BUDGET:

White House proposal gives ax to fossil fuel tax breaks, some Interior programs

President Obama will roll out a sweeping federal budget proposal today that would eliminate subsidies for fossil fuels, invest more money in clean energy projects and cut funding for 120 federal programs, including some at the Interior Department.

The fiscal 2011 budget blueprint also includes a placeholder for revenue from a cap-and-trade climate bill -- recognizing efforts in Congress to advance the legislation without assuming any of its funds would go into the general treasury.

The $3.8 trillion budget includes "tough choices" to cut some federal programs, White House communications director Dan Pfeiffer said yesterday. The budget seeks to reduce or eliminate 120 different programs for a total savings of $20 billion. The cuts would include two grant programs at the National Park Service and an abandoned mines payment program at the Interior Department.

Some of the proposed cuts repeat suggestions that Congress has rejected in previous budgets. Pfeiffer said the administration would continue to push for them this year.

"There was a lot of opposition to some of the cuts we proposed last year, but about 66 percent of them were actually enacted into law. Some that we didn't get are back in this budget," Pfeiffer said in a press call yesterday. "We are going to keep pushing them because we don't believe that just because it has a powerful constituency on Capitol Hill or on K Street, wasteful programs should be continued."

The Obama administration will release the details of the budget later today, and White House Office of Management and Budget Director Peter Orszag and Treasury Secretary Timothy Geithner will head to Capitol Hill this week for a marathon series of hearings to defend the proposals before the budget and tax panels on both sides of the Hill.

They will have to defend a bold proposal to take away some long-held federal tax breaks for fossil fuels and redirect the money toward "clean energy" programs. Orszag said the budget would "eliminate subsidies for fossil fuels" and invest $6 billion in clean energy projects. The proposal would cut tax preferences for oil, gas and coal companies, saving $40 billion dollars over the next decade, according to OMB.

"We want to expand research and development to spur innovation," said Orszag. "[The investment] to spur clean energy is intended to move us toward a clean energy future and works in concert with removing the subsidy for fossil fuels to move us more aggressively there."

The administration proposed a similar energy overhaul last year. The fiscal 2010 budget blueprint included a repeal of several oil industry tax incentives and new taxes for Gulf of Mexico producers to close "loopholes" that allowed companies to avoid royalty payments. Those provisions drew a swift rebuke from the oil industry and Republican and Democratic lawmakers from oil-producing states.

The 2010 proposal was estimated to total $31.5 billion in cuts to oil and gas payments over a decade. It would have eliminated oil and gas companies' ability to claim a deduction on domestic manufacturing income, repealed expensing of intangible drilling costs and charged new fees on nonproducing Gulf of Mexico leases, as well as other changes to royalties and rates.

Across the various agencies, the fiscal 2011 budget has more than $61 billion for various research and development programs, a 6.4 percent increase over last year. That includes more than $100 billion to help states and local governments invest in infrastructure, $4 billion for national and regional infrastructure projects and $6 billion for research, development and demonstration of clean energy technologies.

Freezes and cuts

In an effort to make a dent in the looming federal deficit, Obama's budget proposes keeping nondefense discretionary spending at fiscal 2010 levels for the next three years. In total, it proposes $1.415 trillion for discretionary spending next year. It also seeks to eliminate some significant areas of federal spending, including tax cuts for the wealthy that are favored by Republicans.

The budget freeze is not across the board. Some programs, like clean energy grants, would go up, while others would be eliminated. Pfeiffer said yesterday that Obama will hold Congress to the overall 2010 spending levels -- even if it means making good on the veto he promised in his State of the Union address, should spending go over those limits.

"The president was very clear during the State of the Union that he is quite serious about this, using a veto if necessary," Pfeiffer said.

Key Democrats on Capitol Hill have shown some hesitation to sign up for the White House spending freeze. Leaders on the House and Senate Appropriations committees said last week that they support the idea of budget restraint but will have to examine Obama's budget proposals carefully, since many programs may need spending increases.

Republicans have indicated they would like to take the spending cuts even further. House Majority Leader John Boehner (R-Ohio) yesterday called the discretionary freeze a "good first step" but said it should be extended to all agencies, including the Defense Department.

"We should be going through this budget line by line and, and asking the question, is this spending worth having to borrow money that our kids and grandkids are going to have to pay back? That's the real question," Boehner said on NBC's "Meet the Press." "And if we went through the budget line by line like that, I think there's a lot more spending that we could cut."

The administration's budget would zero out funding for dozens of federal programs. Among them are the "Save America's Treasures" and "Preserve America" grant programs at the National Park Service. President Clinton initiated the Treasures program in 1998 as an effort to mark the millennium by directing federal and private funding to projects to protect cultural resources such as historic structures, collections, artwork, maps and journals.

The Save America's Treasures program has funded more than 700 projects across the country and internationally. It helped pay to restore the American flag that inspired the "Star Spangled Banner" for the Smithsonian Museum of Natural History, the Benjamin Franklin House in London, England, and projects at the Washington Monument and a Frank Lloyd Wright house in Pennsylvania. To date, the program has raised more than $350 million in federal and private funds, according to its Web site.

The administration wants to eliminate the program because its benefits are unclear, given the lack of "rigorous performance metrics and evaluation efforts," according to the White House.

Also on the chopping block is the Interior Department program that gives abandoned mine land payments to certified states. Obama wants to eliminate the program because of concerns about its payment structure. The distribution formula for the program allows states that have already cleaned up most of the abandoned mineland sites, like Wyoming, to continue to receive payments because of the large coal production there.

Other cuts include a brownfields economic development initiative at the Department of Housing and Urban Development. An explanation on the White House Web site says Obama is a "strong advocate" for brownfield cleanups and urban projects, but the small HUD project is duplicative of other programs. Instead, the budget will direct more money to larger programs.

