Budget Reconciliation in the 105th Congress: Achieving a Balanced Budget by 2002

Budget Reconciliation in the 105th Congress: Achieving a Balanced Budget by 2002

97-620 EPW
Budget Reconciliation in the 105th Congress:
Achieving a Balanced Budget by 2002
Updated September 11, 1997
David Stuart Koitz
Dawn Nuschler
Education and Public Welfare Division

Budget Reconciliation in the 105 Congress: Achieving a
th
Balanced Budget by 2002
Summary
Achievement of a balanced federal budget by 2002 was a high priority for the
105
th Congress and the President. After months of negotiations and debate, starting
in February 1997 and ending in July 1997, congressional leaders and the White House
forged a consensus on legislation to accomplish this goal. The legislation, signed into
law by President Clinton on August 5, 1997, sets “caps” on discretionary spending,
constrains entitlement programs, and on balance reduces federal taxes.

Last spring the White House and congressional negotiators reached an
agreement on a broad outline of tax and spending changes. As announced on May 2,
1997, the plan envisioned an estimated $190 billion in cumulative deficit reductions
over the FY1998-2002 period. When coupled with lower interest payments (arising
from the reduced need to borrow) the federal budget would reach approximate
balance in 2002.
As reflected by wide margins of passage of the FY1998 budget resolution, the
plan generally garnered broad congressional support. Its proponents pointed out that
it fulfilled major promises made by both parties, and if successful, it would lead to a
budget surplus for the first time since FY1969. While each party wanted fulfillment
of more of its respective policy agenda, proponents argued that it struck a viable set
of compromises and avoided the budget gridlock that plagued attempts to enact a
budget plan in the 104 Congress.
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Some of its critics complained that its impact was
delayed and too small and relied too heavily on lower current law deficit estimates
made by the Congressional Budget Office. They contended that not enough was
being proposed to rein in long-range entitlement spending, which is expected to rise
significantly when the post World War II baby boomers reach retirement age. Others
contended that the tax reductions were skewed too heavily toward higher-income
people and that the revenue losses would grow dramatically in the long-run.
The budget resolution called for two reconciliation bills, one on spending (H.R.
2015), a second on taxes (H.R. 2014), which both chambers took up and passed in
June 1997. After resolving differences in their respective bills, as well as issues raised
by the Administration, both chambers passed final versions at the end of July. The
President signed them into law as the Balanced Budget Act of 1997 (P.L. 105-33) and
the Taxpayer Relief Act of 1997 (P.L. 105-34) on August 5, 1997.
The legislation includes spending reductions totaling $241 billion over the first
5 years, offset by $46 billion in new spending initiatives and a net $80 billion in tax
reductions. Almost half of the spending reductions was to result from limiting growth
in the federal government’s largest health benefit programs, Medicare and Medicaid
($112 billion in Medicare and $7 billion in Medicaid). Another 37% was to come in
discretionary programs by constraining their growth at levels below inflation. Other
savings were to come from auctioning licenses for using a portion of the airwaves for
wireless communication services, increases in federal agency and employee
contributions to the Civil Service Retirement Fund, various changes in veterans
programs, and cuts in student loan programs.

Contents
Spending and Tax Changes in the May 2 Plan
nd
. . . . . . . . . . . . . . . . . . . . . 2
The FY1998 Budget Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
How the Spending and Tax Changes Were to be Legislated . . . . . . . . . . . . 3
Issues Arising From Budget Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Differences in House- and Senate-Passed Bills . . . . . . . . . . . . . . . . . . . . . . 7
Legislative Activity — Floor Action and Conference Negotiations . . . . . . . 7
Agreement on Final Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Tables
Table 1. Increases/Reductions in Spending and Revenue Required by Reconciliation
Instructions Contained in FY1998 Budget Resolution,
by House and Senate Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Projected Federal Outlays, Revenues, and Deficit or Surplus, Fiscal Years
1997-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 3. Highlights of the Balanced Budget Act of 1997 . . . . . . . . . . . . . . . . 14
Table 4. Highlights of the Taxpayer Relief Act of 1997 . . . . . . . . . . . . . . . . . 16
Table 5. Discretionary Spending Limits, as of August 15, 1997,
Fiscal Years 1998-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 1. Increases/Reductions in Spending and Revenue Required by
Reconciliation Instructions Contained in FY1998 Budget Resolution,
by House and Senate Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Projected Federal Outlays, Revenues, and Deficit or Surplus,
Fiscal Years 1997-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 3. Highlights of the Balanced Budget Act of 1997 . . . . . . . . . . . . . . . . 14
Table 4. Highlights of the Taxpayer Relief Act of 1997 . . . . . . . . . . . . . . . . . 16
Table 5. Discretionary Spending Limits, as of August 15, 1997,
Fiscal Years 1998-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Budget Reconciliation in the 105th Congress:
Achieving a Balanced Budget by 2002
Both the Congress and Clinton Administration set achievement of a balanced
federal budget by 2002 as a high priority for the 105 Congress. After months o
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f
negotiation this past spring, an agreement was reached between the White House and
congressional negotiators on a broad outline for spending and tax changes that would
result in a small budget surplus of $2 billion by 2002. As announced on May 2, 1997,
the plan envisioned an estimated $190 billion in cumulative deficit reductions over the
5-year period, FY1998-2002, resulting from spending and tax policy changes to be
enacted in two budget reconciliation bills. When coupled with $14 billion in lower
interest payments (arising from the reduced need to borrow) the federal budget would
reach approximate balance in 2002. The legislative changes combined with the lower
interest payments were estimated to total $204 billion in cumulative deficit reductions
over the period.
Revenues ($1,453 Billion)
The Federal Budget At A
Glance, FY 1996 Actuals...
Income Tax
57%
Social
Security
25%
Other Social
Other
Excise
Insurance
Spe nding ($1,560 B illion)
4%
4%
10%
Medicare
Social
O t h e r
1 1 %
Security
M a n d a t o r y
2 2 %
P r o g r a m s
1 7 %
N e t
I n t e r e s t
1 5 %
D i s c r e t i o n a r y 3 5 %

