Details of President Obama’s fiscal 2015 budget are starting to dribble out — the full budget
is set to be released at 1130 AM today can be found on the OMB’s site or on Scribd. We”ll be gathering updates, reaction, and analysis as the budget here throughout the day.
In a year where many lawmakers seem more concerned with preparing for the midterm elections, much of the focus of the president’s budget is on helping the less fortunate — particularly the expansion of the Earned Income Tax Credit. Here’s Reuters:
The budget signals a shift away from last year’s emphasis on deficit cutting to a more pronounced focus on poverty reduction, a legacy-oriented goal the president is highlighting as he faces less than three years left in office.
About that spending
What’s not up for debate in this budget proposal is how much the government will spend: back in December, Sen. Patty Murray (D-Wash.) and Rep. Paul Ryan (R-Wis.) hashed out a deal, agreeing to spend roughly $1.1 trillion through September 2015.
The budget will, however, have spending projections that go out 10 years, which do often end up being quite a bit different from the money that actually gets spent. Wonkblog has a series of charts showing projected and actual dollars spent on various parts of the budget since the 2005 projections. Somewhat unsurprisingly, the US is over its projected spending on defense and income security (which spiked during and after the financial crisis). It’s under projected spending on interest, “primarily because projections did not foresee a recession that drove interest rates to near-zero,” says Wonkblog.
The budget proposal that comes out today will never become law, explains Jared Bernstein – although neither will the budget that House Republicans propose. The final draft will be somewhere between the two. But, he says, it still has symbolic importance:
You’ve really got to view these documents as aspirational and as such, representative answers to the most existential questions of our current politics: what is the role of government, how large should that role be, how should it be financed, what is the balance between austerity and investment in public goods, in what ways is the market failing to meet the needs of broad swaths of the population and which are the best policies to meet those market failures?
David Wessel has a good primer on how to read the budget itself. Essentially, to skip the words and go directly to the tables — the most interesting of which he walks through in his post.
And now onto the details:
Tax credit expansion
The biggest detail that has leaked about the budget is that the President proposes expanding the Earned Income Tax Credit and the Child Tax Credit. Wonkblog does a good job of digging into the details of the new proposal. Basically, the President is expected to propose expanding the EITC, a kind of cash payment for the working poor that has traditionally been much more generous to workers with children than to childless workers. Currently the average credit for workers with children is $2,790, while it’s only $270 for those without kids. Workers under 25 without children don’t qualify at all. Here’s Zachary Goldfarb on the details of the changes:
Under the current EITC, workers get 7.65 cents back on every dollar they earn up to $6,570, for a maximum of $503. Then the amount of the tax credit is frozen until the worker earns $8,220. At that point, the EITC starts phasing out until the worker’s income is $14,790, at which point the credit is worth zero.
Under the new proposal, workers would get 15.3 cents back on every dollar they earn up to $6,570, for a maximum of $1,005. Then the tax credit is frozen until the worker earns $11,500. The phase out ends at $18,070.
The chair of President Obama’s Council of Economic Advisors, Jason Furman, has a long piece in the latest issue of Democracy about poverty and the tax code, which provides some insight into the administration’s position on tax credits in this new budget. Of the EITC and it’s sister, the Child Tax Credit, he says:
These policies have also succeeded partly because they are not just tax credits for one section of the population, but are also measures that provide broader insurance to a much wider set of beneficiaries over time. While in any given year 13 percent of people receive these tax credits, one study found that over an 18-year period, because of fluctuations in income, more than half of taxpayers benefitted from the EITC.
Closing tax loopholes
In order to pay for the EITC expansion, President Obama wants to cut some tax loopholes “used typically by wealthy investors or employees of professional service companies such as law, consulting or lobbying firms”, says Reuters. Particularly, he wants to close the “carried interest” loophole in the tax code. Carried interest mostly applies to employees of hedge funds and private equity companies, and basically means that when they share their company’s profits, that money is taxed at a lower rate — the capital gains rate — instead of the normal income tax rate (which, for a hedge fund or private equity employee, is probably about twice the 20% cap gains rate). The Tax Policy Center has a great explainer on both what carried interest is and the arguments for and against getting rid of the loophole.
