Tax-cut packages stack up

WASHINGTON — The spirit of gift giving is in the air, and on Capitol Hill this holiday season that means tax cuts.

President Bush and lawmakers from both parties are busy compiling their wish lists for the New Year, and there is no shortage of ideas for reducing some taxes, repealing others and speeding up those already set to phase out.

It’s not that the federal Treasury is suddenly overflowing. In fact, the Congressional Budget Office said that the federal budget ran a deficit of $157.7 billion for the fiscal year ending Sept. 30, and, if the nation goes to war with Iraq, the federal balance sheet is expected to dip further into the red.

Most of the would-be tax cuts are dressed up as “economic stimulus” measures, which are designed, at least in theory, to spur business and consumer spending and rev up the economy. While the economy grew a respectable 4 percent in the third quarter, year-end predictions are for an anemic 2 percent to 2.5 percent. So, proponents argue, although tax cuts will surely cost the country money, a robust economy will eventually put ample revenue back into the federal government.

Bush is expected to outline a tax-relief package in his State of the Union address Jan. 28, but already some possibilities have emerged.

According to congressional Republican sources, among the likely candidates are: Accelerating the start date of the phased-in $1.35 trillion tax cuts that were passed in 2001; providing business tax relief in the form of more generous expensing for small businesses and additional depreciation on capital purchases; and reducing or eliminating the tax on corporate dividends.

Bush has made no secret of his desire also to make permanent the tax-cut package Congress passed last year. But skeptics, notably congressional Democrats, question how much the economy will be stimulated by such things as permanently eliminating the tax on multimillion-dollar estates. Bush contends it will. He has argued that the 2011 expiration date of the tax cuts creates “uncertainty” in the economy and that “people need a stable environment in order to create jobs.”

It wouldn’t be cheap, though. Just a two-year extension of the 10-year tax-cut package is estimated to cost about $200 billion, according to Congressional Quarterly Weekly. Congressional sources say that the White House is aiming to have a total tax-relief package amounting to $300 billion over the next decade.

The buzz over tax cuts represents a shift away from Clinton-era focus on debt reduction as a means of national economic stability. Not surprisingly, clamor for tax relief has only heightened since Republicans reclaimed the Senate in the midterm elections in November and Bush could look forward to a newly receptive Congress in January.

No one has any illusions that Bush isn’t also looking forward to 2004, when he stands for re-election. The fate of his president father, whose political fortunes tanked with the national economy, is undoubtedly on his mind. In recent weeks he has hired a new economic team whose job it will be to sell tax cuts to Congress and the American people.

“If we pass something this spring or summer, it would provide some relief to the economy by 2004, which would provide some relief going into the election campaign,” said Jeff Lemieux, a tax analyst at the centrist Progressive Policy Institute.

But not everyone is enthusiastic about Congress tinkering with the economy. Federal Reserve Board Chairman Alan Greenspan has said that making the 2001 tax cuts permanent wouldn’t offer much short-term voltage to economic growth, and he cast doubt on the ability of Congress to steer the economy.

Instead, Greenspan has counseled caution, saying that the economy is merely in a “soft patch” on the way to recovery.

Business groups and many Republican lawmakers see it differently and predict that Congress will move ahead with a tax-cut package anyway.

“I don’t think Alan Greenspan would say we are in a robust economy or this is a typical recovery,” said Rep. Jim McCrery, R-Shreveport, a member of the tax-writing House Ways and Means Committee. “I wouldn’t hesitate to cut taxes because Alan Greenspan doesn’t think we should. The good news is that Republicans and Democrats see the need for further tax cuts as a way to stimulate the economy.”

The two parties share some common ground when it comes to tax relief. Popular in both parties are proposals to let small businesses deduct a larger amount of their capital expenses from their taxable income and allowing businesses of all sizes to depreciate a heftier share of their capital outlays.

By giving businesses investment tax relief, the thinking goes, they will spend more money on new computers, machinery and other big-ticket items — spending that will kick-start the economy.

In general, though, Democrats are keeping a wary eye on the White House and are bracing for a battle over a critical point in the tax-cut debate: Who gets the relief?

“We want to make sure the package isn’t one that just gives away money to the high-income brackets,” said Rep. William Jefferson, D-New Orleans, a member of the Ways and Means Committee. “It has to be something that really stimulates the economy. It shouldn’t be to stimulate savings, but to stimulate consumption.”

Popular among Democrats is a temporary elimination of the 12.4 percent Social Security payroll tax that workers and businesses split. Known as a payroll tax “holiday,” the idea would be to put cash in consumers’ pockets immediately, and their spending will spur the economy. The idea has a diverse following, including the Business Roundtable, Sen. Pete Domenici, R-N.M., and Sen. John Kerry, D-Mass.

Sen. Mary Landrieu, D-La., also floated the proposal during her recent campaign, but it’s unclear how forcefully she will push it in Congress.

Critics acknowledge that it would put money in people’s pockets, but they aren’t convinced they will spend it. When consumers received government tax rebates last year, many of them paid off credit-card debt or put the money into savings, neither of which does much to jolt the economy. Jefferson said that a payroll tax holiday could be geared to low-income wage earners.

“They will spend the money, so it will have the stimulative effect we are looking for,” he said.

When Congress returns, Democrats are also intent on providing some assistance to unemployed workers and are touting quick action as a means of economic stimulus. Bush has embraced an extension of unemployment benefits, and some House Republications are also receptive to the idea, although there is no consensus yet on what a proposal will contain.

Neither party expects to monopolize a tax-cut package, and both recognize that to get the necessary votes, the largesse will have to be spread around. The National Association of Manufacturers, for instance, is pushing business tax breaks worth about $150 billion, leaving what they say is “room for competing ideas.”

Wayne Brough, chief economist for the business-friendly Citizens for a Sound Economy, said that despite Republicans controlling the White House and Congress, out of political necessity there will be room made for Democratic proposals in order to get any package passed.

“Especially after a year of business scandals, it will be hard to say you are just cutting taxes for business,” Brough said. “When you put the package together, you want something in there for everyone.”

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Bill Walsh can be reached at or (202) 383-7817.

LOAD-DATE: December 23, 2002