Bush's Budget Tricks

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It's one of the Kabuki rituals of Washington. Each year, a few days after the President's State of the Union address, the commander in chief submits his proposed budget to Congress. TV cameras show the phone book-thick documents coming off the government printing press. The party in opposition denounces the budget as reckless while the administration in power proclaims it tough but thoughtful, perfect for a changing world.

The $2.77 trillion dollar budget proposed for fiscal year 2007, beginning this October, is no different. But it's a particularly risky document for the Bush administration. First, it contains some significant entitlement cuts in an election year. Some $65 billion in entitlement savings are proposed, with about $35 billion coming out of the popular Medicare program. In 1996, Bill Clinton clobbered Congressional Republicans for their proposals to "cut" Medicare, and Congressional Democrats, who managed to kill Bush's Social Security plan last year, are sure to try to do the same this year. Republicans are especially worried about states with a high percentage of the elderly such as Florida, Pennsylvania and West Virginia, which all have Senate races this year.

In any case, some of the entitlement cuts are illusory. For instance, the Bush budget strangely projects $4 billion in oil leases for drilling in the Arctic National Wildlife Refuge as an entitlement cut. But Congress didn't approve ANWR drilling in the current budget and no one's counting on it passing this year. And the budget also includes $5 billion in cuts of agricultural subsidies, very similar to the ones Bush pushed last year to no avail. All said, Bushies are expecting a $423 billion budget deficit for the current fiscal year, up from their recent estimates of $341 billion, the highest ever in nominal terms—although, as the White House is happy to point out, not as a percentage of the budget. By Bush's own estimates, the deficit would decline until $189 billion in 2009 and then soar largely because of entitlement expenditures.

Beyond deficits, Bush may also have to answer for what is not being axed in the current budget. Funding for the Iraq and Afghanistan wars are mostly excluded from the budget. Instead it will be offered in "supplemental" or add-on spending requests, along with additional funding for Hurricane Katrina relief. Bush's Budget Director, Joshua Bolten, told reporters that he expects that the White House will request another $70 billion this year for Iraq. "This is a very expensive proposition," the former Goldman Sachs executive said of the wars. But the true number may well be higher because estimating costs of the Iraq War have been notoriously unreliable; back in 2003, the Administration thought Iraqi oil revenues would cover much of the wartime spending.

And while Bush's budget includes making the tax cuts enacted in 2001 and 2003 permanent—some, like the repeal of the estate tax, are due to expire in 2010—it counts on revenues from some unlikely sources. One of the biggest is the so-called Alternative Minimum Tax, which was designed many years ago to keep the rich from using deductions and other loopholes to get away with paying too little tax. But because of inflation, millions of middle-class Americans have now crept into the AMT zone—especially in high-tax states where state and local taxes are not deductible under the AMT—meaning that they'll have to pay additional taxes. (The IRS has a calculator to let you figure out if you're in the AMT).

The Bush budget assumes a "patch" to fix the AMT bracket creep, but only for this coming year. In other words, while denouncing the AMT's growing burden as a terrible problem, the Bush budget's long-term numbers count on it. When asked by TIME if keeping Americans from creeping into the AMT would cost the Treasury a lot, Bolten said: "It would increase the deficit. I don't have exact numbers on how large, and I believe even if the Congress were to decide to patch the AMT indefinitely, we would still show a very substantially declining deficit path." But some estimates, including those of the Congressional Budget Office, show AMT relief would cost $914 billion over the next decade.

In the coming days, all of Washington will pore over the budget to see what got whacked and what got more dough. Already Democrats are bashing Bush for eliminating a food assistance program for low-income seniors—though the Administration says it merely wants to move the Commodity Supplemental Food Program into the Food Stamps program. And some will question why there's $150 million in the budget to promote healthy marriages and fatherhood training. The partisan bickering is no different from any other traditional Washington spat—it's just that the stakes are a lot higher.