Press Briefing by Treasury Secretary Bob Rubin, O.M.B. Director Frank Raines, Director, National Economic Council Gene Sperling

The Briefing Room

1:20 P.M. EDT

MR. BOWLES: Good afternoon. Let me talk to you first about some of the process matters that we went through in order to get here because I know a number of you have questions on that because we have had a lot of telephone calls over the last couple of days.

The budget team, which is behind me here, began working on this last Tuesday as soon as we received the list from the Joint Tax Committee. The entire budget team has been fully involved in this effort. We did receive input from numerous outside sources, as you can well imagine, and we began meeting with the President on Friday. We met a number of times on Friday; we met Saturday, Sunday, and again this morning.

I should point out that during the early drafts of the bipartisan balanced budget agreement there were any number of special interest provisions that were eliminated prior to the final draft going into place. Some of those that survived -- of those that survived, a number of them we proposed and agreed with; some we agreed to allow to go forward as part of a deal. Some were close calls, frankly, for us, but simply didn't rise to the level of fully objectionable, and some we did, in fact, veto, as the President announced earlier.

Secretary Rubin is now going to talk to you about the tax provisions and give you some details on those, and then Director Raines will talk about the spending and then we'll take some questions.

Secretary Rubin.

SECRETARY RUBIN: Thank you, Erskine. Let me very briefly describe the two tax provisions that the President will be canceling. The first has to do with something called Subchapter F corporations and, basically, what this provision was intended to do was to allow investment firms and others that are trading in securities and have foreign subsidiaries to treat the interest and dividends on the stocks that are part of their trading business as the equivalent of active income. So that it would not be -- this may be a little -- it's perfectly clear? I can get worse, not better. I think I'm just going to do this this way and then you all can ask any question you like.

Basically, the idea was this. Let me try it a little bit differently. Investment companies and brokerage firms and others who trade securities abroad felt, and I think rightly, that their interest and dividends on the trading security issue should be treated the same way as a profits of a manufacturing company, which meant that those profits should remain abroad and not be taxed in the United States until they were repatriated. Under current law that was not the case. And this Subchapter F provision was intended to accomplish that purpose.

It was a one-year provision and was drafted so broadly that it not only accomplished the intended purpose, but also would have resulted in the possibility of providing what, in effect, would be sheltered treatment for dividend interest that it was not intended to cover. That is to say the dividends and interests on investment securities.

And we served notice that were involved in the drafting as this went along that this was too broad in its drafting and -- however, it retained the undue breadth. As a consequence, it was an appropriate candidate and the President, as you know, has cancelled it through the line item veto.

The second one -- neither of these is particularly simple, as you can see. The second one was the one the President referred to with respect to farm co-ops, and as he said he is very sympathetic to the idea of what is known as value-added farming; that is to say, putting farmers in the position where through vertical integration they can get the benefits of processing and, therefore, greater price stability, and put themselves on a more secure footing.

What this was intended to do was to, in effect, provide an incentive for accomplishing that purpose. On the other hand, the way in which it was constructed, in our judgment, had two problems: one, it was inefficient. That is to say it would not only help small farmers, but it could also very well result in large processors getting the primary benefit of this or it could help very large co-ops that didn't need this assistance, so it was too broad in its possible effect, and as a result was an inefficient provision. Secondly, the way it was drafted had the possibility of enabling the sellers, the processors who were selling out to the co-ops to not only defer their income but in some cases possibly never to pay tax -- or defer income tax rather, but in some cases never to pay tax. And that certainly was not, in our judgment, an appropriate objective.

So what the President said was that he would cancel this provision, but he would ask Secretary Glickman to work with the people who were interested in accomplishing this purpose and try to find a more efficient means of accomplishing the same purpose.

That, in essence, is a very brief, I hope transparent, discussion of the two tax provisions that were involved in the exercise of the line item veto.

Frank.

DIRECTOR RAINES: As you know, there were two bills passed by Congress. One was the Taxpayer Relief Act of 1997, and the Secretary of the Treasury just went over with you the cancellation there. I'm going to handle the cancellation under the Balanced Budget Act of 1997.

