We have
Hurricane Katrina standing in front of us.
Annually, the Congress in the past has done 13 spending
bills, and I think it is down to 12 now, and the President
based on your earlier comments, you said it was the priority of
the administration to restrain spending. Now, has the President
vetoed any spending packages during the last 5 years?
Secretary SNOW. No.
Mr. NEAL. Have you recommended any vetoes to the President
during these times, during your time as Secretary of the
Treasury?
Secretary SNOW. Yes, several.
Mr. NEAL. Would you wish to share with us which ones you
have recommended for veto?
Secretary SNOW. Well, the necessity for taking that action
wasn't called for because the suggested changes we recommended
were made.
Mr. NEAL. Well, you know, Lawrence Lindsey recommend to the
administration some time ago what the real cost of the wars in
Afghanistan and Iraq were going to be. The Secretary of OMB,
when he first came before the Congress, current Governor of
Indiana, he said it was going to cost about $60 billion. We
hear this argument that it is time to restrain spending, but
the President has not vetoed any spending bills, right?
Secretary SNOW. Congressman, I have acknowledged that, but
I have also said that the Congress and the President, the White
House, have worked together to bring bills in line with the
President's expectations.
Mr. SHAW. Mr. Jefferson?
Mr. NEAL. That is 2\1/2\ minutes, sir?
Mr. SHAW. That is 2\1/2\ minutes. If Mr. Jefferson wants to
give you some of his minutes, he can.
Mr. Jefferson?
Mr. JEFFERSON. Thank you, Mr. Chairman. I wish I could.
I want to ask, Mr. Snow, about the issues we have back home
in the aftermath of Katrina. I appreciate the early help you
gave us with waivers and so on, with the EITC and other issues,
but the big issue back home is housing, how to get people back
on a permanent basis.
We are about now at the end of the deferral period for most
mortgage holders and homesteads back home where we are going to
face massive foreclosures just right about now. It is going to
affect the banking industry, and it is going to affect the
creditworthiness of a whole region. We have got to do something
dramatic and creative, and we are going to recommend soon--I
want to see if I can get your support for this sort of an
idea--where we permit the homeowners to defer making mortgage
payments over a period of time, up to 18 months, until sometime
in 2007, or unless they occupy the house sooner, where we have
the Treasury, in effect, pay the note along the way. At the end
of this 18-month period, we would permit restructuring or
refinancing or a solid second mortgage that permits the persons
to pay the Treasury back from their own financing, back to the
Government, and that way relieve both the banks and homeowners
of the burden of foreclosure.
Would you support such a concept?
Secretary SNOW. Congressman, you and I have worked together
on things in the past, and I think you know we try and keep an
open mind. I certainly am prepared to talk to you and see if
something along those lines would work. But I am not familiar
enough with the proposal to be able to give an informed comment
on it at this point. But I will certainly follow up with you.
Of course, we have had many conversations with you and your
colleague, Mr. Baker, on finding the right answers here, and we
are in continuing conversations on that subject.
Mr. JEFFERSON. This would be well short of the Baker bill
as a solution, but it would be an immediate response to a
crisis.
The other thing is in this so-called high ground in the
city that did not flood, we have about 5,000 to 8,000 blighted
houses that can be fixed, are not in floodplains but in areas
that did not sustain flooding. There I would like to--what we
have done for the low-income housing tax credit for the rental
property, we would like to do it for the single-family
homeowners in that area. With that sort of concept, I would
like to ask you the same consideration of this concept so we
can attack this thing on two fronts. I hope we can get some
real movement on these ideas.
Secretary SNOW. Congressman, as you know, we have tried to
work with you, put in place recommendations that Congress acted
on for tax relief, the expensing for small business and the GO
Zones and so on. So, clearly, we want to work with you to make
sure that the community comes back.
Mr. JEFFERSON. Well, thank you. We appreciate that.
Mr. SHAW. The time of the gentleman has expired.
Mr. Ryan?
Mr. RYAN. Thank you.
I have two lines of questioning I want to go to, one tax,
then monetary, so I will try and fit it all in. Tax policy, a
number of my colleagues have been talking about capital gains
and realizations, dividend income and the estimates. Let me
just quickly go through some numbers. Our estimators here in
the House Joint Tax Committee, assured Congress in 2003 that
the capital gains tax cut, going from 20 percent to 15 percent,
would reduce revenues by $3 billion from 2003 to 2005, with
bigger losses after that. According to the CBO, actual revenues
were $62 billion higher than Joint Tax predicted over a three-
year period.
Now, this isn't a one-time mistake. In 1997, when President
Clinton lowered capital gains tax rates from 28 to 20 percent,
Joint Tax mis-estimated revenue losses, which were increases by
$84 billion.
The track record at Treasury is basically the same. The OTA
scoring methodology that you have has not only been wrong once,
it has been wrong every time, and so we have a scoring
methodology we know through fact and proof is wrong. Yet we
have this tidal wave of taxes coming to the American taxpayer
at the end of the decade. I don't like to really say make the
tax cuts permanent as much as I like to say let us prevent
large tax increases from being inflicted on our constituents in
the American economy. If we go into tax reform or dealing with
this tidal wave of taxes at the end of the decade, with this
flawed scoring methodology, it is going to be very difficult to
fix this problem.
I understand you are doing some modeling over there. You
are running new simulations. What specifically is Treasury
doing to make the scoring methodology more accurate?
Secretary SNOW. Congressman, what we are doing is
establishing an Office of Dynamic Analysis that will develop
the capabilities over time--and we hope soon--to get at the
issue that you have put your finger on. I think all of us who
have a hand, as I suggested earlier, in doing revenue
estimates, need to be pretty humble, because we have clearly
missed--we have underestimated here the power of lower tax
rates on the Government's revenue stream. I am struck by the
fact that despite--Mr. Neal asked me about all this spending,
and certainly we have commitment and we need to spend for those
commitments, but the January surplus was 21 billion. The
December surplus was 11 billion. The reason, in the face of
this spending, that we are getting this good results on the
budget is the revenue side, the revenue piece.
Mr. RYAN. The great thing about modeling is we can use
hindsight to test our models to see whether they are accurate
or not. Do you plan on taking the results of this office and
putting them into practice? Then I have a quick question on
monetary policy, so if you could give ma quick answer.
Secretary SNOW. The answer is yes, sure, that is the
purpose of it.
Mr. RYAN. Dr. Bernanke is, I think, testifying right now,
the new Fed Chair. It is his first time here in Congress. In
academia, and I believe when he was at the CEA, he publicly
endorsed the concept of inflation targeting, which I think is a
very wise prospect. What is your take on inflation targeting?
Should we engage in explicit inflation targeting, and if so,
question number one, do we have to amend the Humphrey-Hawkins
Law in order to engage in inflation targeting; and number two,
should we endorse and adopt an inflation targeting rule?
Secretary SNOW. Congressman, I have made a practice of not
commenting on Fed policy.
Mr. RYAN. I thought so.
Secretary SNOW. There is sort of a division of labor. They
do not talk about exchange rates, and I do not talk about
interest rates and inflation targeting.
I think it is important to respect that division of labor.
Mr. RYAN. Okay.
Secretary SNOW. Thank you.
Mr. RYAN. Thank you. I yield back.
Mr. SHAW. Mr. Tanner?
Mr. TANNER. Thank you, Mr. Chairman.
Thank you, Mr. Secretary. Currently there is about 47
percent of the debt held by the public is in foreign hands, and
last year about 90 percent of our Treasury securities were
purchased by foreigners. In your opinion, is there any level of
foreign ownership of our debt that would have national security
implications?
Secretary SNOW. Mr. Tanner, I think the investment in the
U.S. securities that we see from many foreign sources is today
a reflection of the strength of the U.S. economy and our
capital markets. So, I think it is really a vote of confidence
in America, and when people invest in America, they get a stake
in America and get a stake in seeing our institutions continue
to do well. So, overall, I think we would have to view the
investment in U.S. securities, equities, treasuries, fixed
income instruments of the private sector and public sector as a
positive thing.
Mr. TANNER. I understand that, but is there any level of
foreign ownership that would cause concern from the national
security standpoint? For example, if they had a geopolitical
interest or some long-term strategic interest for which they
were willing to take a short-term economic hit, there is, I
would assume, some level if we owe--do you see any level at
which this would be of concern?
Secretary SNOW. Congressman, we would of course monitor
that and take action long before we saw it becoming a concern,
but I do not think it is advisable to put any precise
quantification on that. But I take your point.
Mr. TANNER. Would we have any warning signs, in your
opinion, when we were getting close to that point?
Secretary SNOW. I think we understand those markets pretty
well, and have capacity to deal with that, I do.
Mr. TANNER. Let me ask you this. You said, last year in
Iowa, that the consequences of continued deficit spending
likely would be higher interest rates with the resulting drain
on the economy. If financial markets lose confidence, then
funds are made available only at higher interest rates. Do you
still agree with that?
Secretary SNOW. Absolutely.
Mr. TANNER. Now, as you know----
Mr. SHAW. The time of the gentleman has expired.
Mr. Becerra?
Mr. BECERRA. Thank you, Mr. Chairman.
Mr. Secretary, thanks for being here.
Secretary SNOW. Thank you.
Mr. BECERRA. I wanted to talk a little bit about something
you had said earlier about how the economic recovery has been
good, that this economy is sending benefits to all Americans.
That can sometimes present a deceiving picture when you talk in
terms of averages. You talked about average growths in terms of
wages and so forth. But a quick example, to make my point very
clear, if we were to take the income of an average American,
middle class American, and take the income of Bill Gates, and
if we were to take the average of those two incomes, all of a
sudden we have two billionaires in our midst. The reality is
that that middle class American is no closer to being a
millionaire than to being a billionaires. So, we have to be
very careful when we talk about averages.
That is why when you break down this economic recovery that
we have seen over these last couple of years, you begin to
realize that the benefits of that recovery have principally
gone to folks who are very, very wealthy, while the richest 10
percent in this country over the last 5 years has seen its
income rise by about 4 percent. The average, the typical
American family has actually seen its real weekly wages go down
by about 1 percent. So, we have to be very clear to dissect
this so we can really see how average Americans are benefiting,
not lumping average Americans in with very wealthy Americans,
and making it look like on average everyone is doing well.
