Rural Equity Payment Index Reform Act of 2003

Mr. President, I rise today to introduce the Intermediate Sanctions Compensatory Revenue Adjustment Act of 2003, ISCRAA. This legislation will restore to the States billions of dollars in revenue due to them from a massive lawsuit recently conducted on their behalf the tobacco-Related Medicaid expenses litigation. ISCRAA amends an existing provision of the Federal tax code in order to enforce basic, universally accepted fiduciary standards governing the award of attorneys fees. By applying these standards to the attorneys who represented the states in the tobacco settlement, ISCRAA reasonably can be expected to restore to the states income with a present value of approximately $9 billion. I have included at the end of my statement a chart detailing how much each state can expect to recover.

ISCRAA's tax formula is borrowed from the 1996 Tax Act's Intermediate Sanctions Tax, IST, which applies a two-step excise tax to any excessive or unreasonable compensation that the managers of a trust pay to themselves from the assets of the trust. The IST framework encourages the trustee to restore the excessive portion of any fee to the trust--when he does so, the IST's punitive taxes do not apply.

ISCRAA extends the IST to another type of trust relationship: that between a lawyer and his client. ISCRAA applies the IST tax formula to any unreasonable or excessive income that a lawyer collects from litigation resulting in a judgment or settlement in excess of $100 million. To avoid IST taxes, an attorney must restore the excessive portion of the fee to the client.

As my colleague Senator Cornyn will explain today, the ethical and legal abuses that resulted from the 1998 State tobacco settlement make the need for this legislation manifest. Senator CORNYN also will discuss the law of attorneys' fiduciary obligations, which establishes that a fee award is the property of the client--and that any unethical fee must be restored to the client, regardless of how the fee award is structured.

I will discuss today how ISCRAA will affect massive litigations generally. In order to gauge the reasonableness of a lawyer's fee award, ISCRAA adopts and codifies a liberal version of the lodestar- multiplier system. As I will later explain in greater detail, ISCRAA allows fee multipliers of up to 500 percent of reasonable hourly rates. This limit is as generous as the most liberal limits adopted by state courts, and considerably more generous than the limits that federal courts have applied in $100 million cases. ISCRAA's fee formula guarantees that attorneys' fiduciary obligations will be respected, while providing plaintiff's lawyers with ample incentive to provide high-quality legal representation in these types of cases.

Federal supervision of fee awards resulting from $100 million litigations is appropriate for several reasons. First, because of their sheer size, these types of lawsuits inevitably operate as a tax on the consuming public. Few defendants actually can afford to pay such judgments with cash on hand. Instead, the affected industries simply will raise the prices that they charge to their customers.

This is exactly what has happened in the State Medicaid tobacco settlement--according to the leading proponents of that litigation. The first State attorney general to file suit against the tobacco companies has admitted that ``what always happens in these cases is the industry passes the costs to the consumer.'' Other commentators agree that this has occurred in the tobacco litigation. As one law-review article notes, ``the [tobacco] settlement * * * is a tax because it's a set of payments made by tobacco companies that depend on how many packs they sell; in short, it looks like a tax and quacks like a tax.''

Because of the way that these massive judgments typically are satisfied, it is particularly important to ensure that attorneys are paid in proportion to the services that they provided--rather than solely on the basis of the size of the recovery. Again, the State tobacco settlement highlights the nature of the problem. As two of the leading academic commentators have noted, it is ``very troubl[ing]'' that under that agreement, ``a group of private citizens [are] getting paid a percentage of a tax increase they helped pass.'' The sheer size of the tobacco settlement--and the fact that attorneys fees were based on this size, rather than on the attorneys' actual efforts--has given the fee awards an uncanny resemblance to the medieval practice of tax farming. In all but name, the government has licensed a group of private individuals to collect a tax from the consuming public.

I would emphasize at this point that ISCRAA is not an attack on the State tobacco lawsuits. The bill does not pass judgment on the merits or the appropriateness of this type of litigation. ISCRAA simply is designed to ensure that when such lawsuits are brought on the public's behalf, the public receive its fair share of the proceeds. If a State chooses to seek compensatory revenue from industry for past harms, then the resulting tax on the public--minus the reasonable value of the legal services actually provided--must go to the State treasury.

There are several reasons why $100 million is an appropriate threshold for applying ISCRAA's fee formula. First, the courts themselves have indicated that fee agreements based primarily on the size of the recovery tend to become unreasonable when judgements reach this size. As one court has stated, ``in much smaller cases, a fee award of 33 percent does not present the danger of providing the plaintiff's counsel with the windfall that would accompany a `megafund' settlement of $100 million or upwards. But it is quite different when the figures hit the really big time.'' Or as the Third Circuit notes, ``courts have generally decreased the percentage awarded [for attorneys fees] as the amount recovered increases, and $100 million seems to be the informal marker of a 'very large' settlement.''

The logic of avoiding judgment-based awards in these very large cases is straightforward. As one court explains, ``it is not 150 times more difficult to prepare, try, and settle a $150 million case than it is to try a $1 million case, but the application of a percentage comparable to that in a smaller case may yield an award 150 times greater.'' Thus, according to another court, ``there is considerable merit'' to disallowing standard percentage awards as the ``size of the [recovery] fund increases. In many instances the increase [in the recovery] is merely a factor of the size of the class and has no direct relationship to the efforts of counsel.''

It also bears mention that because of its $100 million threshold, ISCRAA applies to a fairly limited universe of cases. As courts have remarked, ``there are few so-called `megafund' cases with settlements over $100 million.'' In 2001, the U.S. Court of Appeals for the Third Circuit attempted to catalogue all common-fund cases in federal court that resulted in recoveries greater than $100 million. Though such litigations have been more frequent in recent years, the Third Circuit identified only 22 such cases since 1985. See in re Cendant Corp. PRIDES Litig., 243 F.3d 722, 737 (3d Cir. 2001).

ISCRAA is somewhat broader than the criteria that Cendant Corp. employed to collect cases. ISCRAA is not limited to common-fund cases-- it also applies to judgments won on behalf of tax-exempt entities or even single individuals. ISCRAA also applies to cases brought in State court, and it aggregates identical claims that are brought against common defendants in separate actions, in order to prevent evasion of its limits through the subdivision of actions. Nevertheless, ISCRAA's scope remains fairly narrow. An academic specialist who is familiar with developments in this field has reviewed the bill and concluded that because of its ``relatively high threshold,'' ISCRAA probably would apply only to about 15-20 litigations per year. I will include a copy of this professor's letter to me in the Congressional Record.

Finally, a $100 million threshold also is appropriate because it limits ISCRAA's reach to litigations that are a natural subject of congress's authority to regulate interstate commerce. It is well- established that ``Congress' commerce authority includes the power to regulate . . . those [economic] activities that substantially affect interstate commerce.'' United States v. Morrison, 529 U.S. 598, 609 (2000). See also United States v. Lopez, 514 U.S. 549 (1995). Both the executive and the legislative branches previously have identified $100 million as guideline for determining whether a matter has a significant impact on interState commerce. See, e.g. Executive Order 12866; Congressional Review Act, 5 U.S.C. Sec. 804(2); Unfunded Mandates Act, 2 U.S.C. Sec. 1532(a). Because it is limited to litigations of this size, ISCRAA is consistent with congress's power and obligation to protect the flow of commerce between states.

Another point that I would like to emphasize today is that ISCRAA is not an anti-plaintiffs' lawyer bill. It is not stingy toward trial attorneys. ISCRAA is carefully designed to protect fiduciary interests while providing plaintiffs' lawyers with ample incentives to provide high-quality legal representation in large litigations. ISCRAA's fee formula is as generous as the limits set by the most liberal State courts that engage in meaningful review of attorneys fees, and is considerably more generous than the Federal courts' practices in $100 million cases. Moreover, the multiplier criteria that ISCRAA employs universally are recognized as legitimate prerequisites for a contingency fee--even by trial lawyers' professional associations.

Federal courts primarily rely on two systems for calculating attorneys fees in cases, such as class actions, in which they are required to set ``reasonable fees:'' the percentage method and the lodestar-multiplier method. The percentage method, as its name implies, calculates fees as a percentage of the total recovery. The lodestar system, by contrast, requires a court to first calculate a fee based on the number of hours that the lawyer worked multiplied by prevailing hourly rates, the ``lodestar''. The court then multiplies this lodestar fee again in order to reward the attorney for the risk of nonpayment of fees that he assumed and for any exceptional services that he provided.

Over the last thirty years, courts have moved back and forth between these two systems. Only a few courts make lodestar-multipliers the exclusive means of awarding attorneys fees. But as one academic commentator has noted, ``lodestar, or hours-based methods, have been adopted in every [federal judicial] circuit.''

And more importantly, in large-recovery cases, there has been very little difference between lodestar and percentage systems. This is because even when courts apply a percentage to calculate fees, and as judgements become very large, courts typically also calculate a reasonable lodestar in order to determine what constitutes a reasonable percentage. Thus, again, as the Third Circuit notes, ``courts have generally decreased the percentage awarded as the amount recovered increases, and $100 million seems to be the informal marker of a `very large' settlement.''

Courts have been wary of awarding fees based on percentages alone. As one State supreme court explains: ``to begin the assessment by arbitrarily picking a percentage amount without any reliance on a cognizable structure invites decisions that are nonobjective and inconsistent. What constitutes a reasonable percentage may differ from one judge to another depending on each judge's predilections, background, and geographical location in the state.''

Thus ``courts that employ the percentage approach appear to be motivated in part by a lodestar dynamic. Because courts are reluctant to give fee awards totally incommensurate with the efforts of the attorneys, percentage awards generally decrease as the amount of the recovery increases.''

One result of the cross-use of the lodestar and percentage systems is that even when courts use the percentage system, those awards overwhelmingly tend to reflect a reasonable lodestar multiplier. Therefore, even percentage-based cases tend to provide evidence of the range of multipliers that the courts consider to be reasonable.

In 2001, the Third Circuit ``set forth a chart of fee awards given in Federal courts since 1985 in class actions in which the settlement fund exceeded $100 million and in which the percentage of recovery method was used.'' Cendant Corp. The court identified 17 such cases. In almost every case, the Third Circuit could calculate the multiplier that was used, and ``the lodestar multiplier in those cases never exceeded 2.99.'' And in the direct lodestar-multiplier cases that court identified, the multiplier ranged from 1.2 to 3.25.

Other courts, surveying smaller cases than the $100 million recoveries examined in Cendant Corp., have identified larger multipliers. One Federal district court has ``observe[d] that in virtually every case where the court notes a lodestar but awards fees based upon a percentage, the lodestar multiplier converted from this percentage is in the range of 1 to 4.'' Another Federal district court has found that ``the range of lodestar multipliers in large and complicated class actions runs from a low of 2.26 to a high of 4.5.''

By contrast, some courts have declared that they would allow only lower multipliers. One Federal court has stated that ``only in the most exceptional circumstances would this court award a multiplier of 3 or greater. . . . this court believes that lodestars enhanced by multipliers less than 3 should adequately compensate even the most talented counsel.'' And the Seventh Circuit has suggested that ``it may be that a doubling of the lodestar would provide a sensible ceiling.''

On the other hand, the Florida Supreme Court--which is generally regarded as one of the more plaintiff-friendly courts in the United States--has announced that: ``we set the maximum multiplier available in this common-fund category of cases at 5. . . . [A] multiplier which increases fees to five times the accepted hourly rate is sufficient to alleviate the contingency risk factor involved and attract high level counsel to common fund cases while producing a fee that remains within the bounds of reasonableness. We emphasize that 5 is a maximum multiplier.''

ISCRAA adopts this more liberal standard. It allows fees as high as 500 percent of reasonable hourly rates. ISCRAA awards multipliers based on two criteria: it allows up to 300 percent to be added onto the amount of reasonable hourly fees if a case that involved a substantial risk of nonrecovery of fees, and allows an additional 100 percent add- on if the attorney provided exceptional services that improved the plaintiff's recovery.