The item that the President has canceled is a provision that provided special relief to the state of New York for provider taxes that had been determined by HHS to be illegal under a 1991 statute. What this would have done would be to permit New York to continue to levy these taxes and to use them to increase their federal match in the Medicaid program. By canceling the provision, New York will not be able to do so.

The 1991 law was intended to stop a practice whereby states had artificially boosted their federal match by having illusory -- levying illusory taxes on hospitals and other providers, and then seeking -- and treating that as a cost of the hospitals and then seeking federal reimbursement on this higher cost, which meant that they were able to obtain far more federal reimbursement than the actual money spent for health care. New York has three taxes that fall into that category and this provision would have made all three of those permissible, while keeping similar taxes in other states impermissible under the law.

And in canceling this provision, we believe that the President has put all the states on an even basis. And there is one part of the New York circumstance that we believe can be dealt with administratively, which we are going to be working with them to do that on one of the three taxes. And so we think we can deal with that problem. But otherwise, the cancellation simply leaves the state of the law the way it was before Congress acted.

Q: Just a quick question, for those of us from New York. Can you just explain what the three taxes are and which one is the one that you can deal with administratively?

DIRECTOR RAINES: Sure. There is one tax that is a regional tax that has a different impact depending on what region of New York you're in. That is the one that we believe we can deal with administratively. There are other taxes that failed to meet the requirement that they be both broad-based and uniform. And then there's taxes that apply to classes of providers that you're not allowed to include in the tax. So they had these three types of taxes that they'd imposed, the first one, the regional taxes, one that we think we can deal with administratively.

Q: They are all on providers only?

DIRECTOR RAINES: All of these are on providers. Again, remember, they are not real taxes, they're never collected. It's simply an obligation that they would put on a hospital to pay over money that was given to them by the state. They then come to the federal government and say, look, we now have this big expense, and then they reimburse the hospital for the amount of money that they paid in the tax. So it's simply a way to increase the amount of the claim on the federal Treasury with no practical effect on the hospitals except in some cases they are allowed to keep some of the extra funds.

Q: The effect of that, would New York, say, have to repay any money to the federal government because of this?

DIRECTOR RAINES: The effect of this will be that New York will be treated the same as the other states. And HHS is in the process now of resolving with those states how they will be treated with regard to the implications of these taxes in the past.

Q: There may have to be a pay-back?

DIRECTOR RAINES: Well, again, that's something that HHS will work out with them, similar to the way they're working it out with the other states.

Q: If a tax is never paid why are you going to deal with one portion of it administratively? Could you explain?

DIRECTOR RAINES: If this tax becomes permissible and becomes a real tax, then the state will no longer be simply reimbursing them for a phantom tax and it becomes a legitimate tax under the law, and so that we will no longer have the extent of gaming that we had prior to the 1991 law.

Q: Mr. Raines, the President said in the statement that the real relevance of the line item veto will come with the appropriations bills. Suppose his action today does not serve as a deterrent in the cycle of FY'98 appropriations bills that are going to wend their way to the White House, just looking on past appropriations patterns, how much do you think the line item veto over an annual cycle of appropriations will save the country?

DIRECTOR RAINES: I think it's impossible to say. Already I think there are fewer problems in the appropriations bills that have moved so far in Congress, and so we have already seen as a result of the bipartisan spirit a lot of the issues coming off the table. So I think it's impossible to speculate because we've already seen behavioral changes happening, and I don't think I could disaggregate which aspect of it is having which effect.

Q: Well, just look at the FY'97 bills that are now law, if the President had had the line item veto, what would be your ballpark guess as to how much he would have stripped out?

DIRECTOR RAINES: It would just be a wild guess. We haven't done that exercise and I really wouldn't want to speculate on something where we haven't done any work.

Q: Director Raines, could you estimate the value of the cost to New York of this? Because the figure being bandied about by the administration is $200 million, but there are people in New York saying it's a lot more. And also, you said that it leaves New York in the same situation, but New Yorkers say that New York gets one of the lowest Medicaid reimbursement rates and far lower than, say, a state like Arkansas. Could you address that as well?