The other point I wanted to make--and I hope there is a
question in here--is that when we talk about this economic
picture being so rosy, I have to ask myself, why is it that in
this budget, which you said you support from the President, did
we have to cut funding for widows who are trying to bury their
deceased spouses. There is a $255 Social Security benefit that
widows receive, death benefit that widows receive when their
spouse--who, by the way earned that deceased benefit--expires.
This budget, your budget, would propose cutting the $255
funeral cost benefit under Social Security that a widow
receives. That saves you $2 billion when you have an over $400
billion deficit.
You also are using the entire $190 billion surplus in the
Social Security Trust Fund to mask the size of the deficit. So,
if you were not to include the Social Security Trust Fund
surplus, the actual size of the deficit, and if you were to
include the cost of the war----
Mr. SHAW. Time of the gentleman has expired.
Mr. BECERRA. --the deficit would be about $600 billion.
Mr. BECERRA. Thank you, Mr. Chairman.
Mr. SHAW. If there was a question there, the Secretary will
have to answer it in writing.
Mr. Foley?
Mr. FOLEY. Yes. Mr. Secretary, I do have to say the tax
policies of this administration have worked. Retail sales
numbers are robust. We cross 11,000 on the Dow. Unemployment is
the lowest in a generation. Tax policy is spurring investment.
We have the greatest homeownership of our lifetime. So, those
are proof positive these are working.
The question though that I do have, I understand that as
Secretary of Treasury, you chair the Committee on Foreign
Investment in the United States. Looking over the budget, I
could not find any line item that specifically funds the
Committee. Recent reports have indicated the Committee has
approved the transfer of ownership from Peninsula and Oriental
Steam Navigation Co., a privately-owned British company, of the
ports in this country, New York, Newark, Philadelphia,
Baltimore, Miami, New Orleans, in other words, every major
seaport on the Eastern seaboard, to a company owned by the
government of the United Arab Emirates.
Just crossing the wire this morning, United Arab Emirates
are engaged in active negotiations with Iran to increase trade
opportunities at a time when we are trying to deal with the
threat Iran poses to the entire world. You recently
acknowledged in an earlier statement that we have had a tough
time convincing the Chinese government to adjust their
currency. How will we get a government entity who now controls
the major shipping points of interest in this country to do
what we would like them to do if we cannot impact the Chinese
on a simple currency adjustment? What was rationale, first, for
the security risk posed by the potential sale, and are we going
to be able to dictate to them the critical security issues?
When I travel to Guatemala, to various and sundry places,
one of my first questions to their officers are, what are you
doing to secure the cargo coming to the United States of
America? Now I have a concern that a foreign national will own
the ports in which those goods are arriving. Could you expound?
Secretary SNOW. Yes. Thanks, Mr. Foley, for that good
question on the CFIUS. The Committee on Foreign Investment in
the United States is chaired by the Treasury Department. We
never comment on particular transactions, but what I can say is
the Committee is made up of all of the relevant agencies of the
U.S. Government, from Homeland Security to Defense, to
Intelligence, to Justice, to make sure that any foreign
purchase of a U.S. based company does not pose a threat to the
national security of the United States. That is the job of
CFIUS, to make sure that any acquisition of U.S. companies does
not pose a threat. Often what happens is that the acquiring
entity agrees to a series of conditions that are designed to
make sure that the security interests of the United States are
protected.
Let me say that is a process that I have watched. I think
it works very well, and I think it is designed to well protect
the security interests of the United States.
Mr. FOLEY. One of the concerns, the GAO had a report to the
Exon-Florio, which is the presidential directive to protect the
Nation on foreign investment. The GAO reports that there are
weaknesses, obviously, in the Committee's implementation. It
says specifically, ``Congress should consider amending Exon-
Florio to more clearly emphasize the factors that should be
considered in determining potential harm to national
security.'' I guess that is the one thing that is troubling me.
Washington Times today says we should be improving port
security in an age of terrorism, not outsourcing decisions to
the highest bidder. The ports are thought to be the country's
weakest homeland security link with good reason. Only a
fraction of the Nation's maritime cargoes are inspected. The
root question is this: why should the United States have to
gamble its port security on whether a subsidiary of the
government of the United Arab Emirates happens to remain an
antiterrorism ally?
I guess that is the sum and substance. They are today. What
happens tomorrow? How do we have safeguards implemented in law?
Secretary SNOW. Congressman, the CFIUS process--and again I
have to be very careful not to go very far here because of
legal restrictions I am under--but----
Mr. SHAW. But, Mr. Secretary, if I may, according to the
rules set out by the Chairman, you will have to respond to that
in writing.
Secretary SNOW. Good.
Mr. SHAW. Mr. Doggett?
Mr. DOGGETT. Thank you, Mr. Chairman.
Mr. Secretary, just putting the Republican budget cuts in
proper perspective, all of the cuts that Republicans just
approved, student loans to Medicaid, to child support
enforcement and other vital programs, will this year fail to
pay for even one single month in Iraq. All of these cuts amount
to about half of the almost $9 billion that incredible Bush
administration mismanagement in Iraq has just lost. That is $9
billion, not even counting all the Halliburton no-bid contracts
of taxpayer money that the administration cannot find, can't
keep track of.
If we approved every single penny that you have recommended
in this budget that you are peddling today, it would pay for
little more than four more months in Iraq, and of course, all
of this doesn't count the terrible cost in the lives and limbs
of young Americans.
The question I have for you relates to your claims that you
are going to make us more competitive with this budget, because
this new budget once again essentially freezes Pell grants at
levels that students received about 30 years ago. You propose
to eliminate most of the Perkins Loan program, which half a
million students rely on for fixed rate low interest loans, and
replace those with the new high interest Boehnert Loan program,
which has these rates and fees that students don't currently
have to pay. This will add about $5,000 on average to the debt
that students have to pay when they are already struggling with
debt. It would seem that the competitiveness you envision is
more students having to scramble and compete against each other
for more scarce Federal resources.
Is the administration's solution here based on the idea
that our students will be more competitive if they have more
debt that they have to pay off and will work harder, or is this
just consistent with your philosophy that since we are going to
have endless national debt, it does not hurt for our students
to have endless personal debt?
Secretary SNOW. Congressman, if you will look at the record
of this administration on education, what you see is something
on the order of a 40 percent increase of spending since the
administration took office, 40 percent----
Mr. DOGGETT. Well, you don't disagree on the Pell grants,
that they are frozen at a level 30 years ago?
Mr. SHAW. Mr. Pomeroy.
Mr. POMEROY. Mr. Secretary, we have a lot of ground to
cover. Let's begin. Referring to your op ed piece in the Wall
Street Journal today, you indicate fully half of all households
benefiting from the lower tax on dividends alone, there can be
no doubt that lower tax on investment benefited the majority of
American people quite directly.
Later in that same article you say: Keep in mind, the
typical investor today, according to Securities Industry
Association, is a middle class person saving for retirement
with a household income of $65,000.
Now, is that where you come up with your conclusion that
half of all households benefit from this lower tax on
dividends?
Secretary SNOW. That and the fact that because of the lower
taxes on dividends and capital gains, there are so many more
people working in America----
Mr. POMEROY. But the beginning of your sentence you said,
yes, that--so yo acknowledge that. Now, how does the tax
structure, if you say that these people are holding this money
through the stock investments made through their retirement
funds, as I understand the taxation of retirement funds, Mr.
Secretary, you do not have capital gains taxes and dividends
taxes attaching to those funds. Is that correct?
Secretary SNOW. There will be taxes when the moneys are
withdrawn.
Mr. POMEROY. Correct. But that tax, Mr. Secretary, is
figured at ordinary income tax rates, not capital gains tax
rates or dividend tax rates. So, it is my understanding, Mr.
Secretary, that contrary to what you are suggesting today,
these capital gains and dividend tax issues don't relate to the
money coming out of retirement funds when someone is retiring
and is drawing down their IRA.
Secretary SNOW. Everybody who participates in the equity
markets of the United States, and that is over half of the
households----
Mr. POMEROY. That is a very--if you are going to say, well,
we all benefit the----
Secretary SNOW. Well, there were something like 36 million
people have taxable dividends. 36 million is a pretty good
sizable portion of the American----
Mr. POMEROY. I have figures from North Dakota, Mr.
Secretary, that says that basically 73 percent of the taxpayers
across all income tax levels receive no benefit from 15 percent
capital gains, no benefit at all. I believe you are misstating
the taxation----
Mr. SHAW. The time of the gentleman has expired.
Mr. Lewis?
Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. I want to go in just a little bit
of a different direction here, kind of a niche issue. I know
that one of the administration's ongoing priorities is
restructuring of the Black Lung Disability Trust Fund debt. I
understand that both you and Secretary Chao have identified
this as a key priority and a basic good government issue. With
the trust fund nearly $9 billion in debt, without
restructuring, it can never be solvent. As you may be aware, I
have introduced a bill to take this problem on and hopefully
solve it. I don't know if you are aware of the legislation. It
is H.R. 3915. If you are and if you have had a chance to look
at it, do you think this will address the problem and hopefully
solve it?
Secretary SNOW. Congressman, I am aware of it, but I have
not had an opportunity to really review it. If you would like
me to, I will look at it and give you written comments on it or
call you and talk to you about it.
Mr. LEWIS OF KENTUCKY. I would appreciate that. If there is
anything else that you think we need to do to bring solvency to
this fund, then I would appreciate your comments.
Secretary SNOW. I would be pleased to do that, and I have
made a note of it.
Mr. LEWIS OF KENTUCKY. Great, thank you.
I yield back.
Mr. SHAW. Gentleman yields back.
Mrs. Tubbs Jones?
Mrs. TUBBS JONES. Mr. Chairman, thank you.
Good afternoon, Mr. Secretary. How are you, sir?
Secretary SNOW. Good, thank you.
Mrs. TUBBS JONES. One of my colleagues on the Republican
side said this was the greatest housing boom we had ever seen,
and the dollar is--this is the greatest bankruptcy boom we have
ever seen too. In fact, Financial Services passed some
legislation because the financial markets didn't want to many
people to be able to declare bankruptcy; isn't that a fact,
sir?
Secretary SNOW. Well, I think----
Mrs. TUBBS JONES. Don't take too long to answer. I only
have 2\1/2\ minutes.
