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The President's FY2009 Budget proposes to spend $3.1 trillion, supported by revenues totaling $2.7 trillion. That would leave a deficit of $407 billion, roughly a third larger than that predicted for FY2008. Over the subsequent four years, the administration projects that spending will rise 9.4 percent, less than a third of the 30.0 percent growth of revenues, and that the FY2013 budget will show a $29 billion surplus. That outcome assumes that discretionary spending will grow more slowly than the rate of inflation, that entitlement spending will be restrained, that nothing will be spent on the wars in Iraq and Afghanistan after the first half of FY2009, that the 2001 and 2003 tax cuts will be made permanent, and that relief from the alternative minimum tax (AMT) will occur only for 2009. Many observers doubt that those assumptions will prove true. The recent deterioration of tax revenues makes it even less likely that the budget surplus projected by the administration will in fact occur.
Overview of the President's Budget
Administration's View of the Nation's Fiscal Outlook
Federal Revenues and Outlays under the President's FY 2009 Budget (chart)
The New Congress and the Budget: Perspectives From Three Former CBO Directors
The Wall Street Journal's Jackie Calmes moderated this First Tuesday panel with Edward Gramlich, Robert Reischauer and Rudolph Penner. The three former Congressional Budget Office directors previewed how the 110th Congress will create a blueprint for spending trillions of dollars in fiscal year 2008 and beyond.
Spending Proposals
1. The President proposes to spend $515 billion on defense in FY2009, 7.5 percent more than in the current fiscal year. In addition, the President asks for $93 billion in supplemental funds for 2008 and $142 billion for 2009 for the War on Terror, including the wars in Iraq and Afghanistan.
2. The President proposes to slow the growth of spending in Medicare and Medicaid through various mechanisms to save a total of $178 billion over five years.
3.The 2009 Budget proposes to hold the rate of growth for non-security discretionary spending below one percent and hold it at that level for the subsequent four years, well below the 4 percent rate of inflation over the past year.
Revenue Proposals
1. Make 2001 and 2003 tax cuts permanent
The President proposes to make permanent various tax cuts scheduled to expire after 2010. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created a new 10-percent individual income tax rate bracket, reduced marginal income tax rates for individuals, increased the child credit and extended its refundability, reduced marriage penalties, eliminated the phase-out of personal exemptions and the limitation on certain itemized deductions for higher-income taxpayers, provided additional incentives for education, increased IRA and pension incentives, provided relief from the alternative minimum tax (AMT), eliminated the estate and generation-skipping transfer taxes, and modified the gift tax. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) lowered tax rates on qualifying dividends and on capital gains through 2008. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extended that provision through 2010. Under current law, all of the provisions of all three tax acts will sunset after 2010.
Making the tax cuts permanent would reduce revenues relatively little before 2011, when the cuts would otherwise expire; over FY2008-10, the administration estimates that the cost would total about $16 billion. Revenue losses would jump to $158 billion in FY2011 and $237 billion in FY2012. Over the ten years from 2009 through 2018, revenues would fall by nearly $2.2 trillion.
In addition to losing revenue, the proposal would be highly regressive. TPC estimates that more than two-thirds of the extended tax cuts would go to the fifth of the population with the highest incomes in 2011 and more than a third would go to the top 1 percent of the income distribution. After-tax income of the highest income one-tenth of one percent would be nearly 8 percent higher than if the tax cuts were allowed to sunset.
2. Provide a new standard deduction for health insurance (SDHI) ($15,000 for family coverage and $7,500 for single coverage)
The President proposes a new standard deduction for health insurance (SDHI) of $15,000 for family coverage ($7,500 for single coverage) for all families who purchase health insurance that meets minimum requirements, whether directly or through an employer. The deduction would apply to both income taxes and payroll taxes. In addition, any premiums paid by employers for a worker’s health insurance would be included in taxable income, again for both income and payroll taxes. The proposal would remove virtually all other tax incentives for health care costs; the change would leave only Health Savings Accounts (HSAs) and the deductibility of high medical costs (which would be limited to Medicare beneficiaries).
The proposal would reduce federal revenues by about $106 billion over the 2009-2013 period because the deduction would exceed the premiums currently excluded from taxable income. Because the deduction would grow more slowly than health insurance premiums, however, that situation would reverse itself over time and the proposal would increase revenues by more than $138 billion over the subsequent five years.
A TPC analysis of the proposal concludes that although the change would equalize the tax treatment of health insurance obtained through an employer and outside of employment, various features of the proposal could have adverse effects, particularly for low-income and less healthy people. (See all TPC work on health insurance.)
3. Provide relief from the alternative minimum tax (AMT) for 2007
The President proposes renewing the higher AMT exemptions through the 2008 tax year. Under current law, AMT exemptions in 2008 are $33,750 for single filers, $45,000 for married couples filing jointly, and $22,500 for other married couples. The President would raise those values to $46,250, $70,050, and $35,025, respectively. Without the renewal, nearly 27 million taxpayers would be subject to the AMT with their 2008 tax filings. TPC analysis indicates that the higher exemption levels would limit the number of taxpayers on the AMT to roughly 4 million in the 2008 tax year. The administration estimates that the proposal will reduce revenues by about $58 billion over the FY2008-2010 period. (See TPC analysis.)
4. General Explanations of the Administration’s Fiscal Year 2009 Revenue Proposals explains all of the President’s tax proposals.
Budget Documents
President's budget
Historical tables
State-by-state tables
Summary documents (PDF)