The criteria that ISCRAA employs universally are recognized as necessary prerequisites to the legitimacy of a contingency fee. ``Courts in general have insisted that a contingent fee be

truly contingent. The typically elevated fee reflecting the risk to the lawyer of receiving no fee will be permitted only if the representation indeed involves a significant degree of risk.'' Charles W. Wolfram, Modern Legal Ethics Sec. 9.4, at 532 (1986). The risk requirement has been recognized ever since contingency fees first were allowed in the United States. The American Bar Association even noted at that time that ``a contract for a contingent fee, where sanctioned by law, should be reasonable under all the circumstances of the case, including the risk and uncertainty of the compensation.'' ABA Canons of Professional Ethics, Canon 13 (1908). Indeed, even the professional associations of plaintiffs' attorneys have, at times, acknowledged that contingent fees should be based on an actual contingency. In a guide to its members, the Association of Trial Lawyers of America has ``recommend[ed]'' that attorneys ``exercise sound judgment in using a percentage in the contingent fee contract that is commensurate with the risk, cost and effort required.'' ATLA, Keys to the Courthouse: Quick Facts on the Contingency Fee System 13 (1994).

The criteria that ISCRAA employs are universally accepted--and the limits that it sets should be universally acceptable. ISCRAA is not intended to alter the considered standards of any jurisdiction. Rather, it is intended to enforce those standards--and to correct the occasional extreme outlier. Because ISCRAA incorporates a fee formula that is substantially more liberal than the usual practices of the federal courts in $100 million cases, we can be confident that high- quality legal representation will remain available to plaintiffs in these large litigations. See, e.g. in re Sumitomo Copper Litig., 74 F. Supp. 2d 393, S.D.N.Y. 1999, RICO and Commodities Exchange Act case resulting in $116 million recovery; attorneys reviewed millions of pages of documents located throughout the world, many requiring translation from Japanese; Federal district court awards multiplier of 250 percent for total fee of $32 million.

Another issue that I will address today is the argument--occasionally raised in opposition to proposals to limit attorneys fees--that such restrictions violate attorneys' rights to freedom of contract.

The first principle to keep in mind when questions of attorneys fees are considered is that ``a fiduciary relationship exists as a matter of law between attorney and client.'' (Illinois Supreme Court.) As one academic commentator has noted: ``[I]t is uncontroverted today that a lawyer is a fiduciary for, and therefore has a duty to deal fairly with, the client. . . . Lawyers are fiduciaries because retention of an attorney to exercise 'professional judgment' on the client's behalf necessarily involves reposing trust and confidence in the attorney. Exercising professional judgment requires that the lawyer advance the client's interests as the client would define them if the client were well-informed.''

The lawyer's status as fiduciary places limits on his dealings with his client--including with regard to his fee. ``An attorney's freedom to contract with a client is subject to the constraints of ethical considerations.'' New Jersey Supreme Court. ``In setting fees, lawyers are fiduciaries who owe their clients greater duties than are owed under the general law of contracts.'' Massachusetts Appeals Court. ``As a result of lawyers' special role in the legal system, contracts between lawyer and client receive special scrutiny. . . . While freedom of contract is the guiding principle underlying contract law, contractual freedom is muted in the lawyer-client and lawyer-lawyer contexts.'' Joseph M. Perillo, law professor.

The unique status of attorney fee contracts has led courts to reject analogies between such agreements and other business or service contracts. Perhaps the fullest exposition is provided by the Arizona Supreme Court: ``We realize that business contracts may be enforced between those in equal bargaining capacities, even though they turn out to be unfair, inequitable or harsh. However, a fee agreement between lawyer and client is not an ordinary business contract. The profession has both an obligation of public service and duties to clients which transcend ordinary business relationships and prohibit the lawyer from taking advantage of the client. Thus, in fixing and collecting fees the profession must remember that it is a branch of the administration of justice and not a mere money getting trade.' ABA Canons of Professional Ethics, Canon 12.''

The same principle has been identified by the Florida Supreme Court: There is but little analogy between the elements that control the determination of a lawyer's fee and those which determine the compensation of skilled craftsmen in other fields. Lawyers are officers of the court. The court is an instrument of society for the administration of justice. Justice should be administered economically, efficiently, and expeditiously. The attorney's fee is, therefore, a very important factor in the administration of justice, and if it is not determined with proper relation to that fact it results in a species of social malpractice that undermines the confidence of the public in the bench and bar. It does more than that. It brings the court into disrepute and destroys its power to perform adequately the function of its creation.''

In order to protect the lawyer's public role and to enforce his fiduciary obligations, the courts read a reasonableness requirement into every attorney fee contract. ``[T]he requirement that a fee be reasonable in amount overrides the terms of the contract, so that an `unreasonable' fee cannot be recovered, even if agreed to by the client.'' G. Hazard, Jr. & W. Hodes, The Law of Lawyering 1. 5:205 Fee Litigation and Arbitration 120 (1998 Supp.).

As one court has stated, ``[A]n attorney is only entitled to fees which are fair and just and which adequately compensate him for his services. This is true no matter what fee is specified in the contract, because an attorney, as a fiduciary, cannot bind his client to pay a greater compensation for his services than the attorney would have the right to demand if no contract had been made. Therefore, as a matter of public policy, reasonableness is an implied term in every contract for attorney's fees.''

Finally, when assessing whether a fee is reasonable, courts ask whether the fee is proportional to the services that were actually provided. ``Fees must be reasonably proportional to the services rendered and the situation presented.'' (Arizona Supreme Court.) ``If an attorney's fee is grossly disproportionate to the services rendered and is charged to a client who lacks full information about all of the relevant circumstances, the fee is `clearly excessive' . . . even though the client consented to such fee.'' West Virginia Supreme Court.

Because attorneys are fiduciaries, they simply do not have complete freedom of contract in negotiating their fees. An attorney's dealings with his client always must reflect that the client comes to him in a position of trust--and therefore, the attorney's fee always must be reasonable. ISCRAA will help ensure that this important obligation is respected.

Another subject that I would like to address today is ISCRAA's effective date. ISCRAA applies to attorney fee payments received after June 1, 2002. This effective date is appropriate under the circumstances of the State tobacco settlement for several reasons: first, Congress routinely enacts major tax legislation with effective dates that look back much further than does ISCRAA. The Supreme Court has ``repeatedly upheld [such moderately] retroactive tax legislation against a due process challenge.'' United States v. Carlton, 512 U.S. 26, 30-31, 1994; see id. at 33, upholding tax whose ``actual retroactive effect . . . extended for a period only slightly greater than one year''.

Second, ISCRAA is not even truly retroactive. ISCRAA does not change the substantive law governing attorneys fee awards. Rather, it simply enforces established, pre-existing fiduciary standards that already bind every attorney in every state. The Model Rules of Professional Conduct, at Rule 1.5(a), contain a clear, direct command that ``a lawyer's fee shall be reasonable.'' Similarly, the Model Code of Professional Responsibility, at DR 2-106, directs that an attorney ``shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee.'' The Model Code further explains that an attorneys fee is ``clearly excessive when, after a review of the facts, a

lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee.'' Finally, as academic commentators point out, in addition to the model rules, ``all State rules of professional conduct prohibit attorneys from charging excessive fees.''

As I described earlier, to enforce fiduciary standards, ISCRAA codifies and applies a very generous version of the fee multiplier system, allowing attorneys fees as high as 500 percent of reasonable hourly rates. This is considerably more generous than what Federal courts typically allow in large-judgment cases. No attorney can be heard to complain that he is subjected to a law that is more generous than his existing fiduciary obligations.

Further, none of the tobacco-settlement attorneys can reasonably maintain that they have a vested right to see their fiduciary duties to the states go unenforced. Nevertheless, in order to be fair to all parties, ISCRAA's excise taxes are applied only to fees that were paid after June 1, 2002. By this date, all of the tobacco lawyers twice had received notice from George W. Bush that he intended to enact legislation to enforce their fiduciary obligations. In February 2000, then-candidate Bush promised that he would ``extend[] the `excess benefits' provision of the tax code to private lawyers who contract with states and municipalities,'' with ``the reasonableness of the fees * * * [to] be determined by the standard judicial `lodestar' method.'' And as early as February 2001, the current Administration announced that it anticipated providing ``additional public health resources for the States from the President's proposal to extend fiduciary responsibilities to the representatives of States in tobacco lawsuits.'' See A Blueprint for New Beginnings: A Responsible Budget for America's Priorities 80, Office of Management and Budget, February 28, 2001.

Under ISCRAA, all of the attorneys who participated in the State tobacco settlement still will be very liberally compensated. Because ISCRAA does not apply to the first three-and-a-half years of fee payments under the settlement, it exempts the first two-and-a-half billion dollars that these lawyers received. Every one of the tobacco lawyers will have more than enough money left to pay for the yachts, luxury cars, and vacation homes that were purchased with the tobacco proceeds. ISCRAA might simply be described as the one-yacht-per-lawyer rule.

But most importantly, because ISCRAA applies to the last year's worth of tobacco fee payments, and to all future payments, it will return a substantial amount of funds to the States--money that already should belong to the States under any reasonable interpretation of fiduciary standards. It is critical that these funds be restored in this time of widespread fiscal crisis. Today a large number of the States face massive budget deficits that threaten their ability to provide health care to the indigent, to fully fund public education, and to guarantee adequate and effective law enforcement. When such needs risk going unmet, fee abuses that cost the States billions of dollars simply can no longer be ignored. The States must receive their fair share of the tobacco settlement proceeds--funds that are badly needed to support basic public services.

Under the terms of the November 1998 Master Settlement Agreement, MSA, between the States and tobacco companies, $500 million in cigarette taxes is set aside every year to pay the attorneys who chose to have their fees awarded in arbitration. Because extraordinarily high fees were awarded by the arbitrators--estimated to total $15 billion-- the $500-million-a-year income stream, which is not adjusted for inflation, may have to be paid in perpetuity. In addition to this annuity, the MSA also sets aside an additional $1.25 billion in cigarette taxes to compensate those lawyers who choose to forego arbitration and negotiate their fees directly with the tobacco companies.

The present value of the $500-million-a-year fee stream--discounting all future payments for the time value of money--has been conservatively estimated at just over $8 billion. Current and future payments from the $1.25 billion fee fund are less certain, since the grants made from that fund and their disbursement schedule have been kept obscure from the public. Because ISCRAA's effective date is June 1, 2002, ISCRAA will probably recoup for the States an additional $1 billion above the present value of future $500 million-a-year payments. ISCRAA does not affect the first three-and-a-half years of fees paid under the MSA. Because these payments almost certainly are adequate to pay all reasonable fees incurred in the litigation, ISCRAA would restore to the States virtually all fees paid after its effective date. Thus the net present value of the sums that ISCRAA would provide to the States can conservatively be estimated at $9 billion.

By restoring these excess fee payments to the states' MSA escrow account and returning them to the States on a per capita basis, ISCRAA guarantees every State a very substantial recovery. Based on the estimates that I have described, even our Nation's smallest State, Wyoming, would recoup at least $15 million in tobacco fee payments, and other small States, such as North Dakota, would receive approximately $20 million. On the other hand, our nation's largest State, California, can expect to recoup at least $1 billion. Other large States would also see generous returns: Florida, $511 million; Illinois, $397 million; Michigan, $318 million; New York, $607 million; Ohio, $363 million; and Texas, $667 million.