Secretary SNOW. Yes. There were reforms in the bankruptcy
laws enacted.
Mrs. TUBBS JONES. As a result of the high number of people
filing bankruptcy, coming as a result of this great housing
boom and predatory lending.
Secretary SNOW. No. I think there was some serial
bankruptcies declared in a way that wasn't consistent with the
intentions of the bankruptcy laws.
Mrs. TUBBS JONES. Some serial bankruptcies declared
inconsistent, but that would have been--I won't argue with you
about that, but the fact is, there are a high number of
bankruptcies, even though you are suggesting that at this time,
this is the greatest housing boom or economic standard that we
have had.
Let me move on to another subject, Mr. Secretary. The
Social Security privatization included in the President's
budget. The dollars that are going to be expended to privatize
over 10 years is something around $1.1 trillion; is that
correct, sir?
Secretary SNOW. It is in the budget. I think it is
something on that--I think it is a little less, like three-
quarters of a trillion, I think, is the number that I remember,
but we can check that.
Mrs. TUBBS JONES. But it is a big number, regardless of
whether it is three-quarters of $1.1 trillion.
Secretary SNOW. Right.
Mrs. TUBBS JONES. That is money that we have to expend up
front in order to fund privatization; is that correct, sir?
Secretary SNOW. Yes, over that period.
Mrs. TUBBS JONES. In fact, all of the stories, all the
polls, all of those say that the American public does not favor
privatization as a result of the cost, right?
Secretary SNOW. I think it depends on what poll you look at
and who you talk to.
Mrs. TUBBS JONES. I mean the polls were strong enough that
the President backed up on his decision to try and privatize in
2006; is that a fair statement?
Secretary SNOW. Well, it didn't happen.
Mrs. TUBBS JONES. It didn't happen, and it did not happen
as a result of the American public raising their arms saying,
``Mr. President, we do not want to privatize Social Security.''
Secretary SNOW. Well, I think it failed to garner
bipartisan support is a fair statement.
Mrs. TUBBS JONES. Because it didn't garner bipartisan
support, that means there are enough Republicans, along with
Democrats, who oppose it and you couldn't move forward.
Thank you, Mr. Chairman.
Mr. SHAW. Mr. Thompson?
Mr. THOMPSON. Thank you, Mr. Chairman. Mr. Chairman, the
budget calls for a tax increase on a very significant portion
of agriculture that I represent. It is the second try to do
this in the way of user fees. I have a letter that I would like
to submit for the record, signed by 20 bipartisan members
opposed to that.
Mr. SHAW. Without objection.
[The letter follows:]
July 26, 2005
The Honorable Bill Thomas
Chairman, House Ways & Means Committee
U.S. House of Representatives
Washington, DC 20515
The Honorable Charles Rangel
Ranking Member, House Ways & Means Committee
U.S. House of Representatives
Washington, DC 20515
Dear Chairman Thomas and Ranking Member Rangel:
We urge you to strongly oppose any efforts by the Administration to
impose greater tax burdens on the wine industry through new user fees.
This industry is already one of the most heavily taxed and regulated in
the country and any additional tax burden would be harmful to the
future growth of the industry.
As you may recall, the Administration's FY06 Budget proposal
included a provision authorizing the Treasury Department's Alcohol and
Tobacco Tax and Trade Bureau (TTB) to collect user fees in order to
offset the cost of its operating budget. These proposed permit and
application fees amount to nothing more than an additional tax on top
of the billions of dollars in excise taxes that the alcoholic beverage
industry already pays.
It has come to our attention that there may be an effort to include
such a provision in the upcoming tax reconciliation package. We urge
you to strongly oppose any such effort. This provision would unfairly
burden the wine industry, in particular the thousands of small, family
owned wineries across the country, many of which have just opened in
the last few years. Any additional tax burden would jeopardize the
significant growth that the industry is currently experiencing.
It is unwise and unfair to further tax an industry simply for
complying with Federal regulations and we hope that you will join us in
opposing any such provision. Thank you for your time and consideration
and we look forward to working with you on this issue.
Sincerely,
Mike Thompson
George Radanovich
Steve Israel
Maurice Hinchey
Lynn Woolsey
Lois Capps
Doris O. Matsui
Timothy Bishop
Jim Costa
John T. Doolittle
Louise Slaughter
Ken Calvert
Randy Kuhl
Mary Bono
Sherwood Boehlert
David Wu
Darlene Hooley
Doc Hastings
Richard Pombo
Greg Walden
Mr. THOMPSON. Thank you, Mr. Secretary, for being here. I
am concerned about a real lack of oversight, not only behalf of
your shop, but ours as well.
According to the GAO, 16 of 23 Federal agencies aren't in
compliance with proper accounting standards. This week we
learned from your own IRS that there is a huge tax gap,
somewhere between 290 and $345 billion that we are not
collecting. The Department of Homeland Security and Government
Accountability Office has released a recent report on Katrina.
We are all seeing that. We know that there has been terrible
mismanagement in everything from the payments to the hurricane
victims, to thousands of trailers sitting unused. Now there are
reports of all the private sector problems associated with the
reconstruction in Iraq. Who is watching the store, Mr.
Secretary? Shouldn't we be having more oversight investigations
and shouldn't we be working together to do this?
Secretary SNOW. Congressman, there is always need for more
attention to details in managing things. I agree with you.
Mr. THOMPSON. I would like to see some effort, joint effort
for greater oversight so we can get a handle on this, because
this would go a long way in balancing our budget problems.
Quickly, on the alternative minimum tax, the President
stated that this should be addressed in the fundamental tax
reform, but there is no proposal in the budget. Does that mean
that the President doesn't want to fix the problems associated
with alternative minimum tax?
Secretary SNOW. No, no. Quite the contrary.
Mr. THOMPSON. Then how do we do it?
Secretary SNOW. You do it in the context of broad-based tax
reform and we will----
Mr. THOMPSON. But it is not in budget.
Secretary SNOW. well, no, because we have not yet finalized
our efforts to come up with recommendations to the President.
Mr. THOMPSON. But there is not a place for it in the
budget.
Secretary SNOW. Well, because we have not yet come up with
the proposals.
Mr. THOMPSON. But in the same budget you are extending tax
cuts that do not expire for years, but the alternative minimum
tax has already expired and it is poised to hurt millions of
Americans.
Secretary SNOW. We support the patch on the alternative
minimum tax.
Mr. SHAW. The time of the gentleman has expired.
Mr. Hulshof?
Mr. HULSHOF. Thank you, Mr. Chairman.
I cannot believe my good friend from the State of
California would advocate tax breaks for wealthy people. I say
that tongue in cheek.
Mr. Secretary, welcome. I cannot let pass, however, some of
the rhetoric that has already become part of this hearing's
record. I have heard the terminology ``shared sacrifice.''
Correct me, Mr. Secretary, if I misspeak. It is my
understanding that 5 percent of the top wage earners in this
country pay over half of the country's bills.
Secretary SNOW. That is correct.
Mr. HULSHOF. More specifically, a successful professor in
Columbia, Missouri, who may have published a book, is paying
for welfare benefits for needy families in Columbus, Georgia. A
wealth businesswoman in Washington, Missouri is paying for free
housing for those in Washington State. Americans reached into
their pockets in the aftermath of Katrina and were generous in
providing for those victims of that tragedy. Yet now we are
seeing that some, some of the victims of that catastrophe have
been spending that money not to pay for the necessities of
life. Probably most importantly, regarding shared sacrifices,
there are families in Monroe City and Herman, Missouri and
other small towns, whose loved ones have paid the ultimate
sacrifice for what we are doing in Iraq, and those families
believe those sacrifices have been worth it.
So, that is my comment. You need not comment on my comment,
Mr. Secretary.
But I do want to pivot and talk about, associate myself
with some of the remarks of Mr. Ryan, Mr. Foley, about how
these pro-growth tax policies have in fact spurred growth and
investment in our economy. I think any fair-minded individual
would arrive at the conclusion that the fundamentals of our
economy remain strong. I would exclude from the definition of
fair-minded individuals, those that are running from political
office. But one of the things--I am a sponsor of H.R. 8. I
think I can say that it is a bipartisan bill because there were
42 of my colleagues on the other side of the aisle on the death
tax repeal, that voted for that permanent, complete and final
repeal.
Mr. Secretary, my question is: what is your opinion of the
impact on taxpayers and the economy as a whole if Congress
fails to act, and we allow the death tax to reemerge in its
pre-2001 levels, that is an exemption of only one million
dollar, and tax rates as high as 55 percent? If we fail to do
our duty and act, give me your best assessment of what might
happen to the fundamentals of our economy.
Secretary SNOW. Well, we would return to the far less
desirable environment we found ourselves in several years back,
with slower growth rates, less job creation and less income
creation across America. It would be to reverse the good path
we are on. It would be a terrible mistake.
Mr. HULSHOF. I applaud the idea--and I think Mr. Ryan
touched on this, others have as well--the creation of a Dynamic
Analysis Division within Treasury's Office of Tax Policy. I
think this is a great idea to actually put into place real
world economic scoring instead of, my terminology, this flat
Earth sort of scoring that we have to deal with. It is my
understanding that the Dynamic Analysis Division will be up and
running hopefully by the July mid-session review. I hope that
we can expect a dynamic analysis of the death tax repeal. Would
you care, in the few seconds I have remaining before the
Chairman gavels me down, would you care to venture a guess as
to what we might expect from a dynamic analysis of the repeal
of the death tax, sir?
Secretary SNOW. I would rather reserve until we have that
analysis completed, but I do think that that tax does have an
adverse effect on entrepreneurship, and people continuing in
businesses and continuing to put their talent to work to grow
the American economy.
On your broader question of the shared sacrifice, I think
it is important to realize that because of the tax cuts that
you approved, the Code has been made more progressive. Higher
income people today pay a higher share of the total tax bill,
and on the mistakes that were made, and certainly there were
some in the context of Katrina, the error were the result of
our commitment to try and err on the side of being as generous
and humanitarian as possible and respond to the needs of the
people who were devastated by that.
Mr. HULSHOF. Thank you.
Mr. SHAW. The time of the gentleman has expired.
Mr. Emanuel, you are recognized for 2\1/2\ minutes.
Mr. EMANUEL. Thank you, Mr. Chairman.
