The Senate hopes to revive the rescue plan by packaging it with popular tax breaks and aid to rural schools. Senate bailout bill keeps growing

The Senate hopes to revive Treasury’s $700 billion financial rescue plan Wednesday night by packaging it together with more than $100 billion in popular tax breaks as well as aid to rural schools important to House Republicans.

To calm voters fearful of bank failures, the $100,000 cap on federal insurance for deposits would also be raised to $250,000—a concession backed by both parties but also aimed at community banks who can be helpful in building small town support for the larger bill.


With each permutation, the bill has steadily grown in size. Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages. And tucked away in the tax provisions is a landmark health care provision demanding that insurance companies provide coverage for mental health treatment—such as hospitalization—on parity with physical illnesses.

Really a bill onto itself, the mental health parity measure has been a bipartisan priority for top lawmakers in both chambers but has stalled because of disagreements again over how to pay for its estimated $3.8 billion five-year cost. In the current climate, that seems to be no longer a stumbling block, and if the Treasury plan becomes law, it will also.

Both presidential candidates, Sens. John McCain and Barack Obama, are slated to return for two important roll calls Wednesday evening, and Obama appears to be playing an increased role in shoring up support among House Democrats after the bill failed Monday.

Proponents hope a strong Senate vote—with support from both candidates—will marginalize the opponents in the House, which could vote Friday on the revised package. In early trading Wednesday, the Dow was holding steady. More important perhaps in the credit markets, the London inter-bank offer rate or Libor, which influences what charge in borrowing from one another, had dropped by 3 points—after spiking Monday night in the wake of the House defeat.

When the Treasury plan went down in the House, it was clearly hurt by the public perception that it was nothing more than a costly bailout for Wall Street. And since then there has been a more concerted effort by proponents to broaden grassroots support around the nation.

The U.S. Chamber of Commerce has begun radio ads targeted at lawmakers. The Republican and Democratic chairmen of national governors associations for the two parties released a joint letter Wednesday urging Congress to act. And the courtship of community banks— by raising the insurance level for deposits –builds on a decision over the weekend to also include tax breaks for local banks which were hurt by the government takeover of the two mortgage finance giants Fannie Mae and Freddie Mac.

Senate leaders are confident that they can prevail, but the strategy is not without risks in the House given the added costs of the tax package. Congressional Budget Office estimates indicate that the net impact will be to add almost $105 billion to an already large deficit next year, and fiscal conservatives will feel they are being straight-armed by the Senate which has refused to do more to offset the costs.

The biggest single piece in the package is an extension of protections for millions of middle class families who would otherwise find themselves exposed to the higher levy under the alternative minimum tax. This alone accounts for about three quarters of the cost or $78.8 billion in 2009. Almost $14 billion more can be attributed to a variety of tax break extensions important to business, including the R&E credit worth about $8.4 billion in 2009.

The rural school aid is smaller —about $3.3 billion over the next five years— but has great importance for many Western communities and could be important then in the House.

Yet many House Democrats are already upset that Republicans and the White House had rejected their effort to require Treasury to impose a fee on Wall Street transactions in five years to help recoup any taxpayer losses. The expanded Senate package would compound this loss and puts Speaker Nancy Pelosi (D-Cal.) in an awkward spot since she has vowed to stand up for these moderates in her caucus.

“The Senate has made a decision about how to proceed and what can pass that body," Pelosi said in a statement Tuesday night. "The Senate will vote tomorrow night and the Congress will work its will. House Democrats remain strongly committed to a comprehensive bill that stabilizes the financial markets, restores confidence, and protects taxpayers, and we hope Congress can agree on legislation in the very near future."

House Majority Leader Steny Hoyer (D-Md.) also warned on Wednesday morning that adding tax extenders might cause Democratic votes to drop of.

Speaking on The Today Show on NBC, Hoyer said he was “not particularly pleased” that the Senate has decided to add a set of tax breaks to the bailout package.

"There's no doubt the tax package is very controversial," Hoyer said. Soon after the defeat in the House Monday, the administration and leadership began exploring ways to revive Treasury’s plan in the Senate, where it has enjoyed more bipartisan support. Minority Leader Mitch McConnell (R-Ky.) took the lead but he was also helped by the fact that his chief negotiator on the Treasury bill, Sen. Judd Gregg (R-N.H.) enjoys a good humored, working relationship with Majority Leader Harry Reid (D-Nev.)

“The voters sent us here to respond to crises, not to ignore them," McConnell said. "And if you fail the first time, you get back up, and you work with each other.”

Reid had been fearful that he would be drawn into prolonged negotiations about changes in the core Treasury plan. But the decision to raise the cap on insurance for savings deposits won wide support Tuesday, and as a practical matter, all sides know they must deal with the tax extenders now or risk having to come back into session after the November elections.

“This is a brilliant move by Harry, and I believe it will help pick up votes on both sides of the aisle,” said Sen. Charles Schumer (D-N.Y.)

How brilliant will rest on the House reaction. The White House itself was somewhat apprehensive Tuesday night until it has seen a better vote count. And if Pelosi starts to lose Democrats who voted for the bill Monday, that means the burden will be even greater on House Republicans to increase their numbers from the 65 who backed the plan then.