Gleams of hope for '08 budget deal

Within hours of the arrival Monday of President Bush's $2.9 trillion budget proposal on Capitol Hill, Democrats dubbed it "disingenuous" and "filled with debt and deception" – not unlike their response to previous Bush budgets.

The chairman of the House Budget Committee, Rep. John Spratt Jr. (D) of South Carolina, questioned if even Republicans would rally around it.

Despite such predictions, GOP leaders have already pledged to rally around one part: tax cuts. "Raising taxes now will not only increase the family tax burden, [but] it will have devastating consequences on our robust economic growth that is creating the new jobs of tomorrow," said House Republican leader John Boehner (R) of Ohio.

But behind the tough talk, conditions exist for a potential compromise in this year's budget negotiations.

For the first time in Mr. Bush's tenure as president, Democrats control both the House and Senate. Their leaders are convinced that to keep that control after 2008 – and even to take back the White House – they need to show that they can govern. That means avoiding a budget train wreck and completing spending bills for the next fiscal year.

At the other end of Pennsylvania Avenue, an unpopular president is looking to leave a domestic legacy.

"There's an opportunity for compromise this year, because if Bush wants to get anything done in the last two years, he's going to have to work with the Democratic Congress to do it," says Robert Bixby, executive director of the Concord Coalition, a public interest group that aims to balance federal budgets.

"And if Democrats come across as just being obstructionist or tax-and-spend, the public could take offense. Presuming that they both want to accomplish something, there's an opportunity," he adds.

In the run-up to the release of the budget this week, administration officials have taken careful soundings on Capitol Hill and consulted widely with Democrats. Rob Portman, director of the Office of Management and Budget (OMB), says he began his consultations on the budget this year by going first to Congress "to hear what they were looking for," and then to the administration.

In response to urging from Congress, especially Democrats, the Bush administration for the first time this year included war costs as part of the regular budget. With war costs, the proposed fiscal year 2008 budget raises military spending 11 percent and nondefense domestic spending by 1 percent. While praising the move, Democrats note that OMB's $50 billion estimate for the Iraq war in 2009 is well below previous spending levels. Administration officials describe it as a "place holder."

OMB officials say they also reined in the number of user fees used to demonstrate "savings" in the budget that have little chance of being enacted by Congress.

In a move that budget watchers say could be significant, Mr. Portman says that he heads into budget negotiations this year with "no preconditions" – which he describes as a "change in position" for the Bush White House.

"Our attempt here is to provide a credible, more transparent budget and one that is more realistic," he said at a briefing on Monday. "And so there are a number of different areas where we tried to be responsive [to Congress]. One is showing more war costs in greater detail."

One flash point in budget negotiations will be Bush's proposal to make tax cuts set to expire in 2010 permanent – at a cost of $1.6 trillion over 10 years. Democrats call the proposal a nonstarter.

But budget analysts note that the White House has already put taxes on the table, with one proposal to reform the alternative minimum tax (AMT) in a revenue-neutral way. The AMT was designed to ensure that the highest income tax payers paid their fair share of taxes, but it now impacts millions of Americans.

"The idea that you do AMT reform in a revenue-neutral way means you're going to have to raise taxes from somewhere else," says Mr. Bixby. "They're implicitly putting tax revenues on the table as a way to pay for something else."

For Democrats, the flash point could be the president's proposal to reduce Medicare benefits for upper-income seniors.

While early discussions with lawmakers over reining in entitlement spending prompted "immediate negative response," Portman says he also heard "a lot of response that says, 'Let's look at this,' on both sides of the aisle."