Mr. Secretary, you had a report today about the fact that
approximately $300 billion in net dollars goes unreported and
uncollected, which then therefore leaves a greater burden of
the taxes onto middle class families. There is a couple parts
of this I would like to talk to you about. One is the fact that
until 2003 enforcement was nonexistent at IRS. Obviously, that
was before your time, I am well aware of that. But it let the
cat out of the bag, so there has been a dramatic increase in
uncollected dollars, could actually reduce the deficit by
almost 80 percent, if in fact what people owed was actually
paid. So, what are we going to do to do something about
collection?
First. If you look at your enforcement that goes on, close
to 70 percent--let me say it this way--there has been a 70
percent increase in the funds for cracking down on first-time
teachers, first-year rookie police officers, and people who
apply and use the earned income tax credit. Yet only a 3
percent increased enforcement in all other areas.
Second. If you happen to be making the minimum wage, you
are 8 more times more likely to be audited by the IRS than if
you are a million dollar investor in a partnership where only 1
in 400 get audited.
So, I am worried about what goes unreported, and
uncollected, and unenforced by the IRS. Then second, when you
do actually do the job of enforcement--and there has been an
increase in dollars since 2003 under your watch--they don't get
distributed equally and not everybody gets audited accordingly.
I would trust you that the people making earned income taxes,
that is, people making about $25,000 a year, work hard, play by
the rules, trying to raise their kids right, that is not where
the gap is, and you have not enforced the law equally across
the board, and if you want to pick up $300 billion quickly that
is owed and says that everybody will live under the law equally
and be responsible equally, you need to enforce the law across
the board equally, not based on whether you are a janitor, a
teacher or a millionaire investing in a partnership. You do not
apply the law today equally.
Secretary SNOW. Well, let me respond. The tax gap is a
serious problem, and we share your concern and that of the
other Members of the Committee on that score. The
administration, as you acknowledged, has made a serious effort
to close the gap.
Mr. EMANUEL. After the problem got very bad on their watch,
right?
Secretary SNOW. Well, you know, this is not a new problem.
On this issue of who is getting audited, the budget calls for
significant increase--and we have seen this in the last few
years--audits of the high-income taxpayers, those earning
$100,000 or more rose--I think the audits of them last year
were some 220,000 in fiscal year 2005, the highest number in
the past 10 years. I take your point. We need to be equitable
and fair here----
Mr. EMANUEL. Mr. Secretary, you and I have a friendship
that goes way back. I am sorry there are some facts here that
just are stubborn, as Ronald Reagan used to say.
Mr. SHAW. Time of the gentleman has expired.
Mr. EMANUEL. Appreciate that, Mr. Chairman. I look forward
to an answer any time in writing, Mr. Secretary, because it is
not true.
Mr. SHAW. Mr. Weller? Mr. Weller is recognized for 5
minutes. The other members will then be recognized for 2\1/2\
to keep the Secretary on schedule.
Mr. WELLER. Thank you, Mr. Chairman, and I will certainly
yield back any time I do not use, recognizing the Secretary is
limited in his time, and give every member an opportunity who
has patiently waited for their opportunity to ask questions of
the Secretary.
Mr. Secretary welcome to the Committee. Good to have you
here today. It is always good to be with you.
I represent a district south of Chicago with a lot of older
communities, both rural and suburban as well as urban. I want
to commend you for including in the President's budget
permanency for the brownfields provision that we have worked to
have included in the Tax Code, tax incentives, to encourage the
environmental cleanup of essentially abandoned industrial and
commercial sites, and I commend you for having the wisdom to do
that. I worked with your department along with my Chairman and
others to create this provision, and of course, I support the
goal of permanency. I would also note, as we work through the
reconciliation conference, with Chairman Thomas's support, we
have worked to expand the brownfields provision to include
petroleum products. About 40 percent of brownfield have
petroleum products. We could always think of that abandoned gas
station in many rural and suburban and urban communities, the
one on the strategic corner. People always think, why doesn't
somebody buy that? Well, there is environmental contamination
there. This incentive I believe will help create recycling of
those sites and put them back to work.
I would note, since this provision became law, that the
largest brownfield in the State of Illinois, which is located
in the district I represent, the former Joliet arsenal, has
attracted in its recycling $1.5 billion in private investment,
by the end of the year should have 2,000 jobs in place, and
frankly, now has the largest container port in North America,
is I think the third largest container handling facility in the
world, all because private investment attracted by brownfields
cleanup.
The one issue I want to address to you, Mr. Secretary, is
dealing with the President's alternative fuels agenda that he
talked about in the State of the Union. I commend him for his
goal of increasing energy independence. I am one of those who
believes it is a national security issue as well as an economic
security issue. We were reminded in September with $3.00
gasoline and higher, what happens when we are overly dependent
on limited sources, particularly petroleum-based fuels.
When he talked about biofuels--and I want to mention to
you, as you may be aware, I have introduced, back in December,
the Biofuels Act legislation which was nicknamed 25 by 25, sets
a goal of providing 25 billion gallons of biofuels, ethanol,
bio-diesel, soy-diesel in use by the year 2025. We currently
use 4 billion gallons.
But the legislation, I believe, will be a key part of our
strategy to achieve the President's goal of reducing our
dependence on Middle Eastern oil by three-fourths by the year
2025. So, I certainly want to work with you. I would note that
in the Biofuels Act, there are provisions which provide for
accelerated appreciation for investment in refining capability
for biofuels. We continue the incentives that were in the
energy bill to encourage retailers to invest in the
infrastructure necessary to distribute. Then we also provide
tax credit for flexible fuels, and this is an area I would
certainly like to work with you, Mr. Chairman.
I just want to ask of you, in my limited amount of time,
you know, from the administration standpoint, from the
President's standpoint, what are the advantages of emphasizing
biofuels reducing our energy independence, and then how do you
see using the Tax Code to achieve that goal?
Secretary SNOW. I was pleased, within the last month or so,
to announce the implementation of some of the provisions in the
Energy Act of last year, that encourage greater reliance on
hybrid vehicles. I think the tax code can play a useful role
here in encouraging movement in the right direction on
alternative fuels, and on alternative technology. So, we want
to work with you on that. I also hope 1 day to visit that port
facility made possibly by the brownfields.
Mr. WELLER. You have an outstanding invitation, Mr.
Secretary. We would love to have you there.
Secretary SNOW. I think it makes a point that is important
about the way the tax system works. If you out certainty into
it, you get investors coming in. That is one reason it is
important to extent the special treatment accorded to the
brownfields on a permanent basis. It would remove the doubt or
the uncertainty affecting investment in facilities like that,
and would promote to goal of encouraging not only investment,
but environmental remediation, which is important as well. So,
I look forward to visiting there one day.
Mr. SHAW. Time of the gentleman has expired.
Mr. WELLER. You have an invitation to come.
Mr. SHAW. Time of the gentleman has expired.
Mr. Johnson, recognized for 2\1/2\ minutes.
Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
Thanks for being here, Secretary.
Secretary SNOW. Thank you.
Mr. JOHNSON OF TEXAS. You have already discussed a little
of the criticism concerning people in the lower tax brackets
who work part time or do not get their health care through
their employ, generally lower income. If you want to discuss
how the President's budget helps remedy that, I would
appreciate it. But I have one other question, and it may not be
in your expertise, but you can get back in writing if you want
to, the idea to allow employers to put more money into HSAs
that belong to chronically ill employees is an interesting one.
Does the administration have an idea as to how chronically ill
will be defined?
Secretary SNOW. I think that is probably a question better
left to my able colleague, Mr. Leavitt, or Dr. McClellan.
Mr. JOHNSON OF TEXAS. Toss the ball, huh?
Secretary SNOW. Well, I think you might not get as informed
an answer from me as you would from them. So, I am going to
defer to them.
But on your broad question of the HSAs and how they affect
things going forward, if the HSAs are made available, and the
broadening provisions that the President called for enacted, I
think you are going to see greater reliance on HSAs, which can
only be good for employees and small business and entrepreneurs
because now they are going to have access to lower cost health
care than is available today. It is a good option for them, not
a panacea, but it is a good option.
Mr. JOHNSON OF TEXAS. It gives them the advantage of
selecting their own health care processes.
Secretary SNOW. Exactly.
Mr. JOHNSON OF TEXAS. Thank you, sir. I will yield back the
balance of my time.
Mr. SHAW. Gentleman yields back the balance of his time.
Mr. Ramstad?
Mr. RAMSTAD. Thank you, Mr. Chairman.
Mr. Secretary, I want to ask you about a thorn in the side
of many taxpayers, and I am referring to the telephone excise
tax. As you know, this tax was first enacted--well, it was
enacted in 1898 as a temporary tax to fund the Spanish-American
War. It is imposed by the Federal government on long distance
phone calls. It seems to me almost an absurdity today that the
tax only applies to phone calls for which charges are levied
based on the distance and the time of the phone call. But as we
all know, most phone companies today don't base their charges
on both distance and duration of the call. Rather, they charge
a flat rate per minute regardless of the distance the customer
happens to be calling.
Now, in the past few years, a number of taxpayers, business
taxpayers, have challenged the IRS' collection of this tax in
Federal court. In fact, no fewer than three Federal courts and
a host of Federal District Courts have all ruled against the
IRS. Can you please tell me why in the world does the IRS
continue collecting this tax, and can you give us an indication
of how long the government will keep litigating this issue? Mr.
Secretary, why not give it up?
[Laughter.]
Secretary SNOW. Well, I think the courts may require us to
do that very soon. You know, this is pending in the Sixth
Circuit. The Department of Justice took an appeal from the
District Court. We are awaiting that judgment. Should the
judgment come down in alignment with the prior three Federal
Circuit Courts, I think the handwriting is on the wall.
Mr. RAMSTAD. That will be the end of the temporary tax
enacted in 1898 to fund the Spanish-American War?
Secretary SNOW. I would think the time to bring that to an
end would be upon us.
Mr. RAMSTAD. That will be good news to taxpayers. Thank
you, Mr. Secretary.
I yield back.
Mr. SHAW. Gentleman yields back.
Mr. Camp?
Mr. CAMP. Thank you, Mr. Chairman.
