Capital Thinking Updates ~ September 18, 2012

General Legislative
On Tuesday, September 18, the House will meet at 12:00 in pro forma session. On Wednesday,
September 19, the House will meet at 2:00 p.m. for legislative business. Legislation considered
under suspension of the rules will include, among other bills: H.R. 6324 - Cutting Federal
Unnecessary and Expensive Leasing Act of 2012; H.R. 6375 - To authorize certain Department of
Veterans Affairs major medical facility projects and leases, to amend title 38, United States Code,
to extend certain authorities of the Secretary of Veterans Affairs, and for other purposes, as
amended; H.R. 5948 - Veterans Fiduciary Reform Act of 2012, as amended; H.R. 3099 - Buffett Rule
Act of 2011, as amended; H.R. 5044 - Andrew P. Carpenter Tax Act, as amended; H.R. 2827 - To
amend the Securities Exchange Act of 1934 to clarify provisions relating to the regulation of
municipal advisors, and for other purposes; H.R. 6361 - Vulnerable Veterans Housing Reform Act
of 2012, as amended; H.R. __ - To provide flexibility with respect to U.S. support for assistance
provided by international financial institutions for Burma, and for other purposes; H.R. 2903 -
FEMA Reauthorization Act of 2011, as amended; H.R. 6368 - Border Security Information
Improvement Act of 2012; H.R. 6296 - Disaster Loan Fairness Act of 2012, as amended; H.R. 5910 -
Global Investment in American Jobs Act of 2012, as amended; H.R. 4124 - Veteran Emergency
Medical Technician Support Act, as amended; H.R. 6163 - National Pediatric Research Network
Act, as amended; H.R. 6118 - Taking Essential Steps for Testing Act; H.R. 733 - Recalcitrant
Cancer Research Act of 2012, as amended; and H.R. 3783 - Countering Iran in the Western
Hemisphere Act of 2012, as amended.

On Thursday, September 20 and Friday September 21, the House will meet for legislative
business. Legislation under consideration will include H.R. __ - STEM Jobs of 2012; H.J.Res 118 –
Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule
submitted by the Office of Family Assistance of the Administration for Children and Families of
the Department of Health and Human Services relating to waiver and expenditure authority under
section 1115 of the Social Security Act with respect to the Temporary Assistance for Needy
Families program; and H.R. 3409 – Stop the War on Coal Act of 2012, Rules Committee Print.

The Senate will convene at 2:00 p.m. on Monday, September 17 for a pro forma session.

Agriculture & Food
LEGISLATIVE ACTIVITY

Discharge Petition Filed on House Farm Bill. On Thursday, September 13, Representative Bruce
Braley (D-IA) filed a discharge petition aimed at forcing a floor vote on the House’s version of the
Farm Bill (H.R. 6083). The petition included 39 Member signatures. To force a vote, the discharge
petition would need at least 218 Members’ signatures. It is unlikely that Representative Braley will
receive the requisite signatures, as disagreements on both sides of the aisle remain over funding for
the Supplemental Nutrition Assistance Program.

Patton Boggs Capital Thinking Weekly Update | September 17, 2012
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Farm Bill Timeline. On Wednesday, September 12, Senate Agriculture Committee Chairwoman
Debbie Stabenow (D-MI) joined a rally of a few hundred farmers pressing for the House to pass a
five-year Farm Bill before the September 30 deadline. We do not expect Congress to pass a five-year
Farm Bill this year or take up an extension until after the election, given that Members of Congress
will likely head home after this week to campaign and House leadership has not indicated any plans
to bring up an extension for a vote this week. Thus, the Farm Bill is expected to expire on Sunday,
September 30. As mentioned in last week’s edition of Capital Thinking, a failure to extend the Farm
Bill will not impact farm programs, as most of these programs are authorized through the end of the
2012 crop year next spring. The only exception is the dairy program, which will expire on December
31, 2012. As such, Congressional leaders continue to operate as though they have until the end of
this year to address authorization of the Farm Bill.

REGULATORY ACTIVITY

Renewable Fuel Standard. Per the request of the corn growers, the Environmental Protection
Agency (EPA) has extended the deadline to submit comments on the Renewable Fuel Standard
waiver petitions submitted by Governors Mike Beebe (D-AR) and Beverly Perdue (D-NC) to October
11, 2012.