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The May 2 plan called for enactment of both
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spending and tax reductions. The
spending reductions were to total $306 billion over the 5-year period. Offsetting this
amount would be $31 billion in new spending initiatives and a net $85 billion in tax
reductions (a number of tax increases would partially offset the tax reductions),
bringing the aggregate deficit reduction down to $190 billion.
Spending and Tax Changes in the May 2 Plan
nd
As originally set out in the May 2 plan, 45% of the spending reductions ($138
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billion of the $306 billion in total reductions) would result from limiting growth in
discretionary programs (i.e., those requiring annual appropriations) at levels below
inflation ($77 billion in defense constraints; $61 billion in nondefense constraints).
Another 42% was to occur in the federal government’s largest health benefit
programs, Medicare and Medicaid ($129 billion together; $115 billion in Medicare
and $14 billion in Medicaid). Most of the Medicare savings would have come from
limiting payments to providers including a 1-year freeze on payments to hospitals.
Medicare Supplementary Medical Insurance (SMI) also would generate savings by
having its premium level set to cover 25% of its costs. Other major budget savings
involve the auctioning of portions of the electromagnetic spectrum (these are licenses
for using a portion of the airwaves for certain wireless communication services; $26
billion); increases in federal agency and employee contributions to the Civil Service
Retirement Fund ($5 billion); various changes in veterans programs (totaling $4
billion); and cuts in student loan programs ($2 billion).
No changes were to be made to Social Security benefits, and while it was
assumed that the Bureau of Labor Statics (BLS) would make changes in calculating
the Consumer Price Index (CPI) resulting in lower automatic cost-of-living
adjustments in federal entitlement programs, no legislative action was stipulated.
1
Increases in spending were to result from expansion of health insurance for
children without medical coverage ($16 billion); reinstatement of Supplemental
Security Income (SSI) and Medicaid benefits for certain legal immigrants whose
eligibility was to end as a result of the welfare reforms enacted in the 104 Congress
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($10 billion); additional selective funding for the basic welfare grants to states created
by the new welfare law ($3 billion); expansion of waivers from certain work
requirements for food stamp benefits ($1.5 billion); relief from premium increases for
certain low-income Medicare SMI recipients ($1.5 billion); and added funding for
environmental initiatives including acceleration of clean up at a number of
“Superfund” sites ($1 billion).
Although the specifics of the $85 billion net tax reduction package were left to
be determined by congressional tax-writing committees (Ways and Means and
Finance), principal among the changes assumed to be included in the bill were broad-
based capital gains tax reductions, significant estate tax reform, a $500 per child tax
credit, and education-related tax measures totaling $35 billion. Assumed revenue
increases would result from extension of expired taxes on airline tickets, departures,
1 The FY1998 budget resolution assumes a 0.3 percentage point reduction in CBO’s
annual CPI forecasts beginning in 1999 to reflect upcoming technical changes by BLS.

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cargo and fuel. Further agreed to and assumed in the budget resolution was that the
net tax reductions would not exceed $250 billion over 10 years. (The tax bill also was
to include an increase in the federal debt ceiling intended to assure the Treasury
Department has ample borrowing authority until late 1999.)
The FY1998 Budget Resolution
In the weeks following the announcement of the agreement, more details of the
plan were worked out. The House and Senate Budget Committees then began
drafting FY1998 budget resolutions intended to set forth spending and revenue
targets to be achieved each year throughout the 5-year period and instructing the
relevant authorizing committees to alter their programs to reconcile their projected
spending and revenue to the targets. Both Houses passed their respective versions
(H.Con.Res. 84 and S.Con.Res. 27) prior to the Memorial Day recess — the House
on May 21, 1997 by a vote of 333-99; the Senate on May 23, 1997 by a vote of 78-
22. Congress passed the final resolution on June 5, 1997; the House by a vote of 327-
97 and the Senate by a vote of 76-22.
Major amendments raised in floor action sought to increase funding for highways
and mass transit programs and add more funds to a proposed expansion of health
insurance for uninsured children. In a 214-216 vote the House rejected an
amendment by Representative Shuster on May 20, 1997 that would have increased
transportation funding in the resolution by $12 billion over the 5-year period. He
would have offset the increase with an across the board 0.39% reduction in
discretionary spending and proposed tax cuts. A similar Senate amendment offered
by Senators Warner and Baucus on May 22, 1997 was tabled by a vote of 51-49. In
another vote on May 21, 1997, the Senate tabled an amendment (55-45) by Senators
Hatch and Kennedy to increase spending by $20 billion to further expand medical
coverage for uninsured children. (This would have been on top of $16 billion built
into the resolution for children’s health insurance sought by the President and included
in the May 2nd budget plan.) The Hatch/Kennedy measure would have paid for the
expansion and contributed an additional $10 billion toward deficit reductions by
raising federal taxes on cigarettes by $0.43 a pack. Numerous other defeated
amendments ranged from adding $109 billion to discretionary spending to increasing
the net tax cut from $85 billion to $161 billion. When all floor action was complete
only minor changes had be made to the basic outline of the May 2 plan.
nd
How the Spending and Tax Changes Were to be Legislated
The discretionary savings arising from the 13 annual appropriations bills were
to be achieved by setting aggregate, government wide “caps” on discretionary
spending. They were set year by year by passage of the FY1998 budget resolution
(the cap for FY1998 was put in force by passage of the resolution; the caps for the
next 4 years were to be triggered by passage of the budget reconciliation bills).
Subcaps for defense and non-defense appropriations were set for FY1998 and, upon
passage of the reconciliation bills, for FY1999 as well (only the aggregate caps would
apply for the last 3 years, FY2000-FY2002).

