President Obama released his Fiscal Year (FY) 2015 budget on Tuesday. As we said in our earlier statement, the Bipartisan Policy Center (BPC) believes that from a fiscal standpoint, this budget essentially constitutes a holding pattern. The Office of Management and Budget (OMB) projects that, were all of the policies in the budget enacted, deficits would decline to under 2 percent of gross domestic product (GDP) at the end of the ten-year budget window and debt would stabilize as a percentage of GDP (albeit at an historically high level). But the budget does not tackle reform to the individual tax code or fundamental reforms to the entitlement programs that are projected to sharply increase federal debt in future decades.
This blog post provides some details on the proposals in the budget.
President Obama’s budget would pay for its spending proposals and finance some additional deficit reduction largely by increasing revenues by a total of around $1.8 trillion through 2024. About $500 billion of that increase would be caused by population growth resulting from immigration reform rather than tax or fee increases. The single largest proposed source of new revenue, which would raise approximately $600 billion over ten years, is a proposal to limit the value of all itemized deductions and many other tax preferences (such as the exclusion for employer-sponsored health insurance) to 28 percent. This provision is similar to ones that appeared in both the tax reform plan proposed last week by House Ways and Means Committee Chairman Dave Camp (R-MI) and BPC’s Domenici-Rivlin Debt Reduction Task Force.
Other major revenue-generating proposals include: ending certain tax expenditures for high-income individuals (e.g., removing the preferential tax rate for carried interest); implementing the “Buffet Rule” – a minimum tax on high-income individuals; changing some parameters of the estate and related taxes; and imposing a financial crisis responsibility fee on large financial institutions.
The budget also includes the detailed outlines of a plan for revenue-neutral reform of the corporate tax system that broadens the base and lowers rates. Under the proposal, the top corporate tax rate would be 28 percent. Like Chairman Camp’s plan, this budget would use one-time revenues from the transition to the new tax system to finance transportation and infrastructure maintenance and improvements.
President Obama also proposes a significant expansion of the Earned Income Tax Credit (EITC) for childless workers (in addition to an increase in the minimum wage to $10.10). Under current law, childless workers (including non-custodial parents) between the ages of 25 and 65 are eligible for a maximum benefit of $500 from the credit. The budget’s proposal would increase the maximum benefit to $1,000 annually, expand eligibility to those between ages 21 and 67, and allow workers at slightly higher incomes to be eligible.1 Expanding the positive work incentives available for childless workers has similarly been suggested by a number of prominent Republicans, and was also a proposal of the Domenici-Rivlin Task Force, although the mechanism was somewhat different.2
Unlike his previous year’s budget, the president did not propose to index the cost-of-living adjustments (COLAs) for most federal programs (including Social Security) or provisions in the tax code to the chained Consumer Price Index (CPI). Using the chained CPI rather than the current Consumer Price Index for All Urban Consumers (CPI-U) would result in slower benefit growth over time.
Just last week, Chairman Camp included a switch to chained CPI in his tax reform proposal, which would raise more revenue over time as more income falls into higher tax brackets. The Domenici-Rivlin plan proposed using chained CPI for both entitlement program COLAs and tax code parameters, which has the potential to become a point of common ground for the two parties moving forward.
President Obama’s proposal estimates savings of about $400 billion over ten years on health care entitlement programs. For information on the healthcare provisions in the budget, please see the BPC Health Project’s blog post.
The budget provides a detailed proposal for FY 2015 discretionary spending that meets the caps specified by the Bipartisan Budget Act of 2013 (BBA), but sets forth an Opportunity, Growth, and Security Initiative, which would allocate $56 billion over the BBA caps in FY 2015, and additional discretionary investments in the out years. The increases are split approximately evenly between defense and non-defense spending and are funded by cuts to mandatory spending and revenue increases, including reducing subsidies for crop insurance and limiting tax expenditures on retirement benefits.
On the defense side, the Initiative proposes to fund increases in weapons system modernization, readiness, nuclear R&D and infrastructure, and improvements to DoD facilities. On the non-defense side, the Initiative would increase funding for or establish programs to bolster education, research and innovation, opportunity and mobility, infrastructure and jobs, public health and security, and efficient and effective government.
The president’s budget includes his executive action creating MyRA plans – simple “starter” retirement accounts. These accounts would be available to anyone whose household income is below $191,000. Individuals could make an automatic payroll deduction of as little as $5 per paycheck into a Roth IRA invested in government savings vehicles. The budget also proposes adopting automatic enrollment into IRAs (“auto-enrollment”) for employees with no access to a workplace savings vehicle.
Early Childhood Education
In this year’s proposal, President Obama brings back last year’s proposal to begin the Preschool for All initiative. Preschool for All would be a new mandatory spending program to partner with states to provide access to preschool to all low- and moderate-income four-year-olds. The program and an expansion of the voluntary home visiting program, which sends nurses, social workers, and other professionals to meet with parents of young children, would be paid for by increasing the tobacco tax and indexing it to inflation.
The budget also expands Preschool Development Grants, Early Head Start, and Head Start as part of the Opportunity, Growth, and Security Initiative.
The budget proposes a major overhaul of the country’s immigration system. The budget proposes to strengthen border security, make it harder for employers to hire undocumented workers, streamline the immigration process, and provide a pathway to citizenship. The proposed reforms are estimated to reduce the deficit by approximately $160 billion through 2024. For more information, please see the Immigration Task Force’s blog post.
Alex Gold contributed to this post.
1 The proposal would increase the age maximum in tandem with the Social Security Normal Retirement age, which is currently 66 and will be rising to 67.
2 The Domenici-Rivlin proposal would establish a flat refundable credit of $1,600 per child and a refundable credit equal to 17.5 percent on the first $20,000 of earnings.