Obama Budget Sets Up Battle Over Sequestration, Taxes

Obama Budget Sets Up Battle Over Sequestration, Taxes
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President Obama on Monday will send Congress a nearly $4 trillion budget that seeks to increase federal spending aimed at middle-class Americans and offset the price tag through higher taxes on the well-off. The changes would take effect in the fiscal year that begins in October.

The president announced that he will ask Congress to jettison across-the-board spending restraints he and lawmakers adopted two years ago, arguing that a stronger economy and declining deficits make this the right time to boost federal spending by 7 percent to support what he calls “smart” and targeted programs that help average Americans get “a fair shot.”

Obama will ask lawmakers to increase defense discretionary spending by $38 billion above the spending caps (to $561 billion) by unshackling the Pentagon from forced cuts and freezes. That would be a policy reversal many security-minded Republicans and conservative defense contractors could get behind.

As his political bookend, the president will seek nearly equivalent new spending -- $37 billion over the caps (to $530 billion) -- for the non-defense discretionary programs he and Democrats favor. Republicans oppose new spending in theory, and have resisted calls to raise taxes on the wealthy for any purpose.

"Let’s take a scalpel and not a meat cleaver,” Obama told House Democrats gathered at a Philadelphia issues conference Thursday night. “Let's make sure we are funding the things that American families need.”

Republicans who won control of Congress in November have warned that Obama’s wish list for new spending -- even for poll-tested and bipartisan initiatives -- will get a chilly reception on Capitol Hill next week.  The majority party is trying to devise its own middle-class economic agenda built around smaller government, less federal intervention and regulation, and lower taxes.

Conservatives and deficit hawks argue that ebbing federal red ink and improved U.S. growth have reopened the door to tackle interest on the national debt and mandatory commitments to Social Security and Medicare, which gobble huge chunks of federal balance sheets as time marches on.

The Congressional Budget Office, the non-partisan budget arbiter for the legislative branch, this week projected that future interest payments will skyrocket on rising debt levels. If the government fails to rein in the nation’s IOUs in the near future, “the large amount of debt might restrict policymakers’ ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises,” CBO said in its report.

Obama flirted with Social Security and Medicare reductions a few years ago, hoping his cautious offer to the GOP might lead to a budget accord that could forestall indiscriminate, across-the-board cuts that neither party favored. But after he and Republicans failed to reach a deal, the punishment neither party wanted was exacted: the poison pill known as sequestration.

The White House, currently energized by Republicans’ governing challenges, has been unveiling bits of its fiscal narrative for weeks. The president and his surrogates have patiently baited hooks to showcase what Obama asserts are conservatives’ nationally misguided policies.

Thursday offered a fresh example: The administration proposed spending $1 billion as part of Obama’s 2016 budget to provide economic sustenance to Central American countries, including Guatemala, El Salvador and Honduras. The White House said the proposed aid would bolster prosperity and regional economic integration, security, and improved governance in countries where populations take great risks to come to the United States to seek better lives.

The push for $1 billion takes direct aim at Republicans’ criticism and alarm following last year’s crisis of unaccompanied children at the southwest U.S. border. Obama blamed the sudden migration and Tea Party politics for snuffing out the last, slender hope for immigration action on Capitol Hill last year. Conservatives insisted any future legislation to reform U.S. immigration laws must occur in smaller, separate measures, and rely first on tough border security to halt surges in undocumented immigrants into the United States. The president will try to maneuver the GOP into voting for his increase or appearing to oppose stronger border security.

In the meantime, the White House is preparing to battle Republicans over Department of Homeland Security funding, which runs out at the end of February. Conservatives said they will use DHS’s budget to leverage Obama into undoing the executive relief from deportation he offered last November to about 4 million undocumented migrants already in the country. In his State of the Union address, the president vowed to veto any efforts to hold up DHS appropriations that take aim at immigration. On Thursday, the White House condemned the standoff engineered by the GOP as budget brinksmanship and a “stunt.”

White House officials believe that in laying out a progressive political agenda in the budget, the administration will test the Republican majority’s legislative skills and political cohesion. House Democrats, dwindled in number after the midterms and huddled in Philadelphia to forge a common agenda Thursday, applauded Obama as their “partner.”

