Suddenly, tax cuts are probable

Voters were lukewarm about Bush's plan before the election, but the tax- cut context has changed since then.

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It's a surprising shift in emphasis: Washington's 2001 tax debate no longer centers on whether reductions will occur, but on how broad and deep they are likely to be.

Not long ago the conventional wisdom held that President Bush's $1.6 trillion tax-cut proposal was a political anachronism. Voters were lukewarm about the plan, the thinking went. The barely elected Mr. Bush would be forced to ditch it in the name of bipartisanship.

Then surplus projections boomed upward. Federal Reserve Board Chairman Alan Greenspan gave tax cuts an implicit OK.

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Just like that, revenue reduction became hot, hot, hot. Now it's the Democrats who have a political problem - namely, how to counter Bush's package, expected to be officially unveiled this week, without appearing to have become the party of the Grinch.

"Democrats hope to be in the majority in the next Congress, and they do not want to offend any interest group that wants a tax cut," says Robert Reischauer, a budget expert who is president of the Urban Institute, a Washington think tank.

Lessons of 1981

But Democratic congressional leaders also do not want to relive Washington's last experience with major across-the-board tax cuts: 1981.

Back then, newly elected President Ronald Reagan pushed hard for major income-tax and business-depreciation reductions. Democrats fought back with their own, more targeted, reductions.

The result was the tax-cut perfect storm. The proposals whirled together, combining, as lawmakers of all political persuasions rushed to add pet provisions. When it finally passed, the tax bill had nearly doubled in size.

In 1981, "Democrats were as guilty in participating in the bidding-up as [Republicans] were," said Senate minority leader Tom Daschle of North Dakota last week.

As recently as Inauguration Day, many Democrats believed that big tax cuts were unlikely to materialize in 2001. This belief was at least partly based on the assumption that Bush was not deeply attached to his tax-cut proposal. Indeed, during the presidential campaign, some analysts contended that Bush's tax stance was merely a means of defending himself against a rightward challenge from Steve Forbes.

Furthermore, tax cuts have often been a politically polarizing issue. Bush, who squeaked into office on the strength of a few hundred votes, might have judged that scaling back his tax proposals was a way to reach across a yawning partisan divide.

But that's not how things have turned out. Bush officials have pressed forward with their agenda as written - and as they have done so, the context for tax reduction has changed radically in their favor.

First, in congressional testimony on Jan. 25, Mr. Greenspan said he now believes the coming surplus will be so large that the US will have enough money both to pay off the national debt and to engage in "surplus-lowering activities" (read "tax cuts"). The shift marked a subtle but unmistakable change in the respected Fed chairman's tone.

"This man is as close to walking on water as you can get in Washington," says Eric Schlecht, director of congressional relations at the National Taxpayers Union. "And frankly, he's been kind of a bane to tax-cutters over the past few years."

Then the Congressional Budget Office issued the latest in what has seemed an unending string of increased budget-surplus projections. Over the next 10 years, Uncle Sam will pile up $5.6 trillion in excess cash - $3.1 trillion, if you set aside the black ink generated by Social Security. Combined with Greenspan's change of heart, the effect has been to undermine Democrats' insistence that a big tax cut is fiscally irresponsible.

Thus, it now seems inevitable that this Congress will approve some sort of relief for taxpayers. House minority leader Richard Gephardt (D) of Missouri said last Thursday there is a "strong feeling" in favor of tax cuts in the Democratic Caucus.

But House Democrats "haven't reached a conclusion" about the size and composition of the reductions they will support, said Mr. Gephardt.

The distribution of income-tax benefits will surely be one area of contention as the debate develops in coming months. Senator Daschle has already served notice that he intends to attack Bush's across-the-board cuts as inequitably benefiting the wealthy. Under Bush's plan, the wealthiest 1 percent of taxpayers receive 43 percent of the benefit, Daschle charged last week.

Bush officials retort that such arguments are pure class warfare and that lower-income taxpayers would actually get the largest cuts, in percentage terms.

Under Bush's plan, expected to be unveiled this week, "6 million families will no longer pay federal income tax," said Treasury Secretary Paul O'Neill during his confirmation hearing.

Individual vs. business tax breaks

The balance between personal and business tax breaks is also likely to be a large issue in the months to come.

Bush officials have long said that they intend to focus on individual ratepayers this year, with the exception of an extension of the $17 billion business research-and-development tax credit.

But corporate lobbyists long denied tax breaks by Bill Clinton's veto pen have been waiting for the day when they could pitch their ideas to what they perceive as a more receptive audience. Wish-list items include everything from lower taxes on foreign-earned corporate income to faster depreciation for computer equipment.

A final question is whether the tax-cut package will end up larger or smaller than Bush's proposed 10-year, $1.6 trillion cut.

Democrats have talked about supporting cuts in the range of $750 million to $1 trillion. But if a 1981-like frenzy develops, any restraint could be swept away. The cost could leap past the Democrats' figure, race over Bush's $1.6 trillion barrier, and keep going.

"You may well see this $1.6 [trillion] go to $2.0," predicts Mr. Schlecht of the National Taxpayers Union.

Schlecht believes such a figure to be affordable. Other analysts differ.

The Center on Budget and Policy Priorities believes that the new CBO surplus projections are flawed. For this and other technical reasons, only about $2 trillion in extra cash will really be available over the next decade, under the CBPP analysis.

"Acting now to commit all of the available surpluses for the next 10 years would leave no funds available for subsequent Congresses to use to address needs that cannot be foreseen but inevitably will arise," concludes a CBPP study.

(c) Copyright 2001. The Christian Science Publishing Society

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