Mr. Secretary, in Michigan, the issue of competitiveness is
foremost in most people's minds, and we are facing pressure not
only from China but India, Mexico, but also the high cost of
health care. Can you explain what the President proposes I his
budget with regard to helping more Americans better afford
quality health care?
Secretary SNOW. The key provision in the President's budget
that would accomplish that objective, Congressman, is the
enhancement of the HSAs by allowing larger contributions and by
making them even more tax advantaged by allowing the purchaser
to deduct the premiums on the policy, and to get a credit back
on the payroll taxes.
This should make an already very attractive vehicle even
more attractive. In order to make it more attractive to the
lower income and middle income people, it also has a refundable
tax feature to it that will enable people in lower income
categories to be able to afford it.
The idea here is simply to make an option available for
people who don't have health care today, largely small
business, entrepreneurs, self-employed, to be able to get the
option of lower-cost health care.
Mr. CAMP. Thank you very much. Mr. Secretary, I am
interested of your assessment of the rate of economic growth in
the United States compared to, say, the European Union or
Canada, and if Congress fails to extend the tax rates on
capital gains and dividends, would that economic growth be
potentially damaged, and if so, could you describe some of that
for me?
Secretary SNOW. Yes. The United States today is the envy of
the world. Our growth rates are roughly double the growth rates
of the other G7-G8 countries. At the heart of a strong recovery
we are enjoying is the tax policy that Congress adopted 3 years
ago to lower the taxes on marginal taxes on income, and to
reduce the taxes on capital gains and dividends.
I think it would be a terrible mistake to reverse course. I
think it would be a terrible mistake not to do the extension,
and I think the track record here is clear, and I would urge
you and your fellow members of the Congress to move on to
permanency, because lower tax rates are consistent with both
strong revenue streams for the Federal government and better
jobs, more jobs, in a more expensive, dynamic and growing
economy.
Mr. CAMP. Thank you, Mr. Secretary.
Mr. SHAW. Gentleman yields back.
Mr. English, you are recognized----
Mr. ENGLISH. I will pass, Mr. Chairman. I have a number of
questions, but in the interest of time, I will simply submit
them for the record.
Mr. SHAW. Mr. Herger?
Mr. HERGER. Thank you, Mr. Chairman.
Secretary Snow, like many here, I firmly believe Congress
should act to permanently extend the tax relief of 2001 and
2003. Tax relief has helped to rebound from the economic
slowdown of a few years ago, has stimulated growth and created
a record number of jobs, 4.7 million new jobs, has stimulated
growth since 2003, and has also contributed to 14.5 percent
increase in Federal receipts, the largest increase in almost a
quarter of a century.
One of the confirmations of these numbers has been a report
issued by the National Federation of Independent Businesses
that expanded section 179 expensing, where small businesses are
able to deduct up to 100,000 of investment in machinery and
equipment authority is helping these small businesses grow. I
would like you to take a moment to elaborate on the President's
proposal to double the amount a small business can currently
expense, and make this amount permanently, and specifically,
what benefit would this assurance by to American small
business?
Secretary SNOW. Congressman, thanks for the opportunity to
address that. Small businesses are really the engine of job
creation in America. They create two out of three new jobs. We
saw that when the expensing under 179 was expanded from 25,000
to 100,000, that a lot of investment was made. It really
spurred investment because it improved the return on
investment, it lowered the cost of investments. The evidence on
that is very clear, and what we are saying is for small
business, since it worked at going from 25 to 100, it is going
to work even more raising it to the 200,000. We want to
continue to have small business lead the job creation parade in
America, make investments, create jobs and grow and expand, and
this is designed to do that. I think it is one of the strengths
of America, our vibrant small business sector.
Mr. HERGER. Thank you, Secretary.
I yield back.
Chairman THOMAS. [Presiding.] The Chair thanks the
gentleman from Florida for his courtesies, and inquires if he
wishes to inquire?
Mr. SHAW. I have one area that I would like to inquire
into, and that is the question of the alternative minimum tax.
I am not talking about just simply adjusting, I am talking
about abolishing it entirely. It is probably the most senseless
tax that we have on the books today. We would, I am sure, have
rescinded it on a bipartisan basis, and the only problem is
that the revenue figure is gigantic. have you done any analysis
as to what effect that would have on the rates if we were able
to rescind it on a revenue-neutral basis?
Secretary SNOW. You are right, Congressman. The AMT,
particularly as it goes forward, will be generating very large
amounts of revenue. We intend to address the question of the
AMT, not as a patch, but as a permanent fix, and to do so in
the context of broad-based tax reform. The AMT, as you suggest,
is such an integral part of the tax life of the American
citizens, and will become more so in the future, such an
integral part of the Code and the way we approach taxes, that
it has to be thought of in terms of the whole code itself.
There are varying estimates. I think we have one in our budget
proposals as to what the revenue effects would be, but whatever
they are, they are very, very sizable. We know that.
Mr. SHAW. Thank you.
I yield back, Mr. Chairman.
Chairman THOMAS. Thank the gentleman.
Mr. Secretary, thank you very much, especially for your
willingness to accommodate, what I know is a very busy
schedule, the opportunity for the Committee on Ways and Means
to speak with you at the beginning of this budget process.
Secretary SNOW. Mr. Chairman, thank you very much.
[Whereupon, at 12:28 p.m., the Committee proceeded to other
business.]
[Questions submitted from Mssrs. English, Herger, Rangel,
Stark, and McDermott to Secretary Snow, and his responses
follow:]
Question Submitted by Representative English
Question: Thank you for your testimony before the Committee on Ways
and Means today. I appreciate your providing our Committee with an
overview of the President's FY 2007 Budget. As you recall, the hearing
was lasting longer than anticipated, and so in the interest of time, I
agreed to submit my questions to you in writing. Therefore, I offer to
you the following concerns and request your prompt response.
First, I would like to raise important issue that has arisen under
the provision enacted in 2004 to provide an incentive for companies to
repatriate their foreign earnings. I understand that recent Treasury
guidance (Notice 2005-64) would undermine the intent of this provision
(Sec. 965 of the I.R.C.) by imposing a tax penalty on companies that
use the provision to repatriate. As you may recall, I was the House
sponsor of the original repatriation legislation, and I have been
following it closely to ensure the incentive is working properly. In
September 2005, I wrote to you to ask that this guidance be revisited
to more clearly reflect Congressional intent. I did not receive a
response until yesterday, February 14, 2006 and despite the five-month
delay, the response simply stated that the Office of Tax Policy is
considering the issue. I do not consider this vacant reply to have
addressed the concerns I laid out in my letter. However, I understand
that Treasury is considering issuing further guidance that would allow
taxpayers to switch to the so-called ``sales method'' of allocating R&D
expenses for the year of repatriation without being required to stay on
that method for 5 years. Providing such guidance would go a long way to
help mitigate the tax increase that otherwise could arise and would be
consistent with Congressional intent underlying the repatriation
incentive. I request that you inform me whether Treasury will issue
guidance to allow companies to be able to use the ``sales method'' for
allocating R&D expenses during this repatriation incentive year without
being bound to stay on that method for 5 years?
Second, I would like to focus on the matter of China's currency.
The Administration has heralded recent steps by China regarding its
currency as important steps toward a freely market-determined Yuan.
Yet, I find it difficult to get too excited about important steps, as
you have called them, when there is no detail as to what those steps
are. In July, when China revalued the yuan with a one-time adjustment
and set the trading band to a basket of currencies from the dollar peg,
did they announce what currencies were in the basket? If so, could you
please provide a list of those currencies?
Is it possible that the resulting daily value calculation of the
yuan could vary widely based on their selection of currencies in the
basket? Could you please explain why?
On average, what is the daily fluctuation in value of the U.S.
dollar in percentage form? Do you think that China's limitation of the
change in value of the Yuan to 0.15% is overly cautious or restrictive?
More recently, China announced that it would abandon the basket of
currencies in favor of a system of 13 ``market-makers.'' Has the
Central Bank announced which banks these market makers are? If so,
could you please provide the names of these ``market-makers?''
This system has been reported as an ``over the counter'' system,
can you explain in greater detail how it works?
Further, this new system was hailed by some in the financial
markets as a major step into injecting accountability and market-forces
to the Chinese foreign currency banking system. How can accountability
exist where transparency is conspicuously absent? And for that matter,
how can market forces operate effectively when access to information is
also missing? I appreciate your consideration of and response to these
questions as an extension of my time during the hearing. I look forward
to your response as well as to working with you on these and other
important issues pending before Congress during the remainder of the
109\th\ Congress.
Answer:
June 7, 2006
The Honorable Phil English
U.S. House of Representatives
Washington, DC 20515-3803
Dear Mr. English:
Thank you for your letter on the section 965 ``repatriation''
deduction and issues related to China's currency. Because your letter
concerns matters of tax and international economic policy, I have
consulted with colleagues in the Office of Tax Policy and the Office of
International Affairs.
As we stated in our previous letter to you on the section 965
deduction, we very much appreciate the inquiries we have received from
your office on the interaction of the section 965 deduction and the
rules for allocating and apportioning research and experimental
expenditures. This is a very technical subject, and it has required
careful consideration.
We continue to believe that the rules set forth in Notice 2005-64,
taken in their entirety, are the most appropriate reading of the
statute. We view the rules in the Notice regarding expense allocation
and apportionment as the proper effectuation of the rules of the
section 965 deduction as set forth in the conference agreement.
After much consideration, we have decided not to issue guidance
that specifically authorizes taxpayers to adopt temporary methods of
allocating and apportioning research and experimental expenditures as a
consequence of the enactment of section 965. Of course, any taxpayer
remains free, through normal procedures, to seek the Commissioner's
consent to change methods before the end of the five-year period
described in Treasury Regulation section 1.861-17(e).
With respect to your questions concerning China, I have consulted
colleagues in Treasury's International Affairs office. They note the
following:
According to public remarks by the Governor of China's central
bank. Zhou Xiaochuan, last August, the US dollar, the Euro. the yen,
and the South Korean won represent the main currencies in China's
basket. The Singapore dollar, pound sterling, Malaysian ringgit,
Russian rouble, Thai baht, and the Canadian dollar are also considered
by the Chinese authorities. China has stated it selects the currencies
for its basket based on their share in China's foreign trade, foreign
debt, and foreign direct investment. China uses the basket as a
reference; thus changes in basket currencies do not automatically
translate into changes in the RMB. Daily fluctuations against the
dollar have averaged 0.026 percent since last July, much lower than the
maximum daily change (0.3 percent).