Here is how much each State can expect to recover:

Alabama....................................................$142,220,272 Alaska.......................................................20,046,569 Arizona.....................................................164,079,935 Arkansas.....................................................85,496,543 California................................................1,083,230,642 Colorado....................................................137,556,275 Connecticut.................................................108,911,511 Delaware.....................................................25,059,883 District of Columbia.........................................18,294,706 Florida.....................................................511,123,686 Georgia.....................................................261,806,474 Hawaii.......................................................38,745,502 Idaho........................................................41,381,203 Illinois....................................................397,174,614 Indiana.....................................................194,456,664 Iowa.........................................................93,585,167 Kansas.......................................................85,976,825 Kentucky....................................................129,257,603 Louisiana...................................................142,919,876 Maine........................................................40,772,615 Maryland....................................................169,384,021 Massachusetts...............................................203,046,997 Michigan....................................................317,835,940 Minnesota...................................................157,327,166 Mississippi..................................................90,973,451 Missouri....................................................178,937,382 Montana......................................................28,852,605 Nebraska.....................................................54,726,966 Nevada.......................................................63,905,164 New Hampshire................................................39,520,996 New Jersey..................................................269,094,724 New Mexico...................................................58,173,915 New York....................................................606,875,689 North Carolina..............................................257,420,675 North Dakota.................................................20,537,847 Ohio........................................................363,078,559 Oklahoma....................................................110,353,478 Oregon......................................................109,417,889 Pennsylvania................................................392,753,669 Rhode Island.................................................33,525,716 South Carolina..............................................128,305,961 South Dakota.................................................24,140,253 Tennessee...................................................181,945,847 Texas.......................................................666,850,647 Utah.........................................................71,417,756 Vermont......................................................19,470,563 Virginia....................................................226,374,115 Washington..................................................188,496,659 West Virginia................................................57,831,660 Wisconsin...................................................171,532,756 Wyoming......................................................15,791,372

I ask unanimous consent that the text of the bill and the following four articles be printed in the Record.

Mr. President, I am pleased to join my colleague, Senator Kyl, to introduce today this landmark legislation to clean up our civil justice system. This legislation would enact a badly needed reform to the way in which attorneys are paid in some of the Nation's largest cases. It is designed to address some of the worst abuses of our civil justice system that I have witnessed in my nearly thirty years in the legal profession as a lawyer in private practice, as a state trial and appellate judge, and as state attorney general.

This legislation, the Intermediate Sanctions Compensatory Revenue Adjustment Act of 2003, ISCRAA, will combat the gross abuse of attorney contingent fee agreements, abuses which we have been witnessing at an increasing rate in recent years. The legislation will enforce attorneys' fiduciary duties to their clients in a small but important category of cases--those resulting in judgments greater than $100 million.

Contingent fee agreements can have an important role to play in our civil justice system. Sometimes, when people are injured but cannot afford to hire lawyers out of their own pockets, attorneys will accept the case with the expectation that, if their clients prevail, the attorney will be paid for his or her services out of the judgment or settlement that the attorney is able to secure for the client. Such agreements between attorneys and their clients are called contingent fee agreements, because the attorney's fee is contingent on the client obtaining a money judgment or settlement. Contingent fee agreements, properly understood and utilized, reward attorneys for their work in obtaining monetary recovery for their clients, and the risk that they take that, despite their hard work and best efforts, they are unable to obtain any recovery for the client at all.

Contingent fees can thus help ensure that plaintiffs with legitimate claims have the opportunity to obtain justice from our courts through the assistance of counsel. But contingent fees also present serious ethical problems for our legal system--particularly in cases in which the dollar amounts at stake are extraordinary, and result in a contingent fee award that overwhelmingly exceeds the relatively light or even negligible effort and risk actually undertaken by the attorneys.

Under the time-tested traditions of our legal system, clients hire attorneys with the understanding and expectation that the attorney is ethically, legally, and morally obliged to represent their best interests, and that the attorney will use his or her legal skills in order to produce the best possible result--not for the attorney, but for the client.

Thus, as my colleague has noted, contingent fee agreements are no ordinary agreements between consumers and businesses. It is a bedrock principle and well-established tenet of our Anglo-American system of justice that attorneys are not ordinary businessmen who can engage in hard bargaining with their customers, as courts have made clear on countless occasions. Rather, attorneys are officers of the court who bear a fiduciary duty to their clients. As fiduciaries, attorneys occupy a position of trust in their dealings with their clients, a trust which attorneys may not lawfully abuse.

One obligation that flows from this status as a fiduciary is the attorney's obligation not to charge an unreasonable or excessive fee. This obligation is a fundamental part of an attorney's ethical duties, universally recognized in the ethics rules of all 50 States. Courts have made clear, time and time again, that every attorney fee contract automatically and necessarily includes the requirement that the fee be a reasonable one, a fundamental and basic duty of all attorneys, and one that no provision of such agreements may abrogate.

ISCRAA affirms and reinforces the longstanding substantive law of attorneys' fiduciary duties, by providing a special mechanism to enforce those duties in a particularly high risk category of cases--a category that the courts themselves have singled out as posing special risks of unethical, windfall fees. Courts have noted that allowing standard contingency fee agreements in cases involving judgments of

$100 million or more have a distinct tendency of grossly overcompensating attorneys for their actual services rendered.

ISCRAA prevents attorneys from evading their obligation to charge a reasonable fee in extraordinarily large recovery cases, by effectively limiting awards to a generous multiple of reasonable hourly fees. State courts, Federal courts, and even trial lawyers' themselves have all recognized that a reasonable fee must be proportional to the attorney's actual efforts. ISCRAA codifies and enforces this principle, while continuing to guarantee lawyers ample and generous compensation for their efforts--using fee multipliers that are as generous as the most liberal limits adopted by state courts, and which are considerably more generous than the limits set by federal courts in $100 million cases.

This legislation thus promises to clean up our civil justice system and to repudiate the grossest abuses of our legal system. Make no mistake: Although all attorneys are supposed to uphold a strict ethical code, under which they are strictly forbidden from charging their clients unreasonable or excessive attorney fees, the temptation to abuse contingent fee agreements is a strong one, and even more so when the dollar amounts are truly extraordinary--such as in the $100 million cases that would be covered by this legislation. And make no mistake: the victim of such attorney fee abuse, and the beneficiary of this legislation, is not the defendant who pays the judgment--after all, the defendant pays the same total amount whether the money goes to the attorney or to the client. Rather, the real victim of this abuse, and the real beneficiary of this legislation, is the injured client, whose money is being taken away from the lawyer through an abusive contingent fee arrangement.

As my colleague has also noted, ISCRAA is unquestionably an appropriate exercise of Congress's power to regulate and protect interstate commerce, considering the large size of the litigations to which it applies. $100 million is a standard threshold used by the federal government to determine whether an economic transaction significantly affects interstate commerce.

But the most important reason for federal intervention in this area I have not yet mentioned, and I would like to take a moment to discuss it here: the gross abuses that we have already witnessed in large litigation fee awards. Recent experience amply demonstrates that, if the Federal Government does not act to prevent unethical and grossly abusive fee awards in massive, nationwide lawsuits, no one will. Moreover, recent experience further demonstrates that unreasonable fee payments in such suits threaten not just the attorneys' fiduciary obligations; they also place at risk the integrity of our governmental institutions. The unwholesome incentives created by windfall, unethical fee awards in large-scale litigations have induced some public officials to abandon their civic obligations.

The textbook example of the types of abuses that make ISCRAA necessary is the attorney fee arrangement awarded in the State lawsuits to recover tobacco-related Medicaid expenses. Individual law firms that represented the States in that litigation have been given hundreds of millions and sometimes even billions of dollars in fees. To date, approximately $15 billion in fees has been awarded to the tobacco settlement lawyers, to be paid out in $500-million-a-year increments. Attorneys representing just three of the States--Mississippi, Texas, and Florida--were awarded $8.2 billion in fees. In many cases, such fees were paid to attorneys who filed duplicate, copycat lawsuits at a time when settlement negotiations had already begun and the risk that the states would not recover any money was negligible. Yet these lawyers nevertheless received massive contingency fees, for suits that involved no real contingency. And for most of the tobacco settlement lawyers, the size of the fee awards bears no reasonable relation to the actual effort expended or risk involved.

There is widespread agreement that the fees awarded in the tobacco settlement are excessive and unreasonable. Perhaps the most damning indictments come from those who took the plaintiffs' side in this litigation--including from plaintiff lawyers themselves. For example, Michael Ciresi, a pioneer in the tobacco litigation who represented the state of Minnesota in its lawsuit, and who is no doubt familiar with what these lawsuits actually require, has said that the Texas, Florida, and Mississippi lawyers' fee awards ``are far in excess of these lawyers' contribution to any of the state results.'' Similarly, former Food and Drug Administration Commissioner David Kessler, another leader in the fight against tobacco, has said that the states' private lawyers ``did a real service, but I think the fee is outrageous. All the legal fees are out control.'' Washington, D.C. lawyer and tobacco-industry opponent John Coale has denounced the fee awards as ``beyond human comprehension'' and stated that ``the work does not justify them.'' Even the Association of American Trial Lawyers, the nation's premier representative of the plaintiffs bar, has condemned attorney fees requested in the state tobacco settlement. The President of ATLA has noted: ``Common sense suggests that a one billion dollar fee is excessive and unreasonable and certainly should invite the scrutiny, of the courts. ATLA generally refrains from expressing an institutional opinion regarding a particular fee in a particular case, but we have a strong negative reaction to reports that at least one attorney on behalf of the plaintiffs in the Florida case is seeking a fee in excess of one billion dollars.''

This letter, written in 1997, only concerned one of the Florida lawyers' request for attorney fees. Ultimately, Florida's private counsel was awarded a total of $3.4 billion in fees. These statements demonstrate beyond all doubt that there is real abuse going on here, and that the victim of this abuse is the client, the plaintiff--and not the defendant.

Perhaps the best gloss on the tobacco fee awards is that provided by Professor Lester Brickman, a professor of law at Cardozo Law School and noted authority on legal ethics and attorney fees. Professor Brickman has stated:

``Under the rules of legal ethics, promulgated partly as a justification for the legal profession's self-governance, fees cannot be `clearly excessive.' Indeed, that standard has now been superseded in most States by an even more rigorous standard: fees have to be `reasonable.' Are these fees, which in many cases amount to effective hourly rates of return of tens of thousands--and even hundreds of thousands--of dollars an hour, reasonable? I think to ask the question is to answer it.''

The attorney fees awarded in the state tobacco settlement are simply indefensible. And the process by which the fees were awarded partly explains how they came to be so. Outside counsel fees were determined by a private arbitration panel established by the Master Settlement Agreement, MSA, that resolved 46 of the states' litigation. Four other states had settled their suits earlier. Their lawyers, however, also were paid out of the accounts created by the MSA. Amazingly, the settlement agreement explicitly immunized all fee awards from judicial review. Even more amazingly, one of the three arbitrators who made the awards had a clear conflict of interests: he was the father of a South Carolina lawyer whose law firm has received the largest fee awards of all, believed to amount to over $2 billion. Another one of the arbitrators had no background in fee arbitrations or any related matter, and simply ignored the law in order to make outrageous awards, using the salaries of sports stars and entertainers as a basis of measure. Revealingly, the third arbitrator, a retired Federal judge appointed by President Carter, dissented from the key fee decisions.

As incredible as the MSA fee awards and the arbitration procedures may seem, even more dubious is the process by which many of the law firms that participated in this lucrative litigation were selected in the first place to represent the states.

In my home State of Texas, trial lawyers have accused the then-state attorney general of demanding $1 million in campaign contributions in exchange for their being hired to represent the state in the tobacco litigation. One prominent lawyer--a former president of the Texas Trial Lawyers Association--has since said that the attorney general's solicitation was so blatant that ``I knew th[at] instant . . . that I

could not be involved in the matter.'' He even later wondered if the meeting had been a ``sting operation.'' Another lawyer simply characterized his encounter with the attorney general as a bribery solicitation.

