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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
    PRESIDENT'S 2003 BUDGET PROPOSALS FEATURING OMB DIRECTOR DANIELS
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                            FEBRUARY 6, 2002
                               __________

                           Serial No. 107-56
                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
79-697                       WASHINGTON : 2002
________________________________________________________________________
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of January 29, 2002, announcing the hearing.............     2

                                WITNESS

Office of Management and Budget, Hon. Mitchell E. Daniels, Jr., 
  Director.......................................................     4

    PRESIDENT'S 2003 BUDGET PROPOSALS FEATURING OMB DIRECTOR DANIELS

                              ----------                              

                      Wednesday, February 6, 2002

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:12 p.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

                  FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 29, 2002
No. FC-12

                       Thomas Announces a Hearing

                     Featuring OMB Director Daniels

                on the President's 2003 Budget Proposals

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
the President's fiscal year 2003 budget. The hearing will take place on 
Wednesday, February 6, 2002, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable Mitchell Daniels, 
Jr., Director, Office of Management and Budget. 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 January 29, 2002, President George W. Bush will deliver his 
State of the Union address, in which he is expected to outline his 
policy agenda. The details of these proposals are expected to be 
released on February 4, 2002, when the President is scheduled to submit 
his fiscal year 2003 budget to the Congress.
      
    In announcing the hearing, Chairman Thomas stated: ``The Committee 
looks forward to Director Daniels' appearance. His testimony will help 
give insight into President Bush's budget and lay the groundwork for 
the coming year's legislative business.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing is to review the President's fiscal year 
2003 budget proposals.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
``[email protected],'' along with a fax copy to 
202/225-2610 by the close of business, Wednesday, February 20, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the full Committee in room 1102 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse unopened and 
unsearchable deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
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Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
``[email protected],'' along with a fax copy to 
202/225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
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Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
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the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Thomas. Good afternoon. Director Daniels, thank 
you very much for joining us. I am sure other Members will 
continue to come in.
    As we have said at all three of these hearings, that the 
President clearly outlined that the 2003 budget is 
significantly different than the 2002, in large part based upon 
what occurred on September 11th, and that the budget for the 
fiscal year 2003 is sharply defined. This is what the President 
said: Win the war, protect the homeland, and revive the 
economy.
    We have been carrying on discussions with the Secretary of 
the Treasury, Secretary of Health and Human Services (HHS), and 
with the Director of Office of Management and the Budget (OMB). 
It gives us an opportunity, I think, to examine the rationale 
that put together the package that we currently have in front 
of us. Oftentimes we focus primarily upon the policy in a 
particular area, and I hope everyone appreciates the difficulty 
of the timeframe of October, November, December, putting a 
fundamentally different budget together for January, and I know 
there were some very difficult decisions that had to be made.
    And I compliment the Administration and the Director for 
moving forward and making some very difficult decisions. In the 
President's State of the Union, he addressed the need for a 
stimulus package that may not be moot, depending upon how the 
House reacts to decisions that have just recently been made in 
the Senate. And rather than reiterate the particular aspects of 
the budget as we have done in previous hearings, I will just 
say that, Director Daniels, it is a pleasure to have you with 
us.
    And before I ask you to address the Committee, I will turn 
to the Ranking Member, the gentleman from New York, to see if 
he has any opening comments.
    Mr. Rangel. Well, thank you, Mr. Chairman. I just want to 
state for the record that this morning when Mr. Stark yielded 
to Mr. Cardin when I had an opportunity given to me for an 
opening statement, that I had not known that was going to 
occur. Having said that, I am very anxious that all of the 
Members have an opportunity to question the Director.
    I just want to thank the Director for a review and a 
withdrawal of the comments that he made as relates to the New 
York congressional delegation attempting to secure the funds 
that we believe will be necessary to rebuild lower Manhattan. 
And I also want to thank him for his reiterance of the fact 
that we should be getting more than the $20 billion that had 
been promised, notwithstanding the fact that there was no 
comment made in the President's State of the Union message 
about the sacrifices that New York took for the Nation, nor did 
there appear to be any provisions in the budget which earmarked 
the funds that were promised. And even though you have said 
that you regret that your comment was misconstrued when it 
was--when you reportedly said that the New York lawmakers' 
efforts to get Federal money for September 11th-related costs 
was like a little money-grubbing game, accepting the fact that 
it was misconstrued, could you share with me what you actually 
meant? Because as the Senior Member of the delegation, we just 
want to do the best we can to service our constituents 
collectively and at the same time show our appreciation for the 
response that has been given to us, not only by the Congress 
but by the President. So I think we might use this exchange to 
clear the air and to move on, and I would like to yield to you.
    Chairman Thomas. I tell the gentleman that these were 
basically opening statements, and I was going to have the 
Director make his statement. And if the gentleman would allow, 
he could at the end of his statement accept that as a question 
and respond to that. So we might get on the record the 
Director's prepared remarks and then respond to Members' 
questions.
    Mr. Rangel. The Director can place it in any manner in 
which he wants in his response, but I do hope that he manages 
to include a response to my question.
    Chairman Thomas. I thank the gentleman. And any written 
statement you have will be made a part of the record and you 
may address this as you see fit.

   STATEMENT OF THE HON. MITCHELL E. DANIELS, JR., DIRECTOR, 
                OFFICE OF MANAGEMENT AND BUDGET

    Mr. Daniels. Thanks to you both very much.
    Chairman Thomas. You need to turn that mike on and then 
speak directly into it. It is pretty unidirectional.
    Mr. Daniels. How's that? Better? Many thanks, Mr. Chairman, 
many thanks Congressman Rangel. Let me show a little mercy and 
summarize very briefly the written submission that I have given 
the Committee. Then if I may, I would very much like to address 
Congressman Rangel's questions and then move on as you direct.
    It is certainly true that in many respects we submit a 
different sort of budget this year. Much of that was already in 
process and I won't dwell on it. But I do hope that Members 
will find some time to examine ways in which this budget has a 
different emphasis, quite apart from the new situation that it 
addresses and the new priorities that it expresses.
    And the novelty of this budget I would summarize under the 
heading of ``accountability.'' We do try to take a long step to 
respond, really, to acts of Congress and calls from Congress 
for serious measurement of performance in government, at least 
to begin down that journey, and therefore we do venture to rate 
at least those few programs for which enough data exists. For 
far too many, we just don't have enough evidence to declare in 
either direction. And we also take very seriously the 
President's order that we try to manage the Federal Government 
as well as it can be, and there are rankings of the departments 
in terms of their starting point on the five biggest problems 
that we have embarked on trying to attack.
    As to the content of the budget itself, the Chairman is 
quite correct that it deals overwhelmingly in its emphasis with 
the two-front war in which the Nation now finds itself and is 
by now I think pretty well understood, concentrates new 
resources overwhelmingly on the Defense Department where they 
are charged, of course, with victory in the war against 
terrorism as well as certain homeland defense assignments, and 
on those parts of the domestic government most relevant to the 
defense of Americans in their homeland. We double spending, a 
little bit more than that, in that category.
    We seek to avoid the guns and butter mistake of three 
decades ago, and therefore apply these new tools of trying to 
separate programs that work from programs that don't, with 
special rigor, and have presented proposals that in the 
aggregate allow only limited increases for the rest of 
government; increases, I stress, but only at 2 percent. That is 
less than has been customary in peacetime recently.
    I would ask you, however, to look below the surface of that 
number, because again, by separating carefully programs that 
work from programs that don't, programs that are relevant today 
from some that are--have seen their better days, there are some 
major increases. Research and development, parts of the 
education program and so forth come in for large increases, 
even within an aggregate that is held to what we believe is the 
maximum prudent level.
    So let me close, Mr. Chairman, simply by pointing out that 
we like the situation of a return to deficits probably less 
than even the Members of this Committee. It is principally a 
factor, of course, of the recession. With the costs of war laid 
on top, we do find ourselves in a deficit position for the 
first time in a few years. I would point out to you by way of 
perspective, this is historically a very small deficit. It is 
the smallest recession-time deficit in the post-war period, and 
those other recessions did not bear the simultaneous burden of 
warfighting--those recession budgets.
    The progress to which this Committee has contributed so 
much in recent years continues to pay real benefits, and we 
shouldn't overlook them, even as we work and worry about the 
deficits we have on hand. Just to cite an example, the interest 
costs, the interest burden on the Federal budget continues down 
and is below 9 cents on the dollar this year, and that is a 
great achievement that this Committee had a lot to do with. 
Just a few years ago, it was 16 cents, the first 16 cents of 
every dollar going for carrying charges, so to speak. So I 
think we have to keep some perspective.
    We all seek an early return to balance, to surplus, to debt 
reduction, and we look forward to working with this Committee 
to do that.
    Let me respond quickly to your question, Mr. Congressman. 
The President's commitment to $20 billion in reconstruction aid 
for New York City is inviolate. It is intact. And it is in 
process. And in fact, it will be exceeded, I haven't the 
slightest doubt. It will be exceeded before counting the 
other--another unprecedented and I think extraordinary gesture 
of support for New York, and that is the victims' compensation 
fund that was attached to the airline rescue bill. So without 
question, in my judgment, before we are done over $20 billion, 
not counting that amount.
    This has been a week in which I am sure I have spoken 
several hundred thousand words in a whole variety of forums. At 
least one of them was really poorly chosen, and I take it back 
eagerly. What I meant and what I should have said was that the 
exercise at some points has been a bean-counting exercise or a 
numeric exercise in which people--it was hard to get people to 
talk about what are we going to get done, what will we rebuild, 
which buildings, which infrastructure, how fast and so forth. 
People only seem concerned about ringing up a meter counting 
the dollars out the door, and that is I think all I meant to 
say. And I am sorry that I said it so poorly.
    But we are working very hard to make sure the President's 
commitment is fulfilled. More importantly, that the Federal 
Government delivers on the unprecedented list of things that it 
has already agreed to do in the case of New York, 100 percent, 
not something less cost of--as you know, of payment for so much 
of the--for all the damage that happened there and so many 
other things.
    I would mention specifically to this Committee, as I did to 
two committees yesterday, a major piece of unfinished business 
that we now have to figure out a new--we may have to figure out 
a new way to accomplish, and that is the centerpiece of the 
economic development program that the city and State have 
requested. And that is the so-called ``liberty zone'' package. 
It was to be part of the stimulus bill, which came so close to 
passage before Christmas, and now is in real doubt, 
regrettably. And we remain committed to that package, 
Congressman, and would like your counsel and guidance about 
alternative means of moving it if the vehicle it has been on 
truly is stuck.
    [The prepared statement of Mr. Daniels follows:]
  Statement of the Hon. Mitchell E. Daniels, Jr., Director, Office of 
                         Management and Budget
    My colleagues at OMB and throughout the executive branch have 
worked hard to present this Committee and our fellow citizens with a 
very different budget for the fiscal year 2003. Before turning to the 
traditional subjects of totals, balances, and specific policies, let me 
recommend to the Committee's attention some new features which I hope 
will now become part of your annual expectations and deliberations.
    This budget takes seriously the assessment of government 
performance, and its relationship to future spending. Activities where 
effectiveness can be proven are maintained and often reinforced; those 
that demonstrably fail, or can make no showing of effectiveness, in 
many cases are looked to as sources of funding. The days when programs 
float along year after year, spending taxpayer dollars with never a 
showing of reasonable results or return, must give way to an era of 
accountable government. This and all future budgets must no longer be 
permitted to answer only ``How much?'' They must also address the 
question ``How well?''
    This innovation responds to decades of calls by good government 
advocates. While long overdue, it is especially necessary at a time 
when the physical safety of Americans requires that the Federal 
Government take on many additional, expensive tasks.
    In the interest of both accuracy and sound management, this budget 
takes a major step toward full cost accounting of programs and 
departments by assigning the costs of health and retirement benefits to 
the places where those costs are created. At long last, the true cost 
of these programs will be visible, and managers will have full 
incentive to control the costs of additional personnel. Other disguised 
costs, such as the future liability associated with hazardous waste, 
remain and should be the object of further reforms.
The Unexpected Cost of the Recession
    It has been clear for months--since September 11th to be precise--
that our fiscal picture had changed in a fundamental way. The weaker 
economy erased $177 billion of revenues previously expected for 2002, 
and $120 billion for 2003. Additional spending to respond to the 
terrorist attacks in these years subtracted another $31 billion from 
the surpluses we all had anticipated. Over a 10-year period, for those 
still professing to find use in such numbers, changed economic and 
technical factors reduced the surplus by $1.345 trillion.
    The recession that began in the first quarter of 2001 was the 
largest but not the only economic factor reducing estimated surpluses. 
The revised outlook for near-term productivity growth reduced the level 
of GDP--and hence the receipts base--throughout the budget window. Both 
the recession and the impact it has had on budget surpluses took us all 
by surprise.
    As the Washington Post has noted, ``2001 was a nightmare for 
economists,'' pointing out that, almost without exception, forecasters 
failed to see recession or its effects coming. In our misjudgments, our 
economists were in large and renowned company. The good people at the 
CBO, and 51 of the 54 private forecasters in the Wall Street Journal 
survey, all missed the recession even as it was well underway. The fact 
that our assumptions were toward the conservative end of the 
forecasting spectrum did not protect us from a very large misestimate. 
May I add that when the Nation's economists are having nightmares, 
budget directors lose sleep, too. We ultimately must choose assumptions 
that we believe will be accurate, and it is no comfort later that the 
rest of the world was in error, too.
    The Administration stated from the outset that it would leave room 
for error, particularly when it came to longer-term projections. In 
mapping out long-term policy proposals, our Blueprint expressly marked 
off over $800 billion (15% of the total expected) as a Contingency 
Reserve in the event that the hoped-for surpluses did not materialize. 
At least as far as one can tell from the latest 10-year estimate, even 
this generous hedge was not enough.
    The 2001 experience casts further doubt on the entire idea of 10-
year budget forecasts. The attempt to see ten years out began only six 
years ago--prior to that time 5-year forecasts were the longest ever 
attempted--but already enough evidence is in hand to convict. The 
experiment with 10-year forecasts demonstrates that no one can reliably 
predict budget levels this far into the future. In fact, despite all 
the lamentations, this year's 10-year baseline surplus forecast is just 
as big as that of 2 years ago; even after tax relief, it is the largest 
ever except for last year's. If we had taken a one-year timeout from 
10-year guesswork, no one would say that anything was ``missing.''
    Our budget extends 10-year forecasts at the top-line level, for 
those still determined to find them credible, but it drops them from 
the rest of the document. There we return to the wisdom of our 
predecessors by using five-year numbers, which are plenty uncertain in 
their own right.
A Two-front War Against Terrorism
    Mr. Chairman, we present this week a budget for a two-front war. It 
proposes substantial increases, those the President believes necessary 
to deliver on the paramount duty of the Federal Government, to secure 
the safety of the American people.
    Last year's budget began the reconstruction of a neglected national 
defense base, and that project continues now with new urgency. The 
President asks Congress to support a 12% growth in base defense 
funding, part of this reflecting the new threats presented by a long-
term terrorist foe. He also requests an additional $10 billion, if 
needed, for the costs of continued hostilities at today's levels.
    Funding for the category of activities we now term ``Homeland 
Security'' will double under the President's plan: airline security, 
first responders, bioterrorism, border security and preventive law 
enforcement, are all scheduled for major increases as recommended to 
the President by Governor Tom Ridge.
    We have worked closely with the Office of Homeland Security to 
define and budget for these activities; an explanation of the 
definition of the Homeland Security budget is attached at the end of my 
testimony. We will guard against and oppose efforts to divert funds 
from Homeland Security requirements or to misclassify unrelated funding 
under Homeland Security's priority status.
    Winning our two-front war is not optional, and will be expensive. 
As in other times of national conflict, tradeoffs will be required. 
Other priorities will have to stand aside for a time, lest we commit 
the ``guns and butter'' mistake of the Viet Nam era. We propose a very 
reasonable level that allows spending not related to the war or 
homeland defense to grow by around 2%.
    Within this ``Rest of Government'' category the President proposes 
$355 billion of spending. It must be noted that the activities it 
encompasses have enjoyed rapid funding increases during recent years, 
growing by an average annual rate of more than 8% since 1998.
    Within this enormous sum, it is both possible and desirable to 
increase high priority programs of proven effectiveness, and this 
budget recommends many such increases. Dozens of programs across the 
government are scheduled for growth based on demonstrated results.
Measuring Performance and Delivering Results
    For decades, good government advocates have called for systematic 
measurement of government's performance, and its reflection in the 
allocation of resources. In 1993, Congress passed the Government 
Performance and Results Act (GPRA), which was intended to implement 
this reform, but this mandate has been virtually ignored. The 
President's budget for 2003 responds to Congress' instruction, 
differentiating where the facts are available between programs that 
work and those that do not.
    Many programs of proven effectiveness are strengthened, by shifting 
funds from those which can make no proof of performance. NSF, WIC, 
Community Health Centers, and the National Weather Service are among 
the best performers, based on clear targets they have set and hard data 
that says these goals have been met or surpassed.
    A serious attitude toward performance is long overdue, but takes on 
special urgency at a time when the demands of national security assert 
a heavy claim on our resources. We hope the findings of this budget 
will trigger interest in performance assessment, and bring forth much 
new information about that large majority of programs for which we have 
no useful data at all.
Restoring Economic Growth
    This budget funds a two-front war, but takes aim at a third 
priority as well, the struggling American economy. The President urges 
the Congress to act, and act quickly, on a jobs and growth package like 
that which passed the House but was blocked in the Senate just before 
Christmas.
    There are some encouraging signs of recovery, but the President is 
not satisfied to leave matters to chance. Government cannot ``manage'' 
the economy, but it should do what it can, and the President wants to 
act on a stimulus measure that might accelerate and strengthen 
recovery. While adding this action to his other budget proposals would 
likely make 2003 a year of a small deficit rather than a year of small 
surplus, the President favors the tradeoff in favor of jobs and growth. 
Past the short term, it is only rigorous economic growth that can 
restore surpluses in any event.
Conclusion
    In sum, we should count our national blessings. Despite 
simultaneous war, recession, and emergency, we are in a position to 
fund the requirements for victory, plus a stimulus package, and still 
be near balance. The deficit we project will be the Nation's smallest 
in times of recession since the early 1950s.
    Interest costs to the Federal Government will continue to decline; 
interest payments will fall below 9 cents of each budget dollar for the 
first time in 22 years. Despite everything, the outlook is promising 
for balance in the year after next, and for a return to large surpluses 
thereafter.
    The President's proposals thus do what must be done, while 
protecting our fiscal future. It is a privilege to submit them for the 
Committee's review.
                                 ______
                                 