China has approved 13 domestic and foreign banks to act as RMB
``market makers'' on China's inter-bank foreign exchange market.
According to press reports, these market makers include eight domestic
lenders-the Bank of China, China Construction Bank, Agricultural Bank
of China, Industrial and Commercial Bank of China, Bank of
Communications, Citic Bank, China Merchants Bank, and Industrial Bank,
as well as five foreign banks--ABN AMRO, Bank of Montreal, Citibank,
HSBC, and Standard Chartered.
In January 2006, China introduced an over-the-counter trading
system that allows banks to trade RMB directly among themselves at a
lower cost. Previously the China Foreign Exchange Trade System
(effectively PBoC--the central bank) served as the counterparty on all
RMB spot trades and the high fees it charged its member banks inhibited
trading volume and volatility. The new rate setting mechanism now
calculates a daily central parity rate based upon a weighted average of
each morning's opening bid and the ask prices for the market makers.
Secretary Snow recently stated that he is extremely dissatisfied
with the slow pace of Chinese exchange rate reform. The Bush
Administration has strongly pressed the view that major economies
should have flexible, market based exchange rate systems. The Secretary
has argued the case both bilaterally with foreign monetary and finance
officials and in multilateral meetings.
Although China has taken more steps to widen participation in the
foreign exchange market, its movements toward a flexible, market based
exchange rate have not been rapid, as you rightly note. This slow pace
is neither in China's self-interest nor in the interest of the world
economy.
For the last 3 years, the Treasury Department has made engagement
with China one of its top priorities. This intensive engagement has
concentrated on exchange rate flexibility, but has also focused on the
other steps necessary to shift the sources of growth toward domestic
demand and consumption, reform the financial sector and build the
foreign exchange market infrastructure. While the economy of China
continues to evolve, we are not satisfied with the progress made on
China's exchange rate regime, and will continue to monitor China's
progress closely.
Sincerely,
Kevin I. Fromer
Assistant Secretary (Legislative Affairs)
Questions Submitted by Representative Herger
Question: The President's budget includes a provision to extend the
0.2 percent Federal Unemployment Tax Act (FUTA) surtax. This surtax was
created in 1976 to pay for a temporary benefits program. That debt was
paid off in 1987, yet the ``temporary'' surtax has been extended
multiple times. It is currently set to expire at the end of 2007, and
the Administration proposal would extend it for another 5 years, until
December 31, 2012. The Federal unemployment trust funds now total about
$30 billion, well more than is needed to support annual federal program
costs. Even without the revenue attributable to the 0.2 percent surtax,
there would be more than enough tax revenues to meet Federal
responsibilities in any given year. Could you explain why the
President's budget would extend this supposedly temporary payroll
surtax yet again?
Answer: Extending the current tax rate will support the continued
solvency of the Federal UTF accounts and maintain the ability of the
unemployment system to respond to future economic downturns. We also
note that the Department of Labor projects some state trust funds will
borrow in the next few years even though no downturn is projected. UTF
dollars are not only used to support benefit costs. Under current law,
they also cover the administrative costs of State Unemployment
Compensation programs and grants to States under the Wagner-Peyser Act
for employment services. Using current economic assumption, the Federal
accounts in the UTF will not reach their statutory ceilings until
Fiscal Year 2016. These ceilings may be viewed as the Federal solvency
requirements. Extending the 0.2% means these accounts will reach their
ceilings 3 years earlier.
Concerning Unemployment Benefits Program: There are several
proposals in the President's budget for the Treasury Department that
relate to the nation's unemployment benefits program. For instance, one
proposal would help states reduce improper unemployment benefit
payments and recover delinquent employer taxes by giving employers new
incentives to correctly report and pay the proper amount of taxes. Are
you confident these changes will be beneficial to employers in terms of
limiting red tape and reducing tax payments to only the needed levels?
Answer: The Unemployment Compensation Program Integrity Act of
2006, which the Department of Labor transmitted to Congress in May,
contains several proposals, some of which are optional on the part of
the states, which would support state ``integrity'' activities to
prevent/detect improper payments and collect overpayments and
delinquent taxes. The Department of Labor's data show that, for every
dollar spent on benefit integrity activities, the unemployment fund
gains between $4 and $5.
These proposals will be beneficial to employers because they result
in net gains to state unemployment funds. State UI tax rates depend in
part on the state's fund balance; higher balances result in lower taxes
overall for businesses.
Joint Questions Submitted by Representatives Rangel, Stark, and
McDermott
Question: For several years we have requested information on the
assumptions behind your budget estimates for the health tax proposals
both during hearings and in writing. Unfortunately, previous requests
have not yielded useful responses, despite that most of these data
points were needed to derive your revenue estimates. Please provide a
table with the following year-by-year estimates for 2007-2016, as
applicable, for each HSA/high-deductible health plan (HDHP) proposal in
the budget, as well as a cumulative column showing the total estimate
(assuming interactions between the proposals) and data source(s) for
each estimate----
The number of people newly insured as a result of each
proposal;
The drop in employer-sponsored coverage as a result of
each proposal, and specifically (1) the number of people who have
shifted from employer-based coverage to the non-group market and (2)
the number of people who became uninsured;
The number of people in employer-based coverage who move
from comprehensive to high-deductible coverage;
The number of people who move from employer-based
coverage to Medicaid or other public insurance programs (including
high-risk pools), broken out by program type;
The total number of new purchasers in the non-group
market;
The estimated take-up rate for by AGI and/or tax bracket;
The estimated out-of-pocket costs as a percent of net
income by AGI and/or tax bracket;
Distribution of tax benefits. Please provide
distributional tables showing the estimated tax benefits for each
policy, and cumulatively, by AGI and tax brackets.
Your testimony claims that President's health agenda will make
health care more affordable, and implies that it will lower spending.
However, it appears that costs are simply shifted to individuals and
overall health spending is not reduced. Indeed, these proposals cost
the Treasury $156 billion over the next decade. Can you quantify claims
of system savings, e.g., how much more affordable, which costs will go
down and by how much? Where precisely in the budget--or even in the
underlying tables and analyses--are the savings from moving people to
HSAs? Surely there would be interactions in public programs and tax
benefits for employers?
The Economic Report to the President acknowledges that high prices
are one of the main drivers of higher premiums and overall US health
spending. How much does the Administration expect prices for medical
services will decrease as a result of these proposals? If actual prices
were to go down, that would reduce spending in other Federal health
programs, such as Medicare and Medicaid. Are these interactions
reflected in your estimates of Federal spending? If not, why? If so,
please detail the annual savings to each program for 2007-2016.
Although employers can contribute to the HSA, they are not required
to do so. In your modeling, what proportion of employers do you assume
will contribute to the HSA? How much on average do you assume such
employers will contribute? How much on average do you assume
individuals or families will set aside? How much do you assume are off-
setting reductions from other savings vehicles (e.g., retirement
accounts, education accounts, etc.) and what is the distribution across
vehicles? If you do not assume reductions in other savings vehicles,
why (e.g., where do you assume the additional funds come from)?
The budget shows that you assume the HSA proposals will cost us $59
billion over 5 years and $156 billion over 10 years in terms of lost
revenue and new outlays. It is not clear whether this is a gross or net
number. For example, does this estimate reflect any interaction with
the employer exclusion for health benefits? How much additional revenue
does the Administration expect to take in as a result of employers
dropping or decreasing coverage for their employees (and potentially
increasing taxable wages)?
Previous independent analyses from the Academy of Actuaries and
others have indicated that widespread adoption of HDHPs/HSAs or of
other policies that could induce adverse selection (e.g., Association
Health Plans or AHPs) would dramatically increase premiums for
traditional insurance. For example, CBO projects that AHPs would cause
increased premiums for 80 percent of people covered by small
businesses. What does the Administration assume happens to premiums for
comprehensive policies under the HSA expansion assumed in the budget?
If you did not perform this analysis, please explain why.
Because HSAs are exempt from all taxes, including payroll taxes
(e.g., contributions by employers are not taxed), they reduce funding
for the Medicare and Social Security trust funds. How much revenue is
lost to each Trust Fund as a result of (1) your latest estimates under
current law and (2) adoption of the President's HSA proposals in this
budget? It is theoretically possible that you anticipate increased
Trust Fund receipts if you assume that employer health benefit
expenditures are reduced and wages are commensurately increased as a
result of HDHPs/HSAs. If so, what are your estimates for increased
payroll tax revenue as a result of these policies?
You mentioned ``portability'' in your testimony, but I can't find
anything in the budget or other documents to explain what you mean.
What is the Administration's portability proposal?
Health insurance premiums in the individual market are determined
by age, gender, and health status among other things. Older and sicker
individuals have to pay more than the young and healthy to get
coverage. These practices greatly favor insurance companies, which have
the power to deny insurance coverage altogether, or refuse to cover
services that a patient might need, such as maternity care. What new
proposals does the Administration have to require insurance companies
to issue non-group policies to all applicants? What new proposals does
the Administration have to limit the ability of non-group issuers to
charge certain applicants higher premiums based on their age, gender,
health status or other factors?
Nearly all states allow health insurers in the non-group market to
use medical underwriting to refuse to sell policies and to charge
certain applicants higher premiums or exclude certain body parts or
conditions, based on the applicant's health history or history of
someone in their family. These practices mean that insurers can
selectively enroll applicants for all policies, including high-
deductible health plans (HDHPs). Does the President propose or support
any measures to require insurance companies to issue policies to all
applicants without medical underwriting? If not, how do you propose to
ensure that all people seeking HDHPs and HSAs are able to get them? If
you suggest that certain folks turn to high-risk pools or other non-
HDHP sources, wouldn't that prohibit them from being able to open and
maintain a health savings account?
Do you show an increase in the number of people eligible for the
7.5% deduction as a result of the shift to HSAs? If so, what is the
year-by-year comparison relative to assumptions or projections under
current law?
Answer: The President's health care initiative is intended to
address the rising cost of health care in several ways. First, the
initiative gives individuals a greater stake in their health care
decisions by emphasizing high deductible health insurance. A
fundamental principle underlying the initiative is that when
individuals are more involved in their health care decisions, those
decisions will be better ones. Putting the health care consumer more in
control of health care decisions, rather than third parties, such as
insurance companies, employers, and the government, will help reduce
the rise in health care costs.
