House passes state aid bill; Obama signs into law

WASHINGTON Tue Aug 10, 2010 7:45pm EDT

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WASHINGTON (Reuters) - The House of Representatives on Tuesday approved, and President Barack Obama promptly signed into law, an election-year bill providing $26 billion to struggling states by closing tax loopholes for multinational companies and cutting food aid to the poor.

The Democratic-controlled House of Representatives gave final congressional approval to the bill on a largely party-line vote of 247 to 161.

Democratic House Speaker Nancy Pelosi took the rare step of summoning House members back to Washington during their summer recess for a final vote on the measure after the Senate approved the legislation last week.

The bill will give states, hard-hit by the U.S. economic downturn, $16 billion more for Medicaid, the health insurance program for the poor, and $10 billion for education in the hopes they can avoid making steep cuts in already-lean budgets.

Budget gaps for the 50 U.S. states could total as much as $120 billion over the next year. States have slashed funding for everything from government employees to education since their revenues began collapsing in 2008 because of the weak U.S. economy.

"Economists have told us that if this legislation were not passed and these jobs were not saved and the budgets of the states were not stabilized we would go into another deep recession, like the one we inherited from the previous administration," Pelosi said, referring to the Republican Bush administration.

Republicans are trying to take back control of Congress from the Democrats in November's congressional elections. Republicans hope to build on voter anger over the size of the U.S. budget deficit, projected at $1.47 trillion this year, by emphasizing the measure's price tag.

"Everyone knows that state budgets have been hit hard and no one wants teachers or police officers to lose their jobs," said House Republican leader John Boehner, who opposed the bill. "But where do the bailouts end?"

Democrats want to convince voters they can strengthen a fragile economic recovery and bring down the country's unemployment rate, currently 9.5 percent.

A report from the research group the Rockefeller Institute of Government released on Tuesday showed that layoffs are hurting state and local governments, with their payrolls falling last month below pre-recession levels.

This is the only one of nine recessions since 1953 in which state government employment has fallen below its pre-recession level, the New York-based research group said.

Since the start of the year, state and local governments have shed 169,000 jobs, according to the congressional Joint Economic Committee.

TAX LOOPHOLES

"We can't stand by and do nothing while pink slips (termination notices) are given to the men and women who educate our children or keep our communities safe," Obama said in the White House Rose Garden earlier on Tuesday as he urged the House to pass the legislation.

Obama added, "This proposal is fully paid for -- in part by closing tax loopholes that encourage corporations to shift American jobs overseas, so it will not add to our deficit."

Democrats say figures from the nonpartisan Congressional Budget Office show the legislation will shave more than $1 billion from the U.S. budget deficit

The bill will be funded by tightening tax rules related to how companies allocate income between domestic and foreign subsidiaries.

It also cuts $11.9 billion from the food stamp program, ending part of last year's economic stimulus plan that temporarily increased the aid given to poor families each month to buy groceries. It rescinds advance refunds of the earned income tax credit, a break given to poor families, as well.

Last year's $862 billion economic stimulus law temporarily raised the federal reimbursements to states for Medicaid. States have been worried about how to fill the void when the money runs out in December.

The education funds contained in the bill will help retain 161,000 teachers and school staffers, according to the JEC.

But states are concerned about the education funds, which require them to maintain school spending at the same level as 2008. The recession had not hit many states then and few can now afford to return to that higher level of spending.

Mississippi Governor Haley Barbour, a Republican, said his state will have to rewrite its budget to qualify for $98 million in education funds, moving at least $50 million into education spending from public safety and health.

"There is no justification for the federal government hijacking state budgets," Barbour said.

Upset that Texas Republican Governor Rick Perry put some of his state's stimulus money in reserve, Democrats stipulated that Texas can receive education money only if it spends some of the earlier stimulus funds. Congress is sending a message to Perry, said Representative Sheila Jackson Lee: "Don't fool with money for children and education.

(Additional reporting by Matt Spetalnick, Susan Cornwell, Jeff Mason and Caren Bohan; editing by Will Dunham and Alan Elsner)

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