President Bush and lawmakers in both parties are busy compiling their wish lists for the new year, and there is no shortage of ideas for reducing, repealing or phasing out various taxes.
It isn’t that the federal treasury is suddenly overflowing. In fact, the Congressional Budget Office says 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 designed to spur business and consumer spending and rev up the economy. Proponents argue that a robust economy eventually will bring ample revenue back to the federal government.
Among the likely Republican initiatives 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 is expected to outline a tax relief package in his State of the Union address Jan. 28, and he 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 argues that the 2011 expiration date of the tax cuts creates economic uncertainty. “People need a stable environment in order to create jobs,” he contends.
It wouldn’t be cheap, though. Congressional sources say the White House is aiming for a tax cut package totaling $300 billion over the next decade.
Since Republicans reclaimed the Senate in the midterm elections in November, Bush can look forward to the convening in January of a Congress that is more receptive than ever to his shift away from the Clinton-era focus on debt reduction as a means of national economic stability.
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,” says 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 the economy is merely in a “soft patch” on the way to recovery.
Business groups and many Republican lawmakers see it differently and predict 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,” says Rep. Jim McCrery, R-La., 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 boost the economy.
In general, though, Democrats are girding for battle over a critical point in the tax cut debate: Who gets the relief?
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, so their spending could 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.
Critics acknowledge that it would put money in people’s pockets, but they aren’t convinced it would be spent. When consumers received government tax rebates last year, many of them paid off credit card debt or put the money into savings; neither of those things provides much stimulation for the economy. Some suggest a payroll tax holiday could be geared to low-income wage earners, who would be more likely to spend the extra take-home pay.
When Congress returns, Democrats also are intent on providing some assistance to unemployed workers and are touting quick action as a form of economic stimulus. Bush has embraced an extension of unemployment benefits, and some House Republicans are also receptive to the idea, but there is no consensus yet on the issue.
Neither party expects to monopolize a tax cut package. Both recognize that to get the necessary votes, the largess 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, says that despite Republican control of both the White House and Congress, accommodation of Democratic proposals is a political necessity 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 says. “When you put the package together, you want something in there for everyone.”
LOAD-DATE: December 31, 2002