By John W. Schoen Senior producer
msnbc.com
updated 2/7/2007 5:07:12 PM ET 2007-02-07T22:07:12

Congress sat down Wednesday to begin hashing over the White House’s $2.9 trillion budget proposal. And while no one expects the spending plan to make it through the process intact, the Bush budget has staked out the battles that will have a big impact on American’s own household budgets.

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Though thousands of line items deep, Bush's proposal for big increases in military spending would put pressure on a variety of entitlements and domestic spending. And the budget debate has already raised questions about whether the numbers add up.

To maintain tax cuts, increase military spending, fund programs like health care and education — while moving to a balanced budget in 5 years — something has to give. One of the biggest changes in the president’s proposal would be the way money is spent for consumers of health care.

The Bush plan calls for big savings in Medicare — some $66 billion over five years — much of which would come from funding for hospitals and health care providers. That could limit hospitals' ability to absorb the cost of providing care for uninsured patients who can’t pay for care. But the Bush proposal also calls for sacrifices from wealthy patients. Some $11.5 billion in savings would come from raising Medicare premiums for prescription drug plans for people who make more than $80,000 a year — or couples who make more than $160,000.

“That's a very reasonable thing to do,” said Kevin Hassett, director of economic policy at the American Enterprise Institute.  “It is a very generous benefit. It’s costing taxpayers who aren't retired lots of money, and the wealthy should pay more.

Bush has already proposed taxing health insurance premiums and then providing deductions for all but the wealthiest 20 percent.

Other domestic programs would also generate savings under the Bush budget — either by slowing increases or cutting back on total spending. Some $13 billion would be cut in state-administered programs like Community Development Block Grants, Head Start, Low-Income Energy Heating Assistance Program, special education and child care, according to the National Priorities Project.

In some cases, funds would be shifted from one domestic program to another. Increased education spending for schools in low-income areas would be offset by eliminating more than three dozen other education programs. The Bush budget would also add about $1 billion to the No Child Left Behind law to expand its reach in high schools. Increases in federally-funded Pell grants to help poor students attend college would be offset by eliminating another grant program for poor college students.

The White House also proposes spending more money to provide food stamps to elderly and working poor families and individuals by excluding retirement savings form income limits. But an estimated 185,000 current food stamp recipients would lose benefits.

But with roughly three-quarters of the budget gobbled up by Medicare and Medicaid ($919 billion), Social Security ($608 billion) and defense spending ($603 billion), there are limits to how much money can be diverted for domestic programs without tax increases.

Taxes up for grabs
Despite the president’s insistence on preserving the tax cuts that are set to expire in 2010, tax policy is also very much up for grabs. One of the Democrats’ major targets is the so-called Alternative Minimum Tax. Originally designed more than 30 years ago to make sure wealthy taxpayers paid their fair share, the AMT was not indexed to inflation and is now hitting an increasing number of middle class taxpayers. The Bush budget would provide $50 billion in AMT relief, but only for one year. AMT critics say a longer-term — and thus more costly — solution is required. Defenders of the plan say it’s a good start.

“You can solve the AMT by raising other taxes,” said Frank Donatelli, a former White House political director in the Reagan administration. “We need to take this one year at a time. If the economy remains strong we could probably do more in that regard."

The economic outlook will also have a lot to do with the effort to balance the budget. The economic assumptions in the presidents plan call for continued growth, low inflation and low unemployment for the next five years. So an economic downturn, and the likely drop in tax receipts it would bring, would mean bigger spending cuts or tax increases to keep the budget balancing plan on track.

While the Bush budget calls for some additional relief for middle income taxpayers, it would also hold the line on the big tax cuts made in 2001 and 2003 that are set to expire in 2010.

“I think there will be a discussion over extending some tax cuts — especially for the middle class,” said Christian Weller, senior economist at the Center for American Progress. “But once you take a more realistic look in terms of revenue projections in the long run, as well as on a spending side, you don't get to where the president wants to go, maintaining all of his tax cuts, especially for the high income earners and at the same time balance the budget by 2012.”

Balancing the budget has become a more pressing issue for voters’ of both parities as the ongoing budget deficit has left behind an growing pile of national debt, which now stands at $8.7 trillion — roughly $3 trillion larger than when Bush took office in 2001. The interest on that debt alone will chew through $261 billion dollars next year, or roughly 9 cents of ever tax dollar collected under the Bush’s proposed budget.

One way to raise more money it to go after people who don’t pay all their taxes. Though it’s impossible to know for sure, it’s estimated that several hundred billion dollars in taxes goes uncollected every year. Hiring more tax collectors — which the White House budget proposes — might help. But it’s not clear that enforcement alone is the key to closing the so-called “tax gap.”

“The  vast majority —  85 percent of tax gap  issues — are as a result of  people who have filed their  income taxes, businesses who  have filed their income taxes  and they've done so with the  honest intention of paying  their taxes as they're supposed  to,” said Alison Fraser, an analyst with the Heritage Foundation. “But they simply get caught up in the complexity of the 17,000  page tax code.  It's too complicated. People are trying to pay their taxes, but it's really hard for them to do so.”

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