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    Mr. Rangel. Well, let me thank you for the clarification, 
but are you suggesting in the bean counting that the delegation 
is involved in, that----
    Chairman Thomas. The gentleman from New York is recognized.
    Mr. Rangel. Thank you so much, Mr. Chairman. That my Mayor 
and Governor has not given you the blueprint that you feel 
comfortable with in terms of allocation of additional funds?
    Mr. Daniels. No, sir, not at all. In fact, I think the 
blueprint is pretty clear, and it is an exciting one. I only 
mean on some occasions it has been hard to talk about the 
blueprint, the ``what will we do,'' because people seem to want 
to stop and start with what will it cost. And my view is it 
will cost what it costs. Let us get the job done, and I am 
confident when we do count the beans later on, we will see that 
it was well in excess of $20 billion.
    Mr. Rangel. I look forward to working with you toward that 
end. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you, Mr. Rangel. And it is somewhat 
melancholy now to look back on those days in December when we 
were over working with Senator Schumer on a package that was 
absolutely completed but did not move because the stimulus 
package at that time did not move. My understanding is in the 
Senate now, the package is down to unemployment insurance. That 
may not be enough room to place a vehicle, and I would be 
interested in working with the gentleman from New York, if in 
fact we might be able to put that as part of our contribution 
on a package going back. There may not be that many vehicles 
moving back and forth.
    And I would invite, Mr. Director, your response, and I 
realize that the Administration perhaps hasn't sat down and 
examined the decision over on the Senate to send only 
unemployment insurance (UI) over as the best they could do for 
a stimulus package, and whether or not we might want to 
embellish that a little bit over here with what would be 
considered on a bipartisan basis worthwhile additions.
    One of the questions that I want to ask you, and I will 
provide in written form, was one that I presented to Secretary 
Thompson, because it is difficult to understand. Sometimes when 
you are looking at the budget to fully reconcile how pieces go 
together, and the concern that this Committee has, given its 
major responsibility on Medicare, is that, one, we commend the 
Administration for placing $190 billion in the budget. That is 
the same number that was in there last year. Last year it was 
$190 billion in the surplus environment, and now it is $190 
billion in a potential deficit environment. Those aren't the 
same $190 billion. The ones this year are much dearer, and we 
appreciate that. But we have also looked at a program that is a 
low-income Medicaid convertible to Medicare drug program that 
has, I believe, costs in the vicinity of $77 billion over 10 
years. Additionally, the Administration has said they want to 
up--to enhance the Medicare+Choice by about 6.5 percent.
    When you add all of those dollars and subtract them that 
are in the budgetary structure, you are down around $115 
billion available. When you look at the MedPAC or Medicare 
Payment Advisory Commission, the group that recommends to us, 
updates for physicians, for example, which over a decade 
ballpark at about $80 billion, assistance to hospitals, 
dialysis facilities, the home health, $115 billion left over 
from previous statutory language, we are looking at almost $100 
billion coming out of providers. And what we could get out of 
the Administration's budget was that those adjustments will 
come from providers. And that is fairly difficult when the 
whole pot, as people are looking at it, is somewhere around an 
additional $100 billion. And the ones who receive the largest 
amounts, the physicians in the hospitals, are the ones who are 
out front in terms of augmentation of current amounts.
    So when you put those two together, it makes it very 
problematic to figure out how we can get where we need to go. 
So we will submit that in written form and would request--and 
we will coordinate with HHS that you would give us just a 
little bit of guidance in terms of the directions as to where 
we may go.
    [The information follows:]

    Question: The President's budget provides $190 billion to modernize 
the Medicare Program, add a prescription drug benefit and take steps to 
strengthen the existing Medicare+Choice program. Meanwhile, MedPAC's 
recommendations for provider payment changes would cost over $100 
billion, but the budget says that any changes to Medicare provider 
payments need to be done in a budget neutral manner across providers. 
How is the Congress supposed to pay for MedPAC's recommendations?

    Answer:

     LThe President's priorities for Medicare are to:

       Lquickly phase in a drug benefit for low-income Medicare 
beneficiaries, that will transition to the comprehensive benefit 
available when the entire program is modernized;
       Lsustain and enhance the options available to 
beneficiaries in Medicare+Choice; and,
       Lmodernize the Medicare Program in order to provide a 
comprehensive prescription drug benefit and improve health insurance 
plan options, consistent with the principles the President outlined in 
July 2001.

     LThe $190 billion included in the FY2003 President's 
Budget is dedicated to providing funding for the President's priorities 
discussed above. This money is not meant to be used for increasing 
payments to fee-for-service Medicare providers. In fact, the Budget 
also states that the Administration believes any changes to fee-for-
service payment policy must be budget neutral in both the short and 
long term, across provider payment updates.
     LThe Administration recognizes that Medicare's current 
administrative pricing system creates extremely complex provider 
payment systems that do not always function smoothly or equitably. In 
fact, these shortcomings of the existing payment systems further 
underscore the need for fundamental reform of Medicare.
     LHowever, a modernized program cannot be implemented 
immediately; therefore, the Administration is willing to work with the 
Congress to look at short-term modifications to provider payment 
systems in order to address payment issues.
     LFurthermore, as we consider changes to payment systems, 
we need to be cautious and recall that any increases in spending will 
be borne in part by beneficiaries in the form of higher premiums and 
coinsurance payments.
     LThe Administration is willing to consider any needed 
adjustments to payment systems and to work with Congress to develop a 
package that is budget neutral across providers. To this end, we point 
out that some provisions in law that have held downpayments in the past 
are about to expire, and extension of these provisions is one means 
available to ensure a budget neutral package of reforms.

                                