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The entitlement changes were to be achieved largely through alteration of
authorizing legislation, such as the Social Security Act (they were to require
amendments to Title XVIII for the Medicare changes, Title XIX for Medicaid, Title
IV for welfare, and Title XVI for SSI). This was to occur through some form of
aggregate budget reconciliation bill. Under the budget reconciliation process each
authorizing committee is required to report its proposed spending (or tax) changes to
their respective budget committees (8 committees in both the House and Senate were
instructed to do so in the FY1998 budget resolution). Typically, the budget
committees package the numerous bills into an omnibus budget reconciliation bill.
This year there were two reconciliation bills — a spending measure and a tax
measure.
Table 1. Increases/Reductions in Spending and Revenue Required by
Reconciliation Instructions Contained in FY1998 Budget Resolution,
by House and Senate Committees
($s in millions)
1998-
1998-
House committeesa
Type
2002
Senate committees
Type
2002
Committee Entitlement Reform Targets Specified in Budget Resolution
Agriculture, Nutrition,
Agriculture
OT
1,500
and Forestry
OT
1,500
Banking and
Banking, Housing, and
Financial Services
OT
-1,590
Urban Affairs
DR
-1,590
Commerce, Science, and
Commerce
OT
-138,938
Transportation
DR
-26,496
Education and the
Energy and Natural
Workforce
OT
1,208
Resources
OT
-13
Government Reform
and Oversight
OT
-3,098
Finance
OT
-100,646
Government Reform
and Oversight
DR
-1,829
Governmental Affairs
DR
-5,467
Transportation and
Labor and Human
Infrastructure
OT
-736
Resources
OT
-1,792
Veterans Affairs
OT
-3,796
Veterans Affairs
OT
-2,733
Ways and Means
OT
-87,607
Tax Relief and Miscellaneous Reforms
Ways and Means
R
84,973
Finance
R
-85,000

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1998-
1998-
House committeesa
Type
2002
Senate committees
Type
2002
Summary:
Direct spending: Totals less
dual committee assignments
-136,851
-137,237
Revenue: Totals less dual
committee assignments
83,144
-85,000
Items assumed but not
reconciled (Commerce)
-1,367
Items allocated when
legislation reported
(Commerce & Transportation)
1,000
OT=Outlays DR=Deficit Reduction R=Revenues (Deficit reduction refers to cases where
Committee has jurisdiction over outlays and revenues that may be used to reach their targets.)
Source: Conference Report on the Concurrent Resolution on the Budget (H.Con.Res. 84, H.Rept.
105-116); and Congressional Record, June 5, 1997.
a Items may be reconciled by more than one committee. Dollar amounts reflect duplicated totals.
Issues Arising From Budget Measures
As reflected by the margin of passage of the FY1998 budget resolution, the May
2nd budget plan generally garnered broad support in the Congress. Its proponents
pointed out that it fulfills major promises made by both parties, and if successful, it
will lead to a budget surplus for the first time since FY1969. While each party wanted
fulfillment of more of its respective policy agenda, proponents argued that it strikes
a viable set of compromises and avoids the budget gridlock that plagued attempts to
enact a balanced budget plan in the 104 Congress (a major dispute with Presiden
th
t
Clinton led to a vetoed budget plan in 1995). Some of its critics complained that its
impact is delayed and too small, and relies too heavily on baseline budget revisions
(referring to a $225 billion reduction in projected current law deficits made by CBO
in the final days of reaching an agreement).2 They contended that not enough was
being proposed to rein in long-range entitlement spending, which is expected to rise
significantly when the post World War II baby boomers reach retirement age. Others
contended that the tax reductions are skewed too heavily toward higher-income
people and that they are back-loaded, meaning that the revenue losses will grow
substantially in the long-run.
Disputes over these and other issues emerged as the House and Senate
considered their respective bills. The House Democratic leadership and Democratic
members of the Ways and Means Committee offered an alternative tax bill in
committee and on the floor. Both were defeated along strong party line votes. Their
stated intent was to shift more of the bill’s reductions toward middle and lower-
income segments of the population. Senate Democrats offered an alternative package
2 These reductions were based on updated revenue projections from the Treasury
showing higher receipts and an improved economic outlook over CBO’s earlier projections.