Second, the initiative fundamentally alters the tax incentives that
underlie the current health care system. The current tax treatment of
health care provides a tax incentive for individuals to prepay for
their health care through employer provided health insurance. This
results greater use of first dollar coverage and greater reliance on
employer provided insurance simply because of the tax bias. Prepayment
of health care through first dollar insurance coverage translates into
less price sensitivity by the health care consumers and is a
significant factor for why health care costs have risen roughly 2
percent faster than the rate of growth in the economy for many decades.
The President's health care initiative reduces the tax bias for
first dollar coverage and the prepayment of health care through
employer provided insurance by extending the tax subsidy available to
health care purchased through employer sponsored insurance to health
care purchased by individuals whether financed through health insurance
or direct out-of-pocket spending, provided they purchase high
deductible health plans.
While putting the health care consumer more in control of his or
her health care decisions and addressing important tax biases that
underlie our current health care system, the initiative only increases
the existing tax subsidy for health care, principally for employer-
sponsored insurance, from about $325 billion to $345 billion in 2010
(Treasury Department estimates).
It is important to evaluate this initiative as a package, because
the individual provisions work in unison to address the inequity and
the uneven treatment of health care in our current system. Accordingly,
it is not possible to disaggregate the individual provisons in order to
answer many of the specific questions posed. As a package, the Treasury
Department estimates that these proposals will have a substantial
effect on the number of HSAs, increasing their number in 2010 by 50
percent. Under current law, the Treasury Department estimates that
there will be about 14 million HSAs in 2010. Under the President's
initiative, the number of HSAs is estimated to rise to about 21 million
in 2010. That is, some 21 million taxpayers would directly benefit
under the President's health care initiative. Of course, helping to
lower the growth in health care costs is a central objective of the
initiative and the anticipated rise in the number of HSAs is important
to achieving this objective.
The early evidence on HSAs is very promising. According to a study
released by AHIP, by January 2006 there were about 3.2 million people
covered by HDHPs. This is up very significantly from the roughly
900,000 people covered by HDHPs reported by AHIP in September 2004.
Research by AHIP also indicates that 42 percent of individuals with
HDHPs have incomes below 50,000 indicating that a substantial number of
lower income individuals are using HDHPs. Similarly, research by E-
Health Insurance found that roughly one-third of those with HDHPs in
the non-group insurance market were previously uninsured. Also, recent
research sponsored by the United Health Group has found that
individuals with HDHPs are 5 percent more likely to seek preventive
care than individuals with traditional PPO plans. This is important
because preventive care may help dampens future growth in health care
costs at the same time as improving wellness.
Employers are playing an important role as individuals begin to
shift toward HDHPs by making substantial contributions to individuals'
HSAs. Recent research by Kaiser/HRET indicates that, on average,
employers contribute roughly $600 to individuals' and $1,100 to
families' HSAs. These contributions reflect one way that the savings
from lower insurance premiums associated with HSAs are passed on to
consumers. The important role played by employers in the HDHP market is
also reflected in tax return and information reporting data. A
preliminary Treasury analysis of these data for 2004, the first year
HSAs were in effect, found that nearly one-half of all HSAs were funded
exclusively by employer contributions. We expect to have an analysis of
HSAs for tax year 2005 completed by the summer of 2007.
[Submission for the record follows:]
Statement of Advanced Medical Technology Association (AdvaMed)
AdvaMed represents over 1,300 of the world's leading medical
technology innovators and manufacturers of medical devices, diagnostic
products and medical information systems. Our members are devoted to
the development of new technologies that allow patients to lead longer,
healthier, and more productive lives. Together, our members manufacture
nearly 90 percent of the $86 billion in life-enhancing health care
technology products purchased annually in the United States, and nearly
50 percent of the $220 billion in medical technology products purchased
globally. Exports in medical devices and diagnostics totaled $24.3
billion in 2004, but imports have increased to $25.2 billion--
indicating the first negative trade balance in medical devices in over
15 years. The medical technology industry directly employs about
350,000 workers in the U.S.
The medical technology industry is fueled by intensive competition
and the innovative energy of small companies--firms that drive very
rapid innovation cycles among products, in many cases leading new
product iterations every 18 months. Accordingly, our US industry
succeeds most in fair, transparent global markets where products can be
adopted on their merits. We strongly support the Administration's
effort to expand market access for US products abroad through new free
trade agreements (FTAs), as well as oversight of market access barriers
in countries with which we have strong trade relationships.
Global Challenges
Innovative medical technologies offer an important solution for
industrialized nations, including Japan and European Union members that
face serious health care budget constraints and the demands of aging
populations. Medical technologies also provide a way for emerging
market countries, like China, India, and Korea, to improve healthcare
to their people, who are increasingly expecting substantially better
healthcare to accompany rapid economic development. Advanced medical
technology can not only save and enhance patients' lives, but also
lower health care costs, improve the efficiency of the health care
delivery system, and increase productivity by allowing people to return
to work sooner.
To deliver this value to patients, our industry invests heavily in
research and development (R&D). Today, our industry leads global
medical technology R&D, both in terms of innovation as well as
investment. The level of R&D spending in the medical devices and
diagnostic industry, as a percent of sales, more than doubled during
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11%
last year. In absolute terms, R&D spending has increased 20% on a
cumulative annual basis since 1990. Our industry's level of spending on
R&D is more than three times the overall U.S. average.
Despite the great advances the medical technology industry has made
in improving patient quality of life and delivering considerable value
for its innovations, patient access to critical medical technology
advances can be hindered by onerous government policies. Patients and
health care systems experience much less benefit from our industry's
R&D investment when regulatory procedures are complex, non-transparent,
or overly burdensome--all of which can significantly delay patient
access and drive up costs. In the future, patients will be further
disadvantaged if reimbursement systems fail to provide appropriate
payments for innovative products--which will subsequently affect the
availability of R&D funds and the stream of new technologies.
The medical technology industry is facing these challenges around
the world as governments enact more regulations. While we support those
regulations that ensure product safety and efficacy, many others are
being imposed without scientific justification, and in non-transparent
processes, which only adds to costs and delays without improving
patient outcomes.
As governments prioritize difficult budget decisions, they
sometimes look to short-term decreases in health care expenditures
without accurately assessing the long-term implications. In most cases,
governments do not effectively measure the contributions medical
technology makes in enhancing patient outcomes and productivity as well
as expanding economic growth, which would more than offset the costs of
providing these products. Instead, governments often inappropriately
include reduced reimbursement rates as part of overall budget cuts.
In some cases, governments seek to reduce prices of medical
technologies in their country by comparing and referencing prices in
other countries. By fixing ceiling prices based on the prices found in
other countries, governments are imposing price controls on medical
technologies that do not appropriately account for different market
conditions and contract terms. Our industry is witnessing a spread of
these reference pricing schemes.
AdvaMed applauds continued progress on international trade
initiatives, including bilateral, regional and global trade
negotiations, such as the Central American Free Trade Agreement
(CAFTA), and the Doha Development Agenda in the World Trade
Organization (WTO). We support new efforts with our other trading
partners to provide U.S. exports of medical devices duty-free
treatment. We are hopeful that future bilateral agreements, including
the U.S.-Korea Free Trade Agreement, can also include directives to
knock down tariff and non-tariff barriers for medical technologies. In
addition, the President and U.S. Trade Representative (USTR) should
continue to pursue trade liberalization in the medical technology
sector with our major trading partners.
AdvaMed believes the USTR, Department of Commerce (DOC) and
Congress should monitor regulatory, technology assessment and
reimbursement policies in foreign health care systems and push for the
creation or maintenance of transparent assessment processes and the
opportunity for industry participation in decision making. We look to
the Administration and Congress to actively oppose excessive
regulation, government price controls, foreign reference pricing
schemes, and arbitrary, across-the-board reimbursement cuts imposed on
foreign medical devices and diagnostics.
Continued U.S. Leadership Needed to Fight Trade Barriers in Japan
The Administration's efforts with Japan under the U.S.-Japan
Partnership for Economic Growth are critical for the medical technology
industry to maintain access to the Japanese health market.
After the U.S., Japan is the largest global market for medical
technologies at $25 billion. Yet the situation facing the medical
technology industry in Japan is getting more difficult every year.
Japan's system for approving use of new medical technologies is the
slowest and most costly in the developed world. Although Japan is one
of the wealthiest countries in the world--the second largest economy in
the world--its spending on health care is among the lowest of major
developed countries. On a per capita basis, Japan's spending of 7.8% of
GDP is lower than 17 other Organization of Economic Cooperation and
Development (OECD) member countries.
In April 2005, Japan compounded the problem by imposing even more
burdensome and costlier regulations, thereby penalizing the U.S.
medical technology industry. Japan's latest regulations are expected to
cost our industry over $1.5 billion just to achieve compliance to 2010.
Even after creating a new agency in 2004 to process applications
for medical technology products, Japan has a backlog of over 300
applications filed before April 2004. When new applications are
included, the backlog is reportedly much longer. A problem for this new
agency is the number of staff reviewing applications for approval of
medical technology products--about 40 officials, compared to over 700
in the U.S. Due to the long approval process, the medical technologies
patients receive in Japan are often several generations behind the
products in the U.S., Europe, and even developing countries like China,
India and Thailand. Lengthy approvals also translate to higher costs
for the U.S. medical technology industry, which must maintain out-of-
date product lines just for Japan.
At the same time, Japan has made significant reimbursement
reductions for medical technologies that impact the medical device
industry in many ways, including limiting the availability of funds
that could be devoted to R&D of new and innovative products. Inventing
products that save and enhance lives requires large investments. Deep
cuts for medical technologies in Japan have put downward pressure on
companies' ability to invest in R&D.
The Japanese government sets the maximum reimbursement rates, which
usually act as ceiling prices for all medical technology products.
These prices are reviewed and usually reduced every two years. For the
period April 2002 to March 2006, the total revenue loss from these
reimbursement reductions is expected to be about $3 billion--a
significant share of which would have gone toward R&D. Japan will
impose additional cuts of several hundred million dollars this April.
