Bush Plan Reins In Domestic Spending

Proposal Aims to Balance Budget And Fund Wars 

MICHAEL ABRAMOWITZ & LORI MONTGOMERY
Washington Post 6feb2007

President Bush took aim yesterday at domestic spending as part of a plan to balance the budget in five years without raising taxes while increasing funding for the Iraq war and permanently expanding the military.

With the $2.9 trillion budget he submitted to Congress, Bush signaled he would attempt to squeeze spending on health care, education, housing and other domestic programs important to the Democratic majority for the duration of his term. Overall domestic spending would be held below the rate of inflation in the fiscal year that begins Oct. 1 and frozen thereafter.

The new Bush budget would also seek to reduce the rapid rate of growth in Medicare and Medicaid, trimming $101 billion from the two programs over the next five years by reducing payments to health-care providers and forcing wealthier seniors to pay more for physician services and prescription drug coverage. And it would provide additional funds for the Children's Health Insurance Program, but not enough to maintain the same enrollment over the next five years, according to independent analysts.

Bush said his plan would bolster national security while "keeping the economy strong with low taxes and keeping spending under control." But Democratic leaders, who will control the budget process for the first time since Bush took office, immediately denounced the plan as an irresponsible attempt to make costly tax cuts for the wealthy permanent and to finance the war by shortchanging children, the elderly and the nation's long-term fiscal health.

"It is disingenuous for the president to suggest cuts to Medicare and Medicaid that he knows the Congress will not support," said House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.). "It's not going to happen."

Some Democrats also questioned the president's math, saying his budget plan relies on a series of rosy economic assumptions to transform the nation's $248 billion deficit into a $61 billion surplus by 2012. Even if the plan is successful, Democrats noted, the president would only be restoring the country's fiscal condition to the surplus he inherited when he took office in 2001.

"This budget is filled with debt and deception, disconnected from reality, and continues to move America in the wrong direction," said Senate Budget Committee Chairman Kent Conrad (D-N.D.).

While the spending blueprint met resistance from Democrats, it appeared to shore up the president's position with conservatives in his own party, who have been deeply unhappy with the growth of federal spending over the past six years. In comments to reporters yesterday, Bush emphasized his desire to reduce the number of congressional pork-barrel projects, known as earmarks, and acquire a line-term veto -- favorite initiatives of fiscal conservatives.

Extending Bush's first-term tax cuts, a collection of rate reductions and tax credits that has kept more than $1 trillion in taxpayers' pockets since 2001, would cost the Treasury an estimated $374 billion between 2008 and 2012, according to the administration. Most of the cuts are scheduled to expire in 2010.

Bush's advisers yesterday credited the tax cuts for the nation's healthy economy and said keeping them in place is essential to maintaining economic growth. A growing economy, in turn, they said, will continue to stimulate tax collections, making it possible to balance the budget even while paying increasing sums for the Iraq war.

White House budget director Rob Portman stressed that point in a briefing for reporters. "The cost of the war is reflected in the administration's deficit projections," he said. "In fact, there has been a $165 billion decrease in our deficit over the past two years, and that includes all of the war costs that we've incurred during that time."

Bush's proposed fiscal 2008 budget would provide another big boost in spending for the war and overall defense and diplomatic spending. The budget plan includes $623 billion for the military next year, including $141 billion for the wars in Iraq and Afghanistan and a $50 billion down payment on the president's plan to permanently increase the size of the armed forces by 92,000 over the next five years.

The State Department would receive nearly $35 billion, an increase of more than 20 percent over current spending estimates, plus $3 billion in emergency spending related to the administration's "global war on terror."

Federal agencies other than State, the Pentagon and Homeland Security would receive increases of about 1 percent over 2007 spending estimates, with requests for eight agencies -- including education and environment -- falling below fiscal 2006 levels.

Bush proposes a number of new initiatives, including a plan to boost the size of Pell grants to help students pay for college, a program to fund pilot projects to reduce traffic congestion and a new effort to raise $3 billion in public and private matching funds to improve national parks. But those programs' costs would be offset with cuts elsewhere.

For example, the Education Department's request for discretionary funding would rise $10 million over the 2007 estimate -- about 1 percent less than the agency received in 2006. The increase for Pell grants and an extra $1.2 billion for elementary and secondary education would be paid for in part by slashing subsidies to the banks that provide student loans and eliminating a student loan program for students at vocational and technical schools.