This former Texas attorney general was recently indicted on Federal charges of attempting to fraudulently divert $260 million in tobacco- settlement legal fees to one of his personal friends. He had given a sworn affidavit that this lawyer had served as Texas' ``primary adviser'' in its tobacco lawsuit--despite the apparent fact that the lawyer had attended no court hearings, depositions, or strategy meetings, wrote no memos or legal briefs about the case, and apparently never even spoke to any of the other attorneys. The attorney general even went so far as to forge and fraudulently backdate documents in order to win his friend a share of the tobacco settlement fee.

As for the five law firms that actually did represent Texas in the tobacco litigation, they filed relatively late lawsuits that were based on other lawyers' work--and yet, despite the minimal energy expended on those suits, were awarded $3.3 billion in attorney fees. This award amounts to compensation that, even assuming that the attorneys worked all day every day during the entire period of the litigation, remains well in excess of $100,000 an hour. As one newspaper editorial has noted, for the amount of money that these lawyers were awarded, Texas could hire 10,000 additional teachers or policemen for ten years. Instead, four of these firms gave the attorney general $150,000 in campaign contributions in recent years.

Texas' experience is not an isolated example. In other states as well, lawyers' participation in the tobacco litigation appears to have been the product of political favoritism--and to have resulted in unfathomable fees that bear no reasonable relation to the services provided. For example: New Jersey: The private in-state lawyers who represented this state in the tobacco litigation have admitted that they had no mass-tort litigation experience and played no role in the state settlement talks. They have also admitted that all the key work in the state's lawsuit was done by out-of-state firms--the in-state firms' principal work was drafting pro hac vice motions to have these outside lawyers admitted in New Jersey courts. Any work that the New Jersey lawyers did was submitted to the outside lawyers, who made all of the substantive arguments. Result: these in-state lawyers were awarded $350 million in the MSA fee arbitration. Connections: the New Jersey lawyers were an inside group of past presidents of the New Jersey trial lawyers' association. The State refused to even consider hiring a nonprofit firm to conduct the New Jersey lawsuit.

Pennsylvania: Settlement talks had already begun, the states' tobacco litigation was being resolved, and all of the legal theories already had been developed long before the Pennsylvania state suit was filed. Result: Pennsylvania's private lawyers were awarded $50 million in the MSA arbitration--equivalent to 1000 percent of a reasonable hourly rate. As one expert has noted, ``there's not $50 million of work in there.'' Connections: the two law firms that the state Attorney General selected to conduct the litigation were among his top campaign contributors. The firms were awarded no-bid contracts. As one Pennsylvania commentator has noted, ``obviously, it was a political kind of thing.''

Maryland: Billionaire tort lawyer Peter Angelos demanded a one billion dollar fee for his work on that State's case, even though, according to the State Senate President, the State legislature had retroactively ``changed centuries of precedent to ensure [Angelos] a win in the case.'' Angelos ultimately received an accelerated $150 million payment for this no-risk lawsuit.

Louisiana: The private law firms that represented the State in the tobacco litigation were awarded $575 million. The MSA arbitration panel actually increased this award on the ground that the State government-- the lawyers' supposed client--was opposed to suing tobacco companies. The Louisiana fee award amounts to almost $7,000 an hour, based on the lawyers' estimate that they worked a total 85,000 hours. Moreover, this estimate is unverifiable, because the state's private lawyers kept no billing records--as the attorney general explained, ``I wasn't that big on hourly or written reports.'' The dissenting member of the arbitration panel simply noted that the Louisiana fee award ``shocks the conscience'' The single biggest beneficiary of this largesse-- receiving $115 million in attorney fees--was a law firm based in Lake Charles, the hometown of the state's attorney general. This firm and the next largest fee recipient had donated over $42,000 to the attorney general's political campaigns. Together, all of the firms that represented Louisiana gave more than $100,000 to the attorney general in the years before they were selected to participate in the state's tobacco team.

Ohio: The lawyers representing this State received fees estimated to exceed $50,000 per hour, despite the fact that, according to independent observers, ``all of the legal issues were resolved long before these Ohio lawyers stepped up to the plate.'' The state's outside counsel had donated $26,000 in campaign contributions to the State attorney general prior to their appointment to the state's tobacco team. After the attorney general chose one private lawyer to serve as the state's ``lead special counsel,'' that lawyer hired one of the attorney general's top aides for an undisclosed sum in order to--in the lawyer's own words--``help me get acquainted with a technique called PowerPoint.'' When told that ``there were many people in Ohio capable of doing a PowerPoint presentation,'' the state's outside counsel responded that this particular attorney general's aide ``was the only one I knew of.''

Massachusetts: According to other tobacco plaintiffs' lawyers, Massachusetts's suit piggybacked on the work of other lawyers and was not pivotal to the outcome of the tobacco litigation. Result: $775 million was awarded to the Massachusetts lawyers in the MSA arbitration.

New York: When this State's then-attorney general hired private counsel to represent the State in its tobacco lawsuit, tobacco companies already had paid $15 billion to Florida and Mississippi for identical claims and a national settlement agreement already was under discussion. As one local anti-tobacco leader has noted, ``these were copycat lawsuits, there wasn't all that much work to do.'' The firms' primary job was to collect New York-specific data in order to calculate damages. Ultimately, the New York firms represented the State for just 13 months. And they received a fee award of $625 million. This amounts to at least $14,000 an hour, for a lawsuit that by all accounts involved no risk. The dissenting member of the arbitration panel has denounced the award as ``an astronomical sum unrelated to, the attorneys', efforts or achievements.'' The New York firms had contributed more than $250,000 to New York politicians and their campaign organizations in the years preceding their selection - and another $200,000 after the State settlement.

Wisconsin: The Wisconsin lawyers' tobacco litigation work has been described as chiefly consisting of media and public relations efforts on their own behalf. Their billing records included time spent selecting office space and buying furniture. One lawyer effectively billed $3,000 to the State for reading an article in a Madison newspaper. The lawyers also billed the State for limousine rides around the state, trips on private jets, and stays at luxury hotels. Result: $75 million was awarded to the Wisconsin lawyers. Based on the law firms' records of the total number of hours they devoted to the case-- including work by paralegals--this fee amounts to $3,000 per hour.

Missouri: A State supreme court justice in Missouri resigned his post in order to join one of the private law firms expected to receive a portion of the MSA arbitrators' fee award. Ultimately, the firms representing the State spent just 5 months on the state's lawsuit. They received a fee award of $111 million. One State leader has described the award as ``the biggest rip-off in the 180-year history of the state.'' The law firms receiving these fees had donated more than $500,000 to State politicians and parties in the years leading up to their selection as the State's outside counsel.

These examples are too numerous to dismiss. In State after State, the temptations created by the massive, windfall fees awarded in the Medicaid tobacco settlement corrupted not only lawyers involved, but the government as well. The fee awards poisoned everything that they touched. No one who examines these events closely--who surveys the obscene fee awards, and the political cronyism that determined who benefited--can disagree that this must never be allowed to happen again.

As a final point, I would like to address a question that has been raised with regard to remedy. Some have argued that nothing can be done to correct the excesses of the tobacco settlement fee awards--even with regard to fees that are still being or have yet to be paid. On several occasions, State judges who were called upon to approve their State's tobacco settlement have also, on their own initiative, inquired into the apparent unreasonableness of the fees awarded. In each case, both the plaintiffs' lawyers--and in some cases, even State officials--have challenged the State courts' authority to act. They have argued that these courts lack jurisdiction to review a national settlement, and that excessive fees cannot be restored to the State. One state's attorney general implicated in these events has argued that it is a ``misconception'' that the tobacco settlement ``attorneys' fees are coming out of the public's pocket. That is not the case. They [sic] defendants have agreed to pay these fees.''

Because of the way that the MSA fee payments are structured, no lawyer's award comes out of any one particular, identifiable State's recovery. Instead, all of the lawyers are being paid from one of two separate accounts, each of which is funded by the tobacco companies.

It is a mistake, however, to contend that, because the MSA fee payments are made directly from defendants to plaintiffs' lawyers-- without ever formally or actually passing through the plaintiffs' hands--they are immunized against ethical scrutiny or correction. It is well and long established in our law that fee awards originate as the property of the client regardless of how the fee agreements are structured. The courts have been very clear on this point. As they have stated: ``The allowance of attorney fees in a judgment gives the attorneys no interest and ownership in the judgment to the extent of the amount of the fee allowed, but the judgment in its entirety is the property of the client. The award for fees is for the client, not the attorney.''

``[A]ttorneys' fee provisions exist for the benefit of parties and not the attorneys. . . . Several jurisdictions have noted that the real party in interest with regard to fees is the client and not the attorney.''

``A judgment for costs is a judgment in favor of the party, and not of his attorney, and the money represented by the costs is the property of the party.''

``[T]he award of attorney fees [is] made not to the attorneys but to the litigant who was personally liable to the attorneys. This is also the view in other states when the courts award attorney fees.''

``An award of attorney's fees belongs to the client and not the attorney.''

Indeed, an award of attorney fees is generally taxable as income to the client. In a recent case, the U.S. Court of Appeals for the Ninth Circuit noted that a plaintiff's obligation to compensate the law firm that represented him ``was satisfied by [the defendant]. The payment was therefore to [the client]. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.'' The Ninth Circuit emphasized that the fact ``[t]hat [the client] never laid hands on the money paid to the lawyers does not obliterate their constructive receipt.'' In other words, the fee award belongs to the client, regardless of how the award is made.

The rule that fee awards belong to the client is strongly supported by important policy considerations. It is necessary because any other rule would be an invitation to collusion and self-dealing between plaintiffs' lawyers and defendants. Again, the courts have been very clear on this point. As the Third Circuit has noted: ``[A] defendant is interested only in disposing of the total claims asserted against it, and the allocation between the [plaintiff's] payment and the attorneys' fees is of little or no interest to the defense. Moreover, the divergence in class members' and class counsel's financial incentives creates the danger that the lawyers might urge a class settlement at a low figure or on a less-than-optimal basis in exchange for red-carpet treatment for fees.''

The Second Circuit has made the same point, noting: ``Defendants, once the settlement amount has been agreed to, have little interest in how it is distributed and thus no incentive to oppose the [attorneys] fee. Indeed, the same dynamic creates incentives for collusion--the temptation for lawyers to agree to a less than optimal settlement in exchange for [generous fees].''

The Ninth Circuit has also addressed the question of ``whether a class member has standing to appeal class counsel's attorney fee and cost award when that award is payable by the defendant independently, and not out of the class settlement.'' The court concluded that ``[e]ven if class counsel's attorney fees are not to be paid from the class settlement . . . , the aggregate amount of the attorney fees and the class settlement payments may be viewed as ``a constructive common fund.'' The court reasoned that ``[i]f . . . class counsel agreed to accept excessive fees and costs to the detriment of class plaintiffs, then class counsel breached their fiduciary duty to the class. If that were the case, any excessive award could be considered property of the class plaintiffs, and any injury they suffered could be at least partially redressed by allocating to them a portion of that award.''

As several commentators have noted, the policy considerations underpinning the rule that fee awards belong to the client apply with full force to the State tobacco settlement. Indeed, that settlement could serve as a textbook example for why this rule exists. As Professor Brickman has noted: ``To the tobacco companies, dollars are dollars, whether paid to States or paid to lawyers. So the real amount on the bargaining table was not the $246 billion that the states settled for, but a larger sum, including the amount to be paid to the attorneys. . . . Stated simply, because dollars are fungible, the fees are coming out of the settlements.''

Even foreign commentators have noted that the State tobacco settlement's ``arbitration is a mere figleaf. The money going to the lawyers was clearly part of the overall amount that the tobacco companies were willing to pay to settle the case. Whatever the lawyers get, the states do not.''