Budget, Appropriations

FY 2013 Continuing Resolution. On Thursday, September 13, the House approved a six-month FY
2013 Continuing Resolution (CR) by a vote of 329-91. The measure will fund the federal government
through March 27, 2013 at a discretionary spending level of $1.047 trillion, an increase of 0.6 percent
for most federal agencies over FY 2012 levels. The Senate will take up the bill this week and the
President is expected to sign the measure before the end of the current fiscal year on September 30.

Cybersecurity

Cybersecurity Legislation. The lack of agreement between key Members, the shortness of the
September work period and the anticipated early recess of Congress has led to little progress being
made on cybersecurity legislation to date. The lead sponsor of the Senate’s comprehensive
cybersecurity bill, Senator Joe Lieberman (I-CT), acknowledged last week that it is very unlikely that
the Senate will take up his bill until after the November election. It is unclear whether Congress will
have interest in spending time on this issue during the lame duck session, with sequestration and tax

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issues to address. But the drumbeat to move a cybersecurity bill continues and moving legislation
during lame duck may still be the answer.

Chairman of the House Intelligence Committee Mike Rogers (R-MI) continues to advocate for the
Senate to abandon the more controversial sections of Senator Lieberman’s bill in order to pass a bill
that focuses on bipartisan areas of agreement, such as information sharing. Yet, Senator Lieberman
has said that this approach is inadequate because it would not address critical infrastructure.

While Senate Minority Leader Mitch McConnell (R-KY) said that Republicans will continue to pursue
bipartisan legislation, Senate Majority Leader Harry Reid (D-NV) expressed his openness to a White
House executive order since there is diminishing hope of passing cybersecurity legislation this year.
Last week, Senator Ron Wyden (D-OR) also called on the White House to issue an executive order
that focuses on critical infrastructure while several Republican Senators that co-sponsored competing
cybersecurity legislation, the SECURE IT Act, wrote an op-ed in the Wall Street Journal that
highlighted the downsides to an executive order and called on the President to work with Congress to
pass cybersecurity legislation.

EXECUTIVE BRANCH ACTIVITY

Executive Order: The Obama Administration is drafting an executive order (EO) in light of the
Congress’ inability to pass a cybersecurity bill. The draft order is currently under review and subject to
change, although some details of the draft order in its current form have leaked. A White House
spokesperson said that the executive order is only one of many options that the Administration is
considering as they look at how to address cyber threats. Media reports late Thursday night say they
have a leaked copy of the EO which establishes an interagency cybersecurity critical infrastructure
council led by the U.S. Department of Homeland Security. Reports also state that the EO would give
the Executive Branch agencies an outline for possible new cybersecurity regulations and/or
strengthen existing cybersecurity regulations. The U.S. Chamber of Commerce has spoken out
against any type of executive order, saying that it would not adequately address the issue of
cybersecurity and could place unnecessary burdens on U.S. businesses. The Administration is also
looking to rewrite the 2003 presidential directive critical infrastructure and cyber issues.

Education

Veterans Education. On Tuesday, September 11, the House passed by voice vote the Improving
Transparency of Education Opportunities for Veterans Act of 2012 (H.R. 4057), which would require
the Department of Veterans Affairs to develop a comprehensive educational outreach policy to

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ensure that veterans and military servicemembers have the tools necessary to make informed
decisions about their postsecondary education. Despite criticism by some Republicans, the Senate
Veterans’ Affairs Committee approved a similar measure, the G.I. Bill Consumer Awareness Act (S.
2241), the following day (September 12) as part of a markup on a larger package of veterans
legislation. The American Council of Education coordinated a letter from other higher education
associations to the Committee noting their general support for efforts to help veterans make informed
decisions and protect veterans from fraudulent and aggressive recruiting practices. The letter also
expressed specific concerns in the bill related to burdensome reporting requirements, transfer of
credit policies, and generally duplicative, uncoordinated efforts regarding veteran consumer
initiatives. The coalition also circulated a letter to House Members regarding H.R. 4057, noting it
prefers that measure over the Senate bill but also addressed concerns related to data collection and
reporting, establishing a centralized tracking system and licensure requirements among other issues.

The Senate is expected to pass veterans’ job-training legislation (S. 3457) on Wednesday,
September 19. It is possible that the education-related legislation could be offered as an amendment
during consideration of the jobs bill.

