Obama’s Budget: Good News for ISIS, Bad News for Taxpayers

Obama’s Budget: Good News for ISIS, Bad News for Taxpayers

President Obama’s Budget proposal, to be released on Monday, confirms that a sweeping, bipartisan compromise to tame exploding federal debt is not on the White House agenda for 2016. The president’s Budget consists of a litany of new entitlements and increased spending measures that would be financed through higher taxes. 

President Obama declared in an article for the Huffington Post that his Budget will bring “middle class economics into the 21st Century.” Following on populist ideas laid out in his State of the Union Address, the Budget includes multi-billion dollar increases in education spending, paid workers’ leave, and infrastructure programs. These are purported to benefit the middle class and will be financed by tax increase on banks and upper-income individuals.

Although the Budget has practically no chance of being enacted by the newly-elected Republican Congress, it is disappointing that the president has abandoned the idea of deficit reduction, even though deficit is projected to steadily rise over the next decade, reaching almost $1 trillion in 2025.

Here’s what to watch in President Obama’s FY 2016 Budget.

Bye Bye Sequestration

The sequester consisted of across-the-board spending cuts and caps on discretionary spending automatically triggered in 2013 as a special congressional committee failed to propose $1.5 trillion in spending decreases over the next decade, a requirement of the Budget Control Act of 2011. 

Related: Sequestration--What in the World Is It?

Sequestration was initially projected to reduce spending by $1.1 trillion from 2013-2021, contributing to the substantial reduction in deficit spending over the last two years. Under the President’s budget, discretionary spending for 2016 would total roughly $1.1 trillion, 7 percent higher than the sequester’s spending caps.  

President Obama’s proposal would “fully reverse” the sequester by increasing discretionary spending to $74 billion above the present spending caps, with a total of $530 billion designated for non-defense discretionary spending and $561 billion for defense spending. However, the president has indicated that he will propose ending several ineffective federal programs, potentially offering a targeted alternative to cut spending. 

Hello, New Programs 

Non-defense discretionary spending, or federal funds appropriated for infrastructure projects or funding for federal agencies such as the IRS, would increase to $37 billion above current spending caps. A portion of this spending would be used to fund several new programs, including free community college, funding for genetic research, and will outline a six-year, $478 billion public works project.

Related: Obama Pushes $60 Billion Plan for Free Community College

Free community college, a proposal touted as a way to facilitate “gains in student enrollment, persistence, and completion transfer, and employment,” would cost $60 billion over the next decade.  The program is expected to be ineffective in boosting graduation rates of community college students, but the Budget may lay out plans to stipulate state-level requirements for student retention.

A plan to develop guaranteed sick leave programs for Americans employed in the private sector will be detailed in the President’s Budget. The proposal would cost the federal government $2.2 billion in new mandatory spending to be paid out to states that create their own paid sick leave policies.  This would burden private firms with additional costs and discourage hiring. 

The National Institutes of Health and the National Cancer Institute would gain an additional $200 million out of a proposed $215 million program to gather genetic data on one million Americans in an effort to develop personalized medicines and unravel the genetic and lifestyle causes of diseases.  The Food and Drug Administration would receive $10 million for their drug and medical device approval process, a move that has bipartisan support. Congressional leadership will look for specific references to expediting the FDA’s drug approval process in the Budget, which will be incorporated and expanded upon in a bill to be sent to President Obama before the end of the year.

Good News for ISIS

The increase in base defense spending would exceed the current spending cap by $38 billion.  But the Defense Department’s Overseas Contingency Operation fund, which was not subject to the sequester, would be reduced by $13 billion to $51 billion, the lowest level of OCO funding since the September 11th terrorist attacks. 

Related: Defeating ISIS--Just a Skirmish or a Full-Fledged War?

Funding to combat The Islamic State of Iraq and Syria will be among the most contentious provisions in the budget request. Overseas Contingency Operation funding for operations against the Islamic State is expected to be $5.3 billion in 2016, down from $5.6 billion requested in 2015. Rather than reducing this funding, it needs to be increased.

This portion of the Defense budget will be face heavy scrutiny on Capitol Hill, as America’s ISIS strategy has been analyzed numerous times in congressional committee hearings. Any specifics of how the funding would be used to combat ISIS will be closely monitored by Congress. 

Bad News for Taxpayers

The President will propose a different tax increase on capital gains and banks to finance newly proposed tax breaks aimed at low income Americans, detailed in a $320 billion tax plan the White House unveiled on January 17th.

A report from the Urban Institute estimated that if all of the President’s tax proposals were enacted, taxes would increase by an average of $209 dollars per household in 2016. More households would face tax increases than decreases; one third would see their taxes rise, while 30 percent would benefit from a net decrease.

Related: How Obama's Tax Hikes Actually Hurt the Middle Class

Under the president’s plan, the top tax rate on capital gains and dividends would rise from 24 percent to 31 percent (including the new Obamacare tax), and inherited assets would be subject to the capital gains tax.  Financial firms with assets over $50 billion would owe a 7 basis point fee on their liabilities.  

The President will propose a one-time 14 percent tax on foreign earnings already accumulated by U.S. companies to raise $238 billion, and a 19 percent minimum tax on all future foreign earnings to fund his proposed $478 billion public works program. While the Budget also calls for a reduction of the top corporate tax rate of 35 percent to 28 percent, the proposed taxes on foreign profits may encourage companies to relocate to countries with more competitive tax systems. 

More Gridlock

More of a political manifesto than an actual policy agenda, the Budget proposal articulates the president’s vision for the economy. Many of the programs and tax and spending increases are nonstarters for the Republican leadership, and it is unlikely that these new programs or revenue measures will be seriously considered when the Budget reaches Capitol Hill. Congress will be drafting and sending its own budget proposal to the White House later this year.

The proposal, and the rhetoric used to support it, will set a combative tone early in the budget process. The President’s populist  justifications of his policies are guaranteed to rally his base and generate backlash from fiscal conservatives. Congress and the White House have seven months to identify areas to compromise and finalize budget negotiations before the 2016 fiscal year begins October 1st. 

Matthew Sabas is a research associate at Economics21 at the Manhattan Institute for Policy Research.

This article was published originally in e-21, Economic Policies for the 21st Century

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