The Justice Department would get about a 1 percent increase, including substantial boosts for counterterrorism and counterintelligence programs and more than 220 new FBI agents. But law enforcement groups say the proposal would effectively cut grants and other assistance to local police by 75 percent at a time when violent crime is rising nationally.

And state officials complained that the president is seeking an 18 percent reduction in funds to provide heating assistance to 5.6 million low-income families, a proposal that would force states either to contribute more money or cut off assistance to about 1 million families.

Democratic budget leaders decried the cuts, many of which have appeared in previous Bush budgets.

"These things have been around the track numerous times and never made it to the finish line," said House Budget Committee Chairman John M. Spratt Jr. (D-S.C.). "It's doubtful they're going to pass."

House Speaker Nancy Pelosi (D-Calif.) also criticized the president for allowing the alternative minimum tax to expand to millions of additional families by 2012, subjecting them to substantial tax increases. The tax was originally conceived as a way to ensure that wealthy Americans did not escape paying taxes.

Grover G. Norquist, president of Americans for Tax Reform and a staunch administration advocate, said conservatives are likely to applaud the package. "By putting a line in the sand that says that 'You can -- and I have -- balanced the budget without raising taxes,' then the Democrats have to do the same," Norquist said.

source: 5feb2007

Bush Budget Sets Stage for Clashes
With Congress Big Divisions Over Iraq

Taxes Are Likely to Limit Room for Compromise

DAVID ROGERS / Wall Street Journal 6feb2007

WASHINGTON -- Faced for the first time with a Democratic majority in Congress, President Bush put a little of everything in his 2008 budget: high spending, assumptions that the government will collect still-higher revenues, and the promise of a modest surplus in five years, even if his tax cuts remain intact.

But no amount of optimism is expected to head off what is likely to be a continuing series of conflicts in coming months between the White House and lawmakers on priorities ranging from urban housing to farm subsidies and defense spending to investments in child health care and education.

Democrats share the president's goal of erasing the federal budget deficit by 2012, but would take a very different path. The two biggest flash points between the White House and Congress are taxes and the war in Iraq. Conflict over these two issues alone could derail Mr. Bush's promise of a modest surplus in five years -- the first since 2001.

In his $2.9 trillion budget, Mr. Bush wants to first protect his signature tax cuts and extend them beyond their scheduled 2010 expiration. Democrats want to scale back some of the reductions that apply to capital gains and the wealthy. Beyond that disagreement, the two sides are split over the alternative minimum tax, originally aimed only at the wealthiest Americans, but which is increasingly reaching into the middle class.

At this stage, the president has committed himself to doing little beyond next year. That's a major concern for Democrats, who have vowed to do what it takes to keep the AMT from hitting tens of millions of additional families.

Stirring Emotion

The second flash point, Iraq, is stirring even more emotion now than the Cold War debate did in the 1980s, when Republicans joined Democrats in trimming President Reagan's defense buildup to pay for domestic spending. The size of Mr. Bush's budget request for defense -- $716.5 billion in new spending over the next 20 months -- is "staggering," said House Armed Services Committee Chairman Ike Skelton (D., Mo.), a strong ally of the military.

One reason for the big defense budget is that the president, for the first time since the 2003 invasion of Iraq, is submitting a spending blueprint that spells out upfront defense costs. But beyond Sept. 30, 2008, Mr. Bush's budget reverts to past practice and allocates only $50 billion for Iraq, or less than half what the annual cost of the war has been so far.

The White House says that's because the war's cost can't be accurately predicted any further into the future. Still, the projected cost for the next year of the war alone will spark competition between defense spending and Democrats' desires to fund their priorities, particularly education and health.

For example, while the Defense Department budget would grow by $49 billion under the president's plan for next year, the Education Department's budget would be cut by $1.5 billion from the joint funding resolution that passed the Democratic-controlled House only last week.

Rob Portman, Mr. Bush's budget director, has sought to ease some of the conflicts. The administration is no longer pressing for a fee on airlines to pay for security screeners. In the case of Medicare, proposed cuts at the expense of oxygen services for the elderly set off a big fight in Congress last year; this time around, Mr. Portman and the administration have sought to find a formula to defuse some of the tension.

Mr. Portman told reporters he was comfortable with what he described as an overall 1% increase in domestic spending, saying, "It's adequate to fund the nation's priorities." But in a sign of the political challenges ahead, Mr. Portman overstated even this modest increase. Democrats have already begun revising spending for 2007, and in some cases the spending increases cited in Mr. Bush's budget turn out to be reductions from those levels.