Hearings and Events. The following hearings have been scheduled:

o Wednesday, September 10 – The Senate Committee on Commerce, Science, and
Transportation will hold a hearing titled “Five Years of the America COMPETES Act:
Progress, Challenges, and Next Steps.”

o Thursday, September 20 – The House Education and the Workforce Subcommittee on
Higher Education and Workforce Training will hold a hearing titled “Assessing College Data:
Helping to Provide Valuable Information to Students, Institutions and Taxpayers.”

o Thursday, September 20 – The Senate Health, Education, Labor, and Pensions Committee
will hold a roundtable discussion on “Pension Modernization for a 21st Century Workforce.”

Additionally, the Information Technology & Innovation Foundation (ITIF) is holding an event on
Thursday, September 20 to release a report outlining the effects that pending sequestration cuts will
have on research and the innovation ecosystem.

REGULATORY ACTIVITY

Gainful Employment. On Monday, September 10, the Department of Education filed a motion
requesting the court to overturn its ruling that the Department’s gainful employment regulations were
an overreach in authority and for-profit and vocational programs were held to arbitrary standards,
which was discussed in the July 9 edition of Capital Thinking. As part of his ruling, Judge Rudolph
Contreras did uphold the Department’s legal right to issue gainful employment regulations and found
that the Department did not overstep its bounds regulating in this particular area. He also left in place
disclosure standards that require institutions to provide students with data on their performance.

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No Child Left Behind Waivers. On Monday, September 10, the Department of Education
announced that it received nine No Child Left Behind waiver requests from Alabama, Alaska, Hawaii,
Maine, New Hampshire, North Dakota, Puerto Rico, West Virginia and the Bureau of Indian
Education. Since September 2011, the Department has received a total of 44 waiver requests.

The 33 states (plus the District of Columbia) that have been approved for NCLB waivers are: Arizona,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana,
Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South
Dakota, Tennessee, Utah, Virginia, Washington and Wisconsin.

The 11 states (plus the Bureau of Indian Education and Puerto Rico) with outstanding requests for
waivers include Alabama, Alaska, California, Hawaii, Idaho, Illinois, Iowa, Maine, New Hampshire,
North Dakota and West Virginia.

Strategies to Increase Postsecondary Success. On Wednesday, September 12, the Department
of Education published in the Federal Register a request for information about promising and practical
strategies, practices, programs and activities that have improved rates of postsecondary success,
transfer and graduation. Responses to be considered in the second round of reviews should be
submitted by November 30. In January, the Department invited submissions and posted select
information received during the first round of reviews in August.

Cohort Default Rates. On Monday, September 17, the Department of Education will release the 2-
year (FY 2010) cohort default rate. The Department of Education will release the 3-year (FY 2009)
cohort default rate on September 24.

Energy

Congressional Hearings. On Wednesday, a Senate Energy and Natural Resources subcommittee
will hold a legislative hearing on four water-related bills, including the Bureau of Reclamation Small
Conduit Hydropower Development and Rural Jobs Act (H.R. 2842) and a bill (S. 3265) offered by
Ranking Member Lisa Murkowski (R-AK) to prohibit FERC from charging land-use fees for
hydropower projects no longer located on federal lands. On Thursday, a House Energy and
Commerce subcommittee will hold a hearing to discuss legislation (H.R. 6172) that would prohibit the
Environmental Protection Agency (EPA) from finalizing proposed New Source Performance
Standards for power plants.

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REGULATORY ACTIVITY

SunShot Competition. The pre-submission and submission period for the Department of Energy’s
“Race to the Rooftops” competition begins December 31. Part of the “SunShot Initiative,” the
competition aims to make subsidy-free solar energy cost-competitive with conventional energy
sources by the end of the decade. The first entrant to successfully achieve the targeted non‐hardware
cost will receive a cash prize of $7 million.

BLM Cost Recovery Fees. The Bureau of Land Management intends to implement the final rule
updating fee schedules it charges to recover costs incurred in processing documents associated with
oil, gas, coal and solid mineral activities on October 1, the beginning of the new fiscal year.

CFATS/TWIC. Department of Homeland Security Under Secretary Rand Beers informed a House
Energy and Commerce subcommittee that a new personal surety plan that integrates the
Transportation Worker Identification Credential program for facilities covered by the Chemical Facility
Anti-Terrorism Standards (e.g., refineries, chemical plants) will be resubmitted to the White House for
regulatory review. A Request for Information is anticipated within 30 days regarding personal surety
risk-based performance standards. There will be a 60 day comment period.

Oil Field Drivers. The Federal Motor Carrier Safety Administration will hold a final public listening
session on September 27 in Dallas, Texas to receive comments on the June 5 notice concerning
regulatory guidance on the applicability of the oilfield operations exceptions in the hours-of-service
regulations. Public comments are due October 5.