    Chairman Thomas. The Chair would say that we have a current 
vote on, but the Chair plans to proceed directly through the 
vote in exchanging chairs, and would begin calling on Members, 
with the agreement of the Ranking Member, on those who did not 
have the ability to participate in the last questioning period.
    So with that, I would turn to the gentlewoman from 
Washington and ask her if she has any inquiries.
    Ms. Dunn. Thank you, Mr. Chairman. I do have some questions 
I would like to ask. I am a little concerned about the time 
left on the vote.
    Chairman Thomas. We have 5 minutes. And if you want to go 
over and vote, the other two Members can go. I was anticipating 
some Members coming back so we could continue. And if the 
gentlewoman has not yet voted, I would suggest that she 
probably wants to go over and vote and then come back and----
    Ms. Dunn. If I could trade my time, I would sure appreciate 
it.
    Chairman Thomas. And we will pick up the Members in that 
order. Have you voted?
    All right. Tell the Director that as soon as a Member comes 
back, that we will begin the questioning, but we are inside 5 
minutes on the vote. So the Committee stands in recess until a 
body arrives.
    [Recess.]
    Mr. Houghton. [Presiding.] Okay. We can reconvene the 
meeting. As the Pro Tem Chairman, I would like to ask a 
question. Most economists thought that there would be sort of a 
minus 1 percent drop in the gross domestic product (GDP) and 
were surprised by the figure that came out that was sort of 
modestly on the plus side, and a big, big shrinking of 
inventories.
    So I think with that as a backdrop, the question that I 
would like to ask you, Mitch, is this: How do you see the 
overall stimulus package in this context? Should we do it? 
Should we not? Does it help the economy? Doesn't it? Where do 
you come down on this?
    Mr. Daniels. First of all, it is important that any 
stimulus package stimulate. And from the beginning of this 
debate, the President has made the point that it is very 
important that any package Congress agrees on, that he would 
sign, would have to have as its principal purpose generating 
jobs and economic growth, and a lot of ideas can travel under 
the same flag.
    And so I will simply want to reaffirm that the content of 
the package is very important; that while it needs to help 
dislocated workers, for example, to merit the label and to 
merit his signature, it is going to have to show some 
possibility of really making a difference of some kind in the 
timing and the strength of a recovery.
    Now, the President's position remains that the promising 
signs we see are encouraging but not sufficient to persuade him 
that we have done all we need to do. And I think he was very 
disappointed at the apparent inability of the Senate leadership 
to follow the House's example and pass a satisfactory package. 
And he remains hopeful that we will find a way yet to do this.
    In our budget, we took our cue from the Council of Economic 
Advisers, which believes that a package along the lines of the 
one that passed the House would add perhaps a half a point to 
economic growth, and that is perhaps 300,000 jobs at the 
margin. And that is certainly something worth doing and still 
worth doing, even though there are some signs of recovery 
already around.
    Mr. Houghton. Well, one of the arguments, of course, is 
that if--and I don't necessarily hear this--that if you have an 
economy which is doing better than you had thought, is on the 
way up, and you don't have a stimulus package, you actually get 
back into budget balance much sooner. How do you feel about 
that?
    Mr. Daniels. It is certainly true that a bigger stimulus 
package would add a little bit of red ink. In the near term, 
very likely would--if it was effective, would reverse that 
effect and would produce more black ink over the long term. The 
President is prepared to make that tradeoff, but the people 
holding the view you just mentioned are generally accurate on 
the OMB baseline, which is slightly different than CBO's or 
Congressional Budget Office. The 2003 budget we have presented, 
in view of everything, in view of the recession, in view of the 
war costs, in view of the extra needs for homeland defense and 
so forth, is in balance, before taking the step of an economic 
package. The President's choice was to go ahead and act. He had 
always said that in normal times the budget should be balanced; 
but a recession, along with war and emergency, was an 
acceptable reason for a deficit. And that is precisely the 
choice that he made in presenting this budget.
    Mr. Houghton. Let me just ask you one further question, and 
then I will pass it along to the others. So it looks like the 
Senate is virtually going to do nothing except pass over 
unemployment insurance. If there were one or two other things 
you think are essential that we ought to be considering as a 
throwback to the Senate, what would those be?
    Mr. Daniels. The Administration hasn't made a decision as 
to rank-ordering the elements. The President liked the elements 
that were in the House-passed bill. The rate reductions in the 
middle brackets would probably be very high on our list. We 
think those have both the best near- and short-term--I am 
sorry, near- and long-term effectiveness. Immediate aid to 
consumers even at the lower income brackets, and of course 
investment incentives. But for the moment we haven't given up 
on the idea we could do all of those things, or things like 
them, and so I am not able to tell you yet that the President 
would pick just one out of--or which one he would pick if he 
was limited.
    Mr. Houghton. Thank you very much. Mr. Crane.
    Mr. Crane. Thank you, Mr. Chairman. Director Daniels, quite 
simply, I am thrilled with the President's budget. It strikes 
the right balance between necessary spending on national 
security and continuing the tax policies that were begun last 
year. However, allow me to suggest there may be one thing that 
might improve the accuracy of this budget. You recognize we are 
locked into a revenue estimating scheme that does not take into 
account the real-world effects of tax policy. We act as if 
there is no budgetary benefit from sound tax policies like 
reducing marginal rates or capital gains or increasing 
incentives for savings. Yet we know these changes have a 
positive effect on the economy. And I just got a report here of 
the effects of the stimulus bill passed by the House, and the 
stimulus bill was estimated by the White House to raise GDP by 
five-tenths of a percent in 2002 and create 300,000 new jobs. 
And without the positive economic growth effect of the stimulus 
bill, the 10-year surplus, 2002 to 2011, would be $175 billion 
lower. And the estimated 10-year costs of the stimulus bill 
passed by the House in December is $157 billion. Therefore, by 
killing the stimulus bill, we lose an estimated $18 billion in 
receipts over 10 years and prevent 300,000 jobs, about half the 
size of a congressional district.
    Mr. Director, what suggestions do you have to improve the 
revenue estimating process so we can get a real-world 
assessment of the tax cuts included in the President's budget, 
and would you consider these process improvements when writing 
the 2004 budget plan?
    Mr. Daniels. Now, this is a very important and longstanding 
question, Congressman. You are absolutely right that we need a 
better way, that today by convention we are not at liberty to 
break from presently, unilaterally at OMB. We make the one 
assumption that we know is wrong. That is, that lower taxes 
have a zero effect, and honest people can differ about how big 
the effect of any given measure might be, but the answer we 
know is wrong is the one we use. And I am hopeful that some 
progress will be made. I know that professional economists have 
worked very hard in these last decades to try to get to some 
accuracy about this, and there are models around that I think 
we could use. It does take the agreement of various parties, 
including the Congress, the CBO and so forth. And I think maybe 
the current situation reminds us again we ought to get serious 
about it.
    Mr. Crane. Well, I would hope that we could get serious 
about it sooner rather than later, because unfortunately it 
becomes a political game. And who is in charge--oh, you are 
back. Okay. I yield back the balance of my time. Thank you.
    Chairman Thomas. [Presiding.] The gentleman from 
Massachusetts wish to inquire?
    Mr. Neal. Thank you, Mr. Chairman. Mr. Daniels, you have 
referenced twice the stimulus bill that came from the House. Do 
you favor repeal of the corporate alternative minimum tax (AMT) 
retroactively?
    Mr. Daniels. It could be acceptable to the President in an 
otherwise adequate package. You said just corporate--repeal 
prospectively?
    Mr. Neal. The first stimulus package that passed the House.
    Mr. Daniels. Well, the first one, as I recall, included a 
refundability provision that we did not embrace; no, not that. 
But the notion that at least looking forward, the corporate AMT 
left as it is would moot or vitiate the job creation effects is 
something that we--that the Administration did find persuasive.
    Mr. Neal. But did you favor it or not favor it?
    Mr. Daniels. As originally passed in the House?
    Mr. Neal. Yes.
    Mr. Daniels. Never took a position on it, but it was not a 
part of the principles--a part of the principles that the 
President had laid down for stimulus. And I want to say that I 
personally felt it was not going to be and probably shouldn't 
be part of any final package.
    Mr. Neal. No. Fair enough. And, look, I appreciate it. You 
have got a tough job. You have run into a buzz saw a couple of 
times by comments that you have offered. And some of the 
comments, at least as it related to the appropriations process 
here, I thought were kind of interesting in the sense that we 
ought to have maybe a truth-in-spending bill around here that 
everybody signs onto, and the same people that preach fiscal 
austerity on the House floor typically load up. And it is not 
the Republican appropriators, incidentally. It is other Members 
of the House that typically send more letters seeking more 
funds for more projects than anybody else does. At the same 
time, they have the opportunity to rail against excessive 
spending on the House floor.
    And so when I watched you a bit caught off guard with those 
comments that you made, I thought it was kind of interesting 
that you might be speaking to an issue around here that has 
gone on for a long time. And I am told by friends on both sides 
of the aisle that the biggest letters that they get in terms of 
requests for expenditures oftentimes come from those who preach 
fiscal sanity on the House floor. And maybe just releasing some 
of those letters around here at some point for the things that 
they ask--and you might want to be part of that, Mr. Daniels. 
You are not going to get them any madder at you than they were 
then. I mean, it is as simple as that.
    But let me get back to the questioning. The reason I raised 
that question with you about corporate alternative minimum tax, 
in the budget request it didn't address individual alternative 
minimum tax, and I have been on this for a long time. Mr. 
Thomas has said it is his desire to take the issue up at some 
point. Well, we are into another setting, another budgetary 
cycle, and the problem is really getting worse for a lot of 
people. It is suggested that it will rise from 5.6 million 
people in 2004 to 13.4 million people in 2005. Would you deem 
this to be a tax increase on 13.4 million people?
    Mr. Daniels. Well, I would certainly deem it to be a large 
problem, and I think you are to be commended for advocacy on 
this issue for a long time and for keeping it in the forefront 
of people's attention. It deserves to be. The tax relief 
measure of last year did, you could say, buy us some time, I 
think to 04, but this needs to be addressed. The Treasury 
Department at the President's direction is working right now on 
a study of tax simplification that very likely will--it will 
have to treat with this issue and very likely I think will come 
up with ideas for resolving it while we--during this interval. 
But it is certainly a problem that I think most parties agree 
needs to be taken care of.
    Mr. Neal. I appreciate your candor. I had a chance to sit 
next to Andy Card recently, and we discussed that whole notion 
of tax simplification, which we have had a pretty good bill I 
think that has been hanging out there for a while, and I would 
be happy to join the other side here in, because----
    Mr. Daniels. Well, we would value your ideas.
    Mr. Neal. That is the kind of issue that I think would 
really help the American people as opposed to much of the 
endless debating we do here.
    So you weren't in favor of the repeal of the corporate 
alternative minimum tax, but you think we ought to do something 
about individual alternative minimum tax?
    Mr. Daniels. That is correct.
    Mr. Neal. You couldn't give me a better answer. I 
appreciate that very, very much. Thank you, sir.
    Mr. Daniels. Yes, sir.
    Chairman Thomas. The gentleman would tell the gentleman 
from Massachusetts, although it has been characterized as the 
corporate alternative minimum tax, even in the initial effort 
of the Committee--and I appreciate the gentleman from 
Massachusetts staying away from the second offer, which was not 
the repeal but significant reduction and a virtual appeal for 
those who fit the category--in both of those instances, there 
were individuals who would have been relieved of the 
alternative minimum tax. It does, of course, carry with it a 
majority of corporate structure, but there are individuals who 
do pay through that tax structure. And since the gentleman 
mentioned the Chair's interest in the individual alternative 
minimum, as the gentleman well knows, it stems from the last 
tax package from the majority--then-majority, in terms of 
moving the regular tax depreciable schedule away from the 
alternative. And the gentleman is correct. It continues to 
grow.
    To me, the fundamental hurdle in resolving it is the fact 
that it is now going to require about $500 billion, half a 
trillion dollars, to address a problem that had his party, when 
they had been in the majority addressed it, for a very modest 
amount would have corrected it. But the goal of seeking revenue 
overruled the appropriateness and fairness of modifying or even 
eliminating that alternative minimum tax.
    I appreciate now the gentleman's late coming to the need to 
resolve that issue, but this is truly one which is going to be 
very difficult for us to embrace. I want to underscore the 
gentleman's initial comments about it being only for corporate 
was simply not true, either in the first version of the 
stimulus package that passed the House or the second.
    Mr. Neal. Mr. Chair, would you yield for a question?
    Chairman Thomas. Certainly.
    Mr. Neal. I think the point that I tried to raise here was 
that there was a certain enthusiasm here for repealing 
corporate alternative minimum tax. Well, we have kind of danced 
around the issue of alternative minimum tax for individuals. 
And all I am suggesting is that time--and again I think the 
Committee and I think that your comments have been entirely 
sincere as they relate to doing something about alternative 
minimum tax--but in the closing moments of last year, we were 
able to rush through a package which the Administration 
apparently, on corporate alternative minimum tax, didn't 
support; and we would have had an opportunity here, I think, 
even in increments, to address the individual alternative 
minimum tax.
    And I hear it all the time from accountants. I hear--and 
incidentally, the accountants that I hear from are almost all 
Republicans--that their employees and the people that work with 
them and the people they work for are all complaining about 
this issue. And think that I accept your word, and have 
entirely, and I would like to get to that at least in some 
measure if we could this year.
    Chairman Thomas. Once again, to make sure that the record 
is correct, the Director responded to your question on the 
initial stimulus package which was passed in October, which did 
have the repeal of the alternative minimum and the 
redeemability of the credits, which was not retroactive. I 
believe the President has gone on record, including most 
recently in the State of the Union, that he was in support of 
the second stimulus package that passed the House, which did 
not repeal the alternative minimum tax but rather made 
fundamental revisions to it. So if the gentleman is referring 
to the December-passed stimulus package as the one that we 
rushed through the House, that question was never asked of the 
Director, and I believe if that question were asked of the 
Director, he would say that the Administration supported the 
December stimulus package. Is that correct, Mr. Daniels?
    Mr. Daniels. That is correct. And if I misunderstood the 
question, I apologize, but that is correct, and I think the 
earlier question did refer to the first version.
    Chairman Thomas. That is correct.
    Mr. Neal. Mr. Chairman, could I prolong this for a bit? My 
point is simply this--and if I could just go back to it. We 
have talked about it here, time and again, and the problem only 
gets worse. All I am suggesting is that a good sit-down with 
the minds in an attempt to address this in a fair-minded 
fashion.
    Chairman Thomas. The Chair will underscore, and then move 
to the next questioner, that the Chair has no problem with the 
gentleman stating his position. It is when the record is made 
which is factually inaccurate that the Chair feels the 
necessity to intervene. The Ranking Member has indicated that 
the Chair seems to intervene fairly frequently. If the comments 
were more accurate, the Chair would not feel that need as 
frequently as he does.
    The gentleman from Pennsylvania wish to inquire?
    Mr. English. I do, Mr. Chairman, and I will keep my remarks 
accurate and within 5 minutes. Thank you.
    Mr. Daniels, it is a privilege to have you here, and I 
first of all want to associate myself with the remarks at the 
beginning of the hearing by the Chairman when he raised the 
point that because of the funding stream that you have outlined 
for Medicare, whereas you have I think provided adequate 
funding for hospitals. You have addressed many of our immediate 
needs. We are concerned that there are still some legacy issues 
left from the Balanced Budget Act that we would like to address 
and that we don't have the revenue to do it. And I would simply 
like to say I hope we are going to be able to work with the 
Administration to find a way of addressing some of those 
issues, whether it--whether the approach is budget-neutral or 
not. And, again, I realize you have to--you have to be very 
concerned about the bottom line. We also have to be very 
concerned about some of the reimbursement policies that are 
currently enshrined in law and need to be revisited.
    On an entirely different issue, Mr. Daniels, I wonder did 
the President's budget envision any change in the earnings 
limit for the nonblind who are on Social Security?
    Mr. Daniels. I've got the answers to at least 10,000 
questions in my head, but I think that is 10,001. Can I answer 
you on paper?
    Mr. English. May I simply leave it with you and suggest 
that the President has the capacity to raise the earnings limit 
for individuals who are on Social Security, some of the most 
vulnerable in our society. Under the last Administration, I 
think in 8 years they only raised the earnings limit once. That 
earnings limit no longer provides what it once did, and there 
are some workers who are working, notwithstanding their limited 
capacities, who are unable to work full time on the minimum 
wage because of the current very low threshold. And I think 
from a standpoint of compassionate conservatism, giving these 
people an opportunity to work, giving them an opportunity to 
become self-sufficient, is in everyone's interest and probably 
won't yield the costs that perhaps a revenue estimate would 
suggest. So I simply will leave that with you.
    On an entirely different issue, I am very----
    Mr. Daniels. Before you move on, Congressman, let me say if 
I interpret accurately the mumbles behind me, the answer to 
your question is no, but I appreciate your bringing it up, and 
we will have a look at it. I suspect, as you, that in some 
state, this will seem both fair and affordable.
    Mr. English. And I am grateful to you for that indication. 
I have been reviewing your unemployment insurance proposal. I 
want to salute you for lowering the trigger for the extended 
benefits program, but I am concerned about the phasing out of 
Federal financing for unemployment insurance and employment 
service operations. My concern is this--and if I 
misunderstand--I understand you are providing full 
discretionary funding for 03 and 04, and then you are providing 
matching funds for 05 and 06, and after that participation by 
the Federal Government in funding these vital operations would 
be phased out.
    What kind of an impact do you expect that to have on the 
commitment of States to provide these functions; and, two, once 
the Federal funding is gone, how much standardization is there 
going to be nationally in how these services are provided? 
Specifically what I am curious about is will employment 
services still be provided by all of the States? What guarantee 
do you provide of that?
    Mr. Daniels. Congressman, you ask what impact I expect. The 
answer to that is a highly favorable one. We are living with a 
legacy issue, to take another of your terms, here that has been 
hanging around a long time. It is a very antique, I have said, 
sort of jury-rigged affair, and we think it ought to be 
reformed in a methodical and gradual way. The proposal here, of 
course, would not touch benefits at all, only the 
Administration.
    Right now, States see dollars, really excessive dollars, 
taxed away from their businesses. They come to Washington. They 
are held in a fund. Occasionally we leak out a few back. And 
this proposal that Secretary Chao and our people have come up 
with we think will enable States first of all to have more 
resources or at least have control of the resources. We would--
part of this would be to disburse $9 million of Reed Act money 
to the States. As the Federal tax is lowered, it makes room for 
the States at their discretion to replace those funds if they 
need them.
    We think in the end you would see more attention to 
administrative efficiency, more flexibility in the States, and 
frankly, to get to your last question, the employment services 
would probably become a bigger and then more effective part of 
our unemployment system than they are today. So I do commend it 
to the attention of the entire Committee. This--I really think 
this has the prospect to be a reform that could have a lot of 
bipartisan enthusiasm. It is complicated, and fortunately you 
have at least one of the Congress' genuine experts on this 
subject among your number. Congressman McCrery can do a better 
job than I of explaining it to you.
    Mr. English. Well, I don't have Mr. McCrery's expertise and 
my time has expired, but I look forward to seeing your 
legislative language and working with you if I can.
    Mr. Daniels. Thank you, sir.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Tennessee wish to inquire?
    Mr. Tanner. Thank you, Mr. Chairman. Thank you, Mr. 
Director for being here. It comes as a disappointment that we 
are in, I would say as a country, a markedly less financial 
position of strength than we were last year. Would you agree?
    Mr. Daniels. Yes, but I think we are all disappointed.
    Mr. Tanner. Last year the budget surplus at CBO estimated 
for this year was $313 billion. OMB was $284 billion. This year 
that has been revised, and there has been a $333 billion 
reduction in the projected surplus this year. CBO gives three 
reasons for this: legislative action, nondefense discretionary, 
defense, June tax cut and so on, economic adjustment and 
technical adjustment. But to say if you put all of these into a 
percentage--and I want to ask you if you agree--about 72 
percent of this total of $333 billion reduction in the 
projected surplus for this year due to economic changes, 11 
percent for defense spending and 9 percent and so on, would 
that be a----
    Mr. Daniels. Yes. Those are either exactly or very, very 
close to any numbers that I have seen. The economy and the 
recession that we are in has had the effect that recessions 
have always had, and that is to take us into the red.
    Mr. Tanner. I agree. Now, the 10-year projections CBO also 
has made--I didn't find it in your document as a 10-year, but 
that shows a total reduction of $4 trillion, and again they 
give the same three reasons for this change: legislative 
action, economic adjustment, in this case $653 billion, and 
technical adjustments, $453 billion. But if you add up the 
legislative changes that CBO says are the reasons for this 
adjustment of $4 trillion from $1 trillion--or $5.6 trillion to 
$1.6 trillion, what one finds is that it only adds up to $3 
billion in terms of the changes.
    The other $3 trillion--the other trillion, of course, comes 
from increased interest costs. Would you--to make the $4 
trillion, according to CBO.
    Mr. Daniels. Right. And if you believe we have any ability 
to see that far into the future, which I am skeptical of.
    Mr. Tanner. Well I am, too, and that is what I said last 
year when you were here telling us there was money as far as 
the eye could see and that we had plenty of room to do 
everything. But 70 percent of the surplus that we talked about 
last year, this $5.6 trillion, wasn't supposed to show up till 
the last 5 years, 10 years. And I couldn't agree with you more. 
That is what we said last year, and we said we were ``banking 
on the come'' too much. But anyway, that is a different story.
    What my point is, is that if one looks at these 10-year 
numbers, one can readily see, according again to CBO, that 
legislative action has accounted for in their numbers about 60 
percent of the change of this $3 trillion, with the tax cut 
being 42\1/2\ percent of that 60. This is what they say based 
on what--the same sort of protocol that they did.
    The only point to all of this, Mr. Director, is we are, 
short term, in a recession and, short term, in a war. I think 
we know that that has had a dramatic impact on this year. The 
same can't be said for any of these 10-year projections. The 
same can't be said for your 5-year projection in terms of what 
we are doing. Nobody expects the recession to last for another 
5 years. At least they haven't said so.