And this point has not been lost upon members of Congress. Representative Chris Cox, R-CA, has testified on the matter: ``It is specious to argue that, billions of dollars, in fees are not being diverted out of funds available for public health and taxpayers. The tobacco industry is willing to pay a certain sum to get rid of these cases. That sum is the total cost of the payment to the plaintiffs and their lawyers. It is a matter of indifference to the industry how that sum is divided--75 percent for the plaintiffs and 25 percent for their lawyers, or vice versa. That means that every penny paid to the plaintiffs' lawyers--whether it is technically ``in'' the settlement or not--is money that the industry could have paid to the state or the private plaintiffs. Excessive attorneys' fees in this case will not be a victimless crime.''

These authorities and their reasoning should be more than sufficient to permanently dispel the notion that an attorney fee agreement can be structured so as to evade the ethical obligation to charge only a reasonable fee. The defenders of the MSA fee payments are simply misleading the public and this distinguished body when they assert that a particular lawyer's award under the settlement does not come out of a particular state's recovery. That fee comes out of all of the State's recoveries. All excessive or unreasonable fees should be restored to all 50 of the States.

Senator Kyl has already presented estimates of the monetary recovery each State can expect if ISCRAA is enacted. I would simply point out here that, according to those estimates, Texas has been charged excessive and unreasonable attorney fees in the amount of $667 million, and therefore would recover those funds if this legislation is adopted.

ISCRAA's return of unethical tobacco-settlement fee awards to the

states is manifestly proper in light of the fact that all fee awards are the property of the client, and the attorney is entitled only to a reasonable fee. No attorney is above these ethical rules and obligations. They cannot be waived or ignored. And in light of our experience with the State tobacco settlement fee awards, and their effect on our public officials, these ethical duties must be carried out and enforced strictly and fully.

Our Federal and State courts generally do a good job of protecting consumers and enforcing the rights of all Americans. But there are problems in our courts that require attention and significant reform. Class action abuse not only threatens the integrity and the perception of rationality in our nation's courts, it also strongly hinders economic and job growth. Tort reform is badly needed to rescue many industries, especially our health care industry, from abuses of our legal system. The judicial confirmation process at the federal level has become bitter, severe and destructive, and that broken process poses a serious threat to judicial independence and the quality and efficiency of our courts. And abusive attorney fee arrangements make a mockery of our civil justice system, all while enriching a small band of unscrupulous litigators at the expense of the real victims, their clients.

To enforce the longstanding fiduciary duty of all attorneys to charge only a reasonable fee, in a class of cases that poses heightened risks of abuse and special significance to the national economy, I urge that this Senate consider expediently, and approve quickly, this important measure, the Intermediate Sanctions Compensatory Revenue Adjustment Act of 2003.

Mr. President, I rise to speak to the critical issue of State fiscal relief, which I believe adds tremendous value to this economic growth package. As I have discussed on numerous occasions, I believe that one of the best stimulants for the economy is providing assistance to our State and local governments, which is why I have fought for its inclusion in this package.

Since December, when I first identified elements that I believed would stimulate the economy, I insisted on a State and local fiscal relief component. Today, I am pleased that the Senate is taking action through this floor amendment to further refine both the agreement and language that Senator Smith and I insisted must be included in the growth package as passed by the Senate Finance Committee.

The growth package that the Senate Finance Committee reported establishes a $20 billion trust fund in S. 1054, the Jobs and Growth Tax Relief Reconciliation Act of 2003, to provide critical, flexible relief for both State and local governments. Also, I would like to thank Chairman Grassley for his willingness to work with me to identify appropriate offsets that ensured this proposal would not increase the net cost of the growth package, and also that the relief provided was not only flexible, but helped to meet the challenges faced by our communities.

By securing support to include a $20 billion fiscal relief trust fund in this package, I was able to ensure that States and localities received the help they need in balancing their fiscal year 2004 budgets. Fiscal relief to State and local governments is vitally important to the health and strength of our economy, which is why I fought to ensure that half of the $20 billion would be modeled after my bill, S. 201, and would be flexible and divided between State and local governments with 40 percent going to localities and 60 percent to States.

The floor amendment under consideration will provide $20 billion in State and local aid to be distributed in fiscal years 2003 and 2004. Ten billion dollars in flexible funding will be distributed between state and local governments, with the remaining $10 billion provided to States through a temporary increase to the Federal Medical Assistance Percentage, known as FMAP, to help alleviate the short-term spike in Medicaid costs.

Because I thought it was important, we are providing $4 billion in flexible funding to local governments. While I know a number of my colleagues have questioned the necessity and importance of providing relief to local governments, I strongly believe that local governments have all the more pivotal and increasing responsibilities at a time such as this, when they face decreasing revenues. And a large percentage of this increased burden has come from unfunded federal mandates related to education, homeland security and election reform. By including $10 billion in flexible funding, distributed between state and local governments, we will ensure that essential government functions are performed.

As we all know, our states and local communities are struggling. For the past 3 years, while the economy has been in a downturn, they have worked to meet the needs of residents, while 49 out of 50 States including Maine are also required to balance their budgets. In fact, the National Conference of State Legislatures reports that since fiscal year 2001, the combined budget shortfall in states has totaled more than $200 billion. And the outlook for fiscal year 2004 is not proving different. In January, 36 states reported budget gaps totaling more than $68 billion for this year alone. In Maine, the Governor and Legislature were forced to trim $1.2 billion from their biennial budget in the wake of a $150 million shortfall in fiscal year 2003.

Some argue State budget shortfalls result from overspending--yet a report issued by the National Governors Association shows that State spending from 1995 to 2001 increased 6.5 percent per year, a rate identical to spending from

1979 to 2003. Rather, it has been a drop in the stock market and the economy concurrent with increased costs associated with necessities like elementary and secondary education, programs under the Individuals with Disabilities Education Act, or IDEA, homeland security, and Medicaid--that has been the real culprit in burdening State and local budgets.

The National Conference of State Legislatures has reported a substantial decline in projected revenue, including drops in income, sales and property tax receipts, and user fees. Indeed, data suggest that over three-fourths of the combined State budget shortfall is due to declines in State revenues. Again, unlike the Federal Government, States don't have the option of running deficits--and after 3 years, most practical belt-tightening measures have already taken effect.

On the spending side, the NCSL estimates that unfunded mandates for the policy areas I just mentioned account for up to $82 billion in increased expenses. And States rightly argue that the vast majority of their increased cost burden comes from the growing unfunded Federal mandate for providing care to the elderly and disabled. Medicaid provides access to health care for almost 43 million of America's poor, elderly and disabled citizens and it alone is a program for which costs have grown by 11.1 percent from 1990 to 2000.

Because of benefit shortfalls in the Medicare program--such as a prescription drug benefit--Medicaid ends up providing more vital services. Indeed, while seniors and the disabled represent only one- quarter of the Medicaid population, they account for almost three- fourths of all Medicaid expenses. For example, in fiscal year 2002 States provided $6.9 billion in prescription drug assistance to Medicare beneficiaries, and another $5.5 billion in copayment and premium assistance.

That is why providing fiscal relief is so critical--because while there is no question this population needs to be served, there should also be no doubt we can't leave States to be the last line of defense in footing the bill.

It is the same with issues like education--and that is why I also support providing flexible funding for States and localities to use as they see fit. In California 20,000 teachers are at risk of being laid off, in New York local districts are raising property taxes to offset the expected 4 percent cut in State education aid, and in Nebraska officials have told 1,000 students that their academic scholarships to state universities are being canceled and 431 college positions were eliminated. We are making such great advances in education--and we all know that education is the key to our future economic success. By providing fiscal relief, the Federal Government is continuing its commitment.

Of course, the level of assistance that Congress is providing would not eliminate any State or local governments' total budget shortfall. But it will provide vitally important assistance and has the support of the largest State and local associations that represent our country's local elected representatives and leaders. Moreover, providing this State and local fiscal assistance within the tax package is entirely in keeping with our efforts to stimulate the economy.

According to a recent Wall Street Journal article, ``Analysts at Goldman Sachs figure State and local belt-tightening will shave as much as a half-point from the economy's growth so that overall fiscal policy will be no more than neutral next year.'' After all, dollars spent on education, health care and transportation have an economic value today and tomorrow.

In fact, the U.S. Chamber of Commerce reports that for every $1 billion invested in transportation, 47,500 new jobs are created. And let us not forget that State and local governments account for more than 15 million jobs nationwide. As we take steps to put more money into the hands of consumers, we must also make sure that those who are employed by a State or local government, either directly or through a government service contract, are able to stay employed.

Providing short-term fiscal relief to help State and local governments balance their budgets is vitally important to the long-term viability of our economy. I thank Chairman Grassley for his leadership on this issue, and I urge my colleagues to support this amendment.

Mr. President, I rise today to speak regarding the jobs and growth package that was reported by the Senate Finance Committee and that has been considered on the Senate floor. It was a long and often arduous journey that brought the bill here for consideration, and I especially thank the majority leader and Finance Chairman Grassley for their extraordinary and tireless efforts in ensuring we were able to pass a package in committee and consider this economic stimulus bill in the full Senate.

Let us remember, this debate began when the President rightfully and forcefully made the case that we have an obligation to help jump-start an economy that was already in the doldrums even before the tragedy of September 11. Over the past few months--as we worked to pass a budget for the first time in 2 years and as the tax cut package moved through the respective House and Senate committees--some said the reductions should be smaller--some said larger--and others even believe that no cuts were warranted. Last week, the House passed a very different tax bill than the one the Senate is considering today, further reflecting the diversity of deeply held beliefs as to our appropriate course of action in Congress.

I have believed since last fall that the American people must know we are serious about creating jobs with a plan that can be effective now. We have lost 2.3 million jobs since March 2001, and with 48,000 jobs lost in April alone, we have reached the highest level of unemployment in 8 years at 6 percent. In the last quarter of 2002, the economy was growing at a languid 1.4 percent annual rate, and the Commerce Department's latest report showed the economy was still at a weak growth rate of 1.6 percent. Consumer spending has increased more slowly than at any time since the 2001 recession, and capacity at the Nation's factories is at a low of 72 percent--meaning that demand can and must be increased.

So the President is absolutely right to make passage of a robust growth package central to his agenda, and I applaud his unflagging leadership in rejuvenating our economy. At the same time, I have also held throughout this debate that to deficit-finance too high

a level of tax cuts would be to risk condemning future generations to the corrosive economic effects of unsustainable deficits--and tying hands of future Congresses in addressing our most pressing domestic challenges.

With a net $350 billion for stimulus, the package reported by the Finance Committee is consistent with these principles, and those that are embodied in a letter I signed along with Senators Voinovich, Baucus, and Breaux before consideration of the budget resolution. In that letter, we stated our belief that ``our nation would benefit from an economic growth package that would effectively and immediately create jobs and encourage investment.'' But we also expressed our belief that ``any growth package that is enacted through reconciliation this year must be limited to $350 billion in deficit financing over 10 years and any tax cuts beyond this level must be offset.''

So how did I arrive at 350? It was not by simply splitting the difference. It was by making a clear, bright-line distinction as to which measures were truly effective, short-term stimulus and which were not. The $350 billion package approved by the Finance Committee provides for all of the President's proposals that can truly have the immediate, stimulative effect our economy requires in their entirety. Indeed, as economist William Gale of the Brookings Institute has said, within that $350 billion figure, we would likely get most of the short- term job boost.

To pay for dividend tax cuts that could create long-term growth, the Finance Committee package employs genuine offsets. With all the provisions of the committee plan in effect for the full 10 years-- accelerating policy that was already passed by the Congress in 2001--it creates the kind of continuity and stability for both markets and consumers that is critical in making investment and spending strategies.

While some undoubtedly believe we should pass a significantly larger tax cut, let us remember that $350 billion in net tax cuts is by no means inconsequential. In fact, if enacted it may be the third largest tax cut in history--and is being considered just 2 years following the largest tax cut in history. Moreover, the Finance Committee bill is a responsible bill that recognizes the lessons learned from past debates on economic stimulus--that boosting both consumer purchasing power and business investment is vitally important to economic growth.

