In the midst of their August recess, House lawmakers returned to Capitol Hill to vote to approve legislation to provide $26 billion in aid to states to avoid teacher layoffs and Medicaid cuts, paid for in part by clamping down on foreign tax credits.

By a mainly party line vote of 247 to 161, the House passed H.R. 1586, the Education Jobs and Medicaid Assistance Act. The bill would prevent layoffs of an estimated 161,000 teachers, and provide funds to hire teachers and prevent law enforcement officers from losing their jobs. The bill is paid for by closing foreign tax credit loopholes and other provisions that would have a net effect of reducing the federal deficit by an estimated $1.4 billion over 10 years, according to the Congressional Budget Office.

“In this bill we close tax loopholes, used by some companies to escape taxes and to ship jobs overseas," said House Ways and Means Committee Chairman Sander Levin, D-Mich., in a statement. "Closing this loophole is fair taxation and it is what the people of this country demand.”

The bill includes $10 billion in funding to save teacher jobs; and $16.1 billion in health assistance to the states that, by reducing shortfalls, would help keep many others on the job, including police officers and firefighters. Both the education funding and the health assistance have been passed by the House twice over the last several months. The Senate voted to pass the funding last week before leaving for the August recess.

This bill saves and creates an estimated 319,000 jobs. According to updated estimates from the Department of Education, the $10 billion education funding would save 161,000 teacher jobs. According to an analysis by the Economic Policy Institute, the Medicaid funds would save and create 158,000 jobs, including preventing the layoff of police officers and firefighters.  More than half these jobs would be in the private sector, including workers who contract for or supply services to state and local governments. 

The offsets in the bill include the elimination of tax provisions that encourage companies to ship jobs overseas, beginning in 2011, by preventing abuse of foreign tax credits. The bill includes provisions from the Obama administration to crack down on corporations that split foreign tax credits from the income subject to foreign tax, allowing them to take advantage of the foreign tax credit to reduce their U.S. taxes even though the foreign income remains overseas.

The bill also eliminates unintended tax incentives for companies to move U.S. assets overseas, ensuring that foreign tax credits are not provided for income that is not subject to U.S. tax.

The bill also limits the use of aggressive tax planning techniques that take advantage of anti-abuse rules in the tax code to avoid U.S. tax and generate additional foreign tax credits.

Under the bill, effective March 31, 2014, food stamp benefits would return to the levels that individuals would have received under pre-Recovery Act law. This modification is estimated to save $11.9 billion over 10 years. House Democrats plan to work to restore this funding before the cuts are implemented in 2014, however.

The bill also includes rescissions from programs that no longer require funding, have sufficient funding, or have funding that probably cannot be spent before the authority to do so expires – with rescissions of budget authority totaling $6.7 billion, resulting in outlay savings of $2.8 billion. 

Rescissions include nearly $2.25 billion in budget authority from Recovery Act programs, over $2.3 billion in budget authority in Defense Department funds unrelated to current military efforts, and about $2.15 billion in budget authority from other agencies. The Department of Education’s Race to the Top, charter school fund, and the Teacher Incentive Fund are not included among these rescissions.

Another offset is the elimination of the advanced EITC. Presently, low- and moderate-income individuals may qualify for a refundable earned income tax credit. Individuals have the option of requesting advanced payments of the EITC throughout the year by having their payments of withheld income reduced by their employer. President Obama’s fiscal year 2011 budget proposes to eliminate the advanced EITC payment option, and the bill incorporates that proposal.  The provision is estimated to save $1.0 billion over 10 years.

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