    So my point is, when we on this side are criticized--and 
have been for the last 2 hours--about saying that everything 
ought to be on the table when they turn around and our 
financial outlook is this dramatic, that everything ought to be 
on the table, we are criticized as saying we want to raise 
taxes because some of these tax cuts that are supposed to take 
place in the outyears that have not yet become law, if we do 
anything to stop that or otherwise hinder it, defer it, or 
anything else, we are tax-raisers.
    Now, do you believe, given this financial outlook, that 
everything ought to be on the table in this hole we find 
ourselves in?
    Mr. Daniels. Well, sir, a couple comments. One is that I 
haven't given up at all on the possibility that we will be back 
in surplus and back to reducing debt very soon. I have got a 
chart here somewhere.
    Mr. Tanner. I don't either. But I am saying, don't you 
think we ought to put everything on the table if we see next 
year that we are still in this sea of red ink?
    Mr. Daniels. It is perfectly within the rights of Congress 
to look at these things all the time. I would say to you that I 
share your skepticism about long-term numbers and said so 100 
times last year, too. As your question pointed out, the revenue 
associated with the tax relief bill of last year phases in 
very--the revenue change phases in very, very gradually. It is 
the position of this Administration that this is not an 
undertaxed society. We are taxing the American economy at rates 
well above the post-war average, even after tax relief, and I 
think we have to be very careful raising that level of taxation 
any higher. But----
    Mr. Tanner. I am not talking about raising taxes. I am 
talking about putting everything on the table.
    Mr. Daniels. Really, I am not here to engage in the 
semantics game of whether--you know, a repeal or postponement 
is an increase and so forth. Just personally I don't think that 
gets us too far. There is a legitimate debate, however, between 
higher rates--higher total taxation and lower. And I am just 
saying, even after tax relief, I believe 19 cents on the dollar 
across this time period, the taxation of the economy is pretty 
high. We ought to be--it might be very counterproductive to let 
it become higher.
    Mr. Tanner. I agree.
    Chairman Thomas. The gentleman's time has expired.
    Mr. Tanner. May I have 30 seconds?
    Chairman Thomas. You get one more bite at him.
    Mr. Tanner. Here is the only point I am trying to make, Mr. 
Director. We already are $3 something trillion of money we pay 
interest on every year. We are going to be borrowing some more 
in the short term. Now, it seems to me to be almost--reach a 
moral question when we send young people in uniform to fight 
for this country in Afghanistan and then ask them and their 
children to pay for it because we are borrowing the money to do 
it, while we take a tax cut; that we are accused of trying to 
raise taxes if we say, wait a minute, we are borrowing money 
that they have got to pay back, and they are doing the fighting 
and we are taking the tax cut now in my generation. That seems 
to me that that makes a strong statement that we ought to put 
all of this on the table if we find ourselves this way next 
year. And that is all I ask you to agree to.
    Chairman Thomas. The Chair believes the gentleman's 
question was rhetorical. The gentlewoman from Washington wish 
to inquire?
    Ms. Dunn. I do. Thank you very much, Mr. Chairman. And 
welcome, Mr. Daniels. We are happy to have you here. I wonder 
if we could put that chart back up that you put, the chart 
before--no, with the bar graph. I think that is a very 
important chart. I can't see it right and clearly from here, 
but it looks like it is the chart that says we will be in 
deficit for 2 years and we will work our way out of deficit to 
end up with a $1.6 trillion surplus after 10 years. Is that 
correct?
    Mr. Daniels. Your statement is correct, although that is 
not what the chart says. You are pretty far away from it over 
there. You mind if I tell you what it says?
    Ms. Dunn. Go ahead.
    Mr. Daniels. It simply shows how wildly these 10-year 
forecasts vacillate. Because everybody understandably has 
focused on last year--the second one from the right, versus 
this year--and saying, notice that the projected surplus, still 
a surplus, has come down. Most people haven't noticed that--
except for last year, this is the best outlook we have ever 
had. It is the biggest 10-year surplus we have ever projected. 
And what that says to me is we can't rely very much on these 
things. They are interesting to look at.
    I have every hope that if the economy should come back 
strong, we could be back here next year looking at another sort 
of outlook that Congressman Tanner regrets that we don't have 
anymore. But your point is a correct one, and we are looking at 
substantial surpluses, even given the circumstances.
    Ms. Dunn. And I think that is an important thing to keep in 
mind, because the way I have heard this reported through the 
media is that we are in dire straits and we will never be in 
surplus again. And in fact we have been in deficit for many, 
many years up to about 4 years ago, in which we had 4 years of 
surplus. Now we are looking through 10 years of ending up with 
a surplus of $1.6 trillion. I think that is a very, very good 
goal and as tight-fisted as this Administration appears to be, 
I think it is a goal that we could hit.
    But I did want to go back to the one point that I heard 
that Mr. Tanner made and just ask you a question. You have 
often objected to the long-term revenue projections that we had 
to make in the Congress. I don't remember doing this until a 
few--couple years ago, when the Senate brought us over to their 
side of the street--because it seemed to me we had usually 
projected in 5-year increments. I am wondering if you could 
comment on that. Is there some economic theory behind this, 
other than the unpredictability of the longer term prediction?
    Mr. Daniels. No. Your recollection is correct. For most of 
American history, we didn't look out further than 3 years, and 
from the early seventies to 6 years ago--5 years--and this 10-
year, I would say experiment, is of pretty recent vintage. And 
when you look, again, at how erratic these numbers are, I think 
that at a minimum it means that we have to not rely too heavily 
on them or trust them too much. And I understand the reasons 
why the experiment was begun, but I think that we have learned 
how problematic they can be and how they can sometimes lead us 
into some long and not very useful arguments.
    Ms. Dunn. Yeah. And I think the problem is just what you 
say. All of a sudden the projections become the battle, and 
even when they are not accurate and probably wouldn't be 
accurate, depending on changes in behavior, we still seem to 
hook onto them. Is there any effort to change us back to a 
shorter term scoring system?
    Mr. Daniels. We certainly need to secure the agreement of 
Congress to do that, but in the budget we have submitted, we do 
show at the top-line level the 10-year numbers, because we know 
it is expected, and we didn't want to obscure at all the 
difference between last year and this year. But we didn't waste 
our time or the reader's time with the rest of the budget. We 
stop at 5 years.
    Ms. Dunn. Okay. Let me ask you one more question, because 
scoring has been a consistent problem. I have been working for 
years on trying to repeal the death tax. We have had many 
different scores. It is incredible how many different scores we 
have had on this. I applaud your effort, Mr. Daniels, to go for 
permanency in all the tax relief provisions that were signed by 
the President last June. I hope we can work toward that.
    I did notice that there was a huge score on the repeal of 
the death tax. I think it was like $130 billion, far greater 
than I had ever seen before. And I wonder if you happen to know 
about that, where that came from, or if I can get some 
information on how that score was put together.
    Mr. Daniels. I would want to talk to the Treasury people 
who prepared that. I didn't notice that it was that big a 
discrepancy, but I would be happy to answer you quickly in the 
aftermath of the hearing on that.
    Ms. Dunn. Okay. And let me just say that Mr. O'Neil 
suggested that when we do such scores, it might be wise to have 
a static score and a dynamic score for these items. I think 
that might be a way to go. What do you think about that?
    Chairman Thomas. I think the Director is mulling over that 
question.
    Mr. Daniels. Just making a note to myself.
    Ms. Dunn. Do you think that would be a possibility of doing 
the two different sets of scores?
    Mr. Daniels. Again, I would want to talk to Treasury about 
it. If the Secretary thought it was a good idea, I suspect I 
will, too, but I would want to talk to him about it, and I 
would want to talk to the--our fellow scorekeepers and make 
sure that they thought it had integrity.
    Ms. Dunn. Thank you.
    Chairman Thomas. Thank the gentlewoman. The gentleman from 
California, Mr. Becerra, wish to inquire?
    Mr. Becerra. Thank you, Mr. Chairman. Mr. Director, thank 
you very much for being here. I would like to just focus a 
little bit on where we are today given where we thought we 
would be a year ago. And I know that no one could have expected 
9-11, and certainly we hope that we don't have to foresee 
anything like 9-11 again, and we will do everything we can to 
prepare ourselves to meet that risk. But it seems to me that 
much of what we did last year, this Congress did--because I did 
not support the tax cut--was predicated on those assumptions. 
And I know that the President, and you in many statements, made 
it very clear that you were trying to achieve certain goals.
    The President had said back in his Joint Address to 
Congress in February of 2001, quote: ``We owe it to our 
children and grandchildren to act now, and I hope you will join 
me to pay down $2 trillion in debt during the next 10 years. At 
the end of those 10 years we will have paid down all the debt 
that is available to retire.''
    Now, I understand that was a principal goal; and you 
indicated that back in March of 2001 you stated that a 
principal goal of this President and his budget is dramatic 
reduction of the national debt. I hope a goal universally 
shared, you said. The President's budget over the next 10 years 
will lead to an increase in the national debt, not a decrease 
and certainly not a dramatic decrease. Does that mean that the 
President has abandoned his goal at dramatic decrease if not 
elimination of the national debt as we know it?
    Mr. Daniels. No, not for a minute; and I--every word you 
read is as true today as it was then.
    Let me say a couple of things. One is, the reason for my 
previous chart, we really don't know how many resources we will 
have. It depends entirely on economic growth, if it comes back, 
if it comes back perhaps more strongly than we can see in 
prospect right now. We have pretty conservative economics in 
our assumptions. No one would be happier than I or the 
President if we could pay the bills associated with defending 
our country, meeting our needs, and return quickly to paying 
down debt.
    Mr. Becerra. But this budget doesn't pay any of the 
national debt, does it?
    Mr. Daniels. Well, it would pay--yes, over the long term on 
these projections it would, but not what we are hoping to pay 
and still hope to pay.
    Let me just point we could pay down debt in the year ahead 
of us in spite of everything, and I can show you that. This is 
the composition of the deficit----
    Mr. Becerra. I understand, but let me make sure. Our debt 
is what, somewhere around $3.5 trillion?
    Mr. Daniels. About $3.3 trillion right now. That is the 
publicly held debt.
    Mr. Becerra. Publicly held debt, putting aside Social 
Security, just the national debt as it set--the raw budget 
debt, $3.3 trillion. At the end of the 10 years under the 
President's budget, it is at least $3.3 trillion, is it not?
    Mr. Daniels. Actually, no. Again, on these numbers that the 
convention requires us to produce, we would still run after 
everything a trillion dollars of surplus over the timeframe. So 
it would come down but not nearly as far as we had hoped.
    Mr. Becerra. So then the numbers that you provided and CBO 
provided us are wrong because they say--those numbers say that 
the debt will be at least the $3.3 trillion that it is today?
    Mr. Daniels. Well, you don't know and I don't know and CBO 
doesn't know because----
    Mr. Becerra. Right. But we are doing things based on 
projections. We passed a tax cut bill last year where----
    Mr. Daniels. That is an interesting point, though. If you 
are, like I, a skeptic dubious about our long-term clairvoyance 
about these things, you probably ought to be feel good about 
the tax relief of last year, whether you liked it or didn't 
from this standpoint. It was more backloaded than the surpluses 
we hoped to see. Therefore, you have got many, many chances to 
revisit it if you think that is good policy.
    Mr. Becerra. I think what I hear you saying is, because of 
the hits, the costs of the tax cut last year won't hit for a 
few years. We may have a few years to prepare. But if the 
economy doesn't improve, those big hits are going to be pretty 
big hits. Let me ask----
    Mr. Daniels. Let me just say it is only a hit if you are 
sitting in Washington. If you are a parent who has a child, who 
would like a child deduction or if you are a married couple and 
would like to get out of the marriage penalty, if you are any 
taxpayer hoping for a little tax relief, you probably don't 
think of it as a hit.
    Mr. Becerra. Director, I would love to do that as well, but 
I would love to tell my parents that I won't be using their 
money for Social Security, and I would love to tell my children 
that I won't charge them because I am using the government 
credit card to pay for the debt that I incur today so that I 
can retire and then my kids will then have to pay for my 
retirement.
    I want to strike on one last point and that is that in your 
budget, as much as we are going into deficit spending and 
because we are having to borrow money from Social Security, it 
seems to me unfortunate that the President's budget also cuts 
all the money from two particular programs that are so 
essential to so many places, especially Los Angeles where I am 
from, and that is school construction dollars and classroom 
size reduction dollars. I hope that the President will rethink 
that because certainly in places throughout the country we need 
to provide our kids with an opportunity to learn so they don't 
have to depend on government and can work and get this economy 
rolling again.
    So, Mr. Chairman, I thank you for your time; and, Director, 
I thank you as well.
    Mr. Daniels. Thank you.
    Chairman Thomas. Did you want to briefly respond?
    Mr. Daniels. Oh, very brief.
    Those two categories were hotly debated last year and 
didn't--and were I believe consolidated with other education 
activities by the Congress, and we did not--we agreed with 
that, by the way. We think that under more flexible--more of a 
block grant approach communities can make their own best 
decisions about whether they need--what they need most to 
improve their schools. So we did not seek to start up in this 
year's budget what Congress agreed to close out in last.
    Mr. Becerra. But----
    Chairman Thomas. The gentleman's time----
    Mr. Becerra. But, Mr. Chairman, just to clarify----
    Chairman Thomas. He answered the question.
    Mr. Becerra. Mr. Chairman, if I could just clarify the 
record, though. Those were programs that Congress agreed to 
pass back in the year 2000, and there was a commitment as a 
result of a compromise to fund that along with other education 
programs that Congress agreed to. So to kill the program is to 
go back on a commitment made--at least if Congress kills it, to 
go on back on a commitment this Congress made to fund school 
construction and classroom reduction.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Georgia, Mr. Collins, wish to inquire?
    Mr. Collins. Thank you, Mr. Chairman; and thank you, Mr. 
Daniels.
    You know, you made a comment a while ago that you and the 
Administration, particularly the President, doesn't think that 
we are an undertaxed society. Well, I can assure you that the 
majority of the people in the Third District of Georgia don't 
think we are undertaxed. In fact, the majority of the people in 
the Third District of Georgia think that we overspend and that 
is the real problem in this town.
    Now, having said that, the real problem, too, is that we 
have a tendency with the party that is in majority, no matter 
which one it is, and today we have both on each end of the 
hall, a separate majority, we have a tendency to enhance 
programs and enhance spending which just creates more problem 
with the fact of taxation. And until we can control our 
spending habits, we will have a hard time controlling the tax 
problem that we face.
    I was reading a quote the other day from the Chairman of 
the Federal Reserve when he testified before this Committee a 
year or so ago when asked about taxation. His response was, the 
lower the tax, the better. He has always been an advocate for 
reduction in marginal rates and for reduction in capital gains 
because he felt like, if you could reduce those, those were the 
incentives for people to enhance their income and to better 
their position, which also enhanced the Treasury of the United 
States.
    Last year when this same gentleman testified before the 
Budget Committee, he was asked the question, do you think you 
raised interest rates too quick and too high? Of course, 
naturally, he said no. His goal in doing so was to slow down 
corporate capital investment. He was successful, very 
successful. In fact, today, after reducing the interest rates 
11 times, which I think is a record number of reductions, Mr. 
Greenspan says that the problem today is a lack of capital 
investment because capital investments are what create jobs. It 
is marketplace activity. It is people buying what comes off of 
an assembly line or else it is purchasing or constructing which 
entails jobs.
    So I think to even think about going back and reviewing or 
putting back on the table and reversing the trend of reducing 
the marginal rates would be entirely wrong, and I think for 
anyone in this town who thinks that the problem with 
unemployment is insufficient unemployment benefits or insurance 
are just plain-out dumb. The problem with unemployment is the 
lack of a job, and there are things that we could be doing, 
things that this body has done, this Committee has done, and 
the things that the President has promoted that would encourage 
investment and create jobs.
    I hope that those who seek to use this situation of 
unemployment, recession, war and emergency as an enhancement to 
their political progress in November of this year fall flat on 
their face, particularly by stopping and obstructing things 
that will help citizenry at home.
    I said yesterday and I will say it today and I will say it 
tomorrow, the problem in this town is we focus on the cash flow 
of the Treasury instead of the cash flow of individuals in 
business where the cash flow of the Treasury comes from. Until 
we change our view and support our constituency and their 
livelihood, we are just absolutely off base; and to think that 
we continue to put in place programs that increase the number 
of people who are dependent upon the government is going to 
help this Republic to stand too are dumb, because that is what 
leads to the demise of a democracy or this Republic. Because 
the definition of such is, once--the definition of a democracy 
is, once people learn of the benefits that they can receive 
from this Treasury, they elect people who will enhance those 
benefits and leads to the demise of the democracy which will be 
the end of our Republic. That is not doom and gloom. That is 
truth.
    I hope that the President will hold the line on spending 
more so than we have on this budget. I hope that the President 
will take a look at measures and issues that are being 
presented or will be presented that transfer more payments of 
one taxpayer to another, because that is wrong. Thank you, Mr. 
Daniels.
    Mr. Daniels. Thank you, sir.
    Chairman Thomas. Thank the gentleman from Georgia. The 
gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman. Welcome, Mr. 
Director. Glad to have you here.
    Mr. Daniels. Thank you.
    Mrs. Thurman. I want to go back in history a little bit, 
because I am very concerned that we are kind of doing a deja vu 
here and just kind of remind us of what happened in--first in 
1981, when the Reagan tax cut came in. And it was done. I 
wasn't here at the time but remember it.
    Then I have had some conversations with people over the 
years to see what happened after 1981 and actually have pulled 
together kind of a list of things that did take place; and, by 
the way, they were revenue--trying to raise revenue after the 
1981--so we had things like the Tax Equity and Fiscal 
Responsibility Act. We did the Highway Revenue Act of 1982. 
Then we did the Social Security amendments of 1983. If I am 
correct, that might have been the time that we first taxed 
Social Security at 50 percent.
    Then there is--we go on, and we have budget reconciliation 
and omnibus budget reconciliation, all of which were revenue 
raisers because of what happened under the 1981--and if I 
remember correctly, Senator Dole was one of the architects of 
that.
    Then I know recently when we have had some of the Social 
Security debate, we had Senator Dole come in and talk to us 
about what happened in the Commission in 1986, and in fact we 
had to raise the retirement time for somebody to retire. I 
believe payroll taxes were increased.
    Then in 1990 we had another revenue raiser because we were 
also in some problems of deficits. Then in 1993 we all know we 
came in and we did it again; and at that time we also put 
another 30 percent, raised the rates on Social Security, put 
those dollars in the Medicare trust fund.
    Then in 1997 we did the Balanced Budget Act, which, by the 
way, we cut millions--actually, billions of dollars out of 
Medicare.
    So part of my concern is that I see kind of this pattern 
that potentially happens, and that is when we start doing some 
of these tax cuts, some of which have not given us exactly what 
we thought it was going to do to the economy, and it has 
created some deficits in some of our social programs such as 
Social Security and Medicare. Those two programs are the ones 
that end up having to have changes and are targeted for changes 
so that we keep them solvent.
    Well, we thought we were doing pretty good because by 
2000--you know, we moved out that Medicare solvency was going 
to 2025, Social Security was going to go out to 2039. I am very 
concerned, and I know we don't have those numbers yet, at what 
the actuaries are going to show when we come back in here as to 
solvency of those two, at what age or what date the solvency of 
those two trust funds are going to be as compared to where we 
are today and what kinds of potential concerns or changes we 
might have in these programs.
    We had Secretary Thompson in here this morning. I had 
several questions because, obviously, I am from Florida. As you 
can imagine, Medicare is a huge issue for us. But we had 
several questions of what was going to happen in nursing homes, 
about 17 percent cuts that are a very big concern to them and 
are very unstable. Government pays for about three to four--
three out of every four beds.
    It looks to me like the prescription drug benefit 
potentially is being shifted down to the States through their 
Medicaid program basically or at least some standards set for 
them to be able to do this, maybe covering over about 3 million 
people in the country.
    But, you know, it is nice to hear about all of this, but 
there are people that have offered some alternatives like the 
trigger. I understand Ellen Tauscher offered that in the Rules 
Committee yesterday or last night to try to fix some of this.
    So I guess, Mr. Director, what I am really trying to get 
at, if in fact--because we have all said the assumptions didn't 
work. They have done this. They have done that. We couldn't 
rely on them. You know, things have changed. We had a 
recession. We had the terrorist attacks. We have all these 
things going on. What is your plan based on knowing that we 
have got that bloated tax cut? If these things don't work, if 
this economic package that you are trying to do, what hope can 
you give to the American people that you are willing to come in 
and make some of those tough issues and tough ideas that might 
have to be presented without continuing to touch the same 
programs that have been cut over the last several years, being 
Social Security and Medicare?
    Mr. Daniels. Well, thank you, Congresswoman. You raised a 
lot of important points, and I am going to try to center on 
what I think was the core of your question.
    The first thing to say is that surpluses are a very 
important goal. They are not the end of government. In fact, 
they are not--they are at least behind three other objectives, 
all of which, through circumstances nobody here created, the 
President didn't create, we are confronting simultaneously.
    So the first thing I think to say to you is that, as 
important as they are and as much as we want to get back to 
them quickly, there are some things that come first. They are 
the defense of the American people, their safety, their 
physical safety, the first and foremost responsibility of the 
central government ahead of everything else. Then the 
encouragement through the things government can do which is 
not--it is not all powerful in the economic area but the things 
that it can do to encourage a return of economic growth. And it 
is only economic growth that will create surpluses.
    Your history catalogue was important, I thought, and 
useful, but I am pointing out that it is really economic growth 
that gets us to a strong position, not the other way around. 
Surpluses have never created a job or a higher GDP.
    I think that the--you ask about tough decisions, and you 
have a President who I think has proven he doesn't shrink from 
them, and he has made a few already. He will make some more. He 
will make some in the arena we are talking about now.
    I was encouraged by Congressman Collins' suggestion that we 
look even harder for modifications in the budget that might 
bring balance back to us more quickly.
    Finally, I would just say that one thing many of these 
questions I think point us to is the need to get serious 
