BACKGROUNDER: HIGHLIGHTS OF THE PRESIDENT'S FY'08 BUDGET

Balanced Budget? The Budget was touted as achieving a $61 billion surplus by FY 2012, but several factors have caused the surplus projection to be received with skepticism:

• Social Security surpluses mask the deficit: The Budget includes Social Security surpluses in the bottom line, which many view as "masking" ongoing structural deficits. The Budget actually projects non-Social Security budget deficits totaling $1.7 trillion over the next 5 years, with a 2012 non-Social Security deficit of $187 billion. (To be fair, both political parties have been using Social Security surpluses to mask ongoing structural deficits for years. That practice won't continue much longer however, since Social Security surpluses will disappear and the program will begin running an annual cash deficit in 2017).

• AMT addressed for only one year: Some have suggested that the Administration has not included in the Budget a broadly supported permanent "fix" for the Alternative Minimum Tax because the cost of doing so (estimated by CBO to be $318 billion through 2012), would have precluded showing a surplus in 2012. It is estimated that the AMT will impact 26.5 million taxpayers in 2008, up from 4 million in 2006, absent reforms that go beyond the Administration's proposed one-year AMT patch for tax year 2007. (Unlike the "regular" income tax, the AMT is not indexed to inflation. So as incomes rise with inflation, a larger number of taxpayers are subject to the AMT each year.)

• War not fully funded after 2008: Unlike prior years, this Budget includes full war costs for the upcoming fiscal year (FY'08), but includes only partial funding for FY'09 ($50 billion) and does not project any war funding for Fiscal Years '10, '11, and '12;

• Social Security reforms delayed until 2012: In order to achieve the projected surplus, the Budget assumes that the Social Security reforms (described below) would not kick in until 2012. From 2013 through 2017, the "reforms" would cost $609 billion and continue escalating as payroll taxes are diverted from the Social Security Trust Funds.

• Rosy Scenario: Some have suggested that the 2012 surplus projection is dependent, in part, on overly rosy economic projections resulting in higher levels of Federal tax revenues. OMB's revenue estimates for 2012 are $155 billion higher than those of the Congressional Budget Office (CBO).

Taxes:

Tax Cuts: The Budget proposes that Congress make permanent the 2001 and 2003 tax cuts (estate tax elimination; and capital gains, dividend, and income tax rate cuts). The cost in lost revenues is $374 billion over five years and $1.7 trillion over 10 years.

Extenders: The Budget proposes permanent extension of the research and experimentation (R&E) tax credit, and one-year extensions of Alternative Minimum Tax (AMT) relief and the Work Opportunity Tax Credit.

Expansion of tax favored accounts: The Budget proposes consolidation and expansion of the three current types of IRAs into retirement savings accounts (RSAs); establishing new lifetime savings accounts (LSAs); and consolidation of 401(k)s, 403(b)s, 457s, and SIMPLE IRAs, into new Employment Retirement Savings Accounts (ERSAs). Initially, taxes paid upon conversion to the new accounts would raise revenues in the short-term (helping the President's 5-year budget projections) but the new tax free accounts would cause revenue losses in the outyears.

Closing the Tax Gap: To make progress in closing the gap between taxes owed and taxes paid (estimated at $290 billion per year), the Budget would expand information reporting on: the sales of publicly-traded securities, payments to corporations for services, and credit/debit card transactions.

Agriculture: As Congress grapples with reauthorization of the multi-year "Farm Bill" in 2007, the President's Budget proposes a controversial shift in resources at the Agriculture Dept. Specifically, the Budget proposes $15.5 billion in spending cuts over 10 years in commodity support and crop insurance programs, together with $20.4 billion in spending increases for natural resource conservation, farm direct payments and research programs.

CRS: Previewing a 2007 Farm Bill

Community Development: The Budget proposes $2.98 billion for Community Development Block Grants, a cut of $807 million below FY'07 (adjusted for inflation).

Defense: Up until this year, the Administration has funded the wars in Iraq and Afghanistan largely through "emergency supplemental" appropriations. That is, the regular annual budget requests for the Department of Defense (DOD) have included only a fraction of the anticipated war costs.

