By KENT HOOVER
khoover@bizjournals.com

President Barack Obama's $3.7 trillion budget request for next year is a mixed bag for the business community.

Despite a five-year freeze on non-security discretionary spending, the federal government would still run a $1.1 trillion deficit in fiscal 2012 under the president's plan. Deficits in succeeding years would be lower, but the budget plan doesn't address the nation's long-term structural debt and the huge amount of interest that will be owed on it. Many economists, including Federal Reserve Chairman Ben Bernanke, say a plan to address this problem needs to be agreed on soon or the federal government, as well as businesses, will face much higher interest rates.

Some industries would benefit from the president's budget. Obama's proposal to immediately spend $50 billion on upgrading the nation's transportation infrastructure would result in more jobs for the hard-hit construction industry.

"It is encouraging to see that the president appreciates the difference between wasteful spending and essential transportation investments needed to boost overall economic growth and protect Americans from later, larger fiscal liabilities," said Stephen Sandherr, CEO of Associated General Contractors of America.

These gains for the construction industry would be partially offset, however, by reduced federal spending on water projects, airport improvements and federal building maintenance.

The renewable-energy industry would benefit from tax incentives and increased spending on federal research. The budget encourages innovation in general by calling for a permanent, more robust tax credit for research and development.

Plus, Obama proposed a permanent extension of a tax break that's designed to encourage investment in small businesses. Under this proposal, investors who buy stock in small corporations and hold it for five years would not have to pay capital gains taxes when they sell the stock.

Targeted: oil, multinationals, wealthy

Many businesses, however, would see higher taxes. The president wants to raise $46 billion over the next 10 years by eliminating 12 tax breaks for oil, gas and coal companies. This would increase energy costs, said Dorothy Coleman, senior vice president of the National Association of Manufacturers. That's a problem for manufacturers, since they consume one-third of the nation's energy.

U.S.-based multinational corporations also would face higher taxes on income earned abroad. The budget plan calls for reducing the corporate tax rate to make U.S. companies more competitive with their global counterparts, but that's tied to elimination of tax breaks that benefit specific industries.

Most small businesses don't pay corporate taxes; their profits flow through to their owners and are subject to individual income taxes. Wealthier small-business owners would face higher taxes under Obama's plan. The president wants to let income tax rates go up in 2013 for families that make $250,000 or more. Family-owned businesses could face higher estate taxes - the president said he thinks the 35 percent rate in effect for the next two years is too low.

"While I had to accept these measures for two more years as part of a compromise that prevented a large tax increase on middle-class families and secured job-creating support for our economy, these policies were unfair and unaffordable when enacted and remain so today," Obama said.

The president's plan also would partially revive a paperwork burden on small businesses created by health-care reform. That law requires businesses that pay $600 or more a year to any other business to file a 1099 report with the Internal Revenue Service beginning in 2012. That's a major expansion of current 1099 reporting requirements, which now apply only to payments to unincorporated service providers.

After small businesses complained that this provision would create a paperwork nightmare, Democrats - including Obama - agreed with Republicans that it needed to be repealed. The Senate passed legislation repealing the provision Feb. 2, and the House is expected to follow suit in the next few weeks.

The president's budget plan, however, would expand the 1099 reporting requirement to payments made to corporations for services.

Obama is guilty of pulling a "a bait-and-switch on the 1099 reporting provision," said Susan Eckerly, senior vice president of the National Federation of Independent Business.

Congress unlikely to back plan

Businesses that don't like the president's tax proposals can take solace in the fact that they "likely are going nowhere," said Clint Stretch, managing principal of Deloitte Tax LLP. Congress this year will focus on spending cuts, not taxes, he said.

Kent Hoover is Washington bureau chief for American City Business Journals.