Reuters reports that the 2015 budget scaled back spending increases the administration had originally wanted for the Commodities Futures Trading Commission, while adding extra funding for the Securities and Exchange Commission. The budget calls for the CFTC to have a $280 million budget (down from the original $315 million), and the SEC to get $1.7 billion. Here’s more from Reuters:
Under the recent congressional deal, the SEC and CFTC both got slight budget increases for this fiscal year. Currently, the SEC is operating under a $1.35 billion budget, and the CFTC is funded with a $215 million budget.
Still, many critics have said those figures are woefully inadequate for the two agencies to do their job and keep pace with Wall Street.
Despite the White House’s reduced funding request for the CFTC, the fiscal 2015 budget does contain a proposal for new legislation that would permit the CFTC to charge transaction fees on futures, swaps and options.
Doing so would put the agency more in line with the SEC’s budget structure, in which its expenses are offset by industry fees. As a result, the funding does not impact the federal deficit.
The head of the CFTC, Bart Chilton, released a statement on the agency’s funding in this budget. He says $280 million is “woefully insufficient for needed oversight and enforcement” by the CFTC.
In the budget, the President calls for a $1 billion appropriation to capitalize a federal affordable housing trust fund, which was approved, but left unfunded, by Congress in 2008. Financing for the fund would come from the government-sponsored Fannie Mae and Freddie Mac. Here’s more from Reuters:
Over time, the White House predicted the money would provide for 16,000 affordable units using a mix of funding sources, including other public funds, tax credits and private debt.
Under the legislation that established the affordable housing fund, the companies were meant to be the source of capital. However, the previous head of the Federal Housing Finance Agency, Edward DeMarco, kept them from paying into the fund after they were bailed out by taxpayers at the height of the financial crisis.
Many housing advocates argue the conditions that prompted the regulatory agency to suspend payments in 2008 no longer exist.
The budget also includes $46.7 billion to fund the Department of Housing and Urban Development, a $1.2 billion increase from 2014. The proposal focuses on programs designed to help the homeless and those that need rental assistance. This includes $20 billion for the Housing Choice Voucher program, which gets rid of cuts to the program from the sequestration and adds new vouchers, including 10,000 vouchers for homeless veterans. The budget also includes funding to maintain affordable rental housing. It reduces funding for the Community Development Block Grant programand the HOME Investment Partnership Program. Wonkblog has more on the housing proposals here.
Student Debt Forgiveness
The budget expands the government’s current student loan forgiveness program. Pay As You Earn, or income-based repayment, caps the amount a borrower has to pay per month to 10% of the person’s discretionary income, and forgives loans after 20 years of payments. The the program currently is only open to borrowers who took out loans after October 1, 2007, but this budget proposes opening it to everyone with federal student loans, regardless of when the loans were taken out. However, it caps the amount that can be forgiven. Here’s Josh Mitchell:
Among the changes proposed Tuesday, individual borrowers would face new limits on how much debt that could have forgiven. The amount forgiven for public-sector workers would be capped at $57,500. Borrowers with debt loads above $57,500 would make payments for 25 years. And payments for married borrowers filing separately would be calculated on their combined household adjusted gross income.
The President’s budget gets interesting when it gets to the defense section. It proposes leaving the defense budget at $496 billion, about where it was last year. Defense Secretary Chuck Hagel wants to cut the Army by 40,000-50,000 troops — levels not seen since before the WWII attack on Pearl Harbor, and retire old equipment. Reuters has more details here.
However, the President also proposes an extra spending package, the Opportunity, Growth, and Security Initiative, which includes $55 billion more in spending than was agreed to in the Murray-Ryan bill. Half of that would be defense spending, the other half on other programs.
Politically, Nicholas Wapshott thinks this defense budget will be great for the President:
Watching Republicans tussle over the future of the nation’s defense — an issue they have traditionally owned – will be an alternative attraction this year to watching incumbent Republican old timers defend their voting records to avoid being ousted in a primary by Tea Party candidates.
The National Debt
Annie Lowrey flags this chart, which shows how the projected budget expects to reduce the national debt over the next 10 years:
Lowrey points out that the Obama budget increases taxes and reduces spending, which theoretically will lead to smaller deficits and a declining national debt. However, as she points out, this chart assumes the economy keeps running smoothly. ”Mr. Obama’s budget assumes that there will be no recession for the next decade – indeed, he sees a moderate but strengthening recovery. History suggests those might be the most unrealistic numbers in the document,” she writes.
Along this line of thinking, it’s worth revisiting the Wonkblog chart that’s linked in one of the posts above, which shows projected and actual spending on income security since 2005 — and how the two diverged when the economy hit a rough patch: