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Obama Tax Plan Would Balloon Deficit, Analysis Finds
Democrat's Promise to Cut Taxes Without Adding to Debt Relies on Bush Fiscal Policy

By Lori Montgomery
Washington Post Staff Writer
Sunday, August 10, 2008

On the campaign trail, Sen. Barack Obama bashes President Bush for "reckless" economic policies that are "mortgaging our children's future on a mountain of debt." But the Democratic presidential candidate has adopted a key component of Bush's fiscal policy: A novel bookkeeping method that guarantees that the $9.5 trillion national debt will get much bigger.

When Obama promises to cut taxes for the middle class without increasing the deficit, he is measuring his proposals against the large deficits that would result from Bush's plan to extend his signature tax cuts beyond their 2010 expiration date. Because Obama wants to eliminate some of the Bush tax cuts, he would bring more money into the Treasury, permitting him to pay for new programs without increasing the deficit even more.

But under current law, all the tax cuts expire and the deficit disappears completely. Democrats in Congress have vowed to preserve the Bush tax cuts only if they can cover the cost and keep the budget in balance. Measured against current law and against the promises of his fellow Democrats, Obama would rack up huge deficits. According to a recent analysis by the nonpartisan Tax Policy Center, Obama's tax plan would add $3.4 trillion to the national debt, including interest, by 2018.

"Obama has criticized Bush for his fiscal irresponsibility, and now he's using Bush's baseline as a yardstick by which to measure fiscal responsibility," said Leonard E. Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. "Congress hasn't agreed to extend the Bush tax cuts because they don't have the money to pay for it."

By adopting Bush's bookkeeping system, Obama has frustrated deficit hawks who say government should live within its means, especially given a new White House forecast that the next president will face a record $482 billion deficit during his first year in office. Obama also appears to undercut congressional Democrats who have made pay-as-you-go budgeting a central tenet of their leadership, insisting that new policies should be paid for instead of adding to the nation's debt.

"It's not unreasonable to say, 'We're inheriting a budget that's going to have substantial deficits into the future' . . . But after we've been saying, 'Bush has irresponsible policies we can't afford,' he will be asking us to replace them with different policies we can't afford,' " said a Democratic congressional aide, who spoke on condition of anonymity so he could speak candidly.

Privately, some Democrats acknowledge that they may be forced to follow Obama's lead and abandon their pay-as-you-go pledge if they want to keep the Bush tax cuts that benefit the middle class, including a $1,000 child tax credit, a reduction in the marriage penalty and a new 10 percent tax bracket. Beginning in 2011, those provisions will increase the deficit by at least $100 billion a year unless lawmakers can raise the money elsewhere.

"Leaving some of the tax cuts in place would cost us a small fortune," said Rep. Jim Cooper (D-Tenn.), a member of a group of conservative House Democrats known as the Blue Dogs who have been adamant about following pay-as-you-go rules. "I don't know that any Blue Dog has a good way to pay for that."

Unlike his Democratic colleagues, Obama has never made balancing the budget a priority. He concedes that he would not be able to do it during his first term, and probably not during his second, either.

Obama economic advisor Jason Furman said Obama compares his tax plans to Bush's instead of to current law because it draws a clear distinction with Republican Sen. John McCain, who wants to keep all the Bush tax cuts and add even more. According to the Tax Policy Center, McCain's tax plans would increase the national debt by at least $5 trillion over the next 10 years. McCain has said he would balance the budget through massive spending cuts.

Furman said Obama would consider abandoning Democratic promises to cover the cost of extending the Bush tax cuts if it were part of "a really tough deficit-reduction bill" that significantly improves the nation's grim financial outlook. "President Bush created this problem. We would put in place rules so it never happens again," Furman said. "But a sound budget is based on making realistic promises and sticking to them."

At the heart of the debate is one of the most arcane but fundamentally important concepts in Washington: The budget baseline.

A baseline is an estimate of spending and revenue expected during a fiscal year under current law. The official baseline is calculated by the Congressional Budget Office, which also has the task of "scoring" legislation so lawmakers can see how much a proposal would cost and how it would change the baseline. CBO makes projections 10 years into the future and updates them three times a year. The next update is due Sept. 9.

Thanks to a profusion of budget gimmicks enacted into law in recent years, the CBO baseline is out of step with reality. For example, it assumes that the alternative minimum tax, an expensive parallel tax structure, will grow to strike millions of taxpayers and bring in billions of additional dollars. Congress is never expected to permit that money to be collected, but lawmakers have balked at taking the tax off the books because doing so would dramatically increase projected deficits.

The CBO baseline also assumes that the Bush tax cuts will expire in December 2010, bringing in even more money. If the law is not changed, the CBO forecasts that the budget will be balanced by 2012.

Four years ago, the Bush administration introduced an alternate baseline that assumes the "extension of all expiring tax provisions" enacted in 2001 and 2003. The tax cuts, the administration wrote, "were clearly not intended to be temporary."

This is not exactly true. Bush never intended the tax cuts to be temporary. But the Republican Congressional leadership couldn't muster the votes to make them permanent because it would have cost far too much money. Even after lawmakers added an expiration date, McCain was one of three GOP senators who voted against the tax cuts.

The expiration date now serves as a trigger that will force Congress to choose among competing priorities: Keep the tax cuts and run up the deficit, or keep the money and raise taxes. It's a wrenching choice that has bedeviled Democrats since they took control of Congress two years ago on a promise to rein in deficit spending.

Changing the baseline to include the tax cuts implies that the decision has already been made. Under the Bush baseline, the White House simply increased its future deficit projections. Both Obama and McCain want to use that standard, and take it a step further by increasing deficit projections to account for a permanent restriction on the alternative minimum tax.

The result would be "deficits far bigger than anything contemplated under current law," said G. William Hoagland, a former budget advisor to GOP Senate leaders.

Robert L. Bixby, executive director of the nonpartisan Concord Coalition, said the Bush baseline may be more realistic politically, but it takes the nation a step away from solving its budget problems.

"We've already got an unsustainable budget situation over the long term. In the short term, we're in a big fiscal hole. So it's really important to hold the line," Bixby said. "The important point is: How much are the policies going to cost? And extending the Bush tax cuts has a cost."

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