Bottom line for Bush's '08 budget: contention

By Joel Havemann and Maura Reynolds

Feb. 6, 2007 12 AM PT

Times Staff Writers

WASHINGTON — The $2.9-trillion budget President Bush unveiled Monday highlighted major policy differences with the Democrats in control of Capitol Hill and set the stage for vigorous battles over healthcare, war costs and deficit reduction in the last two years of his presidency.

Although presidents’ budgets have always been largely a theoretical exercise -- the Constitution gives Congress the job of passing spending bills -- they help set the terms of Washington’s heated budget debates. The heat flared up immediately Monday as Republicans lined up squarely behind Bush’s budget for fiscal 2008, while Democrats castigated it as both heartless and fiscally irresponsible.

The sharp divide seemed to shatter the spirit of bipartisanship that both parties had cultivated since the Democrats captured control of Congress in November’s elections.

Democrats complained that they saw no evidence of declining war costs, and they railed against Bush’s single biggest spending constraint: holding down the growth of Medicare.

“This budget represents more of the same wrong priorities: placing a higher priority on huge tax cuts for multimillionaires than on urgent national needs,” said House Speaker Nancy Pelosi (D-San Francisco). “Democrats are prepared to work with Republicans to make the tough choices that will return our budgets to fiscal responsibility, but today’s budget from the president is simply not the right approach.”

The coming face-off over outlays for the conflicts in Iraq and Afghanistan, social programs and tax cuts will offer a preview to the debates likely to dominate the 2008 elections.

Bush, in his written budget message to Congress, challenged lawmakers to balance the budget by 2012, as his plan would, without raising taxes.

“My formula for a balanced budget,” he said, “reflects the priorities of our country at this moment in its history: protecting the homeland and fighting terrorism, keeping the economy strong with low taxes and keeping spending under control while making federal programs more effective.”

Bush’s plan to balance the budget in five years echoed the plan advanced last year by congressional Democrats during Congress’ attempt to write its own budget for 2007. The Democrats’ plan died when Congress was unable to agree on either party’s budget.

Bush proposed that the government spend $2.9 trillion next year -- that’s $5.5 million a minute -- on revenues of $2.7 trillion.

Revenues would overtake spending five years from now, according to Bush’s calculations, with spending of $3.2 trillion and revenue of $3.3 trillion.

The president’s plan would balance the budget mostly through spending cuts rather than tax increases.

“Balancing the budget by raising taxes would put our economy at risk,” Rob Portman, director of the White House Office of Management and Budget, told reporters.

Bush’s across-the-board tax cuts, enacted in 2001 and 2003 to expire at the end of 2010, would be made permanent. The expiration date had been a way to reduce the theoretical price tag.

The alternative minimum tax, designed four decades ago to prevent the very wealthy from sheltering most of their income from taxes, would be repealed before inflation could drive more middle-class and upper-middle-class taxpayers into its clutches. The revenue loss would be offset after next year by unspecified increases elsewhere in the tax code.

“We want to work with Congress to reform the [alternative minimum tax] because we believe it is a misguided tax policy,” Portman said.

The president’s proposals also include stepped-up tax enforcement, acceding to complaints that nearly $300 billion in revenue is not collected each year.

Treasury officials suggested in a briefing Monday several ways to improve tax collection, including increasing the enforcement budget for the Internal Revenue Service and passing new provisions to help the government keep tabs on taxpayers’ income. One proposal, they said, would make it easier to calculate capital gains taxes for stock transactions: Investment houses would have to report how much money a stockholder originally paid for a stock, not just how much he received when he sold it. The provision would take effect for stocks purchased after 2008, the officials said.

On the spending side, the administration proposed defense outlays of historic proportions, asking for more than $623 billion for the Pentagon in the budget for the 2008 fiscal year, which runs from October 2007 to the end of September 2008. And for the first time since fighting in Afghanistan and Iraq began, the administration’s request included an estimate for the cost of the wars, which totaled $142 billion on top of the Defense Department’s normal budget of $481 billion.

In addition, the Pentagon asked for $93 billion in war funding this year, which would bring the total war costs for 2007 to more than $163 billion. If both requests were approved, the cumulative cost of both wars would top $687 billion, according to the Pentagon’s budget documents -- more than the entire cost of the Vietnam War, even adjusted for inflation.In healthcare, Bush proposed his deepest cuts yet in one of the biggest and most politically popular federal entitlement programs: Medicare. The reductions would total $66 billion over five years, which when combined with a proposed $10 billion in administrative savings would slow the growth in Medicare spending.

The president also proposed a $5-billion increase for a federal-state program to provide health coverage for uninsured children. Democrats say the program needs an increase of $15 billion to maintain coverage at current levels.

In energy, Bush proposed to boost spending on basic science research by $4.4 billion, seeking energy-saving technology breakthroughs to improve economic competitiveness. In addition, he asked for $148 million for solar power research; $179 million for development of ethanol from corn, wood chips and switch grass; $81 million for “plug-in” hybrid vehicle technology; and $309 million to support development of hydrogen fuel vehicles.

In education, the administration proposed deep cuts in federal subsidies for student loans, an idea that sent the stock price of Sallie Mae, the largest lender, plummeting. The president also suggested eliminating two loan programs: the Perkins Loan and the Supplemental Education Opportunity Grant. The savings would be used to increase the budget for Pell Grants.

Under the president’s scenario, the deficit would remain virtually unchanged next year at $239 billion, then decline every year until 2012, when it would record a small surplus.

But that surplus develops only because the administration does not include the budgetary effects of waging the conflicts in Iraq and Afghanistan, nor of shielding middle-income taxpayers from the alternative minimum tax.

Both Democrats and nonpartisan experts said the president’s budget policies were unlikely to result in a surplus in 2012 or anytime in the foreseeable future.

“The president’s budget is filled with debt and deception, disconnected from reality, and continues to move America in the wrong direction,” said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee. “This administration has the worst fiscal record in history, and this budget does nothing to change that.”

Robert L. Bixby, executive director of the Concord Coalition, which lobbies for budget austerity, said: “A lot of things would have to come out just right” for the budget to balance. U.S. troops would have to withdraw quickly from both Iraq and Afghanistan, he said, and Bush and Congress would have to agree on a “miracle” source of revenue to replace the alternative minimum tax, which Bush proposes to eliminate.

“He also has to hope there are no more emergencies,” Bixby added. “Forget about 9/11; there can’t even be any more Hurricane Katrinas.”

Bush also relied on no growth, even accounting for inflation, in outlays for the vast range of government programs whose spending levels are set not by benefit formulas, like Social Security and Medicare, but by annual appropriations bills. For 2008, Bush spelled out how much he would allot to each program, but for the subsequent four years he merely promised austerity without spelling out how he would achieve it.

With defense and benefit programs growing fast, it is the so-called domestic discretionary part of the budget that has absorbed most of Washington’s budget discipline. A number of lawmakers think Congress has cut education, environmental and other spending in this category just about as far as it can.

House Budget Committee Chairman John M. Spratt Jr. (D-S.C.) said, “While the president has endorsed the goal of balancing the budget, under realistic assumptions his budget remains in deficit every year.”

joel.havemann@latimes.com

maura.reynolds@latimes.com

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Proposed fiscal 2008 budget

President Bush proposed a $2.9-trillion spending plan for fiscal 2008, which begins Oct. 1. The budget projects a surplus in 2012, which would be the first surplus since 2001.

Changing spending priorities

Defense

1978: 23%

2008: 21%

Social Security

1978: 20%

2008: 21%

Medicare

1978: 5%

2008: 14%

Other payments to individuals

1978: 21%