Before 2002, Japan adjusted prices according to a process it called
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys its hospitals
for prices paid to distributors, and allows for a reasonable margin (or
``zone'') for discounts off of the government's reimbursement rate.
While there are some difficulties with this system--as identified in
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between
the U.S. and Japanese governments--our industry recognizes that it is
at least based on factors in the Japanese market.
In 2002, however, Japan also adopted a system called Foreign
Average Pricing (FAP). This system calls for the establishment and
revision of reimbursement rates on the basis of prices paid for medical
technology products in the U.S., France, Germany, and the United
Kingdom (U.K). The prices of medical technology products in Japan are
designed to be based not on that market's requirements, but on
completely unrelated conditions in foreign markets.
The U.S. medical technology industry has strong objections to this
system for calculating reimbursement rates. As a methodology for
setting reimbursement rates, it is not economically sound to compare
prices in foreign markets that operate under vastly different
conditions. Japan is a far costlier market for our industry to operate
in compared to other countries. Additionally, Japan's FAP system is an
attempt to compare prices for products that are not the same in Japan
as they are in other countries. Due to Japan's regulatory delays, U.S.
manufacturers must incur the cost of maintaining older or outmoded
production lines for sale in Japan.
Going forward, industry seeks U.S. Government and Congressional
support to help ensure an open dialogue with Japan that would seek to
identify alternatives to the current reimbursement system and
improvements in Japan's regulatory practices. The goal would be to
ensure that Japan's regulatory and reimbursement policies promote the
timely introduction of innovative medical technologies and do not
negatively and unfairly impact U.S. medical technology manufacturers.
Regulatory and Reimbursement Obstacles Impede Market Access in Asia-
Pacific
AdvaMed looks to the U.S. Government to pursue trade liberalization
throughout the Asia-Pacific region, including in China, India Taiwan
and Korea. AdvaMed and its member companies have identified a number of
real and potential barriers to doing business in these countries. While
most of the barriers pertain to unnecessary or redundant regulatory
requirements, there are increasing concerns in the areas of
reimbursement and intellectual property.
China has quickly become an important market for the U.S. medical
technology sector. The American Chamber of Commerce in China estimates
that the Chinese market for medical technology exceeds $8 billion and
is growing rapidly. It is on pace to surpass some of the key European
markets for medical technology in a few years. As global leaders, U.S.
medical technology firms already account for a significant portion of
sales in China and the position of these firms underscores the
importance of ongoing efforts with the U.S. Government to open the
Chinese market further.
AdvaMed looks forward to working with Congress and the
Administration to address the following barriers:
A Lengthy and Costly Product Registration Process
Redundancy in the Registration Process
Misclassification of In-Vitro Diagnostic Products
Lack of Transparency in Decision-Making
Inappropriate Price Controls
Counterfeiting and piracy of Medical Technology
For the medical technology industry, the Bush Administration's
efforts with China under the U.S.-China Joint Commission on Commerce
and Trade are critical for allowing U.S. medical technology firms
broader access to the burgeoning Chinese health care market. The
recently-launched U.S.-China Health Care Forum initiative, led by the
U.S. Department of Commerce and supported by AdvaMed and other health
care partners, holds great promise as another vehicle for addressing
many of the trade-related and health policy-related barriers
confronting U.S. medical technology firms in China.
Korea is another important market for U.S. medical technology
exporters. Last year, U.S. manufacturers exported more than $500
million worth of medical technology products to Korea, an increase of
24 percent over the previous year. However, access to this market
remains marred by antiquated product-testing requirements;
inappropriate requirements to re-register products following a change
in manufacturing location; and pricing and reimbursement policies that
discriminate against foreign manufacturers. Korea was not a party to
the Uruguay Round zero-for-zero tariff agreement on medical technology,
and maintains import tariffs on a range of medical technology products.
AdvaMed recommends the fastest possible elimination of tariffs and non-
tariff measures applied to medical technology products by Korea.
AdvaMed is also concerned that Korea's current reimbursement policies
create incentives to re-use medical devices designated for a single-use
in multiple procedures within several different patients, with the
attendant risks of cross contamination and degradation of product
quality. AdvaMed looks forward to working with Congress and the
Administration through the U.S.-Korea Free Trade Agreement negotiations
to address these issues.
India, with its rapid economic growth and large population, will be
an important market in the future. India is in the process of
developing its regulatory system for medical technologies. The
Department of Commerce has provide AdvaMed invaluable assistance in
working with the government of India on its approach to regulations.
Europe: Seek Appropriate Policies That Improve Patient Access to
Innovative Medical Technologies
Efforts to oversee foreign policies impacting the export and sale
of U.S. medical technologies abroad should also focus on the European
Union (EU). U.S. manufacturers of medical devices export nearly $8.8
billion annually to the EU. Within the EU, Germany ($20 billion) and
France ($8 billion) are the largest markets for medical devices.
Despite opposition from Congress and the Administration, in 2005,
the European Commission approved a directive to up-classify all
shoulder, hip and knee joint implants from Class IIB to Class III. This
directive, which is guided by 1980s data and application of the
precautionary principle, will affect thousands of devices, many of
which are made by U.S. manufacturers, and is expected to cost the
average orthopedic company approximately 500,000= in fees alone for
related Notified Body reviews. Industry now is focused on fair and
transparent implementation of the directive, so as to minimize
disruption of this important market.
In addition, the industry looks forward to the implementation of
the medical device annex of the US-EU Mutual Recognition Agreement
(MRA). Bringing healthcare products to the market faster is an
important priority consistent with the protection of public health and
the reduction of regulatory costs and redundancy. We ask Congress to
push for the full implementation of the medical device annex of the
MRA. Moreover, the EU continues efforts towards over-regulation of
industry through the implementation of burdensome regulatory measures
such as the Medical Device Directive revision, the REACH chemicals
initiative, the WEEE/ROHS, and a possible ban on the use of DEHP in
medical devices.
Finally, as new methods of reimbursement and health technology
assessment (HTA) spread throughout Europe, EU Member States should be
encouraged to adopt policies for product reimbursement and health
technology assessment systems that are transparent, timely, and
adequately account for the benefits of innovative technology.
Breakthrough products available in the United States to a majority of
patients are still available to only a small fraction of eligible
patients in the major European markets. Industry should be allowed to
participate in the HTA process.
Product Reimbursement in Brazil
Recently, the Brazilian product registration authority, ANVISA, has
issued draft Technical Regulations that would require the most sweeping
and complex submissions of foreign reference pricing data of any market
in the world. Consistent with U.S. policy for other foreign markets, we
encourage Congress and the Administration to oppose this policy, as it
will seek to artificially fix prices in the Brazilian market, stifle
innovation and deny Brazilian patients the benefits of U.S. medical
technologies.
Utilize Multilateral, Regional, and Bilateral Forums to Eliminate
Tariff and Nontariff Barriers to Trade that Unnecessarily
Increase the Cost of Health Care
We encourage Congressional and Administration efforts to eliminate
significant tariff and nontariff barriers to trade for medical
technology maintained by many countries, particularly developing
countries. Such barriers represent a self-imposed and unnecessary tax
that substantially increases the cost of health care to their own
citizens and delays the introduction of new, cost-effective, medically
beneficial treatments. For example, the medical technology sector
continues to face tariffs of 15-20% in Mercosur countries, 9-12% in
Chile, Peru, and Colombia, and 6-15% in China.
The Doha Development Agenda offers an important opportunity for the
United States to ensure global access to medical technology by securing
global commitments on lowering tariff and nontariff barriers for the
medical technology sector while expanding upon the access to medicines
goal at the heart of the Doha declaration. We encourage the U.S.
government to build upon the zero-for-zero tariff agreement on medical
technology achieved in the Uruguay round by expanding the product
coverage and adding countries throughout Latin America and Asia as
well. AdvaMed has proposed a sectoral initiative that would achieve
this objective to the Administration. Moreover, elimination of
nontariff barriers such as burdensome import licensing regulations and
non-transparent government procurement policies will help developing
countries ensure patient access to lifesaving medical technologies.
Utilize Multilateral Opportunities to Establish Basic Regulatory and
Reimbursement Principles to Expand Global Trade and Patient
Access to New Technologies
We commend the WTO's recent efforts to ensure global access to
medicines and medical products. While all economies seek to provide
high quality, cost effective healthcare products and services to their
citizens, they should also ensure timely access to state-of-the-art,
life-saving equipment and implement compliance procedures that are
efficient and effective. To further expand patient access to safe and
effective medical devices and ensure cost effective regulatory
compliance, USTR should seek to ensure that economies around the world
make their policies and practices conform to the relevant and
appropriate international trading rules established by the World Trade
Organization (WTO).
Toward that end, member economies should agree to make their
medical device regulatory regimes conform to these guiding principles:
Acceptance of International Standards;
Transparency and National Treatment;
Use of Harmonized Quality or Good Manufacturing Practice
Inspections;
Recognition of Others Product Approvals (or the Data Used
for Those Approvals);
Development of Harmonized Auditing and Vigilance
Reporting Rules;
Use of Non-Governmental Accredited Expert Third Parties
Bodies for Inspections and Approvals, where possible.
Similarly, many economies require purchases of medical technologies
to take place through centralized and/or government-administered
insurance reimbursement systems. To ensure timely patient access to
advanced medical technologies supplied by foreign as well as domestic
sources, member economies should agree to adopt these guiding
principles regarding the reimbursement of medical technologies:
Establish clear and transparent rules for decision-
making;
Develop reasonable time frames for decision-making;
Data requirements should be sensitive to the medical
innovation process;
Reimbursement rates should be based on conditions in each
country;
Ensure balanced opportunity for the primary suppliers and
developers of technology to participate in decision-making, e.g.,
national treatment;
Establish meaningful appeals processes.
The medical technology industry is committed to working with
Congress and the Administration on upcoming trade policies and
agreements to ensure patients throughout the world have access to
medical products.
Conclusion
AdvaMed appreciates the shared commitment by the President and the
Congress to expand international trade opportunities and encourage
global trade liberalization. We look to the President and his
Administration to aggressively combat barriers to trade throughout the
globe, especially in Japan. AdvaMed is fully prepared to work with the
President, USTR Ambassador Portman, the Department of Commerce, and the
Congress to monitor, enforce and advance multilateral, regional and
bilateral trade agreements, particularly with our key trading partners.