Government Relations

Government Relations Legislative Update

Government Relations Legislative Update

Updates on state and federal issues relating to the UW System.

Wednesday, October 20, 2010

Congressional Schedule

Congress is out of session and will meet again for legislative business on Monday, November 15, for the lame-duck session.

The House adjourned on September 30. The Senate finished its legislative business on September 29, but it is reconvening every few days in pro forma session to keep President Obama from making recess appointments during the period before the lame-duck session.

Federal Debt and the Risk of a Fiscal Crisis? (Excerpts/analysis by the WI Taxpayers Alliance of a recent report from the nonpartisan Congressional Budget Office)

"According to the Congressional Budget Office's (CBO's) projections, federal debt held by the public will stand at 62 percent of GDP at the end of the fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history – during and shortly after World War II – has that figure exceeded 50 percent.

Soaring debt ahead

Scenario #1. Looking forward, CBO has projected long-term budget outcomes under two different sets of assumptions about future policies for revenues and spending. The extended-baseline scenario adheres closely to current law…Under that scenario, annual budget deficits would decline over the next few years, and both deficits and debt would remain stable relative to GDP for several years after that. But then growth in spending on health care programs and Social Security would cause deficits to increase, and debt would once again grow faster than the economy. By 2035, the debt would equal about 80 percent of GDP…

Scenario #2. CBO also developed an alternative fiscal scenario, in which most of the tax cuts originally enacted in 2001 and 2003 are extended…Medicare's payments to physicians rise over time (which would not happen under current law); tax law evolves in the long run so that tax revenues remain at about 19 percent of GDP; and some other aspects of current law are adjusted in coming years.

Under that scenario, deficits would also decline for a few years after 2010 and then grow again, but that growth would occur sooner and at a much faster rate than under the extended baseline scenario. By 2020, debt would equal nearly 90 percent of GDP. After that, the growing imbalance between revenue and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push federal debt to unsustainable levels. Debt held by the public would exceed its historical peak of about 110 percent of GDP by 2025 and would reach about 180 percent of GDP in 2035. Indeed, if those estimates took into account the harmful effects that rising debt would have on economic growth and interest rates, the projected increase in debt would occur even more rapidly. Under the alternative fiscal scenario, the surge in debt relative to the country's output would pose a clear threat of a fiscal crisis during the next two decades…

Rising debt to impact economy

Less investment. One impact of rising debt is that increased government borrowing tends to crowd out private investment in productive capital, because the portion of people's savings used to buy government securities is not available to fund such investment. The result is a smaller capital stock and lower output and incomes in the long run than would otherwise be the case…

Interest costs mount. Another impact of rising debt is that, as government debt grows, so does the amount of interest the government pays to its lenders (all else being equal). If policymakers wished to maintain government benefits and services while the amount of interest paid grew, tax revenues would eventually have to rise as well. To the extent that additional tax revenues were generated by increasing marginal tax rates, those rates would discourage work and saving, further reducing output and incomes. Alternatively, policymakers could choose to offset the rising interest costs, at least in part, by reductions in benefits and services…

Paralysis? Having a small amount of debt outstanding gives policymakers the ability to borrow to address significant unexpected events such as recessions, financial crises, and wars. A large amount of debt, however, leaves less flexibility for government actions to address financial and economic crises, which, in many countries, have been very costly to the government (as well as to residents). A large amount of debt could also harm national security by constraining military spending at times of crisis or limiting the ability to prepare for a crisis…

Probability of crisis grows

A rising level of government debt would have another significant negative consequence. Combined with an unfavorable long-term budget outlook, it would increase the probability of a fiscal crisis, investors become unwilling to finance all of a government's borrowing needs unless they are compensated with very high interest rates; as a result, the interest rates on government debt rise suddenly and sharply relative to rates of return on other assets…

How crisis would affect U.S.

A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt – losses that might be large enough to cause some financial institutions to fail…

If a fiscal crisis occurred in the United States, policy options for responding to it would be limited and unattractive. In particular, the government would need to undertake some combination of three actions: restructuring its debt (that is, seeking to modify the contractual terms of existing obligations); pursuing inflationary monetary policy (that is, increasing the supply of money); and adopting an austerity program of spending cuts and tax increases.

Restructure debt? Governments can attempt to change the terms of their existing debt – for example, by changing the payment schedule – but that approach tends to be very costly for countries that try it. Any discussions or actions by U.S. policymakers that raised the perceived likelihood of that outcome would cause investors to demand higher interest rates immediately, if they were willing to extend additional credit at all. Furthermore, investors would demand a large interest premium on subsequent loans for many years.

