Promises, Risks In New Spending Plan

President Barack Obama’s promise of change took on new force Thursday as the White House rolled out a 10-year spending plan that seeks to steer the nation away from today’s staggering deficits but risks new fights over taxes and defense spending.

The 134-page document paints in bold strokes but never escapes the sea of red ink facing the government, as Obama must navigate a course between fiscal discipline and not stifling efforts to turn around the collapsing economy.

The 2009 deficit, for the fiscal year ending Sept. 30, is now projected at $1.75 trillion, after a final White House adjustment allowing $250 billion in more aid for failing banks. Even if Obama should succeed with all his proposals, the 2019 projected deficit is $712 billion and the national debt will have almost doubled again to $23.1 trillion.

Beyond these numbers, the budget is Obama’s most detailed expression yet of where he wants to take the country. He isn’t shy about using the tax code to shift wealth among Americans and his deficit reduction scheme bets heavily on new climate change policies and achieving major savings scaling back U.S. military operations overseas.

“I know that this will not always sit well with the special interests and their lobbyists here in Washington, who think our budget and tax system is just fine as it is,” Obama said in anticipation of the fights ahead.” No wonder — it works for them. I don't think that we can continue on our current course. I work for the American people, and I'm determined to bring the change that the people voted for last November."

Altogether, new taxes of about $1.3 trillion are outlined in the measure, on top of which $645.7 would be raised from a proposed “cap-and-trade” climate change policy to curb greenhouse gas emissions. Upper income households and oil and gas interests would be most impacted, and Obama would pump back $940.2 billion in tax breaks distributed more favorably for working class families and targeted to help new small business investment and research and development.

On the spending side, the budget features a $634 billion reserve fund as a down payment toward healthcare reform over the next decade. But the far bigger contrast with the prior Bush administration comes in defense spending.

Obama is betting that he can save $1.49 trillion over the next decade by scaling back U.S. military operations overseas—chiefly in Iraq but also Afghanistan. And while 2010 defense request—$533.7 billion—represents a 4% growth rate for core Pentagon functions, domestic appropriations appear to grow at a much faster rate—unlike the Bush years.

Taxes are sure to be a major target for Republicans in Congress.

“The President’s budget promotes an ever- larger, more expensive federal government,” complained Rep. Paul Ryan, the ranking Republican on the House Budget Committee. “The increased tax burdens will be used simply to fuel the Administration’s and Democratic Congress’ plans for additional spending.”

The tax increases fall into three major categories: 

—-$636.7 billion would come unabashedly at the expense of “upper income” families by reinstating the 36 percent and 39.6 percent tax brackets reduced under Bush. The major targets are households earning more than $250,000 or individuals with more than $200, 000 in income. Apart from the higher rates, these taxpayers would face a higher 20% tax rate on capital gains, and a reinstated personal exemption phase out and a limitation on itemized deductions. 

—-$317.7 billion more is dedicated to the new health care reserve fund but targeted again to households in the same income range. The money would be raised by further squeezing the value of deductions now used to shelter income, by effectively capping the tax offset at 28 percent compared to the hgher rates the wealthy will be paying.

—-$353.5 billion is attributed to “revenue changes and loophole closers” largely targeted at the oil and gas industry and companies who move operations overseas. Obama would plow back a portion of these revenues to pay for his own set of tax breaks for families but also business. The single largest item is his $800 a year “Making Work Pay” credit to help households offset the cost of payroll taxes. But working class families would benefit as well from his provisions to expand the earned income tax credit and make it easier for low-income families to qualify for the child tax credit. In the case of business, he also has a set of more targeted tax breaks that suit his philosophy. He seeks to eliminate capital gains taxes for qualified investors in small companies, and at a 10-year cost of $74 billion would make permanent the current research and experimentation tax credit –important to the high tech industry.

Beyond taxes, the anticipated revenues from climate change legislation are a bigger-than-expected part of the president’s deficit reduction scheme. He doesn’t count on any new money until 2011 but after that point it is a steady stream in the range of $80 billion annually for a total of about $645.7 billion over the decade.

A portion of these revenues is dedicated to helping to pay for new investments in clean energy technologies, but all of Obama’s spending calculations will soon come apart unless he can achieve the savings he assumes from scaling back overseas operations.

Even in his own party there are skeptics of how much can be saved in the short term, especially given the increased US troop commitment in Afghanistan. And while his budget include $50 billion as an annual “placeholder” for overseas contingency operations through at least 2014, it is careful to add that these estimates don’t reflect specific policy decisions.

In the case of appropriations, the administration is promising to force real changes by terminating programs. But those decisions are weeks away still, and the most significant savings among spending programs again come more at the expense of asking large farmers or higher income Medicare patients to bear more of the burden.

For example, the budget outlines about $16 billion in 10 year savings from agriculture subsidies, a portion of which be used then to pay for child nutrition programs. Included is a proposal to reduce direct payments to farms with sales above $500,000. Cotton storage payments would also be eliminated—a touchy issue in the South. And an estimated $5.18 billion would be saved from various changes in the costly crop insurance program.