quickly about Medicare reform. This budget asks for it. Again, 
the President has asked for it since coming to office. We ought 
to move to it quickly.
    Anything we do with regard to prescription drugs for the 
most vulnerable elderly ought to be a mere bridge as short as 
possible, a transition to genuine Medicare reform, and that is 
the single most important thing we can do to offer long-term 
hope both for solvency and for better quality. And both the 
programs that you mentioned that we all treasure, these 
programs are both in need of long--comprehensive reform, and 
let us get on with it.
    Chairman Thomas. Thank you, Director.
    I tell the Members, to the degree their questions consume 
the 5 minutes, there will be no response. The Chair has tried 
to accommodate moving down the lower level. The last two 
inquirers have consumed almost 10 minutes each. It makes it 
very difficult to accommodate the Members' wishes. When they 
are allowed to do it, they then extend the time the way they 
have and a significant discourtesy to others.
    The gentleman from Ohio wish to be recognized?
    Mr. Portman. Thank you, Mr. Chairman; and thank you, Mr. 
Director, for being here.
    We were talking about history, and I just thought it would 
be helpful to talk about history and ask you a few questions, 
first of all, as to whether we are overtaxed or undertaxed? As 
a percentage of our income, are we taxed at rates that have 
been historically on average or are we high or low?
    Mr. Daniels. Well, above average, Congressman. This is 
after the tax relief and throughout the horizon we can see and 
at all-time record levels when we look at individual income 
taxes.
    Mr. Portman. In fact, the 18 percent average over time is 
going to be exceeded even after the Bush tax cuts are all in 
place?
    Mr. Daniels. It is being exceeded right now and will be as 
far as we can see----
    Mr. Portman. The highest tax rates except during war time.
    Second, with regard to the debt and deficit, just 
interesting statistics out there on that, a lot of concern 
about the debt now. We pay down almost a half trillion dollars 
on the debt. We want to pay down more. But as a percentage of 
our GDP or of our economy or as a percentage of outlays, how 
does our debt compare to the last 20 or 30 years?
    Mr. Daniels. Down substantially, much, much lower than all 
the other developed countries. This is not to say that anybody 
is satisfied with it, only to try to keep it in perspective.
    Mr. Portman. We are down to a percentage of what we were in 
1970s now, and that is thanks to economic growth and beginning 
to curb the increase in the debt. As far as the deficit goes, 
have we ever not run a deficit during a recession?
    Mr. Daniels. Not to my knowledge, sir.
    Mr. Portman. Does your budget propose a deficit that is 
about what it has been during a typical recession or is it a 
lower deficit?
    Mr. Daniels. Actually, somewhat smaller; and, again, this 
is not to express any satisfaction with any red ink at all----
    Mr. Portman. But it is an important question to remind 
during recession----
    Mr. Daniels. Yeah, the deficit one on the right, as you can 
see, the one we are in now, the smallest reaching all the way 
back to World War II----
    Mr. Portman. Another historical issue that has been talked 
about a lot is tax cuts, and I just think it is interesting 
when you look at where we are. We have got a recession. We have 
a war. We have a national emergency. Yes, we put some tax cuts 
in place which hopefully will have kept the recession from 
being worse than it would have been, will keep us from going 
into a deeper recession.
    As I recall, the Democrats have an alternative on the tax 
cut in the Senate. It was a cost that was $1.25 trillion versus 
the Bush tax cut which was $1.349 trillion. They had virtually 
the same cost. Would it have had the same impact on the 
surplus?
    Mr. Daniels. Yes, and some of the alternatives would have 
had a more severe impact on the near term, that is, this year 
and next year; and the ones we are looking at in this budget 
actually would have been--would have--the deficits would have 
been deeper under those alternatives.
    Mr. Portman. I think it just gives us some historical 
perspective with regard to taxation, with regard to deficits 
and debt, and with regard to tax policy and its impact on the 
budget.
    The final question I have for you, I notice in your budget 
that you have got the refundable health care tax credit. I 
didn't have a chance to ask Secretary Thompson about it this 
morning. I wonder if you can give me your personal views on 
that and how do you think it would impact the uninsured?
    Mr. Daniels. The President believes it is a very important 
initiative and hopes that Congress will treat it promptly and 
seriously. We are doing all we can right now to--and Secretary 
Thompson's in the lead in trying to extend coverage to the 
uninsured. We are using much broader use of the waiver policy 
under Medicaid to do that. A million and a half people have 
secured health insurance in the last year through that device, 
but this would reach, of course, millions more in a direct way, 
in a way that gives them the choice, gives them autonomy and 
dignity in meeting their own health care needs, and we would 
very much like to see it. We wanted to see it for dislocated 
workers in the stimulus package that this body passed, and we 
would like to see it on a permanent basis.
    Mr. Portman. We are encouraged to see it in the budget, and 
I thank you, Mr. Director.
    Mr. Daniels. Thank you.
    Chairman Thomas. The Chair would inquire then of the 
Director, would it be possible to get some signal from the 
Administration or preferably the President that if in fact the 
Senate sends over an unemployment insurance package as the 
single response in this time of need that there might be a 
signal that perhaps the displaced workers' tax credit or a more 
broadly based tax credit could be attached to the UI and 
perhaps the New York package to make it a bit broader based?
    Mr. Daniels. Well, the answer would be perhaps. I will be 
happy to take that idea back.
    Chairman Thomas. Thank you for the ``perhaps.'' The 
gentleman from Texas wish to inquire?
    Mr. Doggett. Thank you. Mr. Daniels, I want to thank you 
again for the very constructive role that you played in the 
airline bailout. There was some of my----
    Mr. Daniels. Yes. Rescue.
    Mr. Doggett. Some of my colleagues that wanted to write 
essentially a blank check to Continental Airlines and some of 
the other airlines, and after my objection I think your 
personal involvement and your office's involvement were 
important in getting some safeguards in place to protect the 
taxpayer, maybe not every one that I wanted, but I think it was 
an important step forward.
    On the other hand, I have been concerned about some of the 
things you have said about the statutory debt ceiling. What do 
you believe is the amount of the increase that the Congress 
needs to approve in the debt ceiling and what is the final date 
by which we need to do it?
    Mr. Daniels. I take my cue from the Secretary of the 
Treasury here, but I believe the correct answer is $750 billion 
and--during March to be safe in terms of keeping the operations 
of government moving uninterrupted.
    Mr. Doggett. Under the plan you have laid out here over the 
next 10 years, that won't be the last time that we will need to 
raise the debt ceiling, will it?
    Mr. Daniels. I wouldn't say we would be planning for more. 
Again, I have every hope and will take every step to see that 
we get back to surplus as soon as we can. But you are correct. 
On the projections here, this would not be the last time.
    Mr. Doggett. I don't see anything in your budget to cover 
what I assume is still an objective of the President to 
privatize Social Security with the individual accounts. As you 
know, the Deputy Actuary of the Social Security Administration 
has made some projections about transition costs, and while I 
understand the goal is to not offer the privatization plan 
until after the election, I think everyone involved recognizes 
that there are hundreds of billions of dollars in transition 
costs and yet there is not anything in your budget to cover 
that, is there?
    Mr. Daniels. Not specifically, sir. I think privatization 
is probably not the right word to describe where we are. 
Clearly, the President does favor as a part of the future 
retirees' options the option of some personally directed 
investment accounts, but----
    Mr. Doggett. I understand----
    Mr. Daniels. Usually people mean something more by 
``privatization.''
    Mr. Doggett. You use different terminology.
    Mr. Daniels. Right.
    Mr. Doggett. But whatever the terminology is, private 
accounts or privatization, the cost of transition is not 
inconsiderable, is it?
    Mr. Daniels. Yes. The Commission has, as you know, laid out 
a series of options, none of which has been settled on yet. 
Clearly, this is going to be an extended conversation. There 
are many people who favor different of those options, some who 
disagree with all of them, and therefore we didn't feel it was 
timely to pick a number which could vary dramatically depending 
on which outcome we have.
    Mr. Doggett. But as we look over the next 10 years and 
whether to provide--as your budget does propose an additional 
$650 billion in tax cuts plus whatever we might do on AMT 
relief or expiring tax credits, it is certainly appropriate for 
us to consider what the costs would be for any transition to 
private accounts, isn't it?
    Mr. Daniels. I would not disagree.
    Mr. Doggett. I like your idea of a management scorecard and 
performance budgeting, but I note that one of the several 
agencies that failed in all five categories was the Department 
of Defense, and they are getting the biggest increase. It seems 
to me that when you look at the reports that the General 
Accounting Office, that the Inspector General of the Department 
of Defense have done themselves concerning waste and 
mismanagement at the Department of Defense that our security is 
not improved with more waste and mismanagement, and I hope your 
office will be giving consideration to what can be done, 
whatever the funding level is. We don't get the most security 
with the most waste, but we seem to be adding there.
    Then, finally, we had the cameo appearance from Secretary 
Thompson here this morning on prescription drugs. I know, 
having worked before coming to this office for Eli Lilly, you 
are very familiar with this area, but it does seem to me that 
the prescription drug program that this budget contemplates is 
not one that is going to do much for very many seniors and that 
unless we use--and I know this is contrary to the 
pharmaceutical manufacturer's position--unless we use the 
bargaining power of the Federal Government much as we have done 
for our Nation's veterans, appropriately, to try to help them 
negotiate lower prices, that our seniors are going to continue 
to face the highest prices in the entire world for their 
prescriptions if they are uninsured; and I view this as a 
serious deficiency in the budget.
    Beyond that, the concern that I have is that when you take 
what is essentially $2 trillion of money that was paid in--even 
though you credit it to Social Security and Medicare trust 
funds, it was paid in for that purpose in payroll taxes--and 
use it for non-Social Security purposes and non-Medicare 
purposes, it really is a raid on those funds.
    Mr. Daniels. Two quick responses, if I may, Mr. Chairman.
    First of all, Congressman, much in there I agree with. Let 
me just make a point or two. We always use Social Security for 
other purposes. What we use it for when we can is to pay down 
debt. I think that is everyone's preferred use, but it is 
always used, and the trust funds are always just as big as they 
would have been. So in this era when we are at war at least 
temporarily, we find it necessary to use them for a different 
purpose, but it is important for folks to understand that they 
are always put to one use or another.
    A quick word on prescription drugs. You made a couple real 
important points. I mean, to me we would not disagree that the 
steps the President has been pushing for, the discount card, 
the immediate help for those at the most vulnerable income 
level, are too partial and should be temporary. I mean, to--I 
think to the President the lesson is, let us get the 
comprehensive reform including prescription drug coverage for 
all as soon as we can.
    Second, I would tell you that elsewhere in our budget there 
is a substantial increase--just on the point about the 
manufacturers' participation, a substantial increase 
anticipated in rebates that they pay through Medicaid. And this 
may not meet with favor there, but it is one of the ways in 
which we are trying to enhance and protect Medicaid patients.
    Chairman Thomas. The gentleman from Texas, Mr. Brady, wish 
to inquire?
    Mr. Brady. Yes, Mr. Chairman.
    Mr. Director, the charts we have seen, the budget 
projections, surplus and all, those aren't written in stone, 
are they, for the next 10 years?
    Mr. Daniels. No, sir. That has been one of the--in fact, 
one of the charts sort of goes to that point. We really--it is 
hard to know. We can't know.
    Mr. Brady. But the single greatest way that we can return 
to large surpluses, paying down the debt and creating more 
revenue for Social Security and Medicare, isn't the greatest 
single thing Congress can do right now is to get the economy 
moving as soon as possible?
    Mr. Daniels. Yes, no question.
    Mr. Brady. So would it be your opinion that at this point 
in the recession and if we really are concerned about balancing 
the budget and paying down debt and preserving Social Security, 
neither Chamber in Congress ought to give up on getting this 
economy moving now; is that right?
    Mr. Daniels. That would certainly be the President's point 
of view.
    Mr. Brady. I appreciate, too, your focus on results rather 
than just activity. Up here it seems we always measure our 
progress by how much more money we pour into a leaky bucket. We 
rarely work on fixing those leaks and trying to actually get 
that service to the people who most need it and to that 
direct----
    I serve as a new Member on the Social Security 
Subcommittee, and I am dealing with disability issues where we 
have got retirement claims. Disability claims are projected to 
jump by more than half, and so funding for Social Security is 
reaching the Administration--reaching critical stage.
    The bipartisan Social Security Advisory Board has 
repeatedly said we are going to need new resources, greater 
productivity, especially since about half of our employees are 
ready to reach retirement soon, and we have an increased 
backlog. We have got about--in disability we have got almost 
1.2 million individuals whose claims are backlogged, and in my 
Houston area it has really reached a critical stage. We have 
one of the longest wait times in the Nation for a hearing just 
before a judge, and if you are caught up in this backlog, it 
really is a terrible situation to be in.
    Two questions I have. We all agree we need good service 
delivery. What can be done, do you think, in the near term to 
ensure the Social Security Administration does a better job 
getting the disability benefits to those who need them in a 
fair and efficient manner?
    Second, how do we start now from a resource and 
productivity perspective to set the agenda so we can 
effectively deliver these services long term?
    Mr. Daniels. That is a very important question. I met with 
the new Commissioner of Social Security pretty shortly after 
her appointment. This was the first item on her agenda.
    We talked about it. We talked about the resources required 
but also about potential reorganization or efficiency 
improvements at her department that might begin to bring that 
backlog down; and I can assure you, when you have her before 
you, you will find she sees it as job one.
    Mr. Brady. Great. Thank you. I yield back the balance of my 
time, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Louisiana wish to inquire?
    Mr. McCrery. Yes, Mr. Chairman, thank you.
    Just in case you are wondering, Mr. Daniels, those of us on 
the top row here have not been ignoring you. We have allowed 
our colleagues below us on the Committee to ask questions first 
since we were allowed to ask questions first this morning with 
Secretary Thompson. So I am delighted to have you here and to 
be able to talk with you about the budget.
    I might just say on the repeal of the corporate AMT, when 
the President originally announced his intention to have us 
move an economic stimulus package, he did request repeal of the 
corporate AMT. Now, he did not request the redemption--
immediate redemption of the credits. We came up with that on 
our own. It was a good idea then. It is still a good idea in 
terms of stimulus, if that is what you want, because it pushes 
about $21 billion out the door in the first year, and it 
doesn't cost a dime over 10 years because the Joint Committee 
on Taxation assumes that those corporations would have redeemed 
these credits in any event over the next 10 years. It is their 
money.
    Now, of course, in your budget you say reform the corporate 
alternative minimum tax, I assume somewhere along the lines 
that we included in the negotiation with the so-called 
centrists in the Senate in a second package that we passed as a 
result of those negotiations.
    Thank you very much for including in the budget a proposal 
for reforming our unemployment insurance system. It is very 
badly needed, particularly in light of welfare reform, our 
emphasis on work and getting people off welfare into the 
workforce and particularly in light of our renewed familiarity 
with economic cycles and knowing that we can have recession 
still, and there is a need for employment services. That need 
has gone sorely lacking because of Congress' inattention to the 
matter and appropriating less money to the States than they 
need to adequately run their unemployment insurance services, 
including unemployment services. So that was a welcomed 
addition to the budget, and I look forward to working with you 
and the Secretary of Labor on implementing that.
    There has been a lot of talk this afternoon about the 
budget, the debt, the deficit. Generally, Mr. Daniels, would 
you agree that our economy and our fiscal situation at the 
Federal level are fundamentally strong still, that we are in 
better shape now than we have been in a long time in terms of 
our economy, the underlying fundamentals of our economy and the 
budget or the Foreign Sales Corporation of the Federal 
Government?
    Mr. Daniels. Yes, sir, I would. I think that it is a 
tribute to people on both sides of the aisle and this 
Administration and previous ones that we found ourselves in 
this position again. I think it is historically striking that 
in a recession with a war and with some emergency costs from 
last September's attacks all rolled up simultaneously that we 
are essentially at balance on an operating basis, as I pointed 
out. Until you take the additional step, as the President would 
much like to do, of attacking the recession further with a 
stimulus package you are about in balance; and in historical 
perspective that is astonishing.
    Mr. McCrery. So, in other words, citizens of our country, 
even though we are in a recession and even though we have 
challenges from a security standpoint, in terms of our economy, 
in terms of our financial condition, they ought to be comforted 
that we are still in good shape.
    You say in your testimony that we will pay 9 cents of every 
dollar as interest payments. You don't say when, though. When 
under your budget are we scheduled to reach that level of nine 
cents of every dollar for interest payments?
    Mr. Daniels. We are there. It is about 8.7 cents in the 
year we proposed, as I recall, fiscal year 2003; and it has 
been coming down rather rapidly. Again, we can't go low enough 
I suppose is the way we ought to all agree to look at it, but 
we ought to recognize where it is.
    There is a chart I can show you that does remind us that 
not too long ago much more of that money--we were correctly 
reminded by a question over here that money is not particularly 
productive, but this is the burden on the Federal budget, and 
you can see just as recently as a few years ago it was almost 
twice the level we will now be at.
    Mr. McCrery. So, in other words, for 2003 you are 
projecting 9 cents on the dollar for servicing the debt?
    Mr. Daniels. Yes, sir. Just a little less.
    Mr. McCrery. Great. Thank you very much, Mr. Chairman, for 
allowing us to visit with the Director; and thank you, Mr. 
Daniels.
    Mr. Daniels. Thank you.
    Mr. McCrery. Keep up the good work.
    Chairman Thomas. The Chair appreciates the line of comment 
because, frankly, a dropping deficit in an environment of an 
increasing GDP means you are managing the deficit in a way that 
none of us thought. Some of us remember just a short time ago 
that the interest on the national debt was the third largest 
payment that the Federal Government made, notwithstanding the 
circumstances we are in. We have a much brighter picture than 
we did just a short time away.
    The gentleman from North Dakota, by gosh, wants to be 
recognized.
    Mr. Pomeroy. North, by gosh, Dakota. Mr. Chairman, thank 
you very much for calling on me, and I am delighted to have the 
chance to ask some questions of the Director.
    First, I would note that it appears, using the 
Administration's numbers, the actual borrowing cost would be a 
trillion dollars more in light of the additional debt, rather 
than if we had been able to keep on the debt reduction timeline 
that the Administration projected 1 year ago.
    My question gets to--the first part of my question gets to 
Veterans Affairs (VA) and funding for veterans' health 
benefits. The President specifically noted in his State of the 
Union a historic increase in commitment of resources to 
veterans' health. Seven percent growth I believe is what it 
would equate on a percentage basis. Put in perspective, 
however, that is a little less sufficient than one might 
otherwise think.
    Two reasons. Health inflation, which is about 11 percent, 
costs going up at 11 percent. Anyone who has paid a health 
insurance premium increase knows that costs aren't holding 
level, they are going up, and they are going up beyond the 7 
percent range, again about 11 percent nationally.
    Also, however, when you are looking at the veterans 
population, you are looking at the World War II vets, you are 
looking at the Korean vets, and you are looking at utilization 
increasing as these aging veterans require more health services 
than they did previously in their younger years, 11 percent 
increases in utilization, I believe what the VA figures show. 
So you have got utilization going up by a rate of 11 percent, 
you have got costs going up by a rate of 11 percent, and you 
have got a commitment for the budget of a 7-percent increase.
    Now, the resulting bind has had some terribly unfortunate 
consequences. Recently in North Dakota I have had some meetings 
on veterans' health care, heard horrifying stories about newly 
qualifying veterans, senior citizen veterans waiting 6, 8 
months before they can access their initial visit to the 
doctor.
    Even worse than that, the region that North Dakota is in 
for veterans' health care has literally closed down the 
satellite-based outpatient clinics to any new patients. A 
veteran in Minot, North Dakota, for example, that happened to 
be an existing patient will have health care available through 
the VA satellite facility in Minot. Someone that is just now 
requiring services is going to have to drive to Fargo, North 
Dakota, a drive of about 7 hours, to access those services. 
That is a very, in my opinion, insufficient way to address cost 
response problems.
    I am wondering if the Director has a response in this area.
    Mr. Daniels. I would start by saying that the increases 
last year and then again especially this year, that you just 
correctly referenced will be up over $26 billion in the VA this 
year, is evidence of the commitment that the President feels at 
a time of war when, as I say, the average for nonwar-fighting 
activities is two. One way to look at this is it is three and a 
half times the rate of increase being provided here. I think 
that is worth recognizing at the start.
    In terms of health cost inflation, it depends which part of 
health care you are looking at. The VA system in general is a 
pretty good one and has done some very innovative things to--
such as bulk purchasing of pharmaceuticals, which was mentioned 
a minute ago, that have kept its costs somewhat more in line.
    I think you are quite right that the big driver over there 
is not unit cost inflation as much as it is utilization. Part 
of that is demography. Part of that has been the broadening, 
you know, dramatic broadening in who is eligible, so-called 
category 7 vets, higher income and nondisabled now eligible or 
driving--they are going--they have gone from something like 4 
percent to 21 percent of all utilization. That is the big 
increase that Secretary Principi is wrestling with, and it is 
worth keeping our eye on.
    I made careful note of the fact that you have--that there 
are some local problems that you have seen, and I will make 
sure to report those. My sense is that--and I hope this is true 
that they are somewhat exceptional. It is harder to deliver 
service of VA-type quality in sparsely populated areas, but I 
am sure that Secretary Principi will not be happy about it and 
will want to do something about it.
    Mr. Pomeroy. I have spoken with the Secretary and will be 
meeting with him later this month. I thank you, Mr. Director, 
for that.
    It is just not acceptable to try and work your way through 
the budget shortfall by creating identically placed veterans in 
the same community with a very dramatically different access to 
health services.
    Finally, the last question I would have is relative to the 
budget itself. We are looking at deficits. I am interested in 
your comments about pulling out of deficits in the near future. 
We have a chart that indicates, and I have made copies for the 
Members, that basically within the President's budget proposal 
the additional tax cut would take us from a deficit position to 
a deeper deficit position and that indeed the general fund 
never does get out of deficit for the entire run of the next 10 
years, which means we are subsidizing functions of government 
with revenues coming in for Social Security or Medicare.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T9697A.006
    