CRS-6
as well to the one proposed by the Finance Committee and it too was defeated. In
addition to voicing concerns about the distribution of the tax cuts, the Administration
raised objections as to how the respective House and Senate bills would distribute the
$35 billion in education-related tax relief agreed to in the May 2 plan. Measures to
nd
gradually raise the asset exemption for estate taxes, index capital gains, scale back the
“alternative minimum” corporate tax, offset the proposed $500 per child tax credit to
take into account other low-income tax preferences, and extend ethanol subsidies also
were at the heart of the controversy.
Issues on the spending side also generated a split between the parties, but not as
distinct as with the tax cut vote. The overall margin of passage of the two spending
bills was relatively large (270-162 in the House and 73-27 in the Senate), but neither
chamber achieved a majority of support from Democrats (they voted only 51-154 for
passage in the House and 21-24 in the Senate).
A key issue was how legal immigrants, who would otherwise be cut off from SSI
this summer, would be reinstated. The Administration favored continuing to make
new awards to disabled immigrants (who were in this country as of August 22, 1996)
as provided for in the Senate bill. The House bill, by contrast, avoided a benefit cutoff
for all immigrants (disabled and aged alike) but precluded new benefit awards.
In the health area, controversy centered over measures adopted in both Houses
to create a medical savings account (MSA) demonstration. Supporters said that
MSAs would provide greater choice of medical coverage for recipients and aid in the
resolution of Medicare’s long-range financing problems. Critics contended that
MSAs would undermine the basic insurance nature of the program as well-to-do and
healthy recipients opt for the MSAs and cost $2 billion during the budget period.
Further controversy persisted over Senate measures to gradually raise the age of
eligibility for Medicare from 65 to 67; to means test part of Medicare by requiring
higher SMI premiums (now $43.80 a month) for recipients with incomes above
$50,000 ($75,000 for a couple) (this was a substitute for a Finance Committee
measure to means-test the SMI deductible); and impose a $5 per visit copayment for
home health care. In Medicaid, concern was raised about how the cuts would be
distributed, state by state, and whether the proposed $16 billion expansion of medical
coverage for children ought to be through Medicaid or a new block grant. Also
controversial was proposed language restricting funds for abortions (except in cases
of rape, incest, or when necessary to save the woman’s life) under the children’s
health initiative (in both House and Senate versions of the bill); and a House measure
to make changes in medical malpractice law including imposing a $250,000 cap on
noneconomic damage awards (i.e., for pain and suffering).
In addition, following on the failed attempt to add funding in the budget
resolution to expand medical coverage of uninsured children, the Finance Committee
proposed, and the Senate approved, a measure to raise cigarette taxes by $.20 a pack
with part of the $15 billion proceeds being earmarked for an $8 billion increase in the
proposed $16 billion medical coverage expansion. There was no comparable measure
in the House bill.

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Differences in House- and Senate-Passed Bills
Reflecting the May 2nd plan worked out with the White House, the budget
resolution called for two reconciliation bills, one on spending, a second on taxes. The
spending bill was to come first. The House passed its spending bill on June 25 and
its tax bill on June 26. The Senate passed its versions on June 25 and June 27.
There were several important differences between the House and Senate versions
of the bills. With regard to welfare provisions, the Senate spending bill differed from
the May 2 budget plan and the House bill in extending SSI eligibility for lega
nd
l
immigrants who entered the United States before August 23, 1996 if they become
disabled and apply for benefits by September 30, 1997; and exempting legal immigrant
children who enter the United States after August 22, 1996, from the 5-year ban on
Medicaid eligibility. In addition, under the House bill (but not under the Senate bill),
the value of cash benefits and food stamps would count toward the minimum wage
requirement for welfare recipients in workfare jobs.
Among the major differences affecting Medicare, the Senate bill proposed a
gradual increase in the Medicare eligibility age from 65 to 67, “means-testing” of the
Medicare SMI premium, and a $5 per visit copayment for home health services. None
of these measures were in the House-passed bill. In addition, the Senate bill would
allow 100,000 individuals to participate in a medical savings account demonstration
program compared to a proposed 500,000 participants under the House plan.
With regard to tax legislation, H.R. 2014 as passed by the House, included a
provision that would prevent some low-income individuals from receiving the full
$500 per child tax credit. Controversy arose over preclusion of the credit from being
refundable in cases where there was no tax liability. The Senate bill provided for
some refundability but not as much as the President wanted. The Senate bill also
raised cigarette taxes by $.20 a pack with part of the proceeds being earmarked for
an $8 billion increase in the proposed $16 billion expansion of medical coverage for
children. The House bill only included the originally agreed to expansion (i.e., as
provided in the May 2 plan) and did not raise cigarette taxes. Although basicall
nd
y
similar in their broad features, the bills also took different approaches to providing the
$500 child credit (the Senate version required it be invested in educational savings
accounts at age 13 and over), educationally-related tax benefits, aviation-related
excise taxes, indexation of capital gains (the Senate bill did not index them), changes
in the corporate alternative minimum tax (the Senate bill made no changes), and
ethanol subsidies (the House bill would have continued the subsidies through 2000;
the Senate bill would have continued them through 2007 decreasing them gradually).
Legislative Activity — Floor Action and Conference Negotiations
The Senate began consideration of its spending bill, S. 947 (the Balanced Budget
Act of 1997), on June 23 and completed action on June 25 (passing the bill 73-27; the
Senate passed H.R. 2015 substituting the text of S. 947 as amended). The House
took up its version (H.R. 2015) on June 25 and completed action the same day
(passing the bill 270-162). The Senate began debate of its tax bill (S. 949, Revenue
Reconciliation Act of 1997) on June 25 and passed the measure on June 27 by a vote

