In $3.6 Trillion Budget, Obama Signals Broad Shift in Priorities

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Obama Pledges to Reduce Deficit by $2 Trillion

President Barack Obama is promising to slash federal spending by $2 trillion, even as the administration initially invests large sums of money to revive the faltering economy.

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Obama is expected to send Congress a complete plan in April, and Democratic leaders said they hope to approve it later this spring. But House Majority Leader Steny H. Hoyer (D-Md.) predicted that finding the votes will be "tough." With Democrats in control of both the White House and Congress, their budget will have real meaning for the first time in 15 years, he said, and lawmakers will fight hard to advance favored causes.

"These are real votes, real consequences," Hoyer said. "You're playing with real money."

Obama's spending proposal contains plenty to fight over.

It calls on lawmakers to enact major new programs across the government, including one that would establish a national infrastructure bank to prioritize federal investments and another that would set new mandates on employers to enroll millions of workers for the first time in voluntary retirement savings accounts.

The budget seeks approval of a cap-and-trade program to curb U.S. greenhouse gas emissions by 14 percent by 2020. The program, similar to one used to slash emissions that cause acid rain, would auction permits to companies that emit greenhouse gases and allow them to trade those allowances.

The administration is counting on the program to produce a big new stream of revenue, amounting to $646 billion over the next decade. About $15 billion a year would be set aside to pay for "clean energy technologies" while the rest would go toward making Obama's signature "Making Work Pay" tax credit permanent. The tax credit, worth as much as $800 a year to low- and middle-income workers, was enacted in the stimulus package.

In what the president called an "historic commitment to comprehensive health care reform," the budget proposes to create a $634 billion reserve fund that lawmakers could use to finance a major expansion of health coverage for the uninsured.

The fund would include savings from proposed efficiencies in Medicare and Medicaid, the federal health programs for the elderly and the poor, as well as $318 billion in new taxes on families in the highest income brackets, who would see new limits on the value of the tax breaks from itemized deductions.

That proposal is a fraction of the new taxes Obama proposes to heap on the nation's highest earners. Individuals who earn more than $200,000 a year and families who make more than $250,000 would also lose the tax cuts enacted during the Bush administration, meaning their top income tax rate would rise to 39.6 percent from 35 percent, their investment income would be taxed at 20 percent rather than 15 percent and their deductions for mortgage interest, state and local taxes and charitable contributions would be reduced.

If Obama's tax plan is approved, a family making $500,000 a year would see its annual tax bill rise to nearly $132,000 from about $120,000, a 10 percent increase, said Clint Stretch, managing principal of tax policy at Deloitte Tax.

Hedge fund managers would take an even bigger hit. Much of their multimillion-dollar earnings would be taxed as regular income rather than capital gains, causing their tax rate to rise from 15 percent to as much as 39.6 percent. Oil and gas companies would be asked to pay an extra $31 billion over the next 10 years through an excise tax on offshore production in the Gulf of Mexico as well as new fees for drilling on federal land. Corporations that operate overseas could expect to pay $210 billion more over the next 10 years as a result of new limits on their ability to defer taxation on foreign earnings.

John Castellani, president of the Business Roundtable, an association of executives, praised Obama's commitment to health care and deficit reduction, but said his tax plans could hinder American competitiveness. Calling the president's proposals "aspirational," Castellani said he would "work with Congress" to produce a balanced tax plan that would "help the economy grow and create jobs."

Staff writers Steven Mufson and Shailagh Murray contributed to this report.