Roadmap to the Budget Plan
How the president's sweeping budget could impact consumers, investors, and companies.
On Feb. 26, President Barack Obama filed his comprehensive 10-year budget plan--a numerical embodiment of the many proposals he made during his campaign.
We view the document as more of a comprehensive wish list than a plan that will make it quickly through Congress unscathed. If Obama supporters were fearful that the president was not following through on all of his promises, they may find this document reassuring. Although I don't find labels particularly helpful, this is not a centrist document. Rather, it plans for some meaningful shifts in tax burdens and a much bigger role for government in the economy (although the proposal does talk favorably of charter schools and performance measurement, and caps federal employee salary increases at 2% in 2010).
The opening sections of the document are highly readable and blame our current predicament on the past administration. The document also uses a lot of charts and graphs to highlight the plight of the lower and middle class. In particular, he highlights flat real wages, rising health insurance costs, and poor job growth as proof that the middle class has indeed stagnated. These premises lay the groundwork for the budget numbers themselves, which move more of the tax burden () to upper-class taxpayers and provide substantial credits for the mid- to lower brackets.
Budget Specifics and Business Implications
Although you may not agree with all of the opening hypotheses, Obama clearly lays them out, and his programs flow logically from those initial assumptions. The document also removes some of the awful games played in previous budgets, but unfortunately it adds a twist or two of its own. Some of the apparent spilling of red ink in his budget is due to a more honest accounting of the Iraq War expenses, finally putting the Alternative Minimum Tax into the long-term budget plan (instead of pretending it doesn't exist and patching it in the late hours of each December) and adding a line item for unspecified emergency contingencies (like Hurricane Katrina). We applaud him for his honesty.
On the other hand Obama creates a blind pool of health-care funds totaling over $600 billion from deduction limitations on the wealthy and cost-saving initiatives in health care (). He shows all these funds as revenue that helps reduce the budget deficit. Yet the text seems to indicate that there may well be some health-care initiatives that will utilize this money. The budget merely says "TBD" for the outlays to come from this fund.
There are also substantial revenues in the budget ($646 billion from 2012 to 2019) for the sale of some type of carbon permits by the government. Given that many of these fees are likely to be passed on by utilities and the like, we see this as more of a hidden tax, a regressive one at that, on consumers. Our analysts will be carefully monitoring the structure and acceptability of these carbon permits () over the next year.
The budget also hopes to close a number of business tax loopholes. The energy industry () in particular has been singled out as promised on the campaign trail. The bill includes some increased royalties, changes in the taxation of intangible drilling costs, and changes in depletion allowance that all hit the oil industry. Whether you agree with him or not, the president has made the environment a top priority. Reducing tax credits that would effectively raise prices and dampen demand is at least consistent. Unfortunately, small domestic drillers could be hardest hit while Big Oil is relatively unaffected and companies outside the U.S. could benefit.
Changing taxation of overseas revenues and removing any tax breaks for moving employees outside the U.S. are also meaningful sources of new revenues in the budget. Again this has been a major campaign promise for some time. Other major loophole closers are shown below. Not noted below was a permanent extension of the R&D tax credit--a plus for business.
Business Loophole Closers
Impact on Individuals
The budget in general does not seem to raise net revenues so much as it shifts the burden from the poorer to the richer (). Gains and losses come relatively close to netting each other out. The lower brackets benefit primarily from an extension of the $400/$800 (individual/family) credit that was part of the recent stimulus bill. The upper-middle class will benefit from a permanent indexation of the pesky alternative tax. The rich will be hit primarily by adding new tax brackets at the high end and phasing out deduction and personal exemption benefits.
Tax Cuts for Families in the Middle and Lower Tax Brackets
Taxes for the Upper Brackets
The budget and its introduction also stress the ongoing benefits of higher education. The proposal includes a permanent extension of the American Opportunity Act for $2,500 per year for higher education. It also expands the Pell Grant program and directly takes on student lending by the federal government. There are new proposals at each end of the age spectrum, including a renewed focus on early childhood education and graduate fellowships. On the college side, our only fear is that, in many cases, we have seen increased funding of higher education followed by increased tuitions because of the increased demand.
We have just touched the surface, focusing mainly on policy shifts. However, the budget is rich with lots of detailed programs and explanations. The dollars involved in some of these programs and in aggregate are not small numbers. Most years some of those proposals would merit major headlines, but this year many of them will be lost as rounding errors. We also encourage everyone to a least read the president's introduction at the front of the document and to take a look at some of the charts.
And again we want to stress that none of this has been enacted into law; it is merely a blueprint for future discussion. We can assure you that there will be a lot of horse trading as it moves through Congress, and not all of this has to be enacted at once.
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