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of 80-18 (the Senate passed H.R. 2014 substituting the text of S. 949 as amended).
The House bill (H.R. 2014, Taxpayer Relief Act) was passed on June 26 by a vote of
253-179. Conference negotiations to reconcile differences between the two bodies
and with the President began on July 10, 1997. On July 30, conference reports on
both measures were filed in the House. The same day, the House approved the
spending bill. The following day, the Senate approved the spending bill and both
chambers approved the tax bill. In doing so, congressional Republican leaders met
their goal of completing action on both reconciliation measures prior to the start of
the August recess.
On June 24, the Senate took up 9 amendments to S. 947. Among the approved
measures was an amendment (Roth/Moynihan) to substitute income-related SMI
premiums for a committee measure to create an income-related SMI deductible. By
a 62-38 vote, the Senate also affirmed the Finance Committee’s measure to gradually
increase Medicare’s eligibility from age 65 to 67 beginning in 2003. It also approved
an amendment to require mental health parity (equal coverage for the treatment of
mental and physical conditions) for children who are covered under the budget
agreement’s health initiative (Wellstone/Domenici amendment). There were failed
attempts to strike a provision requiring a $5 copayment for home health care visits
(Kennedy/Wellstone amendment tabled by a vote of 59-41) and to strike the provision
creating income-related SMI premiums (Kennedy amendment tabled by a 70-30 vote).
On June 25, the Senate approved amendments to: extend SSI benefits to legal
immigrants who were in the United States as of August 22, 1996 and later become
disabled (Lautenberg amendment) (the House bill does not extend eligibility to
individuals who become disabled after August 22, 1996); and to increase revenue
estimates from spectrum auctions from $15.9 billion to $20 billion. The Senate
rejected an attempt to strike the limitation on federal funds for abortions (except in
cases of rape, incest, or when necessary to save the woman’s life) under the children’s
health initiative (Lautenberg amendment by a vote of 39-61). In procedural votes, the
Senate rejected amendments to: provide Medicaid eligibility for disabled children who
lose SSI benefits; strike the Medicare changes affirmed by the Senate the day before
(these changes would gradually increase Medicare’s eligibility age from 65 to 67
beginning in 2003, means-test SMI premiums, and impose a $5 copayment for home
health care visits); provide food stamp benefits to the children of legal immigrants; and
to allow vocational educational training to count toward the work requirement under
Temporary Assistance for Needy Families. A provision to allow Texas to privatize
the administration of its welfare programs was withdrawn after a budget point of
order was raised against it.
On June 25, the House took up its version of the spending bill (H.R. 2015).
Prior to going to the floor, the House bill was amended to add $1 billion (to the
already proposed $500 million) to offset SMI premium increases for low-income
Medicare beneficiaries; and to increase revenue estimates from broadcast spectrum
auctions from $9.7 billion to $20.3 billion. A failed attempt was made to remove a
state option to expand health care for children through block grants.
On June 26, the House took up its version of the tax bill (H.R. 2014). The
House approved the bill the same day by a vote of 253-179 (a narrower margin of
passage than for the House spending measure, H.R. 2015). The vote was cast along

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party lines (there was one Republican vote against and 27 Democratic votes for the
bill) demonstrating a lack of bipartisan support for the measure. Prior to the bill’s
passage, an amendment that would have targeted benefits to middle and lower income
groups was defeated (Rangel amendment, in the nature of a substitute, by a vote of
197-235). An attempt to alter provisions relating to capital gains tax reductions,
estate and gift taxes, the child tax credit and tax reductions related to educational
expenses, among other changes, was also defeated (Peterson (MN) motion by a vote
of 164-268).
The Senate took up its tax bill (S. 949) on June 25 and completed action on the
measure on June 27. The Senate bill, passed by an 80-18 vote with 29 Democrats
voting for the measure and 4 Republicans voting against it, received broader
bipartisan support than its counterpart in the House. On June 26, an amendment to
raise the cigarette tax by $0.20 per pack to provide an additional $8 billion (out of an
estimated $15 billion in revenues) over 5 years for children’s health care was
approved by voice vote (Roth amendment on behalf of the Senate Finance
Committee). In a procedural vote, a measure to raise the cigarette tax another $0.11
per pack to fund the 100% deduction of health insurance costs by the self-employed
was rejected (Durbin amendment by a vote of 41-58). The Senate rejected measures
to: target more tax relief to working and low-income families (Daschle amendment,
in the nature of a substitute, by a vote of 38-61); establish a $1 million lifetime cap on
capital gains deductions (Dorgan amendment by a vote of 24-75); eliminate the capital
gains tax reductions after 2002 if a balanced budget is not achieved (Dorgan
amendment by a vote of 34-64); and impose a tax on hardrock mining companies for
the use of federally owned land in the West (the tax was estimated to be $700 million
a year) (Bumpers amendment by a vote of 36-63).

On June 27, the Senate approved measures to: increase the tax deduction
allowed self-employed individuals for health insurance costs (Nickles amendment
passed by a vote of 98-0); extend budget enforcement mechanisms through 2002
(Domenici/Lautenberg amendment approved by a vote of 98-2); and expand the use
of individual retirement accounts for college education expenses to include primary
and secondary education expenses (Coverdell amendment by a vote of 59-41). The
Senate rejected measures to: strike a provision requiring that the $500-per-child tax
credit for children age 13 and older be deposited in individual retirement accounts for
college education expenses (Gramm amendment by a vote of 46-54); and strike a
provision to extend tax preferences for ethanol producers (McCain amendment by a
30-69 vote). A number of amendments failed on procedural votes including measures
to: raise the tax on cigarettes another $0.23 per pack to provide an additional $12
billion for children’s health (Kennedy/Daschle amendment); and require the President
to submit balanced budgets after 2002 and subject legislation that would increase the
deficit after 2002 to a 60 vote point of order (Frist amendment). The bill, as reported
by the Senate Finance Committee, would achieve an estimated $77 billion in net tax
reductions over 5 years (the budget resolution calls for an $85 billion net tax
reduction). Senate Majority Leader Lott stated his desire to close the gap in
estimated net tax reductions during conference negotiations.
More than 80 Members were appointed to the conference negotiations.
Discussion on the spending bill began on July 10, 1997 and on the tax bill on July 11,
1997. As an expression of its Members’ sentiment, the House passed a non-binding

