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Bush Sticks With $1.3 Trillion Tax Cut Plan -- But Will it Fly on the Hill?Wednesday, December 20, 2000 Deloitte & Touche OnLine President-elect George W. Bush met with congressional leaders in Washington December 18 to begin efforts to secure support for his legislative agenda, the core of which is a pledge to cut taxes by $1.3 trillion over 10 years. Although his plan will drive the tax debate come January, getting it enacted will be a challenge. The proposal received only tepid Republican support on the campaign trail. And in the aftermath of losing the popular vote in a close campaign and the bitter partisanship that followed the disputed Florida election results, Bush faces a wide range of potential obstacles once he takes office. Those include holding together a divided Congress, consolidating the conservative base of his party while still pursing compromise with moderate and conservative Democrats, and the possibility of an economic slowdown. Nonetheless, Bush has vowed not to abandon the strong positions he took on tax relief during the campaign. “My first priority was to come to the Hill and explain why I think my plan is the right thing to Republicans and Democrats,” Bush said. “They may or may not think it’s the right thing, but I’m going to keep explaining until the votes start coming.” Business Provisions -- Bush said December 17 that his plan of “broad, fair, and fiscally responsible” tax relief was one of many points of consensus that emerged during the campaign. The Bush plan includes corporate tax proposals to --
Individual Tax Cuts -- The Bush plan would cut the individual rate structure from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, and 33 percent. Bush has also pledged to --
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Cheney Lays the Groundwork With Congress Vice President-elect Dick Cheney met with a variety of lawmakers on Capitol Hill December 13 to discuss next year’s agenda and feel out GOP sentiment for Bush’s tax plan.
Sen. Charles Grassley, R-Iowa, who is expected to be the next chairman of the Senate Finance Committee, agreed with Cheney that there is a broad bipartisan consensus around at least two tax cuts Bush proposed during the campaign: ending the marriage penalty and repealing the estate tax. The two also agreed that an economic downturn might call for a combination of tax cuts, including an across-the-board rate cut. Grassley predicted that Democrats might be willing to compromise on rate cuts. House Republican Policy Committee Chairman Christopher Cox of California echoed those sentiments after his own meeting with Cheney, saying the tax items with the greatest support in Congress are the repeals of the telephone excise tax and estate tax, and ending the marriage penalty. “Cheney is right in echoing my concerns about a possible slowdown [in the economy], which is why I feel so strongly about reducing the marginal rates in our tax code,” Bush said during a December 15 meeting with Sen. John Breaux, D-La., a moderate who could bridge the gap between the new administration and Senate Democrats. Bush and Greenspan President-elect Bush also met with Federal Reserve Board Chairman Alan Greenspan December 18 to get a status report on the U.S. economy. Bush and Greenspan seem to differ on what to do with the federal budget surpluses projected to flow into the Treasury over the next decade. Bush would not comment on the details of his meeting with Greenspan, but the Fed chairman has testified before Congress that he favors using the surplus to pay down the national debt, while Bush favors spending it on a broad tax cut. “I campaigned on a tax relief package that I firmly believed then, and believe even more now, is important as an insurance policy against any economic downturn,” Bush said December 18. “That downturn is more real now than it was a year ago. I look forward to making my case that marginal rate reductions will spur economic growth.” Competing Priorities and Other Obstacles Despite their congressional outreach efforts, the Bush-Cheney team will still face obstacles when the 107th Congress convenes in January. For one thing, Congress has its own tax cut priorities, which total $459 billion over 10 years. (See table below.) The Congressional Budget Office (CBO) estimates that over the nine-year period between 2002 and 2010, there will be a $2.1 trillion non-Social Security surplus that can be used to finance tax reductions, increased spending, or debt relief. Bush’s tax plan is estimated to cost $1.5 trillion when provisions designed to make it neutral with respect to the individual alternative minimum tax (costing $200 billion) are included. This leaves Congress with about $600 billion between 2002 and 2010. That amount could be as small as $150 billion if the all items on Congress’ wish list are enacted. These numbers, however, are complicated by two opposing trends. Because Congress spent more money than projected in the recently completed budget deal with President Clinton, fewer resources are available for tax cuts. CBO, however, is expected to increase its non-Social Security surplus projection later this winter, which would provide Congress with more room to maneuver. It is unclear if there will be enough resources to both finance Bush’s tax plan and fulfill Congress’ legislative agenda.
Bush likely will face other obstacles in Congress. House Speaker Dennis Hastert, R-Ill., has appeared somewhat ambivalent about the Bush tax cut. “I think we ought to look at these things incrementally, that’s the way to get things done,” he said December 15. Hastert later said he would back an across-the-board tax cut and believes it would help the economy should its growth rate decline. For their part, congressional Democrats have been quick to push for a more moderate tax cut. Asked whether Democrats would support tax cuts in general, House Minority Leader Dick Gephardt, D-Mo., said December 15 that he was willing to work with Bush to include targeted tax relief measures as part of an overall package, but did not want to vote on broad-based piecemeal tax cut bills. “We can’t solve the problem of blowing a huge hole in the federal budget by simply saying we are doing it incrementally,” he said. And looming over all of this is one additional complication: although Republicans will control both the House and Senate, their majorities will be so narrow they may have trouble enacting even a modest agenda.
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Compromise is Key The chances of enacting any tax cut, however, hinge crucially on the extent to which the Bush White House and Congress are willing to compromise and the assumption that projected budget surpluses materialize. In the end, given the potential for conflicting tax and spending priorities -- and the lack of a clear mandate for the $1.3 trillion tax cut -- Bush and congressional Republicans may have to move to the center and settle for scaled-down reforms, such as a significant increase in the personal exemption of the estate tax, and accept some Democratic initiatives, including a package of targeted education tax incentives. Although the divisiveness of the campaign has
encouraged Democrats to challenge the president-elect in hopes of taking
back Congress in 2002, Bush has asked for time to make his case. “It
doesn’t seem to make much sense for people to be drawing lines in the
sand until we’ve had a chance to discuss things,” he said December 15.
Outlook for Business Most tax reduction measures likely to be considered next year are expected to be targeted toward individuals. On the corporate side, a permanent extension of the research and development tax credit -- a proposal supported by Bush as well as congressional Democrats and Republicans -- stands a good chance of being enacted. Congress may also extend -- but not make permanent -- the moratorium on multiple and discriminatory taxes on e-commerce transactions. The business community remains divided over the issue. Proponents of e-commerce taxation are devising a system that would allow states to tax Internet transactions, but none of these proposals will be ready for implementation by the time the current ban is set to expire in October 2001. Although Bush promises he would veto any increases in corporate taxes, he could act to shut down a few tax preferences if his Treasury Department deemed them abusive. Over the last six years, congressional Republicans, who normally oppose corporate tax hikes, have passed several such increases. |
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