Inflationary policy? An alternative approach is to increase the supply of money in the economy. But as governments create money to finance their activities or pay creditors during fiscal crises, they raise inflation. Higher inflation has negative consequences for the economy, especially if inflation moves above the moderate rates seen in most developed countries in recent years…higher inflation would also increase the size of future budget deficits…

Austerity? Austerity programs generally include both tax increases and spending reductions. When fiscal crises occur during recessions as they often do, such policy changes can exacerbate the economic downturns – although some studies suggest that certain types of fiscal austerity programs tend, at least in some circumstances, to stimulate economic growth. The later that actions are taken to address persistent budget imbalances, the most severe they will have to be…"

NASA Authorization Act Signed into Law

President Obama on October 11 signed into law the NASA Authorization Act of 2010 (S. 3729), which authorizes $58 billion for the space agency in fiscal years 2011-2013. The new law paves the way for development of a new heavy-lift launch vehicle, adds one extra shuttle flight, provides support for the International Space Station until 2020, and authorizes federal funding for development of commercial spacecraft. The law also authorizes sustained funding for Earth and space science programs, as well as robust support for aeronautics and space technology development.

American Opportunity Tax Credit

President Obama held a Rose Garden event on October 13 to highlight a new Treasury Department report showing that millions of American students have benefitted from the American Opportunity Tax Credit (AOTC) and to urge Congress to make the tax benefit permanent. The credit expires at the end of 2010.

A White House statement says that the Treasury Department report found that the credit increased overall tax benefits for higher education expenses by 90 percent between 2008 and 2009 and helped more than 12.5 million students and their families pay for college in 2009.

The AOTC, created through the American Recovery and Reinvestment Act (ARRA), provides a tax credit of up to $2,500 per student, calculated at 100 percent of the first $2,000 in tuition and 25 percent of the next $2,000. The tax benefit is more generous that the Hope Scholarship that it replaces for tax years 2009 and 2010. The income range of taxpayers who can claim the credit is wider, up to $1,000 of the credit is refundable, and taxpayers may claim the benefit for four years of school instead of only two.

Form 1099 Reporting Requirements
A group of eight higher education associations submitted comments to the Internal Revenue Service (IRS) late last month on implementation of expanded Form 1099 reporting requirements enacted earlier this year as a revenue-raiser in the health care reform bill. National Journal reports that federal actuaries expect the reporting expansion to raise about $17 billion over 10 years by enabling the IRS to better track the flow of money from one business to the next.

The associations' comment letter, led by the National Association of College and University Business Officers (NACUBO), offers recommendations for reducing the compliance burden of the expanded reporting requirements, but it also supports repealing the new requirements because of "the vast additional administrative and financial burdens they impose on colleges and universities."

Under U.S. tax law, businesses are required to submit a Form 1099 for every contractor paid at least $600 for services during a year. This requirement usually does not apply to corporations receiving payments, but the new law removes this exemption beginning in 2012.

Recommendations offered by NACUBO and supported by the associations include: support the exemption of purchasing card transactions (already endorsed by Treasury in proposed banking rules); request clarification that all nonprofit and public colleges and universities are exempted from receiving 1099s; recommend that students and individuals participating in course material buyback programs be expressly exempt from receiving Forms 1099; request that vendors of goods, services, and other property be given the opportunity to receive the Form 1099 electronically; request a substantial increase in the annual reporting threshold, from $600 to $5,000; and recommend that the new reporting requirements be postponed for one year for reporting the payment for services to corporations and three years for reporting the purchase of goods and other property.

Survey of International Student Enrollments

Colleges and universities around the country have received their annual survey of international student enrollments. Campuses are asked to respond to the survey by October 22, 2010, which is available on-line at

The Fall 2010 Survey, which is led by the Institute of International Education (IIE), aims to update the information collected in last year's online survey and to supplement the more comprehensive data campuses provide each year to the federal Student and Exchange Visitor Information System and to IIE's Open Doors report.


Last week, U.S. Department of Education Secretary Duncan issued a statement ( on the recent deaths of two students. In his statement, Duncan said, "It is time we as a country said enough. No more. This must stop." is a "one-stop" site for parents, educators, and community members seeking federal resources on bringing bullying to an end.

Community Colleges Summit

On October 5, Dr. Jill Biden hosted the first-ever White House Summit on Community Colleges (, bringing together community colleges, business, philanthropy, federal and state policymakers, faculty, and students to discuss how community colleges can help meet the education and job training needs of the nation's evolving workforce and the critical role these institutions play in achieving the President's goal of leading the world with the highest proportion of college graduates by 2020.

Further, on the eve of the summit, President Obama announced a new initiative to improve industry partnerships with community colleges. The Skills for America's Future ( will match up private employers with community colleges in every state to develop curricula and programs that will prepare graduates to excel in the workforce.

(AAU, U.S. Department of Education "Ed Review," Wisconsin Taxpayers Alliance and the UW System Office of Federal Relations contributed to this report.)