Environment

Water. On Wednesday, September 19, the Senate Committee on Energy and Natural Resources,
Subcommittee on Water and Power, will hold a hearing to discuss several water bills, two of which
would have a national impact. S. 3265 would amend the Federal Power Act to remove the authority of
the Federal Energy Regulatory Commission to collect land use fees for land that has been sold or
otherwise transferred from federal ownership but that is subject to a power site reservation. The
second bill, H.R. 2842, is the Bureau of Reclamation Small Conduit Hydropower Development and
Rural Jobs Act of 2012.

REGULATORY ACTIVITY

Termination and Replacement of Gulf Coast Ecosystem Task Force. President Obama has
issued Executive Order No. 13626, which terminates and replaces the Gulf Coast Ecosystem Task
Force with the Gulf Restoration Council. The Council was created by the passage of the RESTORE
the Gulf Coast States Act of 2012. The Council is charged with developing a comprehensive plan for
ecosystem restoration in the Gulf Coast region. Among its duties, the Council is tasked with
identifying projects and programs that would restore the natural resources and ecosystems of the

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Gulf Coast region with a portion of the penalties that will be paid by BP under the Clean Water Act as
a responsible party for the Deepwater Horizon incident.

Mississippi River Monitoring Collaborative. The Mississippi River/Gulf of Mexico Watershed
Nutrient Hypoxia Task Force has announced that it is launching two new efforts to monitor reductions
in nutrients – nitrogen and phosphorus – throughout the watershed. The joint federal, state and tribal
task force, chaired by the EPA and the State of Iowa, has established the Mississippi River
Monitoring Collaborative to evaluate progress toward reducing the amount of nutrients entering local
waterways and ultimately to the Gulf of Mexico. The U.S. Department of Agriculture, a member of the
Task Force is also preparing to update its technical standard for water quality monitoring to better
measure the amount of nutrients coming from farm fields. Nutrient runoff from agricultural, urban and
industrial sources has polluted waterways and contributed to the hypoxic zone in the Gulf of Mexico –
an area of low oxygen that is largely uninhabitable by fish and other marine life. The new Mississippi
River Monitoring Collaborative, made up of federal and state agencies, has collected more than
670,000 nutrient data records from 12 states in the Mississippi River Basin, which it will use to
evaluate where conservation practices and policies are working and where new or enhanced nutrient
reduction strategies need to be developed.

State Capitals’ Green Design. EPA has announced that the capital cities of Kentucky, Iowa,
Louisiana, Montana and Indiana will be awarded design assistance under EPA’s Greening America’s
Capitals (GAC) program, which is an effort to help capital cities stimulate economic development,
provide more housing and transportation choices and reduce infrastructure and energy costs.
Through this project, EPA will provide design assistance from private-sector experts to help these
cities demonstrate sustainable designs intended to create vibrant neighborhoods while strengthening
the local economies and protecting people’s health.

The following five capital cities were selected through a national competition for assistance:

o Frankfort, Kentucky will receive assistance to enhance walkability and add bike lanes
between the historic downtown and the State Capitol. The project will also connect the
downtown with the proposed Kentucky River trail.

o Des Moines, Iowa will receive assistance to incorporate green infrastructure elements into a
proposed streetscape plan for a one-mile segment of 6th Avenue. The project will revitalize
the commercial street that serves as the northern gateway to the city’s downtown.

o Baton Rouge, Louisiana will receive assistance to incorporate green infrastructure elements
into a proposed walking and biking trail that connects Louisiana State University with the
city’s downtown.

o Helena, Montana will receive assistance to improve the walkability and add bike lanes along
Last Chance Gulch, a street that connects the northern part of the Helena business district
with the historic downtown. The project will also explore design alternatives for a five-way
intersection to enhance walkability.

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o Indianapolis, Indiana will receive assistance to make streets more pedestrian-friendly and
revitalize public plazas within and adjacent to the Market Square redevelopment area. The
project will tie in with the city’s larger plan to develop businesses in a new green cultural
district.

Financial Services

House Committee to Discuss Consumer Protection Bureau. On Thursday, September 20, the
House Financial Services Committee will meet to review and discuss the semi-annual report from the
Consumer Financial Protection Bureau (CFPB) with Director Richard Cordray.