DIRECTOR RAINES: Well, the New York reimbursement rate is 50 percent and there are a number of states that are at 50 percent. It depends on your per capita income and the state, and so there are a number of states at 50 percent. The best estimate we have at the moment is really a CBO estimate where they have estimated the savings by this cancelation at $200 million. We haven't reestimated that provision yet and so I don't have any number other than the 200 that was used by CBO when Congress passed the provision.

Q: Director Raines, could you explain who was responsible for inserting this language into the bill in the first place and why?

DIRECTOR RAINES: I don't know who, but I would assume it had something to do with people in New York. (Laughter.) The why I think is that there is -- as you may know, over the years there have been constant efforts to utilize the Medicaid program as a way of financing -- either increasing state reimbursements or financing other things. And this is an effort to try to stop the implementation of the 1991 law, and I think it probably is a sign that they believe that the law was about to be implemented that they sought protection.

Q: Were there discussions with the congressional delegation from New York in the process of reaching the decision to cancel this item?

DIRECTOR RAINES: There were discussions with many people over the last several weeks about this and other provisions.

Q: Did you hear a defense from the congressional delegation of this item?

DIRECTOR RAINES: I think we've -- I've heard the defense. The defense that I have heard is that the Medicaid program is very expensive and the state would like to see additional reimbursement. And it's a very straightforward position that they would like to have a higher reimbursement and this is a way to do it. Our view is that this is an impermissible way to do it and would distinguish the state from any other state in exactly the same circumstance.

Q: You have no idea if this was done at the behest of a Republican senator, Republican governor? You're saying you have no idea if this was inserted by a Republican senator on behalf of a Republican governor?

DIRECTOR RAINES: Well, as I recall, there is bipartisan delegation from the state of New York, and the senior-most member of the delegate I believe is a Democrat. So I don't think the politics of this is going to answer any questions as to where we came out. It really is the policy with regard to this provision, and this is a very consistent position of ours. This is nothing new. We've been taking this position throughout the administration. Everyone knows what our position is. Everyone knows that we found these provisions to be unlawful. We're simply being as consistent as can be. And when we see this provision that is contrary to it, the President decided to cancel the provision.

So the only news here is that the current effort to enforce the law involves cancellation of a provision of law, but we've been administratively implementing the '91 law all along.

Q: Do you have any evidence that New York is using the Medicaid money in the way that you've suggested, to finance other projects unrelated to health care?

DIRECTOR RAINES: We have made a determination that they were using the money in a way that was not the way contemplated by the Medicaid law.

Q: Can you give us some examples?

DIRECTOR RAINES: Simply that they've been levying these taxes and having the reimbursements and artificially increasing their federal match. So even if the use of it was not for something we would disagree with, the fact of the matter is, the Medicaid program is not there to be a catch-all financial instrument for anything that the state may view as to be a worthy purpose.

Q: I'm just anticipating the state's argument here. They're likely to say, this decision is going to reduce the amount of money we can spend for health care for poor people. And that hardly seems the kind of pork that the line item veto is invented to deal with, so why use it on this particular provision?

DIRECTOR RAINES: That's been an argument that's been used over the years. And, in fact, when you really look to see, did they, in fact, expand the Medicaid program when they put into effect these provisions, did they increase benefits to people, almost invariably the answer is no. So while we're sympathetic to the fiscal concerns of the state, we don't think that they should be resolved through special treatment in the Medicaid program.

Q: So you're saying there will be no negative impact on Medicare users from the effects of this veto?

DIRECTOR RAINES: This is a Medicaid program, and we do not expect that the state will change -- and we've had no indication from them that they would change the benefits available under the Medicaid program.

Q: Can you clarify something that came up in the review of the farm co-op measure, as to whether or not this fellow down in Texas --

SECRETARY RUBIN: Simmons?

Q: -- yes -- as in fact going to be the principal beneficiary of this measure?

SECRETARY RUBIN: I gather there is some question as to how it would have affected him, but let me tell you, in our analysis, that was not what we focused on. We focused on exactly what the President has said, which was, what effect would this have on farmers and on co-ops and on processors. We did not base our decision on Mr. Simmons, so that --

Q: The answer to that question, though?

