Tuesday, February 05, 2013

Obama Presses Plan to Delay Spending Cuts

Updated February 5, 2013, 2:57 p.m. ET

Obama Presses Plan to Delay Spending Cuts .

Wall Street Journal

WASHINGTON—President Barack Obama urged Congress to pass a small package of spending cuts and tax increases to delay the major spending cuts set to kick in next month, saying thousands of jobs and the nation's economic recovery hang in the balance.

"There is no reason that the jobs of thousands of Americans...not to mention the growth of the entire economy, should be put in jeopardy just because folks in Washington couldn't come together," Mr. Obama said in televised remarks Tuesday afternoon. A short-term measure, he said, would give Congress the room to continue work on a way to avoid permanently the cuts scheduled to begin March 1.

Congressional Republicans now reject any additional tax increases—to reduce the deficit, to postpone the impending spending cuts, or as part of an overhaul of the tax code.

Roughly $85 billion in spending cuts are scheduled to begin next month and run through Sept. 30, and then about $110 billion in annual spending cuts would begin Oct. 1 and continue for eight years. The cuts would hit defense spending and other domestic programs, such as education, transportation and housing, and would also cut certain payments to Medicare providers.

Mr. Obama said the specter of cuts is already affecting the economy and warned that further political dysfunction would derail growth. He said he is committed to take more steps to reduce the nation's deficit through modest cuts to social programs so long as they are done "hand-in-hand with a process of tax reform so that the wealthiest individuals and corporations can't take advantage of loopholes and deductions that aren't available to most Americans."

He said revenue from changes to the tax code should be used to reduce the deficit.

House Ways and Means Committee Chairman Dave Camp (R., Mich.), who has been planning for years to overhaul the tax code, flatly rejected Mr. Obama's approach.

"Tax reform should be about making the code simpler and fairer for American families and helping employers create more jobs," Mr. Camp said. "The president's proposal is nothing more than another tax hike to pay for more Washington spending."

On Tuesday, the Congressional Budget Office released its latest projections about the country's deficit. The CBO said the deficit has been cut in half in the past four years, but federal debt will still hit historic levels if more isn't done.

The automatic spending cuts set to kick in next month are known in Washington as the "sequester." They were scheduled to begin Jan. 2, but they were averted for two months as part of the fiscal-cliff deal. The sequester was a product of the 2011 political agreement that raised the debt ceiling in exchange for deficit-reduction measures.

House Democrats have drafted a plan to replace all of the March 1 spending cuts with a plan that calls for both tax increases and spending cuts. The proposal, drafted by rep. Chris Van Hollen (D., Md.), calls for tax increases on the wealthy, reducing tax breaks for oil and gas companies and a reduction in farm subsidies.

House Speaker John Boehner (R., Ohio) issued a written statement ahead of the president's speech Tuesday: "Republicans have twice voted to replace these arbitrary cuts with common-sense cuts and reforms that protect our national defense. We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes. The president's sequester should be replaced with spending cuts and reforms that will start us on the path to balancing the budget in 10 years."

The White House has pointed to the prospect of cuts as part of the reason why the nation's gross domestic product shrank for the first time in 3½ years during the fourth quarter.

Mr. Obama's proposal to avert the sequester, at least temporarily, is in line with his past proposals to reduce the deficit without across-the-board spending cuts.

Mr. Obama is seeking a combination of spending cuts and changes to the tax code that raise more revenue. If policy makers pursue a short-term fix for the sequester, they are likely to target controversial programs that members of both parties have tried to end for years.

One example could be the roughly $5 billion in direct payments the government makes to certain farmers. This program was close to being eliminated but ended up extended for another year several weeks ago.

Most Democrats agree with the president that the spending cuts should be replaced with a mix of changes to the tax code and spending cuts. Senate Democrats are expected to hash out their differences over details at a two-day retreat in Annapolis, Md., Tuesday and Wednesday.

On taxes, the White House has said it plans to go after specific tax breaks as a way to bring in more revenue. Mr. Obama on Sunday singled out so-called carried interest, which is a share of a partnership's profits that is taxed at capital-gains tax rates rather than at higher income-tax rates. In 2013, the top rate on long-term capital gains is 20% for taxpayers in the highest bracket, while the top rate on ordinary income is 39.6%.

Critics say that carried interest is actually compensation to the recipients and should be taxed at the higher rates. "This proposal would affect the 20% of profits that managing members of venture capital, hedge funds, and private-equity funds typically receive," says Stewart Karlinsky, a professor emeritus at San Jose State University in California.

—Damian Paletta and Laura Saunders contributed to this article.
Write to Jared A. Favole at jared.favole@dowjones.com

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