Campaign Pledges Collide With New Fiscal Reality

By JONATHAN WEISMAN As President Barack Obama finalizes his long-range budget road map for release next week, he is finding it increasingly difficult to translate some campaign promises into policy in the face of a complex economic crisis. Mr. Obama spent Thursday reassuring Canadians that his campaign talk of reopening the North American Free Trade Agreement would not actually impede free trade. His budget writers are struggling to square promises of rolling back George W. Bush's tax cuts with combating the recession. One campaign applause line -- about ending tax quirks that he said encourage U.S. corporations to move jobs overseas -- is facing a wall of opposition from companies pleading for relief in a global downturn. House Speaker Nancy Pelosi, with President Obama this month, says an immediate rollback of some Bush tax cuts would show resolve on the deficit. Deputy Secretary of State James Steinberg, speaking to reporters aboard Air Force One returning from Canada, said that "little issues" have fallen by the wayside as the economy rises in importance. NAFTA didn't even come up in the talks he saw in Ottawa. "There was not a kind of narrow focus on little issues," Mr. Steinberg said. "It was a very strategic discussion...heavily focused on the economy." The economy has become the prism through which almost all policies are now being viewed. When the president asked Canadian Prime Minister Stephen Harper where his focus was, "he said it's the economy, the economy, the economy," Mr. Steinberg recalled. In Mr. Obama's budget blueprint, set for release Thursday, he is almost certain to wait until 2011 to allow tax rates to go up on families earning at least $250,000, according to congressional aides and lobbyists discussing budget matters with the administration. That decision would come despite the urgings of prominent allies, such as House Speaker Nancy Pelosi (D., Calif.), who say an immediate rollback of some Bush tax cuts would show resolve on a deficit heading toward $2 trillion. In his speech to a joint session of Congress Tuesday night, Mr. Obama will stress the decisions that must be made "collectively to get ourselves back on a path toward some sustainable fiscal track," White House spokesman Robert Gibbs said Friday. But some tax proposals from the campaign, such as immediately taxing the overseas earnings of U.S. companies, are drawing resistance from business. The offshore tax proposal alone could raise about $50 billion over 10 years. Getty Images"That will be the largest fight they have ever had with the business community," warned Kenneth Kies, a top Washington business-tax lobbyist. "And they will probably lose." Mr. Obama took an uncompromising stand on such issues during the campaign, appealing to angry voters with his pledges to repeal tax breaks that he said rewarded corporations that retain earnings overseas. Other proposals are more likely to make their way into Mr. Obama's fiscal plan, according to congressional and business sources, though they could still face big fights on Capitol Hill. The upcoming budget is likely to call for the elimination of subsidies to private managed-care companies offering Medicare plans, a savings of as much as $7 billion a year. He is also expected to make good on a promise to propose allowing the federal government to negotiate for lower drug prices for Medicare. The president will likely embrace candidate Obama's pledge to force hedge-fund and private-equity managers to pay income-tax rates on the slice they take of their clients' investment earnings. Those earnings are now taxed as capital gains, at 15%, rather than at the 35% top income-tax bracket most would otherwise pay. The nonpartisan Joint Committee on Taxation estimated in 2007 that such a change would net the government $25.6 billion over 10 years, although the collapse of Wall Street since then is likely to greatly diminish the government's take. A tax on Superfund polluters could also be revived, according to a half-dozen lobbyists, congressional aides and tax experts familiar with the White House's thinking. "Ultimately, it's not going to be enough, but it's a start" toward reducing the deficit, said Steve Wamhoff, legislative director of Citizens for Tax Justice, a liberal advocacy group. Advocates, such as Sen. Byron Dorgan (D., N.D.), are still pushing Mr. Obama to make good on his tax promises. But with the economy reeling, businesses are bracing for a fight. Mr. Kies said most of the recent significant tax increases came during recessions. The front line of the battle may be with the high-technology industry, which largely backed Mr. Obama's economic-stimulus plan, and which has parked billions of dollars in profits in low-tax countries where much of their growth and manufacturing take place. "While Europe and Asia are lowering rates to attract investment, we should not be making it harder for our companies to compete globally," said Ralph Hellman, a senior lobbyist for the Information Technology Industry Council. Write to Jonathan Weisman at jonathan.weisman@wsj.com