LAMBRO: Obama's budget to raise small-business taxes

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By Donald Lambro

ANALYSIS/OPINION:

President Obama's proposed budget reopens political battles on two key fronts - higher income Americans and small businesses who will be hit hard by higher taxes, and the health care industry that will see deep cuts in government medical payments.

The record-shattering $3.55 trillion budget for fiscal 2010, that begins in October, follows an even bigger budget-buster in fiscal 2009 that will tip the scales at nearly $4 trillion, swollen by several giant economic stimulus plans that include the $700 billion bank bailout whose costs could rise significantly higher in the months to come.

No sooner had the White House unveiled the broad outlines of next year's budget Thursday, than the battle over the administration's tax and spend proposals erupted in full fury.

Business advocates charged that multiple tax increases on Americans earning more than $250,000 a year would whack small businesses who pay the individual income tax, too, and produce as much as 60 percent of all jobs.

"You don't build a house by blowing up its foundations. Small businesses and the entrepreneurs who lead them have been the primary drivers of job growth over the past decade. This plan would punish them with higher taxes, resulting in less government revenue, less economic growth, and fewer jobs - not more," said Bruce Josten, chief lobbyist at the U.S. Chamber of Commerce.

On Capitol Hill, House Minority Leader John A. Boehner of Ohio called the budget plan a "job killer," saying that "small businesses, family farms, middle-class families, retirees, charities, everyone with a 401(k), and anyone who flips on a light switch is going to pay higher taxes under this plan."

Mr. Obama ran for president saying he will raise taxes on wealthy Americans by boosting the present 35 percent top income tax rate to the nearly 40 percent rate under President Clinton in the 1990s. Then, as the recession deepened last year, he changed his mind, saying that this was not the time to raise taxes on higher income people because it would further weaken the economy.

But Mr. Obama needs increased revenue to launch his national health care plan - which will cost an estimated $1 trillion over 10 years - and his budget calls for letting President George W. Bush's two top tax rates expire at the end of 2010. The White House expects the economy to be in a recovery at that time, but many economists, including members of the Federal Reserve Board, say it could still be in a recession or in a weakened condition well into 2011.

The other brewing battle will be over how to finance Mr. Obama's national health insurance plan that will significantly expand the cost of government. His budget calls for cuts in Medicare payments to hospitals, insurance plans that serve older Americans, and prescription payments under Medicaid that critics say will result in cutbacks in health care services and facilities.

To help further pay for his universal health care plan, his budget also calls for cutting various tax deductions for wealthier Americans, including charitable contributions, interest on home mortgages, local taxes and other deductible expenses for those who itemize. Cutting back on charitable giving and denying a certain segment of income earners the full deduction on their home mortgages are likely to be major contests in the congressional debate to come.

But Mr. Obama's health care initiative drew praise Thursday from the AARP, the giant senior citizens lobby, who applauded him for including "an important down payment on health care reform" in his budget.

"What's important is not so much specific items included in the health care trust fund, but the commitment to making health reform deficit neutral and showing flexibility that if Congress can come up with alternatives to increase revenues and savings, the administration would go along with this," said Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office.

But in addition to the coming fights over spending and taxes, one of the most contentious parts of the Obama budget will be the immense size of deficits that critics say will continue "as far as the eye can see."

"It's a classic tax and spend budget. It raises taxes by $1.3 trillion over 10 years, raises entitlement spending by $700 billion, and hikes discretionary spending by 12 percent," said Brian Riedl, the Heritage Foundation's chief budget analyst.

"And here's the kicker - even after the recession ends, the budget deficit will be higher than it was under Bush. He was harshly criticized for the $300 billion deficit and now President Obama is bragging that once the economy recovers he'll run a $500 billion-plus deficit," Mr. Riedl said.