Senators to Discuss High-Frequency Trading. On Thursday, September 20, the Senate Banking
Subcommittee on Securities, Insurance and Investment will hold a hearing titled Computerized
Trading: What Should the Rules of the Road Be?” Witnesses are expected to include representatives
from Better Markets, T. Rowe Price, Virtu Financial, and TABB Group.

REGULATORY ACTIVITY

GAO. Dodd-Frank Entities Need to Improve Accountability and Transparency. On Tuesday,
September 11, the U.S. Government Accountability Office (GAO) released a report regarding
financial stability. The report states that the Financial Stability Oversight Council (FSOC) and the
Office of Financial Research (OFR) have taken steps to improve accountability and transparency, but
concludes that these agencies continue to face challenges in these areas. It then discusses 10
recommendations that would increase accountability and transparency at FSOC and OFR.

Health Care

HELP Executive Session. The Senate Committee on Health, Education, Labor and Pensions will
meet in Executive Session on Wednesday, September 19 to consider the following measures: S.
3391, the Taking Essential Steps for Testing Act (TEST), S. ___, the Recalcitrant Cancer Research
Act of 2012, S. 1440, the PREEMIE Reauthorization Act, En Bloc, PN 1790, six hundred nominations
in the Public Health Service received on June 26, 2012 and En Bloc, PN 1829, one thousand, six
hundred and twenty-eight nominations in the Public Health Service received on July 25, 2012.

Senate Aging Hearing. The Senate Special Committee on Aging has scheduled a hearing on
Wednesday September 19, on “Fraud in Medicare Power Mobility Devices.” The hearing will focus on

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efforts to eliminate Medicare waste, fraud and abuse, and an examination of prior authorization
requirements for power mobility devices.

House Oversight Hearing. The House Committee on Oversight and Government will hold a hearing
on Thursday September 20, on “Examining the Administration’s Failure to Prevent and End Medicaid
Overpayments.”

House VA Hearing. The House Committee on Veterans’ Affairs Disability Assistance and Memorial
Affairs Subcommittee has scheduled a hearing on Friday September 21, on “Breaking Through the
Backlog: Evaluating the Effectiveness of the New State Strike Force Team.” The hearing will examine
a Texas authorized program to create a special team of counselors to help the Department of Veteran
Affairs reduce the number of pending claims.

REGULATORY ACTIVITY

OIG Reports. The Office of Inspector General (OIG) released two reports last week:

1.) “Recommendation Follow-up Memorandum Report: CMS Reporting to the Healthcare Integrity
and Protection Data Bank". In a 2010 report entitled CMS Reporting to the Healthcare Integrity and
Protection Data Bank (OEI 07 09 00290), OIG found that CMS took adverse actions against
providers but did not report all of these actions to the Healthcare Integrity and Protection Data Bank
(HIPDB) as required. OIG found that CMS improved its reporting of adverse actions for DME
suppliers, but not for other types of providers. CMS has not fully addressed OIG's 2010 report
recommendation to report required adverse actions to the HIPDB or to report such actions within
required timeframes.

2.) "Medicare Overpaid Inpatient Rehabilitation Facilities Millions of Dollars for Claims with Late
Patient Assessment Instruments for Calendar Years 2009 and 2010.” OIG estimated that Medicare
Administrative Contractors (MAC) made a total of $8.4 million in overpayments to IRFs because
IRFs often did not receive reduced case-mix-group payments for claims with PAIs that were
transmitted to the Database after the 27-day deadline. The overpayments occurred because IRF
and Medicare payment controls were inadequate.

PCORI Workshops. The Patient-Centered Outcomes Research Institute (PCORI) announced
workshops designed to bring patients and stakeholders together in an effort to start building a patient-
centered research community. The workshops are scheduled for October 27-28, December 4, and
December 5. For the first workshop, PCORI has established a deadline of September 24 for
expressing interest in attending the workshop. Please note that there are a limited number of seats
available for each workshop, and that a certain percentage of spots are reserved for patients. PCORI
will extend invitations for the first workshop in late September.

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OTHER HEALTH NEWS

Sequester Report. The Administration released a report Friday explaining their plan to implement the
sequestration budget cuts. The release of the White House report followed the Capital Thinking
Report deadline; a detailed analysis of the report will be provided separately. Discretionary health
spending is scheduled to be reduced by $94 billion, with another $16 billion in Medicare provider
payment cuts. Meanwhile, the American Hospital Association, American Medical Association and
American Nurses Association released a report warning Congress that if it lets the two-percent
Medicare sequestration cut go through, more than 766,000 jobs could be lost by 2021, with nearly
half a million lost at the outset.