For example, the package would cut the marginal tax rates across the board--impacting workers' paychecks by increasing their take-home pay this year. The bill also accelerates tax relief for families with children, including a provision not in either the President's plan or the House bill to accelerate the increase in the amount of the child tax credit that is refundable for working families with low incomes-- building on my inclusion of refundability in the 2001 tax package. Married couples would also receive tax relief from the unfair marriage penalty through the expansion of the standard deduction and the 15 percent tax bracket.

To spur investment, the Finance Committee bill triples the amount a small business can write off for investments in new business assets-- and with small businesses representing 99 percent of all employers-- contributing to 51 percent of private-sector output--and providing about 75 percent of net new jobs, that is exactly the kind of policy that can help create jobs soon. It would also provide needed capital to small businesses by expanding the ability of pension plans and other tax-exempt entities to invest in the securities of Small Business Investment Companies. This provision alone is expected to create an additional 16,000 jobs due to the additional investment capital available for small businesses.

Furthermore, the State fiscal relief provision in the Finance Committee plan can provide additional economic stimulus. With States facing combined shortfalls of more than $68 billion in fiscal year 04, I thank Chairman Grassley for working to include a ``trust fund'' in the package of $20 billion in relief for the States and local governments to use as they see fit to address increasing Medicaid costs, transportation needs, homeland security infrastructure, education, and other critical functions.

I know some have argued State budget shortfalls result from overspending. Yet, as a report issued by the National Governors Association shows, State spending from 1995 to 2001 increased 6.5 percent per year, a rate identical to spending from 1979 to 2003, and I would like unanimous consent to print that report in the Record.

I also have here a letter from the heads of the Conference of State Legislators, the Council of State Governments, the U.S. Conference of Mayors, the National Association of Counties, the National League of Cities and the International City/County Management Association documenting that States and localities are experiencing their worst fiscal conditions since World War II. I ask unanimous consent this letter also be printed in the Record along with my statement.

Moreover, according to a recent Wall Street Journal article, ``Analysts at Goldman Sachs figure state and local belt-tightening (in their budgets) will shave as much as a half-point from the economy's growth. . .'' By providing State fiscal relief, we have the opportunity to return that half-point of growth to our economy. And let us remember, dollars spent on education, health care, and transportation have an economic value today and tomorrow.,

Indeed, should State decide to use a portion of the assistance on transportation, it is worth nothing that, according to the U.S. Chamber of Commerce, for every $1 billion invested in transportation, 47,500 new jobs are created. And let us not forget that State and local governments account for more than 15 million jobs nationwide. As we take steps to put more money into the hands of consumers, we must also make sure that those who are employed by a State or local government, either directly or through a government service contract, are able to remain employed.

On that note, I am pleased an amendment was included here on the floor to further refine the agreement and language that Senator Smith and I included in the growth package reported by the Senate Finance Committee.

After working to generate strong bipartisan support for this issue, the Senate Finance committee established a $20 billion trust fund in S. 1054, the Jobs and Growth Tax Relief Reconciliation Act of 2003, to provide critical, flexible relief for both State and local governments. I also want to thank Chairman Grassley again for his willingness to work with me to identify appropriate offsets that enured this proposal would not increase the net cost of the growth package.

By securing support in committee to include a $20 billion fiscal relief trust fund, I was able to ensure that States and localities receive the help they need in balancing their fiscal year 2004 budgets. The subsequent amendment we passed on the floor, with my support included my proposal which requires half of the $20 billion to be distributed between State and local governments--with States receiving $6 billion and localities receiving $4 billion. The remaining $10 billion goes to States through a temporary increase to the Federal Medical Assistance Percentage, known as FMAP, to help alleviate the short-term spike in Medicaid costs. The assistance would be distributed in fiscal years 2003 and 2004.

So, again, the Finance Committee bill fully provides for the appropriate range of short-term stimulus measures. At the same time, for me--as I have stated--the net $350 billion cost of that package strikes a balance in keeping with the requirements imposed by my allegiance to the principles of fiscal responsibility. Because I came to this debate as one deeply rooted in the idea that perhaps the issue that best demonstrates our commitment to the generation of tomorrow is balancing the Federal budget. I have said time and again that there is not goal more critical to the economic future of our Nation--and that is not just my view.

As Chairman Greenspan recently testified, ``(The deficit) does affect long-term interest rates, and it does have an impact on the economy.'' And he has also warned that, ``If . . . you get significant increases in deficits which induce a rise in long-term interest rates, you will be significantly undercutting the benefits'' of tax cuts. If you consider that the two sectors that are keeping the economy afloat right

now--housing and automobiles--are also two of the most interest rate sensitive--just imagine where we would be in the future with high unemployment and high interest rates.

And it is not just our future economy at stake--if that by itself isn't reason enough for fiscal prudence. I will recall the years we fought to arrive at balanced budgets and surpluses--and reaching that fiscal ``holy grail'' in the late 1990s was supposed to open a window of opportunity to address the domestic challenges of the coming decade--most significantly, strengthening Social Security and Medicare.

Yes, even then, many of us were mindful that projections of future surpluses were just that--projections. That is why even as I supported the tax cuts in 2001--to provide, in Chairman Greenspan's words--an ``insurance policy'' against the effects of a recession, and to provide relief at a time when Americans were suffering under the highest tax burden since World War II--I proposed and I championed a trigger linking the level of spending and taxes to the level of surpluses actually realized.

Of course, none of us could have foreseen that so many challenges would soon arrive, as the President has said, ``In a single season.'' September 11, the war on terrorism, and the necessity of disarming the Iraqi regime, the costs of bolstering our homeland security--all those shook an already fragile economy and sparked a return to deficits. In fact, CBO attributes fully 68 percent of the evaporated $5.6 trillion in surpluses to the recession and economic downturn.

So here we are, with CBO having projected just this month that the deficit will be $300 billion--which is 22 percent higher than their projection from only 3 months ago and about 92 percent more than last year! Keep in mind that is without accounting for the approval of additional tax cuts or additional costs of pressing national priorities like the war in Iraq, homeland security costs, and passing a Medicare prescription drug benefit. And Citigroup economic forecasters have recently predicted that the 2003 deficit could be as high as $500 billion.

Even optimist projections that assume higher-then-expected productivity growth anticipate substantial long-term deficits. And if growth remains just ``average'', the Nation will fact unsustainable budget deficits. Just this month, economists with Goldman Sachs expressed alarm about projections that Federal debate will grow from 33 to 49 percent of gross domestic product--a circumstance they say will undermine the economy, instead of spurring economic growth. And as we face a true cumulative deficit through 2013 projected to be nearly $4.5 trillion--not counting the $2.7 trillion in surpluses from Social Security that are currently being sued to mask the size of the deficit--we cannot tolerate the confluence of burgeoning deficits in perpetuity with the retirement of 77 million baby boomers beginning in 2013.

That is why it was critical that--in establishing a policy on the taxation of dividends that could be built on as we assess the reaction of, and overall impact on, the financial and business sectors--the Finance Committee package pays for it with offsets. As Chairman Greenspan has said, cutting taxes on dividends will ``bolster the economy's long-term ability to grow''--but they should also be paid for.

As reported by the Finance Committee, the bill includes real offsets, scored by the Joint Committee on Taxation, to fully compensate the approximately $80 billion cost of the provision. Moreover, in providing a capped exclusion of $500 for the taxation of dividends, with an additional exclusion for dividend amounts above $500 that goes from 10 percent to 20 percent over 10 years, the proposal would benefit all taxpayers who receive dividends, eliminating the tax entirely for 84.7 percent of all taxpayers.

One of the arguments that proponents of eliminating the tax on dividends use to tout the proposal's benefits is that it will reduce the cost of capital for business over the long term. I agree. However, cutting taxes on dividends affects the financial markets as well.

I am concerned that enacting a shorter term provision with a sunset would have negative consequences and potentially harm the economy. Kevin Hassett, a scholar at the American Enterprise Institute, has commented on such a dividend plan, saying that, ``Since the eliminate of dividend taxes is only temporary, investors must evaluate the risk that dividend taxes will come back. If they do, then the cash flows to investors from owing stock will plummet, as will the value of shares. Under such circumstances, it is undeniable that government policy significantly increases the fundamental risk of stocks. It would be hard to imaging that this would be good for the stock market or the economy.''

Moreover, the benefits of cutting taxes on dividends cannot be viewed in isolation--the effect on the budget must be factored in the analysis. A key point is that, as the Federal budget goes further in the red, the associated mounting Federal debt will ``crowd out'' private capital in the marketplace--having a damaging impact on the economy. This will become more and more evident as we approach the end of this decade, with the pressures of the very large increase in baby boomer retirements.

The bottom line is that, while deficits have supplanted surpluses due to war costs and the lingering effects of recession, we have a fundamental responsibility to ensure they are a temporary phenomenon-- not a perpetual cycle ``as far as the eye can see.'' The years of balanced budgets in the late 1990s should be no brief fiscal interlude, but rather the rule--so lowering taxes and containing deficits until we return to balanced budgets must not be mutually exclusive goals.

Again, the tax bill that was reported out by the Finance Committee provides the right balance of tax relief that would stimulate both consumption and investment. The fiscally responsible growth policies contained in that package meet the dual, critical challenges of immediate, stimulative economic growth without further inflating budget deficits and returning to a perpetuity of red ink. And, as I have said, the dividend plan in the Finance bill is a long-term policy that takes an important, but incremental step to eliminating that ax on dividends.

Regrettably, however, the temporary dividend proposals in the final bill, I believe, is not good long-term tax policy. If we assume a future Congress will extend this provision permanently, then the true cost would be over $300 billion--adding further to ballooning deficits well above the $350 billion net cost of the Finance Committee bill. On the other hand, if Congress does not extend the policy, it could have dire implications on the financial markets and companies.

Finally, it must be noted the way in which this provision is paid for dilutes the important benefits of the section 179 expensing by sunsetting its expansion and cutting short marriage penalty relief proposed by the President. Therefore, for the reasons I have just detailed, I regret I am unable to support the final package, as amended.

Mr. President, I ask unanimous consent that the letter I referred to earlier be printed in the Record.

Mr. President, I rise to speak in opposition to the amendment of the Senator from Arizona. This amendment would retroactively breach the contracts entered into by States and their attorneys, and the settlement agreement reached in the tobacco-related Medicaid expenses litigation.

Let me remind my colleagues of the context in which this historic tobacco settlement came about. There were over 40 years of law suits brought against tobacco companies, occurring over three different time periods.

When these attorneys brought this litigation, cases against tobacco companies would go on for years and years, almost always with little or no favorable results. In order to catch the deception and subterfuge of these companies, these cases needed staying power. The attorneys bringing these cases needed the ability to withstand significant losses while they uncovered the facts needed to make the damning case that the tobacco companies had been hiding from the public.

The plaintiffs' attorneys undertook this riskiest of cases against daunting odds, with a high likelihood of never getting paid at all. In the first phase of tobacco litigation, no one was able to muster the resources needed to bring these cases. Then a group of attorneys in the public interest pooled over $100 million of their own money in order to withstand the onslaught put up by tobacco companies bent on hiding the truth from the public.

The tobacco companies spent approximately $700 million a year in legal fees to their lawyers during this period. Thanks to their tenacity, their legal skill, and the righteousness of their cause, in the end the attorneys who brought this action prevailed. They secured a settlement that returned $246 billion to the States. That is ``billion'' with a ``b.'' To put it in perspective, that is almost as large as our entire budget deficit.

Let me say that again the tobacco settlements resulted in a huge windfall for the States and for the American people. I daresay that, in this day and age when State budgets are more squeezed than ever as a result of Federal cuts and unfunded mandates, if the States were offered this deal again, including the attorney's fees, they would take the deal in a heartbeat. In a heartbeat.

And the money collected by the States under this settlement is only the beginning. The settlement funds a new public education program to reduce youth tobacco use; it provides money every year for tobacco- related research; it dissolves the organizations that have historically served as the tobacco companies' propaganda machines; and it prohibits tobacco advertising aimed at children, such as the use of cartoon characters.

