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

By Lori Montgomery
Washington Post Staff Writer
Friday, February 27, 2009

President Obama delivered to Congress yesterday a $3.6 trillion spending plan that would finance vast new investments in health care, energy independence and education by raising taxes on the oil and gas industry, hedge fund managers, multinational corporations and nearly 3 million of the nation's top earners.

The blueprint, meanwhile, would overhaul programs across the federal bureaucracy to strengthen assistance for millions of people who have borne the consequences of what Obama called "an era of profound irresponsibility," helping them pay for college, train for better jobs and save for retirement while taking less of their earnings in taxes.

The ambitious agenda for the fiscal year that begins in October would not come cheap. This year's budget deficit, swollen by spending to combat a severe recession, would hit a record $1.75 trillion, or 12.3 percent of the overall economy, under the president's plan, the highest since 1945. While Obama inherited the bulk of that gap, his budget would make room for a fresh round of spending that could hit $750 billion to prop up troubled financial institutions.

Next year's deficit would approach $1.2 trillion. But Obama proposes to cut that figure roughly in half by the end of his first term, in large part by levying nearly $1 trillion in new taxes over the next decade on the nation's highest earners, defined as families with gross income of more than $250,000 a year.

In unveiling the 134-page volume that outlines his spending priorities, Obama acknowledged that his proposal would "add to our deficits in the short term to provide immediate relief to families and get our economy moving." But he argued that the economic crisis should not be used as an excuse to delay costly investments intended to modernize the nation's economy, enhance its workforce and, ultimately, reduce government spending.

"What I won't do is sacrifice investments that will make America stronger, more competitive and more prosperous in the 21st century -- investments that have been neglected for too long," Obama said. Citing the need to "break free" from foreign oil, reduce "crushing health-care costs," and improve public education, Obama said: "These investments must be America's priorities, and that's what they will be when I sign this budget into law."

With its immense scope and bold prescriptions, Obama's agenda seeks to foster a redistribution of wealth, with the government working to narrow the growing gap between rich and poor. It is likely to spark fierce political battles on an array of fronts, from social spending to energy policy to taxes.

Alice M. Rivlin, a Brookings Institution economist who served as former president Bill Clinton's budget director, called the plan "gutsy and quite good."

"It has a strong flavor of the Obama philosophy, which is tilting the playing field away from upper income and toward the rest of America," she said.

Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession in order to bankroll a massive government expansion.

"The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John A. Boehner (R-Ohio). "The administration's plan, I think, is a job killer, plain and simple."

White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap. While Obama predicts the deficit would fall to $533 billion by the end of his first term, it would quickly begin to rise again and the national debt would remain elevated throughout the next decade.

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.

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