Mr. Bush's refusal to reconsider his tax policy makes it harder to reach the compromises needed on entitlement programs such as Medicare and Medicaid, which are closely identified with Democrats. This tension is likely to have a ripple effect, shaping the broader budget debate this year.

The most likely route to real progress toward a compromise would be passage of a major deficit-reduction package. But unless the administration is more willing to include taxes in the same package, Democrats would be reluctant to tackle an issue as tough as Medicare. Instead of one battle, Congress faces a series of skirmishes as bills come to the floor, and much will depend on new "pay go" rules that require lawmakers to offset any new spending with new revenues or savings.

Early Test Fight

An early test fight will come over the planned reauthorization of a popular program designed to help states extend insurance coverage to low-income children. The so-called State Children's Health Insurance Program, established 10 years ago for children who don't qualify for Medicaid, would get another $5 billion over the next five years under the Bush administration budget. But advocates in Congress believe $12 billion to $15 billion is needed, and some Democrats would like to see the figure go even higher to extend the program's coverage.

Education is going to be similarly sensitive. Mr. Bush's "No Child Left Behind" reforms are coming up for reauthorization in Congress, and Democrats have long complained that more money must be provided to help local public schools meet the standards set under the law. Toward this end, the administration proposes to provide more funding for low-income public schools, targeted to high schools, and math and reading programs also would receive more money. But a total of $2.3 billion in other education programs would be terminated, setting up conflicts with lawmakers that will make it harder to reach agreement.

Agriculture spending will be another source of conflict. As part of the farm-bill debate this year, the administration is seeking greater investments in renewable fuel, but farm-state lawmakers complain that the budget doesn't provide adequate resources. Senate Agriculture Committee Chairman Tom Harkin (D., Iowa) said yesterday that while the administration's farm plan has "solid suggestions," the budget figures "would deny the necessary funding to reach critical objectives in energy, conservation and rural-economic-development initiatives." The proposed budget also cuts $360 million in 2008 from two conservation programs that have been a priority for the chairman.

Even the budget's basic assumptions about spending and tax revenues will spark debate.

In many respects, Mr. Bush's budget has been overtaken by events, including the House's passage last week of a resolution that includes increases in domestic spending for the last eight months of fiscal 2007.

The Association of American Universities complained that the new budget for the National Institutes of Health proved to be a $500 million cut from an NIH funding resolution for this year. In the case of veterans' medical care, funding does go up in the Bush budget, but the increase is about $1 billion less than the administration boasted in the accompanying explanatory documents.

In the case of revenues, the administration predicts annual government receipts will grow by 30% to reach $3.3 trillion in the crucial year of 2012. That's more than $150 billion higher than what the nonpartisan Congressional Budget Office estimates that same year.

Under Pressure

Democratic critics say the administration is using overly rosy estimates of how many more tax dollars a growing economy will generate for Washington. Still, Democrats themselves are tempted to use the same kinds of numbers, because they too are under pressure to show they can craft a balanced budget. House Budget Committee Chairman John Spratt (D., S.C.) admitted that to get an "apples and apples" comparison with the president's numbers, Congress may take a second look at the White House estimates.

"Humpty Dumpty can get to balance by 2012 with these numbers. The real problem is 2015 and later," said Sen. Judd Gregg (R., N.H.), the former Senate Budget Committee chairman.

p.A1

The Budget Battle and Your Wallet Which Bush Proposals Are Likely to Survive

Band-Aid on the AMT

TOM HERMAN and ANNE MARIE CHAKER / Wall Street Journal 6feb2007

With Democrats now in control of Congress, many proposals President Bush made yesterday affecting individuals' wallets -- including killing the estate tax and overhauling the tax treatment of health-insurance benefits -- appear to be heading for the cutting-room floor.

But a few others, such as giving the Internal Revenue Service more money to pursue tax dodgers and protecting millions of people for another year from being ensnared in the alternative minimum tax, could attract bipartisan support.

Here is how the president's proposed $2.9 trillion budget may affect your pocketbook.

TAXES: The president is asking for nearly $2 trillion in net tax cuts over the next decade, mainly by extending provisions scheduled to expire in coming years. For example, the top 15% rate on long-term capital gains and most corporate dividends is set to expire at the end of 2010. So are today's federal income-tax rates, which range as high as 35%. Without legislation, those rates would head higher starting in 2011.

