Big challenges loom

WASHINGTON - After a year of relative peace in Washington's budget battles, President Barack Obama will lay out a $4 trillion budget on Monday that needles Republicans with proposals for higher taxes on the wealthy and businesses to pay for education, public works projects and child care.

The plan, expected to be dismissed by GOP lawmakers now running Capitol Hill, rolls out as the deficit is dropping and Obama's poll numbers inch higher. Though Republicans will march ahead on their own, they ultimately must come to terms with Obama, whose signature is needed on anything that is going to become law.

Big challenges loom: the need to increase the government's borrowing limit; a deadline for sustaining highway funding; a bipartisan effort to ease painful, automatic cuts to the Pentagon and domestic agencies. Those cuts are the byproduct of Washington's previous failures to tackle the government's deficit woes.

First on the agenda is the need to finalize the current-year budget for the Department of Homeland Security. It's tied up over a GOP demand to reverse Obama's November executive actions that extended work permits and temporary deportation relief to some 4 million people in the U.S. illegally. Funding for the department runs out Feb. 27. Obama planned a budget speech at the department Monday.

A defiant Obama challenged the GOP in his radio and Internet address Saturday.

"If they have ideas that will help middle-class families feel some economic security, I'm all in to work with them. But I will keep doing everything I can to help more working families make ends meet and get ahead. Not just because we want everyone to share in America's success - but because we want everyone to contribute to America's success," he said.

Republicans insisted they are the champions of the middle class.

"Expanding opportunity, protecting middle-class savings, holding government accountable: These are your priorities, which means they are Republicans' priorities," said Kansas Rep. Lynn Jenkins said in the GOP response to the president's radio address.

Obama's plan will contain familiar prescriptions. He wants higher taxes on upper bracket earners and the oil and gas industry. He is proposing new initiatives for education and child care. He is pitching investments in roads, bridges and other projects. And he is pushing for increases for annual agency operating budgets.

The requests come after a mostly tranquil year when Senate Democrats and House Republicans put in place the second year of a 2013 deal that eased the harshest of the automatic cuts. Republicans backed away from a confrontation over raising the government's borrowing cap.

This year will not be peaceful, though, largely because the White House will ask for a $38 billion increase for the Pentagon that Republicans probably will want to match. Obama's demand for a nearly equal amount for domestic programs sets up a showdown that may not be resolved until late in the year.

The centerpiece of the president's tax proposal is an increase in the capital gains rate on couples making more than $500,000 per year. The rate would climb from 23.8 percent to 28 percent. Obama wants to require estates to pay capital gains taxes on securities at the time they are inherited. He also is trying to impose a 0.07 percent fee on the roughly 100 U.S. financial companies with assets of more than $50 billion.

Obama would take the $320 billion that those tax increases would generate and funnel them into middle-class tax breaks. His ideas: a credit of up to $500 for two income families, a boost in the child care tax credit to up to $3,000 per child under age 5, and overhauling breaks that help pay for college.

The ideas, billed as a boost for the middle class, drew scorn from GOP tax-writers who want to focus on revamping tax laws.

But the tax increases, combined with the spending cuts, would allow the White House to say it can cut the deficit by about $1.8 trillion over the upcoming 10-year window, according to people briefed on the basics of the plan. The tax increases, especially the increase on capital gains, bring in far more over the longer term, helping the White House claim it would stabilize the debt in relation to the size of the economy for 25 years.

For 2016, the Obama budget promises a $474 billion deficit, about equal to this year. The deficit would remain under $500 billion through 2018, but would rise to $687 billion by 2025 - though such deficits would still remain manageable when measured against the size of the economy.

An outcry from his Democratic allies led the White House to retreat from a proposal to tax withdrawals from popular 529 college savings plans.

On spending, there's a plan for $60 billion over the next 10 years to pay for two years of community college for an estimated 9 million students and $80 billion to increase access to child care for low- and middle-income families. The administration wants to pay for a six-year renewal of highway and transit programs by taxing overseas business profits that would be "repatriated" back to the U.S.

In dysfunctional Washington, hard feelings linger still from the early 2013 tax increase that Obama forced upon Republicans. There's little hope of a "grand bargain" to fix the government's budget woes for the long term, but a need to address problems such as a shortfall in highway funding and easing cuts to the Pentagon's budget. Even such smaller steps will test the ability of Obama and Republicans controlling Congress to work together.