Supporters of this amendment would have you believe that its provisions somehow make the existing system fairer. Nothing could be further from the truth.

The American way is to reward those who take a risk and succeed. We grant patents that protect inventions for 17 years. We give copyright owners exclusive rights to their works for their entire life, plus another 70 years. More importantly, we don't punish people who come up with a great idea and turn it into a success. To the contrary we let them keep the fruits of their labor. But under the logic of this amendment, we would seek to penalize Bill Gates' $40 billion net worth, simply because he started with little more than a great idea and a vision to make it happen, took the risk, and prevailed. Just like these attorneys who brought the tobacco cases.

Supporters of this bill would also have you believe that it is only the trial lawyers and their supporters who oppose this amendment. Nothing could be further from the truth. Among others, consumer advocates people who look out for the little guy strongly oppose this amendment.

I also find it ironic that this amendment, which would abrogate a settlement entered into by the States, is being offered by some of the very same Senators who have made a career of advocating for States rights. This amendment, which would abrogate the contractual rights of private parties, is being offered by some of the very same Senators who have made a career of upholding the right to enter into contracts without undue regulation.

Just to be clear my colleagues refuse to interfere in the right of States to send defendants to execution without competent counsel, but insist on interfering to undo an agreement where the States reap $246 billion from the tobacco companies. Quite simply, they have got their priorities backwards.

I might also remind my colleagues of one other historical fact: Some of the Senators who are pushing this amendment today are the same folks who, just a few years ago, were doing everything in their power to defeat Federal attempts to force the tobacco companies to pay for the huge damages they have inflicted on the American people. Fortunately for the American people, and for the 50 States, they failed. Now, however, they are trying to undo this successful settlement after the fact.

Ladies and gentlemen, this is America. We make deals and we stick to them. We do not go back on our word. I urge you to oppose this amendment.

amendment no. 594

Mr. President, our economy is in a slump unlike any in recent memory. In fact, we are experiencing a downturn with features unseen since the days of the Great Depression.

In the last 2 years, we have lost over 2.6 million jobs in the private sector. That is the longest continous decline in the number of jobs in over 50 years. It has almost doubled the number of Americans who are stuck in long-term unemployment--out of a job for over half a year.

The unemployment rate has just risen to 6 percent, with 8.8 million Americans out of work.

The stock market has lost value by more than ten percent each of the last 3 years. The last time that happened was, again, the Great Depression of the 1930's. A drop of almost 30 percent in the value of the stock market has decimated the retirement savings of millions of Americans, and drained over $5 trillion in wealth from their net worth.

That is why we are here today, to debate how to respond to this crisis. This crisis is real, it is affecting millions of families directly and indirectly across this country. In addition to the thousands of jobs lost with every new report, millions more families are concerned about the security of their own jobs.

In fact, the situation is so precarious that the Federal Reserve, under the leadership of Alan Greenspan, has shifted its historical concern about inflation to a worry we haven't seen since the 1930's-- deflation. Despite a series of 12 interest rate cuts in a row, that thave pushed interest rates to forty-year lows, the Federal Reserve's meetings are now focused on keeping us out of the kind of deflation trap that Japan has been stuck in for more than a decade.

When the Fed is more worried about deflation than inflation, you know you have a probiem.

And while we ended the last century with the Federal budget in balance for the first time in a generation, we now begin the new century facing deficits bigger that we have ever seen. The Congressional Budget Office has just raised its estimate of this year's deficit to $300 billion, and that doesn't even count this $350 billion tax cut before us today.

Wall Street analysts expected the actual deficit to be closer to $400 billion or even more for this year--the biggest dollar figure ever.

This kind of budget policy is the reason why we will soon be voting to raise the national debt ceiling--to allow us to borrow enough money to pay the bills we have already incurred.

This will be the single largest increase in the national debt in our history, adding almost a trillion dollars to the debt limit, raising it to over $6.7 trillion.

Just a few short years ago we were paying down the national debt.

We have gone from a projected surplus of $5.6 trillion to a $1.8 trillion deficit. This is a record of economic bad news that has not been equaled in most American's lifetimes.

Now we are piling up additional debt, and adding heavy new interest charges to the spiraling costs of this administration's irresponsible budget policy. Over the next 10 years, we will add an additional $1.7 trillion in interest costs on that Debt--$1.7 trillion that will not be available for homeland defense, for health care, for education, for law enforcement.

How well I remember. How the men and women in the business community would come to me in the decades of deficit and tell me, ``Balance the budget, stop borrowing money like nobody else needs it. Get the government out of the credit markets so we can invest and grow.''

Where are those voices we used to hear on the Senate floor, imploring us to reverse decades of borrowing and return to the straight and narrow of balanced budgets?

We need a strong dose of those principles now. We need an economic stimulus that works. And we need an economic policy that does not mortgage our future, that does not dump the bill on our children and grandchildren.

We need a plan that we can afford, that treats the very real, specific problems that average families in Delaware and around the country are facing today. Unfortunately, the bill before us is the wrong plan, at the wrong time, at the wrong price.

We need an economic policy that has an impact right now, in the very short term--an impact on consumer spending, on the demand side, to give employers a reason to bring those workers back.

That means tax cuts for the vast majority of American families who need some relief, and who can be counted on to go out and spend that money--to create demand for more products, create more jobs.

But in addition to the very real and very serious problems we are facing today, in the very near future, just around the corner, the retirement of the baby boom generation will stretch our Social Security system to the breaking point.

Just a decade from now, surpluses in the Social Security system-- extra funds that help to cover some of our current deficits--those surpluses will disappear. Then the drain on our resources will accelerate until--according to the Social Security System's trustees-- by 2030 Social Security and Medicare will be a third of every Federal income tax dollar, and by 2040, almost half of every Federal income tax dollar.

That is clearly an impossible situation that we cannot permit to occur. We must act now to makes sure that we have the resources to keep the promises we made to the millions of Americans who have paid their Social Security taxes over the years.

But every dime of the $350 billion tax cut before us today is borrowed from Social Security--it breaks our promise to those who depend on Social Security, and sends the bill to our children and grandchildren.

The solution we are seeking today, for the ongoing loss of millions of jobs, must not ignore the crisis in federal finances that is beginning now and crests just a decade away.

It is not just that it is unfair and irresponsible to put the burden of our choices off on our children. That should be reason enough to reject this policy out of hand.

But a moment's reflection tells us that if we borrow $350 billion, or $550 billion, or--if the President had his way, $726 billion--if we borrow that money from the same capital markets where our corporations and home buyers get their money, that policy is self-defeating.

It raises the cost of money, and slows the economy down, while handing out windfall tax breaks that people will get without any change in the behavior.

That policy is indeed unfair. It is irresponsible. And it is ineffective.

But a kick-start that gets people spending and businesses hiring--and that has a reasonable cost--that kind of policy can work.

First, we all know that the real price of this bill is not $350 billion. We have already heard that key members of the Republican leadership do not expect that the tax increases in this bill, that keep the cost of the tax cuts down, will survive a conference with the House. If those tax increases go, the cost of this bill goes up.

And key provisions in the bill--like the dividend exemption--phase in slowly and then are supposed to expire after ten years. Even if you buy the idea--which I don't--that giving a tax break to the small percentage of Americans who receive dividends can somehow turn the economy around, how can you expect that change to happen if businessmen know they should wait a few years until the exclusion is phased in?

And what kind of permanent change in corporate behavior can we expect

when we know that the door is going to slam shut on this deal 10 years out?

One answer is that they don't expect that door to close. They expect the dividend provision and others to be extended. Or more and more dividends could be excluded--that creeping expansion and acceleration has been the pattern since we passed the 2001 tax cuts.

Full exemption of dividends, if it were in place at the end of this decade, would cost $750 billion over the next 10 years.

For that and many other reasons, this tax cut, as big and irresponsible as it is, is just a place holder for even more reductions, and even more deficits, even more debt.

But designed this way, to get ten pounds of tax cuts into a five pound bag, so to speak, has resulted in a tax cut that even a conservative economist who supports the administration has called, and I quote from yesterday's Washington Post, ``one of the most patently absurd tax policies every proposed.''

But maybe if this bill offered the average American family some real tax relief, maybe if we could expect a little help for the millions of jobless men and women stuck in long-term unemployment, some of the cost would be worth it.

Tragically, there is no reason to expect this legislation to do anything to stimulate the economy this year or next. The way this tax cut is designed, there is no reason to expect any benefit to the economy, and every reason to believe that the deficits it creates will cause harm.

Estimates by Congressman Henry Waxman, who examined corporate statements, show that the top three executives at Fortune's largest 100 companies would get a tax cut of $118 million if dividends were totally excluded from taxation, the goal that administration officials admit is the real aim of the partial exclusion in this bill. Under full exclusion, twenty one executives would get a tax cut of $1 million.

That is for doing nothing. Just for doing what they already do. That is not corporate tax reform, it is simply a windfall. I trust that those men and women earn every dime they already make. But no one can argue that a $118 million personal windfall into the already large pay packages of those executives is going to create a single new job.

I you really wanted to fix the problem of dividend taxation, even Republican economists--indeed, especially Republican economists--will tell you that you should eliminate the tax at the corporate level. That at least has the potential of changing the behavior of firms that now must choose between borrowing that is not taxed and dividends that are taxed.

That could be part of an honest debate about tax reform and job creation.

And when Alan Greenspan endorsed the idea of reforming dividend taxes, he said it should be done in a way that does not add to the national debt, and that it should be part of a bigger plan of reform. This proposal flunks all of those tests.

Only 13 percent of the impact of this bill will be felt in this year, Mr. President--and less than half in its first 2 years. And the vast majority of the revenue losses come in the future, as the crisis in Social Security approaches. This plan turns economic logic on its head.

This is not designed to stimulate the economy--if it were, it would provide a quick, short-term boost to family incomes, and would give businesses incentives to act right now to increase investment and create jobs.

Under this bill, the one-tenth of one percent of Americans who have an income of over $1 million will receive an average tax cut of $64,000. But those Americans in the middle 20 percent of the income spectrum would get an average tax cut of $233.

That's right, the average American gets a tax cut of $233, under this bill.

That is not fair. But it is not good economic policy either. Those good men and women fortunate and hard-working enough to make over a million dollars a year are not going to change their behavior, they aren't going to create any new jobs, just because they get an additional $64,000.

But getting money to the families who will go out tomorrow and spend it, getting money to those who are about to lose long-term unemployment benefits, getting money to the states to prevent further state tax increases or spending cuts--that has the best hope of giving the economy the stimulus it needs.

The tax cut program that makes sense and that I supported would provide a tax cut for every American taxpayer--for example, $300 for every adult, $300 for the first two children. It increases the child tax credit to $700 this year and $800 next year. And for middle class and working families, this tax cut plan that I supported accelerates relief from the marriage penalty.

Altogether, a middle class family of four would have gotten a tax cut of $1630 this year under the Democratic tax cut plan.

And if you add to that my proposal to allow parents to deduct the cost of college tuition a family with kids in college could get an additional $3000 tax break. That is real help, for real families, to deal with a real problem, and frees up real money to stimulate the economy.

Incredibly, this so-called ``Jobs'' bill makes no provision to extend the life of the long term unemployment program that expires in just two weeks. With the number of long-term unemployed at record levels and growing, this bill simply ignores their needs.

Equally astounding, the bill provides almost nothing for the states whose fiscal crisis is dragging the economy down. State budget cuts in education, health care, law enforcement--even homeland security--slow the economy as workers lose jobs and businesses lose customers.

While there appears to be $20 billion in aid to the states in this bill, in reality, the reductions in federal dividend and income taxation will cut as much as $11 billion from state taxes based on those sources.

Under the tax cut plan I support, small businesses would get three times the tax write off for investments--$75,000 worth--this year, and a tax deduction for 50 percent of the cost of new equipment, along with help getting health insurance for their employees.