MACPAC Meeting. The Medicaid and CHIP Payment and Access Commission (MACPAC) has
scheduled a public meeting on Thursday, September 20 and Friday, September 21. An agenda will
be released in advance of the meeting.

MedPAC Meeting. The Medicare Payment Advisory Commission will hold a public meeting on
October 4 and 5, 2012.

IOM Meeting. The Institute of Medicine will hold a public workshop, “Physical Activity and Physical
Education in Schools: Perspectives on Successes, Barriers, and Opportunities” on Thursday,
September 20. Its purpose is to provide the IOM Committee on Physical Activity and Physical
Education in the School Environment with viewpoints from individuals in academia as well as
practitioners of physical activity and physical education programs in the school environment. The
workshop will feature approximately 12 speakers who will discuss the following programmatic
approaches: 1) Physical Education; 2) Physical Activity in the Classroom; 3) Physical Activity during
Recess/Breaks; 4) Intramural and Extramural Sports; and 5) Active Transport.

The Institute of Medicine’s Roundtable on Health Literacy will host its next workshop on September
24, 2012 at The Conference Center at The New York Academy of Medicine. “International
Approaches to Health Literacy” is the title of the workshop. Experts will present material on the
subject to the Roundtable.

International, Defense, Homeland Security

House Foreign Affairs Committee and Armed Services Committee Hearings, Statements, and
Markups. After focusing on China last week, the House Foreign Affairs Committee (HFAC) will turn
its attention to the Middle East this week, following the attacks on U.S. diplomatic facilities in the
region. Last week, HFAC Chairwoman Ileana Ros-Lehtinen (R-FL) and HFAC Subcommittee
Chairmen Dana Rohrabacher (R-CA) and Chris Smith (R-NJ), all longtime hardliners on U.S.-China
relations, spearheaded hearings on China’s role in the disputed claims in the South China Sea and

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on allegations of coordination of organ harvesting by Chinese Communist Party officials. The
Committee also reported out legislation, Congressman Eni Faleomavega’s (D-AS) H.R. 6313, as
amended by Chairwoman Ros-Lehtinen, which calls on China to refrain from using or threatening
military force in the South China Sea. On Thursday, the full Committee will examine U.S.-Egypt
relations, while Chairman Steve Chabot’s (R-OH) Middle East Subcommittee will focus on
“Safeguarding Israel’s Security in a Volatile Region”. The Egypt hearing will offer Chairwoman Ros-
Lehtinen the opportunity to reiterate her initial response last week to the attacks on the U.S.
diplomatic missions in Cairo and Benghazi, in which she lamented the loss of life and said the
Egyptians laying siege to U.S. Embassy Cairo included “those who continue to seek the support of
and assistance from the United States.” The Congresswoman added, “We have nothing for which we
should apologize.” House Armed Services Committee (HASC) Chairman Buck McKeon (R-CA) more
directly echoed Governor Mitt Romney’s rapid and strident criticism of the Administration, noting, “If
history has taught us anything, it is that weakness is provocative. Again and again under President
Obama we have met threats and thugs with apologies and concessions.” HASC Subcommittees also
held several hearings on Department of Defense operations last week. Meanwhile, Congressman
Chabot’s Subcommittee hearing on Israel surely will include significant Republican (and some
Democratic) criticism of President Obama’s reported decision not to meet with Israeli Prime Minister
Benjamin Netanyahu at the U.N. General Assembly, as well as the ongoing, semi-public U.S.-Israeli
debate regarding whether (and, if so, when and what kind of) “red lines” are appropriate prior to a
prospective military strike against Iran’s nuclear program.

Senate Foreign Relations and Armed Services Committee Hearings and Markups. The Senate
Foreign Relations Committee (SFRC) received a closed intelligence briefing on Iran and Syria on
Wednesday, September 12. The Senate Armed Services Committee met in closed session on Syria
on Friday, September 14. On Thursday, September 20, the SFRC will enter into closed session to
discuss U.S. Embassy and Consular security in light of this week’s attacks. The hearing likely will
strike a somber, businesslike tone, following on the heels of SFRC Ranking Member Richard Lugar’s
(R-IN) pointed refusal Wednesday to criticize the Obama Administration’s preparations for or
response to the attack in Libya that killed the Senator’s former staff member, Ambassador Chris
Stevens. Later on Thursday, Senator James Webb’s (D-VA) SFRC East Asia Subcommittee will hold
an open hearing on the South China Sea and other maritime disputes in the region. Assistant
Secretary of State for East Asian Affairs Kurt Campbell will testify and is expected to express
continued U.S. support for multilateral negotiations. On Wednesday, the SFRC is scheduled to mark
up a series of bills and resolutions, several of which are designed to improve the management of U.S.
diplomacy and foreign assistance.