SECRETARY RUBIN: I have seen his argumentation. I've seen argumentation the other way. I truly don't know. I don't know enough about his specific tax situation to know what effect it would have on him, but that was also not the basis on which the decision was made. The basis on which the decision was made was exactly what I explained before and the President in more general teams discussed at his press conference.

Q: Would you classify the measures that were the --

Q: Can I just follow up on that real quickly and ask about the revenue estimate estimates associated with the food processing provision? The Joint Tax Committee's estimate suggests that as much as perhaps even 80 percent of the 10-year revenue lost to the Treasury from this provision would be associated with just --I just it's actually as much as 60 percent.

SECRETARY RUBIN: Well, they said $84 million, of which 60 was this, I think.

Q: Sixty, that's right, would be due solely to this specific transaction.

SECRETARY RUBIN: Correct.

Q: Number one, does that look about right to you and to the Office of Tax Analysis? And number two, if it is correct, I mean, doesn't that suggest that there would be hardly any cooperatives actually availing themselves of this particular provision and it wouldn't really be a major revenue loser?

SECRETARY RUBIN: Clay, we had a slightly higher estimate. I think our estimate was about $98 million, if I remember correctly, or something like that. Theirs, as you said, was 84 million. They said about 60 was Harold -- was the Simmons transaction. But the answer is that --

Q: Do you have a figure for the Harold Simmons transaction from the Treasury as well?

SECRETARY RUBIN: John, do we? No, we do not. But I think the point remains the same, Clay. The President was sympathetic to the purpose and said that the value-added farming that it was trying to encourage was a good idea. But the problem is the way this was drafted was inefficient and would also result in some people possibly never paying taxes rather than just deferring tax, and that was the basis for cancelation.

Q: Would you classify the two items that you described as that somebody intentionally slipped in and it was written that way to have a purpose that you are now trying to avoid, or were these mistakes and flaws?

SECRETARY RUBIN: I'm not going to impute purpose. I'm just describing the analysis. And based on that analysis --

Q: Can anybody up there talk about that? Is this pork that was intentionally put in, or are these mistakes?

SECRETARY RUBIN: Others may want to comment differently, but I don't see what you gain by trying to impute purpose. I think the purpose -- the question is, analytically, how does this compare to the criteria the President mentioned, and based on those criteria, these seemed appropriate to cancel.

Q: Mr. Bowles, it's kind of a follow-up to this earlier question, and I'm a little confused. The President said, anything that he vetoed would have to be things that were not part of the agreement. So my question is, first, when did you know that these things were in there? Did you know them -- did you know this before the President and the administration agreed to this deal, or was it after? And if you knew it before, how could you risk -- if these things are so important, how can you risk that line item veto might be declared unconstitutional and these things would become law? How can you risk that?

MR. BOWLES: Well, let me just state from the viewpoint of those of us who were actively involved in the negotiation, that these items were not discussed at our level. I think there was some discussion among the staffs about some of these items, but at are our level none of these were discussed. Had they been discussed and had we agreed to them, then we would not have exercised the line item veto in this regard.

Q: Well, did you know they were in there at the time the administration agreed with Congress to go ahead with this? Or did you find out after the fact?

MR. BOWLES: I was not aware of any of the three of these because none of these three were discussed at our level and that's why we felt it was appropriate to use the line item veto in that regard. Some of these were discussed at lower levels. We expressed objections to some of the way they were formatted and the way they were formulated, but they continued to go forward. We did not discuss them at our level.

Q: I have to try follow up. I don't think I'm getting an answer to my question. Did you know -- by the time the administration agreed with House Republicans, did you know these things were in there or did you become aware of it afterwards?

MR. BOWLES: I think I've tried to answer that question for you. If you look at the document, it's about that thick, okay? And none of these items were discussed at the level that Bob and Frank and I discussed them with the Republicans. However, each of them, I think, probably were discussed at lower levels. We expressed objection to them, and they ended up going into it anyway.