CRS-10
resolution on July 10, 1997, by a vote of 414-14, instructing its conferees not to
accept the Senate-passed measure raising the Medicare eligibility age from 65 to 67
and that welfare recipients participating in “workfare” projects be guaranteed
minimum wage and related workplace protections. The House also rejected a motion,
199-233, to instruct its conferees to drop the House-passed provision to “index”
capital gains but to extend more of the $500 per child tax credit and various education
tax benefits to lower income families and students.
Another issue raised by a bipartisan group of House members was whether an
enforcement mechanism should be included in the bills to require Congress and the
President to cut spending or delay tax cuts if the spending or revenue targets
underpinning the reconciliation legislation were not met. A free-standing measure
(H.R. 2003) was introduced that would trigger automatic spending cuts and cancel
(or delay) tax cuts if a gap in the targets arose and Congress and the President did not
act to close it. It also established caps on specific entitlements, as well as on
entitlements as a category. Fulfilling an earlier commitment to its sponsors, the House
leadership brought the bill up for a vote on July 23, 1997, but it was defeated 347-81.
For its part, the Administration offered an alternative tax reduction package
during the July 4t recess that made a number of concessions designed to close some
h
of the gap between its preferred tax cuts and those passed by the House and Senate.
The President did signal willingness to consider means-testing of Medicare benefits;
however, disagreement remained between the President and congressional negotiators
on which agency should administer the collection of SMI premiums. The President
argued for the Treasury Department (in conjunction with the Internal Revenue
Service) as the collection agency, not the Department of Health and Human Services
as specified in the Senate plan.
On July 24, Republican leaders presented the Administration with a unified
(House-Senate) Republican budget plan. Major items in the tax plan, which provided
for net tax reductions of $89 billion over 5 years, included the indexation of capital
gains (an item over which the President had threatened a veto); an increase in the
estate tax exemption from $600,000 to $1.2 million over 10 years; a $500-per-child
tax credit that would allow families receiving the EITC to carry forward any unused
portion of the credit for up to 3 years (it was not to be refundable as argued for by the
President); and an education tax credit of up to $1,500 for the first two years of post-
secondary education and up to $5,000 for the third and fourth years. The plan
included the creation of education savings accounts; however, disagreement persisted
over whether families with children ages 13 to 17 would be required to invest in these
accounts the proposed $500-per-child tax credit as outlined in the Senate plan. The
initial revised offer also did not include the Senate’s provision to increase cigarette
taxes by 20 cents per pack to fund children’s health care. On the spending side,
differences persisted over the inclusion of benefits for legal immigrants who become
disabled, job and wage protections for welfare recipients who participate in
“workfare” projects, and means-testing of Medicare SMI premiums.

CRS-11
Agreement on Final Bills
On July 28, White House officials and congressional Republican leaders
announced that a tentative budget agreement had been reached. After further
negotiations to work out final details, conference reports on both measures were filed
in the House on July 30. The compromise spending plan did not include Medicare
proposals to means-test SMI premiums, increase the eligibility age from 65 to 67, or
require a $5 copayment for home health care; however, it would establish a bipartisan
commission to study long-term Medicare funding issues and allow for 390,000
participants in a medical savings account demonstration program. The plan would
also provide $24 billion for children’s health coverage ($8 billion more than provided
under the May 2 budget
nd
plan) and gradually increase the federal cigarette tax by 15
cents per pack by 2002 (this provision was originally in the Senate tax bill). Resolving
another item of contention, the plan did not include a provision to exclude welfare
recipients in workfare projects from minimum wage standards and workplace
protections. On July 30, a provision was added that would provide federal funding
and tax breaks for the District of Columbia and give the financial control board
authority over some District agencies.
The tax bill would expand the child tax credit to include families receiving the
EITC and individuals with incomes up to $75,000 ($110,000 for couples). The credit
would be $400 per child under age 17 in 1998 and $500 thereafter. The plan would
increase the estate tax exemption from the current level of $600,000 to $1 million
over 10 years. It would also provide $40 billion in education tax benefits including
tax breaks for families participating in state-sponsored prepaid tuition programs and
a $1,500 credit for the first and second years of post-secondary education. Families
with children ages 13 to 17 would have the option to invest the child tax credit in tax-
deferred Individual Retirement Accounts for higher education expenses. (A Senate-
approved provision to allow withdrawals from education savings accounts for private
or parochial elementary and secondary school expenses was dropped from the final
measure upon the insistence of the President.) Although the measure does not include
the “indexation” of capital gains, it would reduce the top capital gains tax rate from
28% to 20% and eventually to 18%. A last minute provision was added to the
measure by Republicans related to the credit of revenue from cigarette taxes toward
the proposed $368 billion settlement owed to the government by the tobacco industry.
On July 30, the conference report on the spending bill (H.R. 2015, H.Rept. 105-
217) was taken up by the House and approved the same day by a vote of 346-85.
(Rules requiring a lapse of three days before a vote is taken on a conference report
were waived by a vote of 226-202). The vote reflected strong bipartisan support with
193 Republicans and 153 Democrats voting for the measure and 32 Republicans, 52
Democrats, and 1 Independent voting against it. The Senate began consideration on
July 30 and approved the measure on July 31 by a vote of 85-15 (with 12 Republicans
and 3 Democrats voting against).
On July 31, both chambers took up the conference report on the tax bill (H.R.
2014, H.Rept. 105-220). They completed action on the measure the same day. In the
House, the bill was approved by a vote of 389-43 (with 1 Republican and 42
Democrats voting against). In the Senate, the measure was approved by a vote of 92-
8 (with 8 Democrats voting against). (Prior to its passage, Senator Durbin raised a

