Unprecedented size, scope in president's proposal

WASHINGTON -- This is change, whether you believe in it or not. And not just pocket change.

Following through on many of his campaign promises, President Obama wants to spend about $3.6 trillion next year to pull the nation out of recession and begin major new initiatives in health care, energy and education.

All that and more is contained in a 134-page budget request for 2010 and beyond that is unprecedented in size, breathtaking in scope and sure to have a major impact on millions of Americans — if he can get much of it through Congress.

It's a budget plan that would help the young by increasing their chances of getting a college education and the poor by providing funds for health insurance. It seeks to clean the air and reduce the USA's dependence on foreign oil. It would cut taxes on low- and middle-income Americans while raising them, starting in 2011, on couples who make at least $250,000 a year.

All this would come at a price to be paid by in the future: annual deficits of at least $500 billion, and a federal debt that would reach $23 trillion in a decade.

Like Ronald Reagan for Republicans 28 years ago, the new Democratic president is staking out his party's position on spending and taxes. Whereas Reagan sought to limit government, Obama wants to expand its reach. And he's determined to tackle the nation's most pressing issues, despite setbacks suffered by fellow Democrats Bill Clinton and Jimmy Carter in similar efforts.

"These are extraordinary times," Obama senior adviser David Axelrod says. "We're not in a position to think incrementally in terms of recovery, in terms of financial stability."

The most jarring difference is with the last eight years — a period in which George W. Bush focused on sweeping tax cuts and spending for the wars in Iraq and Afghanistan.

"If anyone disputes the fact that elections can make a difference, all you have to do is look at the budget," says Thomas Mann, a political scholar at the Brookings Institution. The differences between Obama and Bush, he says, are "day and night."

In little more than five weeks, Obama has shown he intends to think big and act quickly. He's already agreed to spend nearly $800 billion over two years to try to jump-start the economy. He's not only pressed Congress for the second half of a $700 billion bailout of the financial industry, he's reserving the option for another $750 billion on top of that.

Rather than focus solely on the immediate economic problems, however, Obama's budget shows he wants to work simultaneously toward long-term goals such as overhauling the health care system and achieving energy independence.

"This budget is Chapter Two," says John Podesta, former White House chief of staff under Clinton and director of Obama's post-election transition team. Obama "wants to do the big reforms that are going to lead to long-term, sustainable growth."

It's a lot to ask of Congress. But administration officials say there's no time to wait.

"Is it too much? I certainly hope not," says White House budget director Peter Orszag, who was a driving force in pushing health care to the top of the president's agenda.

Some of it, no doubt, will be too much. Republicans are balking at the sight of tax increases and squawking about domestic spending increases.

"The administration's plan is a job killer, plain and simple," says House Republican leader John Boehner of Ohio. Adds Tony Fratto, Bush's former deputy press secretary: "Trying to mask huge spending increases under the cloak of 'fiscal responsibility' is the height of audacity."

Budget watchdog groups are grousing about deficits projected to drop from $1.75 trillion to $500 billion — but stay in that range as far as the eye can see.

"When you get to the point that you're pleased to be able to achieve a half a trillion (dollar) deficit when the economy gets going again, you're in rough shape," says Maya MacGuineas of the Committee for a Responsible Federal Budget.

For those reasons and more, Obama will have a much tougher time getting his budget initiatives through Congress than he did his economic stimulus package — and that passed the Senate with the support of just three of the chamber's 41 Republicans. Democrats have a big majority in the House, they lack the 60 votes in the 100-member Senate needed to cut off filibusters.

The message from the Obama administration Thursday was simple: This is the change a majority of voters believed in, and this is what's needed to get the economy roaring again.

"I work for the American people," Obama said. "I'm determined to bring the change that the people voted for."

Wealthy would pay more

Almost since 1993, when Clinton pushed through a major deficit reduction package replete with tax increases, Washington has been avoiding any more. As a result, spending has soared past revenue, and deficits have risen.

Enter Obama, who's proposing $1.4 trillion in tax increases in his budget, including more than $600 billion in energy taxes. Starting in 2011, the plan would raise taxes for those in the highest income levels —$250,000 for married couples and $200,000 for individuals — by adding 36% and 39.6% tax brackets, phasing out personal exemptions and limiting itemized deductions. It also would raise the capital gains tax rate from 15% to 20%.

A married couple with two children under 17 and a $500,000 income would owe about $11,300 or 9% more than under current law. A single taxpayer with no children and the same income would owe about $19,200 more, according to data from Deloitte Tax. "It's a pretty significant increase," says Clint Stretch of Deloitte Tax LLP, which prepared the estimates.

The changes represent a departure from the past eight years, when tax rates fell for all income brackets, and when the difference between the lowest and the highest narrowed. "It's a fundamental and large shift in the tax burden," Stretch says.

Obama's plan keeps most of Bush's tax cuts. The "Making Work Pay" tax credit, a focus of Obama's economic stimulus bill, would become permanent. The credit is $800 for those filing jointly and $400 for individuals. It phases out for single taxpayers with $75,000 of adjusted gross income, $150,000 for joint filers.

Other increases in the budget include expansions of the earned income tax credit and child tax credit for low-income Americans, an expanded saver's tax credit and a plan to automatically enroll people in IRAs and 401(k) plans.

The plan offers $800 billion in tax breaks for taxpayers. A married couple with two children under 17 and household income of $35,000 would save about $1,200, according to Deloitte Tax.

Republicans left no doubt where they stand on tax increases. Sen. Judd Gregg, R-N.H., who withdrew as Obama's nominee for Commerce secretary, calls them "massive."

