President Obama’s budget seeks an end to tax break for the middle class

Grappling to contain record deficits, President Barack Obama is seeking
to end a middle-class tax break he once said would be permanent.

The $3.8 trillion budget request rolled out by the White House on Monday would renew the Making Work Pay tax credit for fiscal 2011, but then would have it sunset.

{mosads}That’s a switch from last year, when Obama’s budget called for making the tax credit permanent.

The cut costs the federal government about $63 billion in annual revenue while putting up to $400 in the pockets of workers making less than $95,000. It was approved for the first time in last year’s $787 billion stimulus package.

An administration official said the tax credit reflects changing realities in Congress on climate change legislation.

The tax initially was intended to compensate middle-class families for increased energy costs related to a cap-and-trade mechanism that would have capped greenhouse gas emissions by businesses while setting up a system allowing emissions credits to be bought and sold, the official said. The credit was to be paid for by revenue from the cap-and-trade system.

Now that Congress is considering different ways of compensating middle-class families for higher energy costs related to a cap-and-trade bill, using the Making Work Pay credit is not necessary, the official suggested.

The 2010 budget said that with “families squeezed, this tax cut will put needed money in their pockets for them to make ends meet and cover the costs of necessities.”

It referred to the tax as the first stage of a middle-class tax cut promised during the presidential campaign.

White House Budget Director Peter Orszag on Sunday told reporters that the administration was pushing for the permanent extension of Bush-era middle-class income tax cuts along with the one-year extension of Making Work Pay “because middle-class families suffer disproportionately” during tough economic times.

The administration also wants to roll back former President George W. Bush’s tax cuts for people making more than $250,000 annually. That would reinstate the 36 percent and 39.6 percent tax rates.

Obama as recently as Friday hailed the Making Work Pay tax cut.

“You guys may not have noticed it in your paychecks, but each month it’s a little bit bigger because of those tax cuts that we put in,” Obama said during a visit to a factory in Baltimore.

The administration is casting its 2011 budget as an effort to address the nation’s deepening fiscal crisis and revive the economy. The budget tries to balance the seemingly divergent goals of spending money to create jobs while also saving money to cut the deficit.

The White House wants Congress to approve a $100 billion jobs bill with a tax credit for small businesses that hire new workers or raise employee wages.

The administration also proposes new taxes on banks and the wealthy, however, and curtails spending in some areas. It says it hopes that the combination of tax hikes, spending cuts and the implementation of recommendations from a bipartisan fiscal commission would halve this year’s $1.56 trillion deficit within four years.

“We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money, as if we can ignore this challenge for another generation,” Obama said Monday in remarks at the White House.

Pressed on how they could jumpstart the job market while reining in deficits, administration officials insisted the goals weren’t mutually exclusive.
Orszag said that deficits must be lowered, but that there’s a danger to acting too quickly.

“One of the challenges is to get those deficits down in the future so we don’t choke off economic activity and job creation,” Orszag said. “But we want to make sure we don’t do it too quickly so we don’t repeat the mistakes of 1937.”

He said the Roosevelt administration’s move to shut down deficit spending that year led to a recession that followed the Great Depression. The administration is worried about a double-dip recession even as the economy pulls out of the worst recession since FDR’s era.

{mosads}Even with a new jobs bill, the administration painted a gloomy unemployment picture. Its latest estimates project the unemployment rate to average 10 percent this year and remain at about 9 percent in 2011 and 8 percent in 2012. The jobless rate won’t return to the pre-recession level of roughly 6 percent until 2015.

Long-term deficit projections are just as daunting.

Orszag acknowledged that the proposed budget won’t get the deficit to the White House’s target, a budget shortfall equivalent to 3 percent of the country’s economic output. At that level, federal revenues would equal all spending except for payments on debt. The 2011 deficit will equal 10.6 percent of the nation’s gross domestic product and will bottom out at 3.6 percent, or $785 billion, in 2018 before rising again.

To push the deficit down to the sustainable 3 percent level, Obama proposes the creation of a bipartisan commission that will produce fiscal reforms that could include tax increases, spending cuts and changes to entitlement benefits.

Top Democrats in Congress have been skeptical about Obama’s focus on the deficit, particularly his call for a non-defense discretionary spending freeze while the job market remains weak.

House Appropriations Committee Chairman David Obey (D-Wis.) said Monday that jobs would be the “No. 1 focus” of his committee. Obey said House appropriators would go along with Obama’s overall spending levels but may also look at finding savings in defense spending, which the White House is looking to shield.

“We will not exceed his requested level for appropriations, but we will also not exempt any department or activity from review, including foreign aid and the Pentagon, because none of them are without waste,” Obey said in a statement.

House Majority Whip James Clyburn (D-S.C.) said that trying to find greater savings in the budget wouldn’t help alleviate the recession. Clyburn, on Fox News, instead called for more spending on education and job creation instead of immediate deficit-reduction moves.

Republicans panned Obama’s budget request for calling for more spending, which they argue hasn’t created enough jobs.

“The president has sent us more of the same — a budget that claims to be fiscally responsible, but just below the surface contains more spending, more borrowing and more taxes,” said Sen. Judd Gregg (N.H.), the top Republican on the Senate Budget Committee.

The White House has pushed back against GOP criticism by noting that much of the red ink expected over the next decade is due to tax cuts and a Medicare drug entitlement passed during the Bush administration that weren’t paid for. Obama also offered a vigorous defense of his budget from criticism from left-leaning lawmakers who don’t like proposals to cut spending.

“We have to do what families across America are doing — save where we can so we can afford what we need,” he said. “I’m willing to reduce programs I care about; I am asking Congress to do the same.”

Jordan Fabian contributed to this article.