On February 2, 2015, President Obama submitted his FY 2016 Budget Proposal to Congress, echoing many elements outlined in his State of the Union address. The Budget proposal exceeds restrictive spending caps (“sequestration”) mandated by Congress four years ago and proposes new capital gains and bank taxes, emphasizing tax credits to help the middle class, infrastructure investment, and free community college. The President’s $4 trillion Budget outlines his priorities for his last two years in office as well as sets the stage for the next Presidential election.
The President’s Budget includes changes to the four-year, $302 billion GROW AMERICA Act legislative proposal from last year’s budget, now offering an ambitious six-year, $478 billion public works program of highway, bridge, and transit upgrades, financed in part by a one-time mandatory tax on profits that US companies have amassed overseas, known as repatriation. The 14% tax on accumulated foreign profits – significantly lower than the current top rate of 35% – would generate $238 billion in revenues; the remaining $240 billion would come from the existing federal gas tax which funds the Highway Trust Fund. While there are numerous ways to structure a repatriation tax break, both within and outside of tax reform, the general notion of directing repatriated revenues to infrastructure seems to have some bipartisan support in Congress. Recently, Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) proposed paying for highway and bridge fixes by letting companies voluntarily pay taxes on foreign earnings at a one-time rate of 6.5%. But all financing mechanisms are likely still on the table, including raising the gas tax, as evidenced by the bipartisan bill introduced by Senators Patty Murray (D-WA) and Bob Corker (R-TN) to increase the gas tax by 12 cents over two years and index it to inflation. Among the many policy changes in the GROW AMERICA Act is a proposal to double the popular TIGER transportation grant program to $1.25 billion per year, to be funded from the Multimodal account of their proposed Transportation Trust Fund, rather than from annual appropriations as is the case currently.
In addition to proposing increased federal funding for surface transportation, the Budget proposes a new category of municipal bonds, Qualified Public Infrastructure Bonds (QPIBs), to attract additional private capital to infrastructure investment. Recently announced as part of the Build America Investment Initiative, but requiring legislation to implement, QPIBs would expand the resources available to states and municipalities to fund infrastructure projects by allowing issuance of tax-exempt debt for projects with significant private sector participation.
QPIBs could be used in public-private partnership arrangements for publicly-owned, privately-operated, managed, or leased investment arrangements for airports, ports, mass transit facilities, water, sewer, waste disposal facilities, and surface transportation projects. Interest income earned on QPIBs would not be subject to the Alternative Minimum Tax, making QPIBs a potentially more attractive option than other qualified private activity bonds.
Another element of the FY 2016 Budget Proposal requiring legislation is providing students free community college for those annual income earners at or under $200,000 a year. Estimated to benefit millions of students annually, the proposal applies to students of all ages with a 2.5 GPA who attend school at least half-time and are making steady progress towards a degree. To qualify, community colleges would have to offer academic programs that fully transfer credits to local public four-year colleges and universities or training programs with high graduation rates that lead to in-demand degrees and certificates. They must also adopt evidence-based institutional reforms to improve student outcomes. The Administration believes this proposal has bipartisan support.
The Budget proposes improving access to high-quality child care and early education by tripling the maximum Child and Dependent Care Tax Credit (CDCTC) for families with children under the age of five and supports universal preschool by substantially increasing funding for the Department of Education’s Preschool Development Grants.
Building on the Promise Zones initiative, the Budget proposes creating the Upward Mobility Project which will allow up to ten communities, states, or consortia of states and communities to combine funds from four existing block grant programs. Designed to promote opportunity and economic development and reduce poverty, it will test promising approaches to helping families become more self-sufficient and to revitalizing communities. The Budget also encourages states to develop fully paid family leave programs by providing funding for the initial set-up and half of the costs for as many as five states.
As noted, the Budget exceeds the proposed sequestration spending caps. The Budget Control Act of 2011 (P.L. 112-25) established sequestration, mandating total projected spending cuts of $1.2 trillion evenly divided over the nine-year period from FY 2013 to FY 2021. Sequestration applies to discretionary spending – anything that Congress funds each year through the appropriations process. Social Security, Medicare, Medicaid, and the Highway Trust Fund are exempted, but sequestration applies to virtually everything else, including defense, housing, veterans’ programs, education, and research. The two-year bipartisan budget deal brokered by Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WS) (P.L. 113-67) has expired and sequestration is reinstated in FY 2016.
With the budget deficit down to pre-2008 levels, the proposed Budget ignores sequestration, which the President maintains will hurt domestic programs and military readiness. Spending would be set at $74 billion above the sequester cap, which is approximately a 7% increase in 2016 spending over levels that would trigger sequestration. The plan provides $530 billion on the non-defense discretionary side, which is an increase of $37 billion over spending caps, and $561 billion in defense spending, which is an increase of $38 billion over the caps.
Sequestration was originally imposed as a method for forcing a compromise that would stave off the across the board cuts, and it is expected that Congress will come to an agreement this year to prevent sequestration from going into effect.
The release of the President’s Budget kicks off the FY 2016 budget and appropriations process, which will begin soon in the House and the Senate, and sets up a confrontation with the Republican-controlled Congress, although Republicans are divided. Some have vowed to rein in deficit spending, while others have indicated a desire to break spending caps to increase defense spending. Despite the potential battles over funding levels, it is possible that both parties could find agreement on infrastructure proposals, middle class tax credits/corporate tax reform, and trade authorizations.