CRS-12
point of order against the legislation over a last minute provision pertaining to the use
of cigarette taxes as a credit toward the proposed tobacco industry settlement. The
Senate waived the point of order by a vote of 78-22.)
On August 5, the President signed the two bills into law as the Balanced Budget
Act of 1997 (P.L. 105-33, H.R. 2015) and the Taxpayer Relief Act of 1997 (P.L.
105-34, H.R. 2014).
On August 11, the President exercised the first use of his new “line item veto”
authority — created by the Line Item Veto Act signed into law in April 1996 (P.L.
104-130) — to cancel three provisions in these new laws: a spending provision
pertaining to New York’s use of health provider taxes to match federal Medicaid
payments (5-year savings estimated at $200 million); a tax provision that would allow
U.S.-based insurance companies, banks and investment firms to delay taxes from
overseas income (5-year savings estimated at $317 million); and a tax provision that
would allow individuals to defer taxes on profits from the sale of food processing
facilities to farmer cooperatives (5-year savings estimated at $98 million). These line
item vetoes may face legislative and judicial challenges. Congress can restore the
provisions by a majority vote; however, a second veto by the President would require
a two-thirds majority in both chambers to override the veto. Legal challenges to the
constitutionality of the line item veto are likely in the future.
Revenue and Outlay Changes Resulting From Reconciliation Legislation
($s in billions)
FY1998-FY2002
FY1998-FY2007
Spending reductions
$241.3
$843.4
Discretionary:
88.8
380.5
Mandatory programs:
Medicare
112.0
385.0
Medicaid
7.2
36.9
Other mandatory
33.4
41.0
Subtotal

152.6
462.9
Spending increases
(45.6)
(90.1)
Net tax reductions
(80.0)
(242.0)
Total changes in spending & taxes
115.7
511.3
Reduction in interest costs
+2.4
+82.7
Total deficit reduction
$118.1
$594.0

CRS-13
Table 2. Projected Federal Outlays, Revenues, and Deficit or Surplus,
Fiscal Years 1997-2007
(fiscal year, $s in billions)
1997
1998
1999
2000
2001
2002
Outlays
1,612
1,691
1,750
1,799
1,857
1,888
Revenues
1,578
1,635
1,698
1,751
1,821
1,920
Deficit (-)/surplus (+)
-34
-57
-52
-48
-36
+32
2003
2004
2005
2006
2007
Outlays
1,987
2,073
2,178
2,253
2,361
Revenues
2,000
2,101
2,214
2,324
2,447
Deficit (-)/surplus (+)
+13
+29
+36
+72
+86
Source: Congressional Budget Office, The Economic and Budget Outlook: An Update,
September 1997.
Changes in 10-Year Budget Outlook Projected
from Reconciliation Legis l ation
(Deficit or surplus, in billions)
$ 1 0 0
$ 8 0
$ 6 0
U n der new budget law
$ 4 0
$ 2 0
$ 0
( $ 2 0 )
U n der old law
( $ 4 0 )
( $ 6 0 )
( $ 8 0 )
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
So urce: CBO, Sept. 1997.
Highlights of the spending and tax legislation follow.

CRS-14
Table 3. Highlights of the Balanced Budget Act of 1997
Medicare
C
creates net savings of $115 billion by limiting annual
reimbursement to hospitals, physicians, and other
providers
C
allows 390,000 participants to purchase government-
financed medical savings accounts in place of traditional
Medicare
C
reallocates some home health expenditures from the HI trust
fund to the SMI trust fund
C
maintains SMI premiums at 25% of program costs and phases
in over 7 years the cost of the home health reallocation into
SMI premiums
C
expands preventive care benefits
C
expands managed care options
C
establishes a National Bipartisan Commission on the Future of
Medicare by December 1997
C
excludes Senate-approved provisions to means-test Medicare
SMI premiums; raise eligibility age from 65 to 67; and require
a $5 copayment for home health care services
Medicaid
C
net savings of $13 billion
C
adds $1.5 billion to assist low income individuals with
Medicare SMI premiums
C
restores benefits for disabled children who lose SSI due to new
eligibility guidelines
C
reforms disproportionate share hospital payments
C
repeals Boren amendment requiring States to pay “reasonable
and adequate” rates to hospitals and nursing homes
Children’s
C
provides $24 billion for children’s health care including
health
$20.25 billion for State Children’s Health Insurance Program
Welfare
C
maintains SSI benefits for both elderly and disabled legal
immigrants receiving benefits on or before August 22, 1996
C
authorizes SSI eligibility for legal immigrants who entered the
United States on or before August 22, 1996 and who later
become disabled
C
creates welfare-to-work grants totaling $3 billion in fiscal
years 1998 and 1999
C
provides States with option to waive food stamp work
requirement for certain individuals
C
provides new money for work/training for food stamp
recipients
Cigarette tax
C
increases cigarette tax by 15 cents per pack by 2002 (from 24
cents to 39 cents); funds to be used in part for children’s health
care (The revenue effects of this provision are included in the
estimates for the tax reconciliation bill.)
Civil service
C
increases federal agency and federal employee contributions to
retirement
the Civil Service Retirement and Disability Trust Fund

CRS-15
Table 3. Highlights of the Balanced Budget Act of 1997
Veterans
C
achieves $2.7 billion savings through extension of current law
benefits
provisions including the $90 pension limit for persons in
Medicaid nursing homes
Housing
C
achieves $1.8 billion savings through extension of current law
provisions including those pertaining to section 8 housing
Spectrum
auctions
C
generates $21.4 billion in revenues from spectrum auctions
Budget Enforcement Provisions
Discretionary
C
extends discretionary spending limits through 2002
spending limits
C
separate limits for defense and nondefense discretionary
spending in fiscal years 1998 and 1999
C
single limit for defense and nondefense discretionary spending
in fiscal years 2000 through 2002
C
separate limit for the Violent Crime Reduction Trust Fund
through fiscal year 2000
PAYGO
C
extends pay-as-you-go requirement that direct spending and
tax legislation be deficit neutral through fiscal year 2002
C
requires that all legislation be deficit neutral for at least 5
years after enactment
Congressional
C
permanently extends 5-year coverage and enforcement of
budget process
congressional budget resolutions among other changes

