Obama budget: Spending cuts, higher smokers' taxes

WASHINGTON -- Mixing modest curbs on spending with tax increases reviled by Republicans, President Barack Obama proposed a $3.8 trillion budget on Wednesday that would raise taxes on smokers and wealthy Americans and trim Social Security benefits for millions.

Obama's 2014 blueprint combines a $242 billion infusion of new spending for road and rail projects, early education and jobs initiatives -- all favored by Democrats -- with longer-term savings from programs including Medicare and the military. It promises at least a start in cutting huge annual federal deficits.

The president pitched his plan as a good-faith offer to his GOP rivals since it incorporates a proposal he made to Republicans in December that wasn't radically different from a GOP plan drafted by House Speaker John Boehner. But it follows January's 10-year, $600 billion-plus tax increase that has stiffened GOP resolve against further tax hikes.

"I have already met Republicans more than halfway, so in the coming days and weeks I hope that Republicans will come forward and demonstrate that they're really as serious about the deficit and debt as they claim to be," Obama said.

After four years of trillion-dollar-plus deficits in his first term, Obama's plan projects a $973 billion deficit for the current budget year and red ink of $744 billion for the 2014 fiscal year starting in October. By 2016, the deficit is seen as dropping below 3 percent of the size of the economy, a level that many economists say is manageable.

Obama cast his budget as a compromise offer that would bridge differences between Republicans and their desire for reducing government spending and Democrats who want more revenue from taxpayers. But it's difficult to overstate the gulf between Obama and the conservatives who are in the GOP driver's seat in Congress.

While the budget proposal will not prompt any immediate congressional action, it will probably surface this summer when Republicans are expected to demand additional reductions in the deficit in exchange for increasing the nation's borrowing authority.

Obama claims $1.8 trillion in deficit savings during the coming decade, but the budget tables show the savings actually are $1.4 trillion, and $1.2 trillion of that is devoted to reversing automatic, across-the-board spending cuts required because of Washington's inability to follow up a 2011 budget pact with further deficit action.

"This is worse than a status quo budget," said House Budget committee Chairman Paul Ryan, R-Wis. He said it has about $1 trillion in new taxes, $1 trillion in new spending with deficit reduction of only $119 billion during 10 years under GOP math that sorts through interpretations employed by the White House that could be open to question.

For instance, Obama claims $167 billion in lower war costs -- money the administration never intended to spend -- and uses that "savings" for road projects and other undertakings it bills as jobs initiatives.

The real cuts include $400 billion scrubbed from health-care programs like Medicare during the coming decade, including cuts in payments to drug companies and higher Medicare premiums for people who are better off.

The administration would modestly cut the annual operating budgets for both the Pentagon and domestic agencies while reprising ideas like higher Transportation Security Administration fees on airline tickets, the end of Saturday mail delivery and higher pension contributions for federal workers.

The total climbs closer to $1 trillion in tax increases after adding in ideas like a 94 cents-per-pack increase in taxes on cigarettes.

changes for corporate foreign earnings, slower inflation adjustments to income tax brackets, elimination of oil and gas production subsidies, an increase in the estate tax, a new "financial crisis responsibility" fee on banks and new taxes on trading of exotic financial instruments known as derivatives.

"He does deserve some credit for some incremental entitlement reforms," said Boehner, R-Ohio. "But I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes. Listen, why don't we do what we can agree to do?"

That's not the way it works, countered Gene Sperling, the director of Obama's National Economic Council. "The offer that is there for Speaker Boehner is not an a la carte menu."

The White House budget claims $580 billion in tax increases on the wealthy over 10 years, including a 28 percent cap on itemized deductions that's never gotten anywhere on Capitol Hill.

Republicans predictably slammed Obama's plan for its tax increases while his Democratic allies generally held their tongues over cuts to Social Security benefits.

"It's not the budget I would write on my own, and it includes several policies that I don't think are the best ways to tackle the deficit and debt," said Senate Budget Committee Chairman Patty Murray, D-Wash.

The Social Security cuts would come from a slightly stingier inflation adjustment known as "chained CPI" that would reduce annual cost-of-living increases for a variety of programs by about 0.3 percentage points a year. It would reduce federal spending on government programs over 10 years by $130 billion and promises to save far more in subsequent decades.

Once the change was fully phased in, Social Security benefits for a typical middle-income 65-year-old would be about $136 less a year, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. But after age 75, Social Security recipients would receive larger-than-scheduled benefit increases by 0.5 percentage points a year through age 85.

Obama promises to ease the burden of the proposal on the poor and the very elderly by not applying it to programs meant for low-income Americans. That means annual increases in assistance programs such as Social Security Supplemental Security Income and Pell Grants for student aid would not be calculated by using the lower inflation formula.

Despite Obama's vows not to raise taxes on the middle class, the chained CPI proposal also would result in higher taxes because tax brackets would be adjusted for inflation more slowly, with much of the effect felt by middle class taxpayers. The provision would raise about $100 billion over 10 years. At the same time, raising the cigarette tax from $1.01 to 1.95 per pack would be disproportionally felt by the poor. That tax increase would raise $78 billion over 10 years.

Obama's plan generally tracks a nonbinding budget measure that passed the Senate last month, though Democrats controlling the chamber left out the chained CPI proposal.

House Republicans, by contrast, muscled through a far more austere plan in March that contains big cuts to Medicaid and would reduce domestic agency budgets by about 20 percent below levels contemplated in a hard-fought 2011 budget pact that set tight "caps" on spending passed by Congress each year.

"I don't think we should be talking about grand bargains because that implies the president and Senate Democrats are ready to embrace fundamental entitlement reform, which they have shown absolutely no indication of doing," said House Budget Chairman Ryan, his party's vice presidential nominee last year.

Such pessimism is also felt by Democrats. Asked this week about the prospects for a broad budget deal, Murray said: "I think we're a long ways from there right now."

------

Online:

http://hosted.ap.org/interactives/2013/us-budget-2013/

------

Associated Press writers Martin Crutsinger, Donna Cassata and Julie Pace contributed to this report.