The tax cut I support would get $20 billion in real help to the states to confront the fiscal crisis that is compounding the national economic slump.

And the tax cut program I voted for would extend unemployment benefits to help those looking for work sustain that search in a time of record job losses.

Finally, the plan I supported is affordable. Its effects take place immediately, and it would not leave a hole in our finances for our children to repair.

That's the plan I supported, and it is the plan our country needs. I cannot vote for this bill that is now before us because it fails to do so.

Mr. President, on rollcall vote No. 162, I voted nay. It was my intention to vote yea. I ask unanimous consent that I be permitted to change my vote to yea, which was the Landrieu amendment, since it will not affect the outcome of the vote.

Mr. President, I am pleased to join my colleague Senator Snowe in introducing the Medicare Mental Health Copayment Equity Act. This legislation will establish mental health care parity in the Medicare program.

Medicare currently requires patients to pay a 20 percent co-payment for all Part B services except mental health care services, for which patients are assessed a 50 percent co-payment. Thus, under the current system, if a Medicare patient sees an endocrinologist for diabetes treatment, an oncologist for cancer treatment, a cardiologist for heart disease treatment or an internist for treatment of the flu, the co- payment is 20 percent of the cost of the visit. If, however, a Medicare patient visits a psychiatrist for treatment of mental illness, the co- payment is 50 percent of the cost of the visit. This disparity in outpatient co-payments represents blatant discrimination against Medicare beneficiaries with mental illness.

The prevalence of mental illness in older adults is considerable. According to the U.S. Surgeon General, 20 percent of older adults in the community and 40 percent of older adults in primary care settings experience symptoms of depression, while as many as one out of every two residents in nursing homes are at risk of depression. The elderly have the highest rate of suicide in the United States, and there is a clear correlation between major depression and suicide: 60 to 70 percent of suicides among patients 75 and older have diagnosable depression. In addition to our seniors, 400,000 non-elderly disabled Medicare beneficiaries become Medicare-eligible by virtue of severe and persistent mental disorders. To subject the mentally disabled to discriminatory costs in coverage for the very conditions for which they became Medicare eligible is illogical and unfair.

There is ample evidence that mental illness can be treated. Unfortunately, those in need of treatment often do not seek it because they are ashamed of their condition. Among our Medicare population, the mentally ill face a double burden: not only must they overcome the stigma about their illness, but once they seek treatment they must pay one-half of the cost of care out of their own pocket. The Medicare Mental Health Copayment Equity Act will phase-down the 50 percent co- payment for mental health care services to 20 percent over six years. By applying the same co-payment rate to mental health services to which all other outpatient services are subjected, the Medicare Mental Health Copayment Equity Act will bring parity to the Medicare program and improve access to care for our senior and disabled beneficiaries who are living with mental illness. I urge my colleagues to join with us to pass this critical legislation.

I ask unanimous consent that several letters of support be printed in the Record.

Mr. President, owning your own home is the foundation of the American dream. It encourages personal responsibility, improves child development, provides economic security and gives families a greater stake in the development of their communities. Communities where homeownership rates are highest have lower crime rates, better schools and provide a better quality of life for families to raise their children.

However, too many low- and moderate-income families living in urban and rural areas across our nation have not been able to share in the dream and benefits of homeownership due to the lack of available housing or the high cost of what housing is available.

Today, I am introducing the Community Development Homeownership Tax Credit Act, along with Senators Santorum, Sarbanes, Allard, Daschle, Kennedy, Stabenow and Clinton to encourage the construction and substantial rehabilitation of 500,000 homes over the next ten years for low- and moderate-income families in economically distressed areas.

The bill will increase the supply of affordable homes for sale in inner-cities, rural areas and low- and moderate-income neighborhoods across the United States. It will bridge the gap that exists today between the cost of developing-affordable housing and the price at which these homes can be sold in many low-income neighborhoods by providing investors with a tax credit of up to 50 percent of the cost of home construction or rehabilitation.

By facing the mounting challenge of producing affordable housing, I strongly believe we can help provide critically needed economic development low- and moderate-income communities across our country and provide an important stimulus in the development of our nation's economy. The production of new homes provided in this legislation will create both construction and construction-related jobs which will both increase economic growth and lower the unemployment rate. New Economic activity can revitalize many inner-city neighborhoods and rural areas where unemployment and crime have been a fact of life for too long.

Buying a new home also leads to the purchase of new appliances and furnishings. Average new homebuyers spend almost $5,000 on appliances and

furnishings during the first year of living in their new home. This will help stimulate the manufacturing section of our economy. It is clear that building new homes creates jobs and moves our economy forward.

Over the past decade, we have made substantial progress in increasing the homeownership rate in the United States. In 2000, the U.S. homeownership rate reached a record high of 67.1 percent with some 71 million U.S. households owning their own home. However, many working families have been struggling to find an affordable home in our nation's cities. Over the past two generations, many families have moved out of cities and into the suburbs, which has depressed the development of housing in the inner-city. In 1999, the homeownership rate in the central-city areas was 50.4 percent, this is more than 20 percent lower than the suburban homeownership rate of 73.6 percent.

Working families with low- and moderate-income have also had difficulties buying a home. Currently, 83.3 percent of households with family income higher than the median family income are homeowners, while only 52.4 percent of households with family income below the median income are homeowners.

Too many communities face a lack of available homes because developers are concerned that the new houses may not be sold for the cost of construction. Many properties or sites that could be developed into affordable homes now sit vacant, and neighborhoods remain undeveloped because the gap between development costs and market prices has not been filled. The lack of affordable single-family homes affect many urban and rural areas where a majority of residents earn less than the median income.

Today, too many minority families face barriers in their attempts to reach the American Dream of homeownership. According to Census data for the fourth quarter of 2002, non-Hispanic whites have a 74.8 percent homeownership rate, while minority groups have just a 55.4 percent homeownership rate. African Americans have only a 47.5 percent homeownership rate, and Hispanics have a 49.5 percent homeownership rate in the same study. The gap between white and African American homeownership rates has been approximately 25 percent to 30 percent for most of the last century. These numbers are simply unacceptable.

Despite our efforts at the federal level to promote homeownership, many minorities also face higher than average denial rates for mortgage applications. A recent study by the University of Massachusetts shows that racial and ethnic lending disparities continue in Boston. For example, African Americans were 2.73 times as likely as whites to be denied in their mortgage applications. Latinos were 2.25 times as likely as whites to be denied in their mortgage applications. Finally, Asians were 1.55 times as likely as whites to be denied in their mortgage applications.

Along with a lack of available homes in urban and rural areas, our nation is also facing an affordable rental housing crisis. Thousands of low-income families with children, the disabled, and the elderly are finding it difficult to obtain or afford privately owned affordable rental housing units. Recent changes in the housing market have limited the availability of affordable housing across the country, while the growth in our economy in the last decade has dramatically increased the cost of the housing that remains. Constructing new housing will help many families move out of rental housing and help increase the number of available rental housing units and help ease the affordable housing crisis we now face.

The story of Benjamin and Rita Okafor shows how working families in Massachusetts have great difficulty obtaining a decent home of their own. For many years, the Okafor's and their two young children were forced to live in a one-bedroom apartment. Benjamin Okafor, who worked full time as a cab driver in Boston, spent days and months looking for a bigger apartment for his family. However, the lack of affordable housing in the Boston area made it impossible for him to find anything appropriate. When his wife Rita became pregnant with their third child, the Okafor's knew something had to change in their living situation. Luckily, Ben was accepted into the Habitat for Humanity program and worked 300 sweat equity hours constructing a house. In August 2000, the Okafor family moved into a new home of their own in Dorchester. Ben says that this new home gives them the hope and stability they need. Yet, there are still far too many working families living a substandard housing and many more families that desperately need assistance to become homeowners. A new tax incentive for developers to build affordable homes in distressed areas will help working families like the Okafor's to afford a home for the first time.

The benefits of owning a home can bring families financial rewards and personal satisfaction with a deep sense of security. Real estate values have historically risen over time. Homeowners may deduct mortgage interest and property taxes as an expense against income. Real estate has generally been seen as marketable, allowing for property to be sold at a predictable price to a dependable group of available buyers.

We know that owning a home instead of renting leads to a better quality of life for its residents, but we are now learning more and more about the impact homeownership has on the cognitive and behavioral outcomes for children. A recent study by Ohio State University shows that children of families who own their home have fewer behavioral problems and are able to learn more effectively. Specifically, a child's cognitive abilities are 9 percent higher in math and 7 percent higher in reading for children living in their own homes. The study also shows that these children also experienced up to 3 percent lower behavioral problems than other children. This study proves that the national goal of homeownership has an added benefit of helping America's children learn and behave better, which helps our schools produce better citizens and will help our economy develop in the long term.

The Community Development Tax Credit Act, which I am introducing today, bridges the gap between development costs and market value to enable the development of new or refurbished homes in urban and rural areas to blossom. The tax credit would be available to developers or investors that build or substantially rehabilitate homes for sale to low- or moderate-income buyers in low-income areas. The credit would generate equity investment sufficient to cover the gap between the cost of development and the price at which the home can be sold to an eligible buyer.

The tax credit volume would be limited to $1.75 per capita for each State and allocated by the States themselves. Credits would be claimed over 5 years, starting when homes are sold. I believe this legislation will result in approximately 50,000 homes built or refurbished annually, assuming about $40,000 per home.

The maximum tax credit equals 50 percent of the cost of construction, substantial rehabilitation, and building acquisition. The eligible cost may not exceed the Federal Housing Administration single-family mortgage limits. The minimum rehabilitation costs is $25,000. Eligible building acquisition costs are limited to one-half of rehabilitation costs. States will allocate only the level of tax credits necessary for financial feasibility of individual projects. Ten percent of the available credit will be set aside for nonprofit organizations.

The eligible areas for the tax credit are defined as Census Tracts with median income below 80 percent of the area or state median. Rural areas that are currently eligible for USDA housing programs will be eligible for the tax credit. Indian tribal lands will be eligible for the tax credit. State-identified areas of chronic economic distress will also be eligible for tax credit, subject to disapproval by the Department of Housing and Urban Development.

Those eligible to buy homes built or refurbished using the tax credit include: individuals with incomes up to 80 percent of the area or state median and up to 100 percent of area median income in low-income/high- poverty Census Tracts.

Individual states will write plans to allocate the available tax credits using the following selection criteria: contribution of the development to community stability and revitalization; community and local government support; need for homeownership development in the area; sponsor capability; and the long-term sustainability of the

project as owner-occupied residences. Then individual developers along with investors can apply to the state to be awarded a tax credit for developing a property in a low- or moderate-income area. If chosen by the state, investors can start to claim the tax credit as the homes are sold to eligible buyers. They can continue to claim the tax credit for five years. Investors are not subject to recapture. If the home owner sells the residence within five years, a scale would determine the percentage of the gain that would be recaptured by the Federal Government. In the first two years, 100 percent of the gain and 80, 70 and 60 percent in the third, fourth, and fifth years, respectively, would be recaptured.

The Community Development Homeownership Tax Credit Act that I am introducing today will positively affect the lives for approximately 500,000 families over the next 10 years, help resolve the affordable rental housing crisis we face, and help create jobs and grow our economy. I ask all of my colleagues to help expand the foundation of the American Dream by supporting this new tax incentive to encourage the construction and rehabilitation of homes for low- and moderate- income families in economically distressed areas.

This legislation is supported by the U.S. Conference of Mayors, Fannie Mae, Freddie Mac, the Enterprise Foundation, Local Initiatives Support Coalition, Mortgage Bankers Association of America, National Association of Home Builders, National Low Income Housing Coalition, National Association of Local Housing Finance Agencies, National Association of Realtors, National Council of La Raza, National Hispanic Housing Conference, Habitat for Humanity International and others.