Budget Rules Will Test Obama Tax, Healthcare Agenda

WASHINGTON --An early test for President-elect Barack Obama will be whether he can bridge divisions in his own party over deficits and budget rules. His success on this front is crucial to his ability to enact much of his domestic agenda, including health care reform and tax cuts, budget watchers say.

At issue is a fundamental difference in the way the Obama campaign accounts for the cost of extending tax cuts that are now in place, and the way that Democratic lawmakers have accounted for those costs.

The accounting difference is no small potatoes. The non-partisan Tax Policy Center estimated the net cost of all of Obama's tax proposals at $2.9 trillion over ten years, using the budget rules Congress must use. But using the Obama campaign's preferred budget assumptions, the same proposals taken together actually would raise money for the Treasury on net - to the tune of about $627 billion over 10 years.

"What Obama is talking about doing is fundamentally inconsistent with how Democrats have been budgeting for the past two years," said Robert Bixby, executive director of the Concord Coalition, a group that advocates for balanced budgets.

The key difference is that Obama assumes that tax cuts enacted in 2001 and 2003, and temporary protections from the alternative minimum tax, will be extended indefinitely. His campaign advisors argued that extending these tax cuts should be assumed to have no cost.

The Congressional Budget Office, by contrast, assumes only what is in current law. Since the tax cuts expire in 2010, CBO and Democratic pay/go rules assume that there is a cost to the government of extending them.

Those rules would put Obama $2.5 trillion in the hole, according to Tax Policy Center figures, before he even begins on healthcare, new tax or spending proposals. That's because Obama has proposed extending many of those tax cuts and indexing the AMT for inflation.

CBO cannot change its baseline to "build in" the cost of extending current tax cuts unless Congress amends the 1985 Budget Act. More likely, observers said, is that House and Senate Democrats will write their budgets in a way that exempts the 2001 and 2003 tax cuts, and AMT provisions, from pay/go rules.

Such a change might not be unwelcome to Democratic tax-writers who have been saddled with coming up with revenue offsets to meet pay/go rules, one House aide said. But it could be a hard sell with the budget chairmen, Rep. John Spratt, D-S.C., and Sen. Kent Conrad, D-N.D.

"I don't think [the chairmen] will be real enthusiastic about doing any kind of baseline changes," said Hazen Marshall, a partner at the Nickles Group and former Senate Budget Committee staff director. "The question is, will the leadership or the White House prevail upon them to change that view?"

Fiscally conservative House "Blue Dog" Democrats, who have pressed for pay/go enforcement, will also have to be persuaded. Democratic leaders agreed to waive pay/go rules in several instances over the past two years, but not before drawn-out squabbles involving the Blue Dog coalition.

"Speaker Pelosi must find some accommodation for these two factions within her Democratic caucus," said G. William Hoagland, a former aide to Senate Majority Leader Bill Frist, R-Tenn., who is now Vice-President for Public Policy at CIGNA Corp.

"Or, and I don't think this would be a bad thing, Speaker Pelosi might have to reach out to House Republicans to find a bipartisan majority on the future of pay-go rules in the [next] Congress," Hoagland added in prepared remarks delivered Thursday at a conference in Washington.

One tack Democrats might take is to argue that in light of the effects of the financial crisis and the Bush administration's response - heaping on hundreds of billions in new debt - yesterday's arguments about pay/go seem less important.

"I'm not sure the old rules are relevant anymore," Rep. Jim Cooper, D-Tenn., who is a member of the House Blue Dog Coalition, said in an interview.

Cooper argued that Obama shouldn't have to live within the pay/go rules that congressional Democrats sought to apply to President George W. Bush's proposals. "It would be unfair to the new president to put him in a budget straitjacket," he said.

Cooper said Obama should convene a bipartisan group to develop a new approach to budgeting and pay/go, that should also look at U.S. government obligations and debt that is not currently counted in the CBO estimates.

"I think we've got to first get hold of the real numbers. We're not even close to the real diagnosis," he said.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com