House and Senate Homeland Security Developments. On Wednesday, the House passed, by a
355-62 margin, Homeland Security Committee Member Bob Turner’s (R-NY) mass transit security
legislation, H.R. 3857. The legislation allows the Department of Homeland Security’s (DHS) Transit
Security Grant Program funds to be used to support specialized patrol teams, without relying on a
waiver from the DHS Secretary. On Thursday, HHSC Chairman Peter King (R-NY) will hold a wide-
ranging hearing on the future of DHS operations, on the heels of related HHSC Subcommittee
hearings held on Tuesday, September 11 and Wednesday, September 12. Especially with only two
former Bush Administration officials and a former DHS Inspector General scheduled to testify,

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Committee Republicans are likely to strike a somewhat critical tone of the Obama Administration’s
homeland security efforts. However, Ranking Member Bennie Thompson (D-MS) and other
Democrats can be expected to push back forcefully. The Senate Homeland Security and
Governmental Affairs Committee will hold a similar hearing on Wednesday, but DHS Secretary Janet
Napolitano, FBI Director Robert Mueller, and National Counterterrorism Center Director Matthew
Olsen will testify to present the Administration’s views in that case. In addition, the HHSC’s Oversight
Subcommittee, chaired by Congressman Michael McCaul (R-TX), will tackle DHS acquisition
challenges on Friday.

Sequestration
To offset the required increase in the debt ceiling, the Budget Control Act of 2011 (BCA / P.L. 112-25)
mandated that a sequestration process would commence on January 2, 2013 if the Joint Select
Committee on Deficit Reduction and Congress failed to craft a $1.2 trillion deficit reduction plan. The
sequestration process will include automatic, across-the-board reductions in defense and non-defense
discretionary spending.

White House Sequestration Report. On Friday, September 14, the White House Office of
Management and Budget (OMB) released the sequestration report required by the Sequestration
Transparency Act of 2012 (P.L. 112-155). The report outlines how federal agencies would implement
the initial $109 billion in automatic sequestration cuts scheduled to go into effect on January 2, 2013,
down to the “program, project, and activity” level. The report is almost 400 pages long and details
cuts on a program basis. The release of the White House report followed the Capital Thinking Report
deadline; a detailed analysis of the report will be provided separately. The synopsis is as follows for
all agencies and programs not exempt from sequestration:

o Discretionary domestic (non-defense) programs will receive an 8.2 percent cut in funding
o Mandatory/direct domestic (non-defense programs will receive a 7.6 percent cut in funding
o Discretionary defense programs will receive a 9.4 percent cut in funding
o Mandatory/direct defense programs will receive a 10 percent cut in funding.

House Passes Sequestration Replacement Legislation. On Thursday, September 13, the House
passed the National Security and Job Protection Act (H.R. 6365). The Act would require the President
to submit a plan to replace the $109 billion in automatic January 2, 2013 sequestration cuts. The
Republican proposal was approved by a vote of 223 to 196. The bill specifies that the plan, due to
Congress on October 15, must replace the sequestration with spending cuts only, not revenue. The
bill also reduces the overall discretionary cap for FY 2013 by $19 billion, bringing it down to the level
proposed in the House FY 2013 Budget Resolution (H. Con. Res. 112), and it eliminates the firewall
between defense and non-defense spending established in the Budget Control Act (P.L. 112-25). The
House passed a similar bill in May (H.R. 5652). The House vote is merely symbolic; the Senate will
not take up the legislation and the White House issued a veto threat for the bill.

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House Armed Services Committee Hearing. On Thursday, September 20, the House Armed
Services Committee will hold a hearing titled “Department of Defense Plans for Sequestration: The
Sequestration Transparency Act of 2012 Report and the Way Forward.” Witnesses will include Robert
F. Hale, Undersecretary of Defense (Comptroller); Gen. Lloyd J. Austin III, Vice Chief of Staff, U.S.
Army; Adm. Mark Ferguson, Vice Chief of Naval Operations; Gen. Larry O. Spencer, Vice Chief of
Staff, U.S. Air Force; and Gen. Joseph F. Dunford, Assistance Commandant, U.S. Marine Corps.

