Despite recent announcements by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) that federal budget surpluses over the next 10 years will grow much higher than expected, the White House and congressional leaders remain divided over how the additional funds should be spent. The OMB and CBO estimate the surplus funds will grow respectively by $1.1 trillion and $996 billion more than earlier projections. Holding firm to earlier commitments, President Bill Clinton wants to use the additional funds first to extend the solvency of the financially troubled Social Security and Medicare programs, and then use $156 billion over the next decade for defense, education, child care and health. On the other hand, Republican leaders in Congress would like to use the additional funds to provide a bigger tax cut.

Based on OMB’s revised forecast, total surpluses over the next decade should reach $2.9 trillion, which is $517 billion more than the agency predicted last February. The good news is that the additional funds are "on-budget" surpluses. This means they are increases over and above the surpluses generated by the Social Security Trust Fund, which the President and congressional leaders have pledged to set aside to extend the solvency of the Social Security program. The bad news is that the budget caps agreed to in the 1997 Balanced Budget Act (BBA) prohibit members from using the surplus funds on discretionary spending and tax cuts. To stay within the spending limits, appropriators in both Houses of Congress are considering drastic cuts in many key city programs (See related story on cover page). Further, the BBA sets a limit on tax cuts over the next decade at approximately $792 billion. Therefore, the Act will have to be amended before the surpluses can be used for more spending or tax cuts.

The Conference adopted a resolution during the annual conference in New Orleans urging Congress to revise the budget caps in the Balanced Budget Act of 1997 to ensure adequate funding of priority urban programs. Further, a second resolution was adopted urging the Administration and Congress to support several priorities in the FY 2000 tax bill including: New Market Initiative that will provide tax incentives to generate venture capital to spur jobs and economic growth in distress communities; Commercial Revitalization Tax Credits which will provide tax incentives to businesses that expand or relocate in distressed communities; Better America Bonds that will provide tax incentives to promote open space, water quality improvements and brownfield redevelopment; School Construction Tax Credits to promote construction and the rehabilitation of public schools; more favorable depreciation rules for commercial property owners to encourage building improvements that promote occupancy and extend the life of existing structures; Low Income Housing Tax Credits to encourage the expansion of housing construction; and tax credits and other incentives to attract private capital in support of local rail and other public transit investment.

There is wide division in both political parties about using the surplus funds for tax cuts and increased spending on discretionary programs. In general, Republican leaders in the House favor using the additional surplus funds for tax cuts. House Ways and Means Chairman Bill Archer (TX) wasted no time in calling for using practically all of the increase ($1 trillion) for tax cuts over the next decade. However, after moderate Republicans in the House and Senate Republicans made it clear that they were not in favor of using all of the additional surplus funds for tax cuts, Archer pulled back and advocated using between $800 billion and $900 billion for tax cuts. On July 1, Archer provided a list of proposals that are likely to be included in the House tax bill. These include a reduction in the so-called marriage penalty, a cut in the estate tax, reducing the capital the capital gains tax, and extending a number of expiring tax credits.

House Budget Committee Chairman John Kasich (OH) opposes lifting the budget caps to allow increased spending on discretionary programs and has criticized appropriators for dragging their feet in passing spending bills that comply with the limits. He supports using at least $800 billion of the additional surplus funds for tax cuts. But appropriators like Rep. John Porter (IL), who chairs the House Labor, Health and Human Services Appropriations Subcommittee, would like to see the budget caps lifted so that the committee can avoid making deep cuts in programs under this function. Without the additional funds, Rep. Porter said he doubts he can get the votes to pass the Labor, Health and Human Services Appropriations bill for the year 2000.