(CNNMoney) — President Obama on Wednesday will propose a $3.77 trillion budget for 2014 that would cut deficits by $1.8 trillion over the next decade, according to senior administration officials.
Obama’s budget blueprint — which has already drawn criticism from the left and the right — will offer changes to Medicare and Social Security. It will also include tax increases that would primarily hit high-income households and corporations.
The plan will call for greater spending on infrastructure, early childhood education and nondefense research. Those investments would be paid for by other measures so that they don’t add to deficits, officials said.
The president’s budget is late this year, coming after the Senate and House have each passed separate and very different 2014 budget frameworks.
While it’s not expected to fly on Capitol Hill, Obama’s budget nonetheless sets an important marker for continuing debt talks with lawmakers.
Boost infrastructure spending: The president’s budget will call for a $50 billion investment to, among other things, repair highways, bridges, transit systems and airports. He would also create a National Infrastructure Bank to bring together public and private capital for important projects.
Change how inflation is measured: Obama has already gotten blasted from the left for supporting a switch to “chained CPI,” which is a new way to measure inflation that would reduce projected federal spending by slowing the growth in federal benefits that are annually adjusted for cost of living. Those include Social Security benefits.
His budget, however, will also call for ways to compensate for the change for low-income veterans, recipients of Supplemental Security Income and the oldest Social Security beneficiaries, a senior administration official said.
Chained CPI would also raise more revenue, since many parts of the tax code are adjusted for inflation every year — including income tax brackets, the standard deduction and contribution limits to 401(k)s.
By 2020, the use of chained CPI could mean an average tax increase of $311 among the nearly 81% of households that would see a tax increase, the Tax Policy Center estimates.
Cap value of itemized deductions: As he has proposed before, the president wants to limit the value of itemized deductions and exclusions for high-income households.
Normally a taxpayer multiplies her top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28%, which is below the top two income tax rates. So someone in the 39.6% bracket today would save $39.60 on a $100 deduction. Under Obama’s proposal, she would save $28.
Enact a Buffett Rule: Last year, Obama proposed the “Buffett Rule” as a guiding principle for tax reform.
The idea: to make sure that people earning more than $1 million paid their “fair share” of federal tax — which he defined as a minimum of 30%.
This year, he will include a more concrete version similar to one proposed in a bill last year by Sen. Sheldon Whitehouse, according to a senior official.
The Senate legislation would impose a minimum 30% effective federal tax rate on those with adjusted gross incomes above $1 million, although it phases in for those making between $1 million and $2 million.
Taxpayers subject to the Buffett Rule would still get a break for charitable deductions when calculating what they would owe under the Buffett Rule.
Impose new limit on tax-deferred retirement accounts: Among his new tax measures, Obama would set a limit on the tax-advantaged portion of an individual’s savings across IRAs and other tax-preferred retirement accounts.
The account balance threshold would be based on what could finance an annuity of $205,000 a year in retirement. In 2013, that would be $3 million, the administration estimates.
At that threshold, the proposal would affect far less than 1% of IRA and 401(k) account holders, according to estimates from the Employee Benefit Research Institute. Depending on how the threshold is adjusted in future years, however, that percentage could rise significantly.
Raise tax on cigarettes and other tobacco products: To fund expanded access to pre-K education, an idea raised in the State of the Union address, Obama will propose a new federal tax on cigarette and other tobacco products.
It won’t be the first time. In 2009, he signed into law a federal tax increase on cigarettes to help pay for an expansion of the State Children’s Health Insurance Program, which provides health care for 8 million children.
Raise tax rate on investment fund manager income: Managers of private equity, venture capital and hedge funds are taxed 20% on the portion of their compensation known as carried interest, essentially paying the long-term capital gain rate. Obama wants carried interest to be treated as ordinary income. The result: fund managers could pay a rate as high as 39.6%, or more than 2.5 times the rate they pay now.
Reduce deficits by $1.8 trillion: Obama’s debt reduction proposal comes straight from an offer he made to House Speaker John Boehner last year during their fiscal cliff negotiations.
The proposal would replace the automatic budget cuts that went into effect last month.
Close to $600 billion of the $1.8 trillion would come from new revenue — specifically the cap on itemized deductions and the Buffett Rule.
The other $1.2 trillion would come from spending cuts: $200 billion from defense and nondefense programs on the discretionary side of the budget. Another $400 billion from Medicare and other federal health programs in ways that largely affect hospitals and drug companies. And $600 billion in cuts affecting non-health spending on things like agricultural subsidies and unemployment insurance.
A senior administration official characterized Obama’s offer to Boehner, which these measures represent, not as a starting point for talks but a “sticking point,” noting that if Republicans can’t agree to include revenue as part of any negotiated package “there will be no deal.”
It is unlikely the president’s proposals will be adopted wholesale. But if they were, his budget would bring total deficit reduction in his tenure to $4.3 trillion.