Stakeholder Efforts. Also on Thursday, September 20, the U.S. Conference of Mayors will lead a
press conference in conjunction with the release of a letter highlighting the impact sequestration will
have on local communities and metro economies. Other organizations, including the NDD Coalition,
will also participate in the press conference.

Tax
Senate Tax Extenders Legislation May Wait Until After Election. Senate Majority Leader Harry
Reid (D-NV) stated this past week that he does not expect the $205 billion tax extenders legislation to
pass the Senate before the election. In August, the Senate Finance Committee reported legislation
which focused on the tax “extender” provisions that expired at the end of 2011 and those that are due
to expire at the end of 2012. The Committee acted to extend most, but not all, of the business and
individual extenders through 2013 (retroactive to the beginning of 2012 for those provisions that have
already expired). Key provisions in the bill include: extension and modification of the research and
development (R&D) tax credit, extension of the active financing exception, and an extension allowing
taxpayers to deduct state and local sales taxes in lieu of State and local income taxes. The legislation
also included a two-year (through 2013) AMT patch for individuals. Although it was not expected that
the legislation would move before the election, the Majority Leader’s comments confirm that further
action on tax extenders will have to wait until the lame-duck session.

Hearing on the Implementation of the Affordable Care Act. The House Ways and Means
Oversight Subcommittee held a hearing last Tuesday which focused on the IRS’s implementation of
the Patient Protection and Affordable Care Act (ACA). Republicans at the hearing expressed concern
that the ACA is a complex and unwieldy law that is creating an administrative burden on the IRS and
taxpayers. One witness added that the current ACA penalty for not purchasing insurance is too weak
and would not incentivize people to buy it until they are indeed ill. Representative Erik Paulsen (R-
MN), expressed concerned with the medical device tax, characterizing it as inappropriate because
typically excise taxes are associated with the public policy goal of deterring certain behaviors, such as
limiting smoking, alcohol or “gas-guzzling” vehicles, and are not normally placed on medical devices.
Democrats, on the other hand, defended the ACA and argued that the IRS is performing well in
administering the law. In June, the Republican-controlled House passed legislation to repeal the
medical device tax from taking effect next year, but the Senate has not yet acted on it.

House Ways and Means and Senate Finance to Hold Joint Hearing on Capital Gains Taxation.
Originally scheduled for late June, the House Ways and Means and Senate Finance Committees will

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hold a joint hearing on Thursday, September 20, on tax reform and the tax treatment of capital gains.
Currently, the maximum tax rate on long-term capital gains is 15 percent, whereas the maximum
individual ordinary income rate is 35 percent. Without Congressional action, on January 1, 2013, the
maximum rate on long-term capital gains will increase to 20, while the maximum rate on individual
ordinary income will rise to 39.6 percent. The capital gains tax will be further increased due to a
Medicare surtax passed in the Affordable Care Act which will impose an additional 3.8 percent tax on
the net investment income earned by upper-income taxpayers. In advance of the hearing, both
Committee Chairmen, Representative Dave Camp (R-MI) and Senator Max Baucus (D-MT) have
expressed hope that an agreement can be made on comprehensive tax reform.

Tax Hearings Next Week. The following tax hearings are scheduled in the House Ways and Means
and Senate Finance Committees next week:

o Thursday, September 20: Joint House Ways and Means and Senate Finance hearing on
Tax Reform and the Tax Treatment of Capital Gains

Transportation

Transportation Funding. Transportation stakeholders have been focused this week on the impact
the Continuing Resolution (CR) will have on funding levels established in the two-year surface
reauthorization, MAP-21. For a variety of technical reasons, the six-month CR sets a lower obligation
limitation (or effective spending level) for the first six-months of FY2013 than the figure set in MAP-21,
essentially freezing the obligation limit at FY2012 levels instead of providing the 1.4 percent increase
established in MAP-21. In addition, while the CR provides an across the board 0.612 percent
annualized increase from FY2012 levels, for technical reasons it does not appear that this CR
inflation adjustment will apply to the federal-aid highway program either (although it will apply to other
Highway Trust Fund programs, including mass transit). The Chairmen of the Transportation
Committees in the House and the Senate have both made public their disappointment that the CR
does not honor the MAP-21 funding levels. Many stakeholders have noted, however, that the funding
difference of 1-2 percent is minimal in the context of the overall program and that it can be restored
when the full-year appropriations bill is enacted.

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Capital Thinking Updates ~ September 18, 2012

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