Q: Mr. Bowles, some analysts think that one of the real powers of the line item veto doesn't come on budget, tax, and spending issues at all, but on unrelated issues where the President can use the threat of a line item veto to get a recalcitrant member in line on some other issue. Do you think that's true?

MR. BOWLES: Well, the President has said that was his experience in Arkansas with the line item veto, that he only had to actually use it a few times, but having the very threat of it was enough to get some highly objectionable provisions removed before they actually got into the bill.

Q: But could it be used to, say, to get Jesse Helms to give William Weld a hearing -- (laughter) -- by threatening to veto North Carolina pork?

MR. BOWLES: I can't imagine we would threaten to veto anything from North Carolina -- (laughter) -- but we certainly haven't talked about that yet.

Q: A follow-up to that. Was there --

Q: -- expected legal challenge -- first of all, do you feel that since there is a mix now from tax and spending that you're going to be on stronger ground? And second, will one of these affected parties have to bring suit? Is that the way you all anticipate it would work?

MR. BOWLES: I think Frank can probably speak to who actually can bring suits, since he is one of the named people in the original action. But we really looked at each one of these on their own merits and their own merits alone, and not whether one was a tax provision or a spending provision.

DIRECTOR RAINES: The gist on the factual question, what the Supreme Court held in their last decision was it required someone who was actually affected by the President's action to bring suit. So we don't know that there will be a suit, but anyone who can claim that they were harmed as a result of this would have standing. They would then have to make a case.

Q: Could that be New York State, for instance, or would that have to be one of the hospitals?

DIRECTOR RAINES: The courts will sort out who, among all the people, would have standing. But, clearly, the President has now acted. He has acted under the very clear advice from the Justice Department that the statute is constitutional. It is our fundamental belief it is a constitutional statute and one that has great history behind it. And we will move forward in the expectation that the statute will be held to be constitutional as we look at other bills that are presented.

Q: When did you decide that these would be the three? When was that decision made?

MR. BOWLES: The President made the final decisions this morning.

Q: Mr. Raines, if I could follow up on the standing question. The original plaintiffs on the Hill have different opinions as to whether they have standing now that the veto has actually been exercised. Would your legal advisors tell you that a lawmaker would have standing?

DIRECTOR RAINES: I don't know what our legal advisors would say on that. I think you're going to have to -- I think I would direct that really to the Justice Department --

MR. MCCURRY: They advised us not to answer that.

DIRECTOR RAINES: Right -- because you're getting into very esoteric aspects of standing law.

Q: Back to Medicaid. Mr. Raines, has any other state -- this ruling that shut down the pass-through tax and the draw-down -- the law applied to all 50 states. Since the implementation of that law, has any other state sought to get out of it in this way?

DIRECTOR RAINES: Not to my knowledge.

Q: Is there any connection between the fact that Senator Moynihan was involved in the constitutional challenge and he's from New York State? In your choice. In talking about the deterrent power of the line item veto and his political --

DIRECTOR RAINES: No.

Q: Also, Mr. Raines, could you explain why -- there were several other geographic Medicaid provisions that were put in this bill; for instance, the Alaska one which raised the reimbursement rate. Why was this one more objectional to the President, let's say, than the Alaska one?

DIRECTOR RAINES: As the President pointed out, this would have put into law a bad policy. It is the use of these taxes to escalate the federal reimbursement is bad policy. Congress has determined that and this would simply grandfathered a state in to continue that bad policy.

Q: You also, I think, had sent a letter to the Hill saying that the Alaska provision was unwarranted and bad policy. Do you know why you chose --

DIRECTOR RAINES: No, what we said was that we thought that if you're going to go about changing the federal reimbursement at the state level, that it should be done broadly. And not that there were certain -- there weren't states that had a legitimate argument that their rate ought to be a different rate, but we thought that it would be better practice to do it broadly. That doesn't mean if they do it narrowly you would say, well, then let's reject this narrow application of what you may believe to be a good policy.

Q: Mr. Bowles, could you characterize the debate that took place within the White House whether to even use this or not? And also, already Mr. Gingrich is saying that this is petty politics. Are you perhaps risking losing the spirit of bipartisanship over what really amounts to three fairly insignificant amounts when you look at the overall budget deal?