"We went line by line through the federal budget to look for ways in which we can save money," Pfeiffer said. "Where there was waste, duplicative programs or programs that have outlived their usefulness, they were eliminated or reduced."

Cap and trade

The fiscal 2011 budget proposal will reflect Congress' efforts to cap greenhouse gas emissions by showing a "net zero effect" in terms of cash flowing through the government's coffers, according to sources familiar with the budget.

Obama last year drew widespread criticism from both parties when he released the 2010 budget assuming a cap-and-trade program would raise some $650 billion over 10 years via a full auction of emission credits, with the money primarily going to pay for middle-class tax cuts and development and deployment of clean energy technologies.

Sen. John Kerry (D-Mass.) last week called that approach a "mistake" and predicted Obama would not take the same course this time around.

"See, what happened last time was it went into the federal Treasury and it was unaccounted for," said Kerry, a lead Senate author on this year's version of climate legislation. "That set off a lot of alarm bells with people. That's not what it's meant to be, and that's not what's going to happen."

A source familiar with the Obama budget said the new plan would recognize that Congress continues to work on cap-and-trade legislation but won't make any revenue assumptions with specific dollar figures. Instead, the budget is expected to include a footnote explaining that any revenues that do flow through the Treasury are to be used primarily for climate-related purposes, such as to offset the effects to consumers and industry.

"In terms of the budget itself, it has a net-zero effect," the source said. "It's a much simpler budget presentation that recognizes how the legislation is developing through the House and Senate."

According to the Congressional Budget Office, the House-passed climate bill (H.R. 2454) would increase government revenue by $873 billion through 2019 and also increase direct spending by $864 billion in the same time period. Democratic sponsors of the bill said the new revenue -- raised by an auction and free allowances -- would be channeled back to the public and industry through tax credits and rebates.

Of critical importance for the House bill's sponsors, CBO also said the legislation would actually help pay down the federal deficit by about $9 billion over a decade.

Kerry and other Senate climate bill sponsors have not decided whether they will use a cap-and-trade system for controlling greenhouse gas emissions, let alone how they would divide up emission allowances or what percentage of the credits would be auctioned. Should they even get that far, those decisions would be critical for CBO as it determines what effect the legislation has on the federal budget. Senate rules also require that any major bill cannot add $5 billion to the federal deficit in any of the five decades following enactment (E&E Daily, Oct. 29, 2009).

During his State of the Union speech last week, Obama repeated his calls for Congress to pass a comprehensive energy and climate bill. The president urged Republicans and moderate Democrats to compromise on the package, and he said he was open to an expansion of nuclear power and offshore exploration for oil and gas.

But Obama did not use the words "cap and trade," prompting some lawmakers to question just how wedded the administration is to the plan. Also unclear is where the Obama administration stands on the distribution of emission allowances. Obama campaigned for the White House in support of 100 percent auction. His 2010 budget reflected that approach, sparking complaints from Democrats and Republicans on Capitol Hill, as well as key industry constituents like Duke Energy CEO Jim Rogers.

White House officials did not respond to request for comments about the climate components of their fiscal 2011 budget.

Headed into the new year, former CBO Director Douglas Holtz-Eakin, said he thought Obama would leave the cap-and-trade funding assumptions in the budget because it improves the fiscal outlook over the next decade, even if it creates a political storm.

"You don't have the luxury of chucking your proposals overboard," said Holtz-Eakin, who served during the 2008 presidential campaign as a top economic adviser to Republican nominee John McCain.

Several Senate Republicans cautioned against making any budget assumptions because they doubt the authorizing legislation has any chance of making it into law.

"I think to base a budget upon the passage of an economywide cap and trade this year would be a very risky bet," said Senate GOP Conference Chairman Lamar Alexander (R-Tenn.). "It's hard for me to imagine economywide cap and trade passing the Senate in 2010."

Sen. John Barrasso (R-Wyo.) said he hoped the revenue would not be included in the president's draft budget. "Clearly, the sentiment of the Senate is that's not going to be something that's going to pass," he said.

Senate Energy and Natural Resources Chairman Jeff Bingaman (D-N.M.) acknowledged that there may be a lesson from last year's budget debate. "That's a less reliable source of revenue than they might have thought it was a year ago," he said.

Considerable questions remain over whether Congress will even complete its work on a comprehensive cap-and-trade bill during an election year when many lawmakers would prefer an all-out focus on the economy. Sen. Sheldon Whitehouse (D-R.I.) urged Obama to include the funding commitment for cap and trade, saying it would "send a positive signal about continuing forward."

Whitehouse added: "It would certainly signal less confidence in revenues if he leaves them out of the budget."

Kerry last week said "everything is on the table" as he leads talks on where to go with the Senate climate and energy bill, including limits on individual sectors of the economy. Kerry also said he is not planning to push for moving the climate bill via the fast-track budget reconciliation process that would only require 51 votes, rather than the 60 needed to defeat a filibuster.

White House climate and energy adviser Carol Browner and Senate Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) advocated the reconciliation approach in 2009.

"I'm not ruling anything out, but I'm not suggesting anyone has ever talked about that right now," Kerry said. "It's not been a conversation and nobody has made that suggestion, and we hope we're going to get 60 votes for this or more."

Schedule: The Senate Budget Committee hearing is tomorrow at 10 a.m. in 608 Dirksen. The House Budget Committee hearing is tomorrow at 2 p.m. in 210 Cannon. The Senate Finance Committee hearing is Thursday, Feb. 4, at 10 a.m. in 215 Dirksen.

Witness: Office of Management and Budget Director Peter Orszag.

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