Dear Pete and Frank:

Pursuant to Section 301(d) of the Congressional Budget Act of 1974, I am submitting my views and estimates with respect to federal spending and revenues within the jurisdiction of the Senate Committee on Finance for fiscal year 1999.

Projected Budget Surpluses

The Congressional Budget Office (CBO) anticipates that the federal budget will achieve a surplus of $8 billion this fiscal year, with larger surpluses projected in later years and continuing until 2008. Estimated surpluses total $143 billion between 1999 and 2003, and $679 billion over ten years. CBO estimates that the President's budget proposals would spend $43 billion of the surplus between 1999 and 2003.

We should not spend the surplus, as the President's budget would do. We should dedicate the entire surplus to saving Social Security. While some have suggested that we simply set aside the surplus for Social Security, I think we can do better. John Kasich and I have proposed dedicating the surplus to establish Social Security personal investment accounts. These accounts would be supplemental to the current Social Security system. While my proposal would model these accounts after the Thrift Savings Plan, I am open to other ideas. The sooner we begin, the more time this money would have to grow in workers' accounts.

Unfortunately, the current budget rules do not allow us to dedicate the surplus in this manner. Therefore, I urge the Budget Committee to reconsider the Budget Act rules to allow flexibility to dedicate the surplus for this type of purpose. We should not let this opportunity pass us by.

Revenues

With revenues at an all time high as a percentage of GDP, I think we must provide significant tax relief this year. However, we are limited in how we can offset tax cuts.

While the President's Fiscal Year 1999 budget contains a number of revenue raisers, many are rehashed proposals that have failed before due to opposition on both sides of the aisle. Others are controversial and doubtlessly will meet the same fate. Therefore, we cannot realistically expect to use them to offset tax cuts.

We also cannot look to the spending programs within the Finance Committee's jurisdiction for savings. We are all firmly committed to protecting the reforms we have made to the Medicare, Medicaid, and welfare programs, and should make no further changes at this time.

That leaves tobacco settlement revenues as our best option for offsetting much needed tax relief for married couples, students, child care and seniors as well as adopting reforms to protect taxpayers. I would urge the Budget Committee to refrain from adopting any budget resolution that would directly or indirectly preclude the use of these funds for offsetting tax cuts. If we are prohibited from using tobacco settlement revenues to offset tax cuts, then the prospects for tax relief and meaningful reforms to the IRS are bleak.

Among the tax relief proposals I would like the Finance Committee to consider are:

1. Marriage Penalty Reforms

Half of American families face the marriage penalty. The marriage penalty occurs when a married couple, usually a two income earning couple, pays more in income tax than two single individuals. In 1995, in the Balanced Budget Act, the Congress proposed to phase out the marriage penalty for non-itemizers. That proposal was vetoed by President Clinton.

2. Family Tax Relief and Savings and Investment Incentives

In addition to marriage penalty relief, the Finance Committee may consider legislation to provide tax incentives for savings and investment and tax relief for families such as child care credits for both stay-at-home moms and working parents.

3. Expiring Tax Provisions

Several tax provisions, including the research and experimentation ("R&E") tax credit, are scheduled to expire in 1999. The Finance Committee may consider legislation to extend or make permanent these tax provisions.

4. Parent and Student Savings Account PLUS Act

In 1997, the Senate passed several tax incentives to assist parents and students with the rising cost of education. Many of these measures were enacted into law, but several savings-related proposals were rejected by the Administration in the final negotiations. On February 10, 1998, the Finance Committee approved a bill that would restore these tax incentives to the form approved by the Senate in 1997. Included in these proposals are an increase in the contribution limit for education IRAs from $500 to $2,000 per year. Parents would be able to withdraw amounts from education IRAs for k-12 expenses. The tax-free treatment of employer-provided educational assistance, for undergraduate and graduate education, would be extended through 2002. Amounts distributed from state-sponsored prepaid tuition plans would be tax-free instead of tax-deferred.

5. Restructuring the Internal Revenue Service

Our three days of hearings on the practices and procedures of the IRS shocked the nation last September and created the impetus for House passage of an IRS restructuring bill (H.R. 2676). However, the House bill, which is estimated to cost $2.852 billion over 10 years, is a good start but does not address important taxpayer protection issues raised in our hearings. We owe it to taxpayers to add crucial taxpayer protections to the House bill. I am committed to moving an IRS Restructuring bill this spring, but caution supporters that this bill may have significantly larger revenue losses above the House's bill, especially if the innocent spouse issue and a reform of the interest and penalty system are addressed in a comprehensive manner.