Don't expect Congress to act soon on the president's proposals to make those tax rates permanent. Lawmakers effectively have punted that issue into the elections of 2008, and beyond, amid continuing concern about reining in the federal budget deficit.

The budget also includes a plan to prevent the rapid spread this year of the alternative minimum tax, a parallel tax system designed originally to prevent a small number of wealthy people from dodging federal income taxes completely. Because the AMT wasn't indexed for inflation, it's now hitting many middle-income families, too. A Treasury official said about four million taxpayers will get hit by the AMT for 2006, and if Congress does nothing, that number will soar to about 25 million people for 2007.

Some kind of AMT fix is likely to win congressional approval. Among those already feeling the pinch of the AMT are many people who live in high-tax areas, such as New York City, New Jersey, and California and those with large families.

As expected, the president reiterated his request to Congress to kill the federal estate tax permanently. Under current law, this tax will disappear in 2010 but only for that one year.

Democrats are clear they won't go along with permanent repeal. Instead, look for an eventual compromise that includes raising the basic exclusion from the tax and cutting the top rate, thus reducing the number of people affected by it. This year, the basic estate-tax exclusion is $2 million, and the top rate is 45%. Some lawmakers have discussed increasing the exclusion to somewhere in the range of $3 million to $5 million.

Part of the budget calls for new steps to attack the nation's so-called tax gap, the difference between what the government collects each year and what it should be collecting. IRS researchers have estimated the gap is about $290 billion. .

One proposal: The president wants Congress to require many securities brokers, mutual funds and others to report what investors pay for stocks and funds. The information is relevant in figuring tax on capital gains, or the profit investors make when they sell. Treasury says it would increase compliance on capital-gains taxes.

The budget estimates the measure, which would apply to securities acquired after 2008, would rake in about $6.7 billion over 10 years. Key details of the plan aren't yet available, said a Treasury spokesman. Some Democrats have already come out in favor of similar legislation.

This proposal is "very constructive," said a spokeswoman for the Securities Industry and Financial Markets Association, a trade group.

STUDENT FINANCIAL AID: President Bush proposed cutting the subsidy that banks and other student-lending companies receive from the federal government. Lenders say this would likely mean cuts in student benefits, such as 24-hour hot lines and discounts for on-time payments. Democrats have proposed a similar move, so the question will be, how deep the cuts?

The president also proposed cutting entirely certain student-aid programs, including the Perkins Loan, Supplemental Educational Opportunity Grant and Leveraging Educational Assistance Partnership grants for needy students. Mr. Bush tried, and failed, to eliminate some of these programs in the past and it's doubtful he'll succeed this year with a Democratic Congress.

The administration wants to apply the savings to other aid that affects more students, including raising the annual loan limit on subsidized Stafford loans by $2,000 for third- and fourth-year students. Stafford loans, which have a current limit of $5,500, are the government's biggest student-loan program.

The administration also proposed raising the annual limit students receive from the Pell Grant program -- which provides needy students with money that doesn't have to be repaid. The limit would be increased to $4,600 in the 2008-2009 academic year from the current $4,050, and ultimately to $5,400 in 2012-2013.

Pell Grant recipients are likely to see some increase. A Democratic bill introduced last month would boost the limit by a greater amount. But it's uncertain what will happen with subsidized Stafford loans. While Mr. Bush proposed raising loan limits, Democratic legislation that passed the House last month would cut interest rates.

HEALTH: Mr. Bush proposed requiring more higher-income seniors to pay more for Medicare. Currently, about 1.5 million seniors -- individuals with incomes above $80,000 a year and couples with incomes above $160,000 -- pay higher premiums in Medicare's Part B, which covers physician and outpatient services. Those income levels currently are indexed for inflation, but the president's proposal would eliminate that and expand the means testing to include the the new drug benefit, Part D. Officials expect the means testing of Part D to affect more than 1.1 million seniors in 2008. It's not clear how this proposal will fare in the Democratic-controlled Congress. While many Republicans and some Democrats have supported the limited means testing in Medicare that has already begun, many Democrats have opposed it. And senior citizens' groups aren't likely to support expanding means testing unless the resulting savings are used to improve the program, which isn't part of the Bush proposal.

The budget also calls for major tax-law changes designed to make health insurance more affordable, but also threatens to raise taxes on many upper-income Americans. But with so many competing health plans on the table, there is little chance the president's proposal will be enacted. (See related article.)

--Jane Zhang and Rob Wells contributed to this article

p.D1