One year ago, for example, the President's FY 2007 Budget requested $50 billion for the war. Congress added another $20 billion, and then this week the President requested an additional $99.6 billion for the remainder of FY 2007.

Complying with a congressional requirement, the President's FY 2008 Budget requests $145.2 billion for Iraq and Afghanistan, which OMB Director Portman has assured Congress is the projected full cost for FY 2008.

Non-Iraq spending boosted: The Budget proposes for FY '08 an increase in defense "base" spending (i.e. non-war spending) to $481.4 billion, continuing the growth trend since 2001, though at a significantly faster rate.

Education:

Cuts overall funding: The President's Budget requests $56 billion in discretionary funding for the Dept. of Education, $2.3 billion below FY'07 (adjusted for inflation).

Increases Pell Grants but cuts other Higher Ed programs: The Budget proposes an increase in Pell grant maximum awards (to $4600 in FY 2008 and $5400 by 2012) and increases loan limits for some undergrads, but would eliminate higher education programs including Perkins loans and Supplemental Educational Opportunity Grants.

Increases "No Child Left Behind" K-12 Programs / Cuts others: Increases funding for elementary and secondary education programs authorized under No Child Left Behind, but falls far short of fully funding NCLB at the authorized levels. The increases go to Education for the Disadvantaged and two new voucher programs. To pay for these increases, the Budget would eliminate education technology state grants, Even Start family literacy program, Safe and Drug-Free Schools, Teacher Quality state grants and other programs.

Reduces Lender Subsidy Payments for Student Aid: In order to achieve mandatory spending savings of $11.2 billion through 2012, the Budget calls for a reduction in lender subsidy payments for student aid.

Energy and Environment:

EPA would be funded at $7.2 billion, $509 million below FY'07 (adjusted for inflation). Most of the reduction is to the Clean Water State Revolving Fund, which is cut $417 million below FY'07 (adjusted for inflation).

Energy Efficiency and Renewable Energy would be funded at $1.2 billion, a cut of $238 million below FY'2007 (adjusted for inflation).

Health Programs:

Medicare Cuts: While there is bipartisan agreement that the current rate of growth in Medicare expenditures is unsustainable, there is little agreement on how to reduce projected expenditures. The President proposes measures that would produce budgetary savings (compared to currently projected Medicare expenditures) of $65.6 billion over the next 5 years and $252 billion over the next 10 years. These measures include:

• Expanding over time the number of upper-income seniors paying higher Part B premiums;

• Imposing on upper income seniors higher Medicare Part D (prescription drug) premiums; and

• Freezing or slowing the annual increases (known as "updates") in Medicare payments to fee-for-service providers, that are designed to help hospitals, skilled nursing facilities, home health services and inpatient rehab facilities keep pace with health care inflation.

The Budget does not include any measures to forestall a cut of 10% in '08 Medicare payments to physicians (as estimated by CBO).

Medicaid Cuts: Similar to Medicare, there is widespread agreement that the current rate of growth in Medicaid expenditures is unsustainable, but there is no consensus on how best to achieve budgetary savings. The President's Budget proposes changes in law to generate Medicaid savings of $12.0 billion over five years and $29 billion over ten years. A controversial round of Medicaid cuts enacted last year barely squeaked by in the Republican-led Congress, casting serious doubt on the viability of these proposed cuts.

In addition, the Budget announced regulatory changes the Administration will pursue to achieve another $12.7 billion in savings over five years, including eliminating Medicaid graduate medical education, changes in reimbursement rules for rehabilitation services, and changes to school-based services.

State Children's Health Insurance Program (SCHIP) reauthorization: While the Budget calls for reauthorization of the expiring SCHIP program, congressional Democrats argue the levels proposed in the Budget are insufficient to maintain benefits for those now receiving SCHIP coverage.

Uninsured: In order to promote purchase of health insurance, the President proposes a new standard deduction for health insurance of $15,000 for families ($7,500 for singles). To offset revenue losses from the new deduction, the Budget would eliminate the current tax exclusion for employer-provided health insurance, FSAs, the self-employed health deduction, and medical expense itemized deduction. The Administration estimates that about 80 percent of workers would pay less in taxes under the President's plan, while the 20 percent whose employers provide more than $15,000 worth of health benefits would see their taxes rise.