MR. BOWLES: I'll answer your questions in order. First of all, we did have a number of discussions within the White House on various provisions -- on whether or not they really rose to the level that we wanted to use the line item veto. But we looked at each separate provision based on its own merit.

Secondly, I have had discussions with the Speaker about the use of the line item veto. He was aware that we did plan to use it, and this morning I spoke with him and told him the items on which we did plan to use it. We do -- we have accomplished a lot going over the last year with a real bipartisan spirit here, with real cooperation between the White House and the Congress, and we have a very heavy agenda going forward for the fall. And I expect we will continue to see that bipartisan spirit go forward.

Republicans and Democrats, going back over time, have been proponents of the line item veto. It's actually when you have to use it is when you get some disagreement.

Q: What did Mr. Gingrich say to you?

MR. BOWLES: When I told him the specific items that we had decided to use, he thanked me for calling him and left it at that.

Q: Mr. Bowles, are you going to stay on for this heavy agenda in the fall, or are you leaving?

MR. BOWLES: I'm going to be here until I finish these to-do items that are on this list the President gave me back in November of last year.

Q: How long is that?

Q: Did Mr. Gingrich --

MR. BOWLES: Basically, I think he was actually on the treadmill when I talked to him.

Thank you.

Q: Can you tell us what happens to the money that was saved here? Does it go into a lockbox for deficit reduction or --

DIRECTOR RAINES: Yes.

Q: So this money is now segregated and will be spent -- cannot be spent --

DIRECTOR RAINES: Cannot be spent, that's right.

Q: Mr. Raines, could we get an answer to Allison's question before about Alaska versus New York? Is what you were saying that if the provision had favored -- if the bill had used the same mechanism to help New York that was used to help Alaska, that then you would not have objected?

DIRECTOR RAINES: If the -- they are two totally different cases. In Alaska's case, there was an effort to change directly the reimbursement rate.

Q: If the law included an attempt to raise New York's reimbursement rate directly to capture that same amount of money, would you also have objected?

DIRECTOR RAINES: I don't know. It's not something we looked at. I don't want to speak for what has been a very good group process or speak for the President on something not presented to him, so it would be just speculating. But I gave you the rationale by which we examined it, and the President did as well, so I think you'll just have to infer from that. But I don't want to jump ahead of my colleagues or the President on what he might have done in another set of circumstances.

Q: A quick question for Mr. Rubin and Raines. Were these three provisions on your original Treasury and OMB statements of administration policy of provisions you would recommend a veto over all of the --

DIRECTOR RAINES: We did not make any threats of line item vetoes during the process at all.

Q: But you had -- both of you had lengthy lists of provisions that you objected to.

DIRECTOR RAINES: I believe this item was, in fact, mentioned in one of my letters. The New York provision -- on the tax side, we did not get to the level of the size of these kinds of items.

Q: Gene, could you take one question, just to repeat Cheryl's question, which I think was legitimate? Are these particular items that were canceled today -- do they fit that description of pork, which to most voters the line item veto was designed to remove from the bill? Is this really pork that you're going after today?

MR. SPERLING: I think what Secretary Rubin was saying was that we looked at the item on merit and policy without asking what the motive was. But I think the important point for the deterrent effect for the future is that whether some of these provisions were purposely crafted to allow for certain abuses, or they were just accidentally drafted that way, the effect either way is that from now on people know that these provisions will get a high level of scrutiny. And already this week, we have seen provisions have to be defended publicly that never before would have had to be scrutinized under the light of day.

So every single time in the future now, everybody is going to know that if they put a provision that is sloppily drafted or drafted to promote a special interest or overly narrow, that they will have to defend it publicly and that it may be subject to a presidential line item veto. And it is that very powerful deterrent effect that will have, I think, the considerable savings, both in terms of money to the taxpayer, but also savings in the sense of having good policy drawn for the public interest as opposed to bad policy that has loopholes and allows for more special interests?

Q: Want to bet? (Laughter.)

MR. MCCURRY: Thanks, Gene. Thank you.

END 1:50 P.M. EDT