Even groups aligned with Obama express concern that tax increases at the end of this recession could trigger another one — a situation Franklin Roosevelt faced in the 1930s. "The Great Depression was really two big recessions with a recovery in the middle," says Bill Gale of the Brookings Institution. "There's potential to do real damage."

Taking on health care

The most dramatic initiative in the budget is one that's not yet fleshed out: overhauling the nation's health care system.

The last major effort in 1994 fell victim to opposition from insurers and other interest groups. Obama is determined to try again by setting aside $634 billion over 10 years, to be raised from tax increases on upper-income taxpayers and reductions in payments to Medicare providers.

"Many voices were telling the president to go slow," says Rep. Henry Waxman, D-Calif., chairman of the House Energy and Commerce Committee, which controls Medicaid. "He wisely ignored those voices. Health care reform will help families, businesses, and workers all struggling to pay for the constantly growing costs of health care."

Unlike Clinton, Obama isn't proposing how to spend that money. He wants to reduce the number of uninsured from 46 million and reduce premiums for others, but he doesn't say how to get there. That's up to negotiations with Congress.

Robert Moffit of the Center for Health Policy Studies at the conservative Heritage Foundation likens that approach to paying the check at a restaurant before you see the menu. "It's money first, and they're going to provide the details later," he says.

Orszag told budget watchdog groups Wednesday that a bold move toward universal health coverage would raise costs initially but eventually slow the rate of growth in health care costs.

That's what Republicans and fiscal conservatives want to do —before overhauling the health care system. Gregg and other Republicans say Obama and Congress must find a way to address the ballooning costs of Medicare and Social Security to reduce future deficits before spending billions more on health care.

"Neither of those issues are taken on in this," Gregg says. "Why aren't we doing something more constructive about this?"

New energy regulations

Obama has emphasized the need to address global warming. His budget signals his intention to do just that: the list of revenue includes $646 billion that would be raised over the next decade by cutting emissions of greenhouse gases, the pollutants linked to global warming.

Obama wants to create a so-called cap-and-trade system. Congress would set a limit, or cap, on greenhouse emissions. If an oil refiner, for example, wants to exceed the limit, the government would sell it a permit to allow for more pollution. The $646 billion in Obama's budget would come from the sale of permits.

Its inclusion is "a clear indication of the priorities of the White House," says Tim Profeta of Duke University's Nicholas Institute for Environmental Policy Solutions. But "there's still a political challenge to getting climate-change legislation passed."

That energy provision says less about Obama's interest in reducing global warming and more about his interest in raising federal revenue, says William Kovacs of the U.S. Chamber of Commerce. "It's essentially a $63 billion-a-year tax on energy to fund social programs."

Money to save energy and promote cleaner forms is scattered throughout the budget, from $250 million for biofuels and wind energy to $50 million for renewable energy projects on property managed by the Interior Department.

Environmentalists are delighted. Obama "has put us squarely on the path toward a clean energy future," says Carl Pope of the Sierra Club.

Boosting access to college

Obama's third major initiative is in education, an area most often left to the states. His plan to make college more affordable represents a break from Bush, who focused most of his energy on improving K-12 education with his signature "No Child Left Behind" law.

"We've never really seen a president of either party make such a strong commitment to investing in the nation's workforce," says Terry Hartle of the American Council on Education, a lobbying group for college presidents.

Obama would save $4 billion a year by ending a longstanding government-subsidized college loan program, in the process beefing up a direct loan program created by President Clinton in 1993. That would make the federal government the only source of federally supported college loans.

The program, known as the Federal Family Education Loan (FFEL) program, dwarfed the direct loan program last year, loaning $56 billion to about 6 million students as opposed to $14 billion to 1.5 million students. Student loan providers say the proposal threatens what has been a dependable source of education funding. It comes at a time when many students are making their financial aid decisions for the next academic year.

Kevin Bruns of America's Student Loan Providers says families can continue to rely on the federal loans. "This isn't happening tomorrow," he notes. Even so, concerns about exactly how long these loans will be around dragged down the stock of Sallie Mae, the largest provider of FFEL loans.

Obama would increase the maximum Pell grant for low-income college students to $5,550 a year, making it part of the government's mandatory annual budget. The move would protect it from future political and budgetary pressures. It also would link regular grant increases for students to inflation.

Saving money on defense

One area that's not benefiting from Obama's new spending is defense. In fact, because the war in Iraq is winding down, he will save money there to use for other programs or deficit reduction. Spending for the war on terror would fall from a peak of $183 billion in 2008 to $130 billion next year.

Today, Obama outlines his plan to withdraw U.S. combat troops from Iraq by August of next year. The president, who pledged to pull out combat troops in 2010,will speak at Camp LeJeune in North Carolina. Obama also has ordered the deployment of 17,000 more troops to Afghanistan to help battle a resurgent Taliban. The administration hopes to complete a review of the Afghanistan situation by early April.

Overall, the proposed defense budget is $534 billion, a 4% increase from the Bush administration's last budget. That includes more members of the Army and Marine Corps.

Even so, defense spending as a percentage of the nation's economy would drop from 4.5% to 3.1% by the end of the next decade.

"Defense is less of a burden," says Robert Work of the Center for Strategic and Budgetary Assessments. He warns that without more money, weapons purchases and military construction "will be under tremendous pressure."

Contributing: Kathy Chu, John Fritze, Mary Beth Marklein, Greg Toppo, John Waggoner and Traci Watson