                                

    Mr. Daniels. Of course, you are using your definition. 
Instead of unified budget, you are using the on budget, that 
is, taking the trust funds aside, which is a concept we 
understand. I point out there has never been a period in our 
history where we ran an on-budget surplus for an extended 
period. We agree with you we would like to do it. It all 
depends on the economy.
    It is worth noting that this year and next year the same, 
if there had never been a tax relief bill and in fact if we had 
not spent a nickel more than the year before, the economy alone 
would have, quote, raided Social Security, would have, quote, 
broken the lockbox all by itself by a large amount in the year 
we are sitting in. So that is--as others' questions pointed us 
to, that is the key variable. That is what we have got to look 
at.
    If it does come back, our long-term outlook could brighten 
once again. Two years ago today, we saw $2.9 trillion over 10 
years. Everybody said hooray. That was the best we had ever 
seen. Last year, it looked much better. This year, we are back 
where we were in 1999. I hope we go back up.
    Mr. Pomeroy. Mr. Director, your own comments of a year ago, 
having protected every penny of Social Security, every penny of 
Medicare receipts for Medicare, setting aside $1 trillion for 
needs and contingencies, it is still a $1.6 trillion overcharge 
to the American taxpayers. That was not a qualified outlook you 
placed on budget projections last year. You indeed were perhaps 
the loudest voice for these are projections we can bank on. We 
did with the tax plan, and now we have got a decade of deficits 
as a result.
    Mr. Daniels. Well, I beg to differ. I would be happy to 
send you a list of many, many times, including I will bet you 
on the very day that--February 25 there in which I talked about 
the uncertainty of the long term. The reason that we talked 
about a $1 trillion set-aside contingency, the explicit reason 
was because we cannot know the future.
    Now, looking from today with everything that has happened, 
it is true that $1 trillion was--even $1 trillion wasn't 
enough. The shortfall just from the economy was in excess of 
that, and for that I have no particular defense except it is 
not as though we didn't think of the very real possibility that 
circumstances could work against us.
    Mr. Pomeroy. But knowing what--I thank the Chairman. Thank 
you, Mr. Director.
    Chairman Thomas. Let the Chair respond to the gentleman's 
concern about the veterans who have to drive 7 hours to Fargo. 
I just tell the Director, we have been trying to work--and we 
came close in the last Administration--with the concept in 
terms of distances where you have a VA without walls. You 
really only need a storefront with a computer in which the 
veteran is determined and you contract in the community.
    It makes no sense with the World War II veterans now in 
their seventies having to get outpatient services and drugs 
filled and other very modest treatments to require them to go 
to the bricks and mortars owned by the U.S. Government with the 
VA title on it. This really is a way to make sure that they get 
the kinds of services that they are entitled to, instead of 
having an administrative structure which is somehow hooked to 
bricks and mortars being serviced to our veterans. This idea of 
simply contracting where there is not going to be a VA health 
clinic or even where there is one, for example, in my district 
where they have cut back significantly on the benefits, means 
why don't we just let the veterans get the services in the 
areas where they reside and contracting out the local services? 
The service, the commitment to the veteran is what we ought to 
honor.
    Mr. Daniels. Right.
    Chairman Thomas. Not a requirement that they visit some 
particular building.
    Mr. Daniels. That is absolutely right. A lot has been done. 
Much more needs to be done in contracting out.
    I will just add one other footnote. It will help if we can 
continue to have support in Congress for getting out of bricks 
and mortar that we really don't need anymore. There are many 
places in America--while you don't have enough facilities in 
Minot, there are places where we have multiple hospitals within 
blocks of each other and don't need them, and we do have 
difficulty sometimes moving to where the need is.
    Chairman Thomas. Any additional questions?
    The Chair and the Members would thank you very much, Mr. 
Director, and look forward to the difficult decisions you have, 
especially the responses to the particular questions that have 
been asked.
    The hearing stands adjourned.
    [Whereupon, at 4:05 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Thomas and Mrs. Johnson 
to Mr. Thompson and Mr. Daniels, and their responses follow:]

