Obama's budget: Back to brass tacks

President's fiscal outline will reveal much more clearly how he plans to cut the deficit in half by 2013. Expect feathers ruffled all around.

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By Jeanne Sahadi, CNNMoney.com senior writer

Obama's budget
It's a tough job: Control spending in the long run as the U.S. commits unlimited dollars in the near term. More
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NEW YORK (CNNMoney.com) -- President Obama has sought to inspire Americans to view the current financial crisis as an opportunity to better the country. In past times of upheaval, he said in his address Tuesday night, the United States emerged with new industries, a better educated citizenry and an economy geared for growth.

"Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down," he said before a joint session of Congress.

And in keeping with that theme he described the budget request outline he will submit to Congress on Thursday as "a vision for America ... a blueprint for our future."

That's the speech. Now comes the hard-scrabble bargaining over that vision.

Lawmakers will debate the merits of new programs Obama will propose. They will also tussle over how he plans to pay for those initiatives while cutting in half the annual deficit he inherited by 2013.

Obama said his budget experts have already found ways to save $2 trillion over the next decade. On an annual basis, that's $200 billion a year, or more than 6% of the $3 trillion federal budget, and close to 10% of the $2.29 trillion in revenue collected last year.

His budget request is expected to identify at least some of the ways he'll generate those savings. But given that two-thirds of the budget is considered largely off limits -- so-called nondiscretionary programs such as Social Security -- it's an ambitious commitment.

"The real key is will the president be able to bring the Congress along to accomplish these things" said Jim Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. "None of this stuff is easy, or otherwise it would have been done. But it's possible if you're serious about it."

So far, the cost-saving and revenue-raising measures Obama has mentioned may not offer the sure-bet savings the president would like, budget experts say.

Among them, Obama has said he wants to:

Let tax cuts expire for families making more than $250,000: The president said he wants to "end the tax breaks for the wealthiest 2% of Americans." It's not clear yet whether he would do that by 2011, when they're currently scheduled to sunset. In the fall, he had said he would consider economic conditions before letting tax rates increase.

A decision to do so in 2011 would be inconsistent with his economic team's argument that the economy would still benefit from stimulus funding that year, said Doug Holtz-Eakin, former director of the Congressional Budget Office who also served as the chief economic adviser to John McCain during the presidential campaign.

But Horney suspects "everything in his budget is contingent on economic conditions."

The Tax Policy Center estimates that making the 2001 and 2003 tax cuts permanent for everyone would result in a $1.7 trillion loss in revenue over 10 years. Letting the tax cuts expire for only high-income filers could reduce that loss to $949 billion.

Reduce troops in Iraq: Obama's budget request outline is likely to detail the dates and size of the troop drawdown he has in mind.

The president has said his budget estimates would include how much money he believes will be needed for Iraq and Afghanistan in the coming years -- something the Bush administration did not do.

He's already indicated that he'll be boosting efforts in Afghanistan. And it will cost money to draw down troops in Iraq, at least in the short-term. So it's not clear yet how much, if any, net reduction in war spending he'll achieve in the next five years.

Reduce health care costs: No one disputes that bringing health care costs down while improving care will go a long way toward shoring up the long-term threats to the federal budget because of growing obligations under Medicare. And it will make health coverage more affordable for the uninsured.

But how quickly would cost savings result? In many instances, "savings would take a good while to be realized," Horney said, noting it could take from 10 to 30 years. But given the magnitude of the long-term challenge posed by health care costs, he added, it's still worth starting now.

In addition, he will propose creating a more than $600 billion "reserve fund" to pay for reforming health care, White House officials told CNN.

One area Obama could achieve savings within the next year or two is by ending overpayments made to private insurers who sell Medicare plans, Horney said.

End payments to agribusinesses that don't need them: Holtz-Eakin and Horney expect Obama will try to strengthen payment limitations on how much farm operations may get in farm subsidies. "A very large proportion of subsidies go to very large farms," Horney said.

The chance for savings any time soon? "It's been tried 100 times. I hope they succeed," Holtz-Eakin said.

It's politically complicated. Farmers, he noted, are a powerful bloc. And the fight over subsidies is less between red and blue states than it is between regions with large farms and those with smaller ones, Horney said.

End tax breaks for companies shipping jobs overseas: One change Obama is likely to call for is an end to a provision that allows U.S.-based companies to defer paying tax on the profits of their foreign subsidiaries until the money is brought back to the United States. Often those profits never make it back to U.S. shores. Obama might want to require companies to pay U.S. income tax when the profits are earned, no matter where in the world.

"But politically it's difficult because you have big, important companies with big lobbies [who will fight it]," Horney said.

Curb greenhouse emissions: Obama campaigned on a promise to create a $150 billion fund to bring renewable energy technologies to market -- an effort paid for by a cap-and-trade program in which companies would have to pay for permission to emit greenhouse gases.

There's considerable debate about the best way to reduce greenhouse gasses, and cap-and-trade is just one idea. There's also considerable debate about the best way to set up a cap-and-trade market. In addition to funding renewable energy research, some of the revenue raised would likely go toward helping low- and middle-income families pay for increased energy costs that companies are expected to pass on to consumers, Horney said.

Even if a cap-and-trade bill were to pass Congress, other questions would remain: How quickly would revenue be raised? How much of it would be left over to help reduce the deficit? These and other questions may be addressed by the president's budget outline on Thursday. To top of page

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