Rep. Steny Hoyer, the House Democratic whip from Maryland, described the stark contrast Democrats want the public to see during his introduction of the president in Philadelphia.  “If Republicans choose partisanship over progress,” Hoyer said, “the American people must see us fighting for what we believe this country’s future ought to be.”

In reviewing Obama’s spending and tax plans next week, there are some issues to watch:

Deficits, Debt and Entitlements. Following his re-election two years ago, Obama endorsed raising Medicare premiums for couples earning more than $170,000 and adopting additional Medicare savings. He has backed a new inflation measure for Social Security that would have trimmed benefits over time, producing federal savings.

That negotiating stance expired, however. The president, who in 2013 alarmed Democrats by entertaining those GOP calls for entitlement cuts, is now trying to force the opposition to navigate on his middle-class-spending turf, rather than join them on the GOP’s smaller-government platform.

In his budget, Obama will point to data showing the Affordable Care Act has been driving down rates of increase in health care spending, including in Medicare. The White House suggested Thursday that the budget will showcase the projected economic benefits stemming from immigration changes, which would include millions of migrant workers paying into Social Security and bolstering the program’s bottom line.

Obama’s primary budget message is that his administration’s policies have demonstrably revived the economy following the Great Recession, and warrant the nation’s trust, in comparison with Republicans’ doomsday assertions that his policies kill jobs, cripple the private health care system, undermine domestic energy production, and coddle unqualified mortgage borrowers.

“There is no economic metric by which we are not better off than when I took office,” the president asserted Thursday night.

The Congressional Budget Office, meanwhile, revived a warning this week about rising federal debt (expected to be $19 trillion when Obama leaves office). The weight of interest obligations was a reminder that discretionary spending in 2016 is a subset of longer-term threats to the nation’s economic output, measured against gross domestic product.

“CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year -- more than twice what it was at the end of 2007 and higher than in any year since 1950,” the agency said. “By 2025, in CBO’s baseline projections, federal debt rises to nearly 79 percent of GDP.”

Revenues. The president wants to raise $320 billion in new revenues in 2016 through an assortment of individual and corporate tax changes. The new money would be important as an offset against what Obama wants to spend, maintaining deficits on a downward trajectory for another few years.

The two political parties both say they favor corporate tax reform, but each side concedes that the devil is in the details, which translates into interest groups lobbying around every sentence in the tax code.

Most seasoned tax analysts believe enactment of tax reforms will wait for a new president and the next Congress. But Obama will use his budget blueprint to lay out the basic middle-class arguments Democrats will defend through the 2016 presidential election.

In addition, Obama has linked new revenues raised from proposed corporate tax changes to his favored spending for infrastructure, including roads, bridges, rail lines, ports and the Internet. In his State of the Union address, the president tucked the embattled Keystone XL pipeline, which Senate Republicans easily approved Thursday with help from nine Democrats, into the section of his remarks about infrastructure, not energy.

“Let’s pass a bipartisan infrastructure plan that could create more than 30 times as many jobs per year,” he said. “Let’s set our sights higher than a single oil pipeline.”

Not a year goes by that Obama doesn’t tout his infrastructure agenda, without much success in Congress. This year he has new lures. One is corporate tax rates, and the other is a Canadian oil pipeline to Oklahoma that Republicans favor as a “jobs bill” and the administration continues to study.

War Spending and Deficits. In his 2016 budget, Obama will again confront his prediction that the war with the Islamic State in Iraq and Syria will take years. Does Obama borrow trillions of dollars to defeat the terror group and to help Iraqis? Or does he identify a longer-term solution to pay for the ongoing war costs?

The president had anticipated that the end of the Iraq War begun under President George W. Bush, and the conclusion of U.S. combat commitments in Afghanistan would produce budget bonuses he could redeploy for other purposes. In this fiscal year, the assault on the Islamic State was funded with borrowed money, identified for budget purposes as Overseas Contingency Operations.

Republicans say they favor a balanced budget within 10 years without raising taxes, and many also favor jettisoning spending limits for defense. How the more than $8 million-per-day war with the Islamic State is treated in the Obama blueprint Monday will be of considerable interest on Capitol Hill.

Alexis Simendinger covers the White House for RealClearPolitics. She can be reached at asimendinger@realclearpolitics.com.  Follow her on Twitter @ASimendinger.

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