                                      U.S. House of Representatives
                                               Washington, DC 20515
                                                   February 8, 2002

The Honorable Tommy Thompson
Secretary
U.S. Department of Health and Human Services
200 Independence Avenue, SW
Washington, DC 20201

The Honorable Mitchell E. Daniels
Director
Office of Management and Budget
725 17th Street, NW
Washington, DC 20503

Dear Secretary Thompson and Director Daniels:

    Thank you for testifying at the Ways and Means Committee this week. 
We appreciate your hard work in developing the President's budget in 
this difficult time for our Nation.
    As we stated in the hearings, we commend the President for not 
reducing the resources he devoted to prescription drugs and Medicare 
modernization last year, notwithstanding the new realities of the war 
on terrorism and an economic downturn, which has produced short-term 
budget deficits. We share your commitment to ensuring that our seniors 
and disabled beneficiaries receive the highest quality of care for a 
price our taxpayers can afford.
    The President's budget provides $190 billion over 10 years for 
prescription drugs and Medicare modernization, of which $77 billion is 
reserved for low-income drug assistance. The budget proposes spending 
increases for private plans in Medicare of $4.1 billion. It also 
proposes several modest savings proposals--competitive bidding for 
durable medical equipment, Medigap reform, Medicare Secondary Payer and 
Graduate Medical Education reform--which collectively total $6.5 
billion. Hence, there is $116 billion remaining for prescription drugs 
for all non-low income beneficiaries and Medicare modernization. 
Although we believe $116 billion is insufficient for a comprehensive 
prescription drug benefit, we assume you share our belief that none of 
this money is intended for provider payment increases.
    The Administration's budget includes a statement that any provider 
payment adjustments must be budget neutral in both the short and long-
term. However, the Medicare Payment Advisory Commission (MedPAC), a 
non-partisan advisory Committee of Medicare experts, recently 
recommended provider payment changes that could collectively total more 
than $174 billion over 10 years. The MedPAC recommendation for 
reforming the physician sustainable growth rate alone would cost $128 
billion according to the CMS actuary. Clearly, we are not suggesting 
that we could afford, or that we should implement every MedPAC 
recommendation. However, MedPAC has identified serious problems, such 
as significant and successive payment cuts to physicians, which are 
unsustainable and require reform.
    Does the Administration believe Congress should address any of the 
problems identified by the MedPAC (see attached list) with respect to 
hospitals, home health agencies, physicians, skilled nursing facilities 
and dialysis facilities? Please identify which provider problems you 
believe merit Congressional action and which do not. Since the budget 
calls for budget neutral payment adjustments, please provide a specific 
list of Medicare savings recommendations, which can finance appropriate 
provider payment changes.
    Given the short legislative year, and our intention to act on 
Medicare legislation this spring, we would appreciate a prompt and 
detailed response to these requests.

            Best regards,
                                                        Bill Thomas
                                                           Chairman
                                        Committee on Ways and Means

                                                   Nancy L. Johnson
                                   Chairman, Subcommittee on Health
                                        Committee on Ways and Means

Enclosure: MedPAC Recommendations

WMT/NLJ/jm
                               __________

 ------------------------------------------------------------------------
 ------------------------------------------------------------------------
                                                                10 yrs.
        Medicare Payment Advisory Commission                   Billions
 Recommendations
------------------------------------------------------------------------
Physicians
    The Congress should repeal the sustainable          $127.7 1
 growth rate and replace it with the Medicare Economic
 Index. The Secretary should revise the physician
 productivity offset from -1.5% to -0.5% to reflect the
 productivity of all costs rather than just labor. The
 resulting update for 2003 is 2.5%.
 Hospitals
    The Congress should phase out the difference in        $15 *
 the inpatient national rates between hospitals in MSAs >1
 million and hospitals in all other areas starting in 2003.
 In the first year, the update for hospitals in MSAs  The Congress should revise the Medicare               $1.8 2
 Disproportionate Share payment formulas so that the
 payments for rural and small urban hospitals are capped at
 10% rather than 5.25%.
 Skilled Nursing Facilities
    If refinement of skilled nursing payment system        $10 3
 is adopted by the Secretary as planned, Congress should
 fold-in the resource utilization group (RUG) add-on
 payments into the skilled nursing rates.
 Home Health Agencies
    The Congress should update home health payments         $2 *
 by market basket for FY 2003. (Current law is mb -1.1%.)
 The Congress should retain the 10% bonus payments for
 rural home health agencies.
    The Congress should eliminate the 15% adjustment       $17 4
 to home health payments, which otherwise would result in a
 4% to 7% reduction in payments.
 Dialysis Facilities
    The Congress should update dialysis payments by       $0.5 *
 2.4% in 2003.
------------------------------------------------------------------------
      TOTAL                                                        $174
------------------------------------------------------------------------
1 Office of the Actuary, Centers for Medicare and Medicaid Services
  (CMS), February 7, 2002.
2 Medicare Payment Advisory Commission, February 7, 2002.
3 CMS, Health Care Industry Market Update, February 6, 2002.
4 Congressional Budget Office (CBO), January 2002.
* Estimates based on BBRA, BIPA and discussions with CBO, February 6,
  2002.

