Federal Budget “Sausage-Making” Season Opens

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The federal budget and appropriations process officially began today with the release of President Obama’s $4 trillion budget proposal for fiscal year 2016. In the coming weeks, congressional hearings will review and challenge many of the proposals in the President’s budget blueprint. Over the spring and summer, Congress is responsible for turning policy discussions into line-item spending decisions that must be enacted into law before the new fiscal year starts on October 1, 2015.

Given the changed leadership in Congress, it is helpful to put the new proposal in context of the broader federal budget process. What follows is an initial summary of key proposals of interest to charitable nonprofits; this recap does not attempt to list the many and various spending options that would affect the work of various nonprofits and the people they serve. Below that are terms used in the budget process, and what they mean in the real world.

What the President’s Proposing:

  • Sequestration: The President’s draft budget proposes to end sequestration, which it calls “mindless austerity,” and calls for spending $74 billion more than permitted under the Budget Control Act of 2011.
  • Charitable Deductions: For the seventh time, the President’s budget calls for limiting the value of itemized deductions (including the charitable deduction) for higher-income taxpayers.
  • Buffett Rule: As in past years, the President’s budget seeks to impose the “Buffett Rule” to require wealthy individuals to pay at least 30 percent of their income — after charitable contributions — in taxes.
  • Valuing Bequests: The budget suggests expanding the amount of inherited wealth that is subject to capital gains taxation by repealing the rule, known as “stepped-up basis,” that allows heirs to place a value on the inherited property, such as real estate and stocks, as of the date of inheritance rather than at the actual cost the original owner paid for it years earlier. Importantly, individuals would not have to pay capital gains taxes on such property that is donated to the work of charitable nonprofits. See Investing in America’s Future, pages 54-55.

Budget Process 101

The following descriptions explain what the terms mean in practice:

  • President’s Budget: Unlike in some states where a governor’s budget is treated as the first or near-final draft of spending legislation, the budget proposals from the President are only a blueprint of spending requests and a list of policy priorities that the House and Senate are free to consult or ignore. For decades, the phrase “dead on arrival” has been uttered by many partisans in the House and Senate when a President’s budget is released, and the statement frequently turns out to be true.
  • Budget Resolution: The House and Senate Budget Committees are responsible for drafting Congress' annual budget plan for the federal government. These committees establish the level of total overall spending and revenues for the year and designate how spending is to be divided among the different functions of government, such as defense, agriculture, and health & human services. The spending and revenue levels are set forth in a broad outline that is known as the “budget resolution.” The budget resolution is not sent to the President for his signature and does not become law, but instructs the appropriations subcommittees on how much they can spend and perhaps policy changes that will be incorporated in a “budget reconciliation” package.
  • Appropriations: The budget resolution is turned into legislation through the Appropriations Committee in the House and Senate. There are twelve subcommittees in each chamber tasked with designating the line-item spending of each federal department, agency, and program. Each subcommittee produces a bill which is supposed to be enacted individually. This rarely happens; consider spending legislation for the current fiscal year, which was not adopted until December 2014 when Congress approved the “Consolidated and Further Continuing Appropriations Act, 2015,” ten weeks after the beginning of the fiscal year on October 1.
  • Sequestration: The Budget Control Act of 2011 imposed future cuts in federal spending of roughly $1 trillion over ten years through a budget gimmick known as “sequestration.” Each year, across-the-board cuts of approximately $100 billion are split evenly between defense and most discretionary domestic programs. The Washington Post and other thought leaders have called for repeal of sequestration. See also the statement of the National Council of Nonprofits.
  • Budget Reconciliation: With Republicans now in control of the House and Senate, there is growing interest in a process known as “budget reconciliation” as a tool for securing statutory changes in mandatory spending (entitlements) or revenue programs (tax laws) to achieve goals set forth by the budget resolution. The budget resolution includes instructions requiring specific authorizing committees to make changes to ensure budgetary savings. These legislative changes are packaged into one bill and considered under expedited procedures. The majority party in the Senate typically favors the reconciliation process because filibusters are not allowed and controversial changes to law can be approved with a simple majority.
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