The White House is also still demanding that top earners pay more. Taxes: Obama budget would hit middle class

President Barack Obama rarely misses a chance to call on upper-income Americans to pay more taxes.

But his annual budget is doing more to target middle-class taxpayers than any of his previous proposals, calling for caps on deductions, changes in the way some tax benefits are calculated and a big hike in cigarette taxes — all proposals that would make middle-class Americans pay more.


Obama’s budget is still being picked apart on Capitol Hill, but his openness to an even wider range of tax increases will frame the coming fiscal debates.

( Also on POLITICO: Obama with GOP on tax extenders)

“It’s a new paradigm,” said Bob Williams, a senior fellow at the nonpartisan Tax Policy Center. “This is the first budget he’s presented that has proposed raising taxes on people below the $250,000 thresholds he’s maintained over the past five years.”

It also has some Democrats worried, especially those who represent districts where their constituents make a good salary but don’t see themselves as rich stand to get hit.

“It’s a concern,” Rep. Allyson Schwartz, a Pennsylvania Democrat who represents some of Philadelphia’s suburbs, told POLITICO in reference to Obama’s proposed deduction cap. “For many people, the mortgage tax deduction is your biggest deduction. It’s very significant. And just as the housing market is coming back, there’s a question about the timing of that.”

Republicans are lapping up the proposals as evidence — despite Obama’s rhetoric — the administration won’t spare the middle class from higher taxes.

( PHOTOS: 12 Republicans resigned to higher taxes)

“The president keeps breaking his campaign pledge to not tax the middle class — first with his health care law and now with these tax hikes in his budget,” Utah Sen. Orrin Hatch, the top GOP member on the Finance Committee, told POLITICO. “As I’ve said before, when it comes to this White House and its penchant for wanting to raise taxes, everyone — including those middle-class families the president says he wants to help — needs to watch their wallets.”

Three proposals in the budget would hit the middle class in ways the president has not previously suggested.

The president’s proposal to change the way inflation is calculated means that benefits like the earned income tax credit would grow at a slower pace. His proposed deduction cap would hit people with taxable income as low as $183,000. And, policy experts say the budget plan to raise taxes on cigarettes is regressive.

Of course, the White House isn’t backing down from its demand that top earners should pay more taxes to get the deficit under control.

( Also on POLITICO: Poll: Put brakes on gas tax)

In fact, the administration went beyond proposing only recycled policies — such as the Buffett rule imposing a minimum 30 percent tax rate on income exceeding $1 million — by limiting the amount of tax-advantaged contributions that can be funneled into individual retirement accounts.

And Obama has made clear that he won’t back options like the so-called chained CPI, which has an impact on tax benefits, on a standalone basis. They must be included as part of a broader deficit-reduction deal that includes substantial revenue from the wealthy to win White House support.

An analysis released Monday by the Tax Policy Center shed new light on how the budget proposals would play out across the income spectrum.

Taxpayers earning more than $1 million would see their tax liabilities soar by an average of $82,604 in 2015.

Meanwhile, those earning between $75,000 and $100,000 would pay an average of $74 in additional taxes. And taxpayers making between $100,000 and $200,000 would pay an extra $149 on average.

Some of the new revenue would come from those who might be least able to lose more money to Washington. That’s especially true when it comes to the federal cigarette tax, which Obama proposes raising from $1.01 per pack to $1.95 per pack to help fund an education initiative.

Nearly 29 percent of adults who live at or below the poverty level smoke, according to data from the Centers for Disease Control and Prevention. Just 18 percent of adults above the poverty line are smokers.

“This is one of the most regressive taxes on the books,” said Dave Kautter, managing director of the Kogod Tax Center at American University.

Backers of the provision say this is an instance in which whether the tax increase is disproportionately harder on lower-income Americans doesn’t matter as much.

“It’s a tax that’s there for social purposes and therefore you accept the distributional impact,” said John Buckley, a longtime Democratic staffer on the House Ways and Means Committee who is now a professor at Georgetown Law Center.

Meanwhile, the proposed move to chained CPI to calculate inflation would hit a broad swath of taxpayers. Democrats largely hate the proposal and have mostly focused on the way it would reduce Social Security benefits over time.

But it also amounts to a de facto tax increase. Tax brackets are tied to inflation, but if inflation is measured at a slower pace, it’s likely that people will rise into higher brackets more quickly.

And benefits that are indexed to inflation, like the earned income tax credit, a refundable break for low- and middle-income families, would grow at a slower rate.

“Everybody will be affected to some degree by this chained CPI move,” the TPC’s Williams said.

Finally, the 28 percent cap on deductions would hit those on the higher end of the middle-class spectrum. That proposal effectively reduces the value of write-offs for people starting in the 33 percent tax bracket. In 2013, that bracket kicks in at $183,250 for individuals and $223,050 for married couples.

That amounts to another dent in Obama’s long-held pledge to not raise taxes on individuals earning less than $200,000 and couples making less than $250,000. The administration previously proposed having the deduction cap kick in at the 36 percent tax bracket.

While the GOP may view such measures as backhanded ways for Obama to get around his campaign promises, experts say the proposals reflect a simple reality: There’s simply not enough revenue to pull from top earners to truly tackle the nation’s deficit or significantly cut tax rates.

Take the mortgage interest deduction for example. At $68.2 billion, it’s one of the most popular — and expensive — breaks on the books.

A majority of the deduction — $42.5 billion — is claimed by people earning between $50,000 and $200,000 each year. Almost $24 billion, meanwhile, stems from those earning more than $200,000.

“There’s only so much money you can get out of the upper-income brackets,” Kautter said. “The big money comes from the rank-and-file taxpayers.”