                        
                       U.S. Department of Health and Human Services
                                               Washington, DC 20201
                                                     March 14, 2002

The Honorable Bill Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

The Honorable Nancy L. Johnson
Chairman
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Thomas and Chairman Johnson:

    Thank you for your letter to the two of us regarding the 
President's budget and the ways Congress could adjust Medicare payments 
to health care providers in a budget-neutral fashion. We know you share 
the Administration's dedication to better meeting the health care needs 
of elderly and disabled Americans, and appreciate your longstanding 
interest in and untiring dedication to these important issues.
    President Bush believes that the Nation has a moral obligation to 
fulfill Medicare's promise of health care for America's seniors and 
people with disabilities. Medicare has provided this security to 
millions of Americans since 1965. However, as Medicare's lack of 
prescription drug coverage demonstrates, Medicare is not keeping up 
with rapid changes in the way health care is delivered or with benefits 
available in the private health insurance market.
    To ensure that Medicare continues to provide our Nation's elderly 
and disabled secure access to modern health care, the President's 
Fiscal Year (FY) 2003 Budget renews his commitment to comprehensive 
Medicare modernization with integrated prescription drug coverage. His 
proposal is based on the framework for bipartisan legislation that he 
proposed in July 2001. Specifically, the President's budget proposes to 
invest $190 billion in Medicare to modernize the program by improving 
health insurance plan options that include prescription drug coverage. 
We agree with you completely that all of the new funding should be used 
for the President's top priority of improving the coverage options 
available to beneficiaries, including prescription drugs, and not for 
increasing payments to fee-for-service Medicare providers.
    The President's top three goals for improving Medicare include 
quickly phasing in assistance with drug costs for Medicare 
beneficiaries, sustaining and enhancing the options available to 
beneficiaries in Medicare+Choice, and strengthening and modernizing the 
Medicare Program. This includes transitioning low-income prescription 
drug assistance into a drug benefit that serves all Medicare 
beneficiaries and adding new plan options for beneficiaries and 
updating the benefit package. Many of these improvements, such as full 
implementation of a prescription drug benefit, will take several years 
to set up. The needed improvements identified in the President's budget 
can begin to take effect sooner by building on existing programs.
    We agree with you that the current administrative pricing system 
creates extremely complex provider payment systems that do not always 
function smoothly or equitably. In our view, these problems further 
underscore the need for the President's priority of fundamental 
modernization of the Medicare program. We believe the primary focus of 
the Congress should be on strengthening and modernizing Medicare, not 
on revamping outdated, overly complex payment systems.
    While we appreciate the work the Medicare Payment Advisory 
Commission (MedPAC) has put into developing their proposals, we do not 
believe these ideas are the appropriate starting point for a discussion 
of Medicare provider payments.
    We have no compelling evidence that there is a problem with the 
overall adequacy of provider payments, although we recognize that 
recent short-term adjustments have been substantial in the system 
Medicare uses to pay physicians. For example, while home health 
services are vitally important to the Medicare program, home health 
spending is expected to rise by over 42 percent this year and 12 
percent next year, and this includes the adjustment to payments already 
scheduled in current law. And although certain provider payments may 
benefit from adjustment, we believe such adjustments can be 
accomplished without draining new funds that are even more urgently 
needed for improving Medicare benefits.
    In the context of moving forward on our shared goal of modernizing 
and strengthening Medicare, the Administration is willing to work with 
Congress to consider limited modifications to provider payment systems 
in order to address payment issues. Most importantly, as we all 
consider changes to payment systems, we need to be cautious and recall 
that any increases in spending will be borne, in part, by beneficiaries 
in the form of higher premiums and coinsurance payments.
    Therefore, while the President's Budget did not contemplate any 
particular provider payment changes, we are willing to consider limited 
adjustments to payment systems and to work with you to develop a 
comprehensive package that is budget neutral across providers. We will 
not support any package of provider payment changes unless it is budget 
neutral in the short- and long-term. To this end, we recognize that 
some provisions in law that, in the past, have restrained growth in 
payments are about to expire, and extension of these provisions is one 
potential way to ensure a budget-neutral package of reforms.
    We believe it is possible to develop a fiscally responsible package 
of provider payment adjustments that remain budget neutral. We are 
happy to begin to work with you to provide technical support for such a 
package if you desire. Enclosed is some additional information on 
various provider issues that we hope will be useful in our continuing 
discussions of these issues.
    We look forward to working with you to advance the priorities of a 
prescription drug benefit, a strengthened Medicare+Choice program, and 
a modernized Medicare Program, while also pursuing the issues 
surrounding modifications to provider payment systems.

            Sincerely,
                     Tommy G. Thompson and Mitchell E. Daniels, Jr.
                                 ______
                                 
       Administration's Views on Various Provider Payment Issues
Physician Payment Update
    The current system for updating Medicare's payment for physician 
services was originally established in law in 1989, and has been 
adjusted a number of times since then, eventually resulting in the 
Sustainable Growth Rate (SGR) system that is used today. In general, 
Congress' goal for the payment system was to restrain unsustainable 
growth in physician payment under Medicare. The system has been working 
precisely as designed. Between 1997 and 2001, Medicare physician 
spending increased from 17.6 percent to 20.5 percent of total Medicare 
fee-for-service spending. Moreover, physician spending continued to 
increase, growing 5.3 percent in 1999, 10.7 percent in 2000, and 11.2 
percent in 2001, far outpacing inflation in the broader economy.
    Last year, a number of factors combined to cause the physician 
payment formula, as set in law, to produce a negative update. First, 
there has been a downturn in the economy, which affected the SGR 
because it is tied to estimates of the Nation's Gross Domestic Product 
growth per capita. Second, actual cumulative Medicare spending for 
physicians services in prior years was higher than expected. Third, 
information on services that were not previously included in the 
measurement of actual expenditures was now included. Had this 
information been captured in the measurements originally, spending 
increases would have been 5.9 percent in 2000, and 9.7 percent in 2001, 
rather than the respective 10.7 and 11.2 percent increases mentioned 
above. Counting these previously uncounted actual expenditures, as 
required by law, contributed to this year's negative update to 
physician payments. However, despite the negative update, overall 
Medicare physician spending is not projected to decrease this year. In 
fact, as the Congressional Budget Office (CBO) noted before Congress 
two weeks ago, program spending increases by 5.9 percent in 2002.
    While a formula that produces these payment fluctuations year-to-
year should be reviewed, the underlying system is sound and effective. 
As CBO Director Dan Crippen concluded in his testimony before Congress:

          ``In considering whether to change the current system for 
        setting Medicare physician payments, the Congress confronts the 
        prospect of reductions in the fees paid per service for the 
        next several years. MedPAC's recommendation would increase the 
        Federal Government's spending for physicians' services under 
        Medicare by $126 billion over the next 10 years. In contrast, 
        other approaches might have the potential to lessen the 
        volatility in the update without dismantling the mechanism for 
        linking physician fees to total spending for physicians 
        services or growth in the economy.
          Changes that increase Medicare payments to physicians will 
        increase Federal spending. Incorporating higher fees for 
        physicians' services into Medicare spending as currently 
        projected would add to the already substantial long-range costs 
        of the program and to the fiscal challenge to the Nation posed 
        by the aging of the baby boomers. Raising fees would also 
        increase the premium that beneficiaries must pay for part B of 
        Medicare (the Supplementary Medical Insurance program). 
        Inevitably, over the long run, higher spending by Medicare for 
        physicians' services will require reduced spending elsewhere in 
        the budget, higher taxes, or larger deficits.''

    We believe that considerations of sustainability and of our other 
urgent priorities in Medicare argue strongly that, if changes in the 
physician payment system are undertaken this year, they should be 
undertaken carefully and implemented in a way that does not 
significantly worsen Medicare's long-term budgetary outlook. The 
Administration supports reforms in physician payment that lessen 
volatility, and further believes that any short-term payment problems 
can be addressed at a much lower cost than the MedPAC recommendation 
implies.
Home Health
    The President's budget also assumes no further delay in the 
implementation of the ``15 percent reduction'' in home health interim 
payment system (IPS) limits. As you may know, this reduction is 
somewhat of a misnomer. It does not translate into an across-the-board, 
direct cut in Medicare payment rates for home health services, as many 
have described it. Rather, the 15 percent reduction is a decrease in 
the payment caps under the old IPS. The actual percentage reduction in 
payments that will result from lowering the limits is much less. In 
fact, the CMS actuary estimates that the 15 percent reduction will only 
reduce payments to home health agencies by about 7 percent, not 15 
percent. Further, after the PPS rates are reduced by 7 percent, we 
would apply the home health update (currently estimated to be 2.1 
percent), leading to a net reduction of approximately 4.9 percent.
    Home health spending is expected to rise by 42 percent for FY 2002. 
Even if the 15 percent adjustment occurs, we estimate that home health 
spending would increase 12 percent in FY 2003, 8.3 percent in FY 2004, 
and 7.8 percent in FY 2005. Therefore, we do not support a repeal of 
the 15 percent adjustment in the caps.
Skilled Nursing Facilities
    Prior to the enactment of the Balanced Budget Act of 1997 (BBA), 
many nursing home companies were expanding rapidly, taking on 
significant debt, and leveraging themselves heavily for acquisitions of 
new homes and allowing their debt-to-equity ratios to escalate steeply. 
That strategy backfired on many of the industry's biggest companies 
when the nursing home industry came under financial pressure resulting 
from the implementation of the Prospective Payment System for skilled 
nursing facilities (SNFs) and other Balanced Budget Act of 1997 
provisions. As a result, Congress passed two laws to provide some 
relief. The Balanced Budget Refinement Act of 1999 (BBRA) and the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA) required three Medicare payment ``add-ons'': a 4 percent 
increase in per diem rates; a 16.66 percent increase in the nursing 
component of each Resource Utilization Group; and a 20 percent increase 
for certain categories of high-cost, medically complex patients. The 
first two add-ons expire on October 1, 2002. The third will expire when 
FIRS implements a case-mix refinement rule. The Administration is 
currently moving forward in its development of this refinement rule.
    The President's budget proposal reiterates the Administration's 
commitment to paying SNFs fairly and appropriately for the delivery of 
services to Medicare beneficiaries. CMS recently explored the fairness 
and appropriateness of Medicare SNF payments in the February 6, 2002, 
Health Care Industry Market Update--Nursing Facilities. While we surely 
want to avoid overpaying any of our providers, we also must be 
sensitive to their funding needs in order to maintain high quality 
services. We are willing to continue to review the substantive 
justification for modifying SNF payments with the Committee.
Hospital Updates
    Under the President's budget assumption, inpatient hospital 
payments for FY 2003 would follow current law and be updated by the 
market basket, which accounts for inflation in the factors that 
contribute to the costs to provide hospital services, minus 0.55 
percentage points. Under current law, the update beyond FY 2003 would 
be equal to the full market basket. Since the inception of the 
inpatient prospective payment system (PPS), hospitals have received a 
full market basket update only once in FY 2001. Since FY 1984 hospitals 
have received on average approximately 60 percent of the market basket 
forecasted increase. Even so, since the early 1990's, the Medicare PPS 
inpatient margin has risen sharply from 1.3 percent in FY 1993 to a 
historical high of 16.0 percent in FY 1997. Although there was a 
decrease in FY 1999 to a 12.4 percent margin, the Medicare inpatient 
hospital margins have begun to increase again. In addition, since the 
early 1990's, there has been a significant drop in the number of 
hospitals with negative inpatient margins. In FY 1991, 61.2 percent of 
hospitals had negative inpatient margins compared to approximately 25 
percent in FY 1999.
    The stabilization of overall hospital margins in recent years 
suggests that, overall, the restrictions on market basket increases of 
recent years have not resulted in inadequate hospital payments. 
Reasonable and modest limits on hospital market basket updates would 
appear to provide adequate reimbursement for hospitals. Modest limits 
below full market basket updates could be linked to continued careful 
review of Medicare hospital margin data to ensure that margin problems 
do not worsen, and certain hospital types that show clear evidence of 
negative and declining Medicare margins could be monitored closely for 
special consideration. The Administration believes that the savings 
from such measured changes in hospital payment updates could be more 
than adequate to finance reasonable net increases in total payments to 
physicians.
    There are market updates for other providers that were established 
in the Balanced Budget Act of 1997. To help restrain spending growth, 
you could also consider extending market basket update reductions to 
the calculations for other prospective payment systems.
    We are prepared to provide further technical guidance to the 
Committee whenever it is requested.

                               12

    [Questions submitted from Mr. Shaw to Mr. Daniels, and his 
responses follow:]
                                    Office of Management and Budget
                                               Washington, DC 20503

    1. Does the Administration's proposal to expand IRS' direct 
assistance to taxpayers filing online (EZ file) potentially create a 
conflict with private accountants and tax return preparers, running 
counter to OMB's Circular A-76?

    Response: No, it does not. The primary objective of the EZ Filing 
Initiative is to make individual tax return preparation and filing 
easier and less burdensome by assuring access to a free, secure, online 
filing option for a significant portion of individual taxpayers. The 
IRS is moving toward providing additional access to tax services via 
the Internet. The Treasury Department and IRS are currently discussing 
a partnership with the tax preparation and software industry to make 
free online options available. If a partnership with the tax software 
industry is reached the initiative will reflect a unique partnership of 
the tax preparation industry and government.

    2. What potential privacy issues has Treasury/OMB identified and 
how are you prepared to deal with them?

    Response: Any online filing will have robust security to ensure the 
privacy of taxpayer information filed with the IRS. In addition, such 
filing will not compromise the existing regulations and standards that 
govern the use of taxpayer information. When partnering with the 
industry, certain privacy regulations and standards must continue to 
apply, all of which are currently adhered to by commercial preparers. 
Some examples include:

     LIRC Section 7216 prohibits the use or disclosure of tax 
return data for purposes other than preparing the tax return.
     LCompanies who e-file returns today to the IRS must 
annually pass the Participants Acceptance Test to ensure the security 
of all transmitted data.

    3. What internal agency conflicts potentially could arise by having 
IRS assuming roles as both tax return preparer and its existing role 
for developing regulations, collecting, and auditing tax returns?

    Response: None. The IRS is committed to reducing taxpayer burden 
and the cost associated with preparing taxes. Just as IRS provides 
forms and instructions for paper filing of returns and provided 
Telefile via phones, this project moves tax filing to the next medium--
the Internet.

                                
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