CRS-16
Table 4. Highlights of the Taxpayer Relief Act of 1997
Child tax
C
provides $500 tax credit per child age 16 and under
credit
($400 in 1998)
C
establishes eligibility for individuals with incomes up to
$75,000 and couples with incomes up to $110,000
C
permits partially refundable credit for families receiving the EITC
C
assumes $5 billion savings from EITC fraud reduction
Capital
C
reduces the top capital gains tax rate from 28% to 20% on assets
gains
held for a minimum of 18 months (up from 12 months)
C
reduces the capital gains tax rate from 15% to 10% for lower
income brackets
C
for assets purchased after 2000 and held at least 5 years, capital
gains tax rate goes down from 20% to 18% and from 10% to 8%
Education
C
establishes tax credit of up to $1,500 for the first and second years
tax benefits
of college
C
establishes tax credit of up to $1,000 ($2,000 by 2002) for the
third and fourth years of college
C
permits annual tax deduction of up to $2,500 for interest paid on
student loans
C
authorizes tax free treatment for state prepaid tuition plans
Estate taxes
C
increases estate tax exemption from $600,000 to $1 million over
10 years ($1.3 million for family farms and small businesses
effective immediately)
Home sales
C
provides tax exemption of up to $500,000 ($250,000 for single
filers) in gains from the sale of a principal residence
IRAs
C
expands coverage and other reforms of Individual Retirement
Accounts including penalty-free withdrawals for first-time home
purchases; the doubling of income limits for tax deductible
contributions to existing IRAs over 10 years; and creates new
backloaded IRAs with tax-free withdrawals if account is held for
at least 5 years and the account holder is at least age 59½
Self-
C
gradually increases deduction for health insurance costs of self-
employed
employed individuals to 100% by 2007
Airline tax
C
extends and reduces domestic airline ticket tax from 10% to 7.5%
by 2000
C
implements airport-to-airport flight fee ($1 in 1998; $3 by 2002)
C
replaces $6 international departure tax with $12 tax on
international arrivals and departures

CRS-17
Table 5. Discretionary Spending Limits, as of August 15, 1997,
Fiscal Years 1998-2002
($s in millions)
1998
1999
2000
2001
2002
Defense :
a
Budget authority
269,000
271,500
na
na
na
Outlays
267,958
266,742
na
na
na
Nondefense :
a
Budget authority
252,623
255,699
na
na
na
Outlays
284,038
289,365
na
na
na
Violent Crime Reductionb:
Budget authority
5,500
5,800
4,500
na
na
Outlays
3,592
4,953
5,554
na
na
Overall discretionary :
c
Budget authority
na
na
532,693
542,032
551,074
Outlays
na
na
560,018
565,339
561,326
Total discretionary:
Budget authority
527,123
532,999
537,193
542,032
551,074
Outlays
555,588
561,060
565,572
565,339
561,326
Source: Congressional Budget Office, The Economic and Budget Outlook: An Update, Sept. 1997.
na = not applicable
Included in overall discretionary category beginning in 2000.
a
b Included in overall discretionary category beginning in 2001.
c Includes defense and nondefense categories in 2000; includes defense, nondefense, and violent
crime reduction categories in 2001 and 2002.
Selected CRS Products
CRS General Distribution Memorandum. The Effects of Applying Minimum Wages
to Workfare Programs for Welfare Recipients, by Mary Reintsma.
CRS Issue Brief 95050. Caribbean Basin Interim Trade Program (NAFTA/CBI
Parity), by Vladimir N. Pregelj.
CRS Report 97-635. Federal Retirement and Health Insurance: FY1998
Congressional Budget Proposals, by Carolyn L. Merck.
CRS Report 95-366. Food Stamp Reform: the Continuing Debate, by Joe
Richardson.
CRS Report 97-389. Generalized System of Preferences, by George Holliday.

CRS-18
CRS Report 97-385. Health Insurance for Children: Legislation in the 105th
Congress, by Beth Fuchs, Jean Hearne, Bob Lyke, and Patrick Purcell.
CRS Report 97-400. Immigration-Related Welfare Provisions in the FY1998 Budget
Process, by Joyce C. Vialet and Larry M. Eig.
CRS Issue Brief 97037. Medicaid: FY1998 Budget, by Melvina Ford.
CRS Report 97-643. Medical Savings Accounts: Legislation in the 105 Congress
th
,
by Bob Lyke.
CRS Report 97-802. Medicare Provisions in the Balanced Budget Act of 1997 (BBA
97, P.L. 105-33), by Jennifer O’Sullivan, Celinda Franco, Beth Fuchs, Bob Lyke,
Richard Price, and Kathleen Swendiman.
CRS Report 97-218. Radiofrequency Spectrum Management, by Richard M. Nunno.
CRS Report 97-633. Student Loans: Reconciliation Provisions, by Margot A.
Schenet.
CRS Report 97-650. Tax Benefits for Education in the Budget Reconciliation
Legislation, by Bob Lyke.
CRS Report 97-614. Taxes and FY1998 Budget Reconciliation, by David
Brumbaugh and Gregg Esenwein.
CRS Report 97-636. TIAA-CREF: Repealing Grandfather Rule on Pension
Business, by Ray Schmitt.
CRS Report 96-607. Tuition Tax Credit and Deduction: Issues Raised by the
President’s Proposals, by Bob Lyke.
CRS Report 97-567. Tuition Tax Credit and Deduction: Who Benefits from the
President’s Proposals?, by James Stedman, Bob Lyke, and Margot Schenet.
CRS Report 97-266. Veterans Issues in the 105 Congress
th
, by Dennis W. Snook.
CRS Issue Brief 93034. Welfare Reform, by Vee Burke.