Can He Do It?
Campaign's Visions Will Evolve As Obama Shifts to Governing

By Annys Shin
Washington Post Staff Writer
Sunday, November 9, 2008

Now comes the reality.

During the long election campaign, Sen. Barack Obama promised many things to many taxpayers, investors and homeowners. When he first announced some of his proposals, the economy and the federal budget looked vastly different. But now the bad news has multiplied: The deficit is expected to soar toward $1 trillion this fiscal year, the ranks of the unemployed are swelling, a massive bailout plan for banks is in place but has yet to play out.

So how will President Obama's pocketbook promises evolve as he moves from campaigning to governing?

The financial crisis and the tottering economy will be the top priority and will probably slow the rollout of polices that would help improve the personal finances of individuals.

"That has to just take precedence over the other stuff," said William Gale, director of economic studies at the Brookings Institution. "Remember, the plans were created at a time when we weren't in this situation. Something has to give. Significant flexibility is required."

What probably has to give is swift action on the myriad tax cuts that candidate Obama laid out on the stump, analysts said. His proposals would slash taxes by $2.9 trillion from 2009 to 2018 and boost the national debt by $3.5 trillion by 2018, according to the nonpartisan Tax Policy Center. House Democrats say they plan to move quickly to implement Obama's tax plan. But a recession and the ballooning deficit may leave little leeway for the president-elect to speed his tax plan, analysts say.

The high cost and complexity of reforming the health-care system also could slow some of the president-elect's initiatives. Among his proposals: requiring that all children be covered, expanding access to Medicaid, creating a tax credit to help small businesses cover their workers.

A few of Obama's proposals, introduced just before Election Day in response to the financial crisis, may become reality fairly soon. A stimulus package could be considered by Congress this month, before the president-elect takes office. In his first press conference as president-elect on Friday, Obama said: "The one thing I can say with certainty is that we are going to need to see a stimulus package passed either before or after inauguration." It probably won't mean another round of rebate checks for individuals but could include a suspension of taxes on unemployment benefits.

Another proposal that could come sooner rather than later is the suspension of a retirement savings rule that requires people age 70 1/2 to take withdrawals from their accounts. Seniors who don't need the money may not want to draw from their accounts when their stocks are at rock bottom. It would be wise for seniors who can wait to do so for as long as possible, said Clint Stretch, tax principal in the Washington national office of Deloitte Tax. "There's a good chance the Treasury or Congress will do something," he said.

Once the economy stabilizes, the Obama administration will return to the other campaign promises, many analysts say. And though the details could change, the president-elect probably won't abandon the basic principle that shaped his program: raising taxes on the wealthiest Americans and giving tax credits and health-insurance subsidies to moderate- and lower-income households.

"I do believe that core piece of orthodoxy gets enacted at some point," Stretch said.

The impact on your budget could be significant. During the campaign, Obama drew something of a bright line at the family income level of $250,000. Families that made more would pay more in taxes; families that earned less would pay less.

Under Obama's tax plan, middle-income taxpayers would see their after-tax income rise by about 5 percent, or nearly $2,200 annually, by 2012, according to the Tax Policy Center. Middle-income taxpayers are defined roughly as those making $40,000 to $70,000 a year. Taxpayers in the top 1 percent -- those with an adjusted gross income of at least $388,806, according to the Internal Revenue Service -- would face an average tax increase of $19,000 by 2012. That would amount to a reduction in after-tax income of about 1.5 percent.

Some households, particularly those with higher incomes, may want to make some financial adjustments, advisers said. The planners stressed that it's impossible to know exactly what shape the policies will eventually take, but they offered some general thoughts. If your family falls into Obama's definition of wealthier Americans making more than $250,000 a year, then you might want to think about reducing your taxable income. Obama has proposed raising capital gains and dividend taxes, estate taxes, income taxes and possibly payroll taxes for this group.

"The question for those folks is how many different places can it possibly hit their income or portfolios?" said Barry Glassman of Cassaday & Co. in McLean.

Even if you earn less than $250,000, you may also benefit by reducing your taxable income. For instance, if Obama and Congress wipe out income taxes for seniors earning less than $50,000, as he has proposed, and you are a senior who earns a bit more, one strategy could be to turn taxable income into tax-free income by putting money in municipal bonds, Glassman said.

Deloitte's Stretch has been fielding questions about whether any increase in the capital gains tax will apply retroactively to 2009. He doubts it, as do other tax experts. He advises people to weigh the transaction costs of selling stock against any potential tax benefit. "How much of a 6 percent transaction cost will you be willing to incur for a 5 percent tax gain?" he said, referring to Obama's proposal to raise capital gains tax rates.

People who may want to prepare for a capital gains tax increase are those with deferred compensation. You may want to speed up the timetable for payments. "You would presumably take this money and put it in some investment that would get a lower capital gains or dividend treatment," he said.

The bottom line on the Obama plan, Stretch said: Check in with your adviser.

"There may be a play there," he said.

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