As part of his plan to expand coverage, the President would expand Health Savings Accounts by making more types of plans eligible for the tax deduction, expanding the scope of qualified medical expenses, allowing larger contributions by employers, and making it easier for families to get HSAs.

Background on President's health insurance proposal

NIH: The National Institutes of Health would be funded at $28.7 billion, a cut of $743 million from FY'07 (adjusted for inflation).

CDC: The Centers for Disease Control and Prevention would be cut $165 million below FY'07 (adjusted for inflation). Most of the cut is the proposed elimination of the Preventive Health and Health Services Block Grant.

Homeland Security: While overall funding for FY'08 would increase to $36.4 billion, state and local grants would decrease:

State Homeland Security Grants would be funded at $187 million, a cut of $348 million below FY'07 levels (adjusted for inflation).

Local Law Enforcement Terrorism Prevention Grants would be funded at $263 million, a cut of $119 million below FY'07 levels (adjusted for inflation).

Urban Area Grants would be funded at $585 million, a cut of $185 million below '07 levels (adjusted for inflation).

Firefighter Grants, for protective gear, training, and equipment, would be funded at $300 million, a cut of $375 million below '07 levels (adjusted for inflation).

Law Enforcement:

COPS eliminated: The Budget would provide no new funding for the half billion dollar COPS (Community Oriented Policing Services) and would cancel $87 million of remaining budget authority.

State and Local Law Enforcement Assistance: The Budget would cut grants to state and local governments to combat violent crime by more than 60% or $660 million.

Low Income Programs:

Housing cuts: The Budget would reduce rental assistance for the disabled by $112 million (47.3 percent) below the FY 2007 level; and rental assistance for the elderly by $160 million (21.8 percent) below the 2007 level.

LIHEAP (Low Income Home Energy Assistance) would be funded at $1.8 billion, a cut of $420 million below FY'07 (adjusted for inflation).

Food Stamp eligibility would be eliminated for an estimated 280,000 families that qualify because they receive non-cash welfare (TANF) assistance.

Social Security – Individual Accounts Worsen Deficits and Debt: The Budget again includes the President's plan to divert up to one-third of workers' Social Security payroll contributions into individual accounts (IAs), but the start date has been shifted back to 2012 so that a budget surplus could be projected that year. Under the IA proposal, existing beneficiaries would keep the current system, as would workers above a specified cutoff age. Younger workers who choose to participate would be able to divert a portion of their payroll taxes (between 2 and 4 %) into an individual account up to a maximum contribution. In exchange, they would accept a future reduction in guaranteed Social Security benefits, wagering that their IA would earn a return larger than the reduction in benefits.

The IA proposal raises the following concerns: (1) Social Security is a "pay-as-you-go program," with current workers' payroll taxes paying for current retirees' benefits. Consequently, diversion of payroll taxes from the Social Security Trust Funds would leave the Trust Funds without sufficient funds to deliver benefits to current retirees, creating an enormous solvency gap and necessitating government borrowing in excess of $2 trillion. (2) The plan would restore long-term solvency to Social Security exclusively through large benefit cuts. (3) If market returns on the IAs are lower than anticipated, retirees could end up with insufficient retirement funds to cover basic necessities.

Transportation:

SAFETEA-LU: The multiyear "highway bill" included carefully negotiated and guaranteed levels for highway funding. The Budget would cancel an upward "revenue aligned" Budget Authority adjustment of $631 million (designed to keep spending in sync with revenues deposited into the trust fund). In addition, mass transit programs would be cut $308 million below the authorized amount.

Amtrak would be funded at $800 million, a cut of $518 million below FY'07 (adjusted for inflation).

Airport Improvement Program capital grants would be funded at $2.75 billion, a cut of $832 million below FY'07 (adjusted for inflation).

Veterans:

Veterans' Health: While the Budget fully funds veterans medical care in FY'08, over 5 years it would fall $3.4 billion below levels necessary to stay even with FY'07 inflation adjusted funding. In addition, the Budget calls on veterans to pay new and increased health care fees in FY'08 (enrollment fees and drug copayments rejected by Congress in each of the last 4 years).