We are trying to address a number of problems at the Agency that have been brought to our attention. Taxpayers who are trying to comply with our complex tax laws must be provided more protection against IRS abuses. Penalties and interest should not destroy taxpayers and force them out of the tax system because the IRS took months to inform them of problems. The IRS should not be allowed to hound individuals for the tax liability of their ex-spouse. The unfettered discretion of the IRS to lien, levy and seize a taxpayer's property needs to be curbed. If the IRS relentlessly pursues a taxpayer who ultimately prevails, the taxpayer should be entitled to recover attorney fees and costs. Taxpayers who want to pay their tax and remain compliant, should be able to pay their liability over time or to compromise with the IRS.

These crucial protections will lose revenue but are vitally important to the future of the relationship between the IRS and taxpayers. We owe it to taxpayers to add these and other important protections to H.R. 2676. As such, we will need to ensure that the budget accommodates this important and timely relief for taxpayers who are fed up with the current system.

6. Repeal of the Clinton 1993 Tax Increase on Social Security

President Clinton's 1993 tax bill included a provision that raised the portion of Social Security benefits subject to tax. Our senior citizens should never have had this onerous tax levied on their Social Security benefits. Repealing President Clinton's 1993 tax increase is an appropriate tax relief measure for our senior citizens.

Tobacco Settlement Legislation

There are legislative proposals to implement the comprehensive tobacco settlement between the tobacco companies, state attorneys general, and private plaintiffs. Tobacco-related revenues may need to be raised as part of this legislation. Any tobacco related revenues that flow to federal coffers should be returned to the American people through tax relief. I understand that the funding of teen smoking prevention initiatives and increased medical research will be provided through the appropriations process.

Tax Simplification and Technical Corrections

The Finance Committee has included tax simplification proposals in tax legislation enacted in 1996 and 1997. The Finance Committee will continue to examine the tax code for simplification opportunities and technical corrections.

Tax Reform

The Finance Committee intends to hold hearings on proposals to replace or fundamentally change the existing tax system. I believe that a comprehensive overhaul of the tax code should be in place before any action is taken to sunset the existing tax code.

Social Security

Social Security faces serious financial problems in the future. Beginning in 2012, annual revenues to the Social Security Trust Funds will no longer cover benefit payments. Social Security will then need to draw on Trust Fund assets, which are currently invested in Treasury bonds. As these bonds are redeemed, Social Security will make an increasing claim on the Federal budget for about 17 years. In any case, by 2029 Trust Fund assets are projected to be exhausted, and Social Security can meet only 75 percent of benefit obligations.

Social Security reform proposals should be examined in light of the larger issue of the need for Americans to better prepare for retirement. As I stated earlier, I intend to introduce legislation this spring that would use the surpluses to create personal investment accounts for workers. The Committee will hold hearings in May and June to explore this proposal and others. Our goals in any legislation that would create personal investment accounts would be to empower Americans with more control over their retirement decisions; give lower income Americans ownership of investment assets; provide a permanent solution to Social Security financing; and improve the intergenerational equity of Social Security benefits all while maintaining current law benefits.

Medicare

The Medicare reforms contained in the BBA did not solve the long-term financial challenges facing the Medicare program with the pending retirement of the "baby boom" generation. The Committee will continue to explore solutions for the long term viability of the program and closely follow the work of the National Bipartisan Commission on the Future of Medicare. The Committee will also be closely monitoring the Medicare Choice program.

Welfare and Medicaid

I will continue to monitor the progress of the states in implementing the "Personal Responsibility and Work Opportunity Reconciliation Act of 1996." Major initiatives with significant budgetary implications are not anticipated in the welfare programs.

Medicaid and the State Children's Health Insurance Program (S-CHIP)

The "Balanced Budget Act of 1997" contained important reforms to the $176.9 billion Medicaid program (federal and state expenditures combined) and created the new $24 billion State Children's Health Insurance Program (S-CHIP). I will monitor federal and state implementation of these reforms.

Thank you for the opportunity to comment on the areas within the Finance Committee's jurisdiction. I look forward to working with you as we enter this productive legislative year.

Sincerely,

William V. Roth, Jr.
Chairman