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SPECIAL REPORT Bush Makes Opening Bid in Tax Cut Game With $1.6 Trillion Package Thursday, February 8, 2001 Deloitte & Touche OnLine Making his first major move in this year’s tax debate, President George W. Bush on February 8 sent his $1.6 trillion, 10-year tax cut package to Congress. As expected, the plan mirrored the “Tax Cut with a Purpose” program that candidate Bush touted during the presidential campaign, with one important difference: the proposed income tax rate cuts would be retroactive to January 1, 2001, to help the slowing economy. The plan’s only noteworthy business item is a provision to make the research and development tax credit permanent. Support for significant tax relief has grown in both
parties, aided by Federal Reserve Board Chairman
Alan Greenspan’s January 25 endorsement of tax cuts and by the
steady rise in the federal
budget surplus projections. (According to estimates released by the
Congressional Budget Office (CBO) on January 31, the non-Social Security
budget surplus will reach
$3.1 trillion between 2002 and 2011.) Even so, lawmakers from both
parties have their own constituents to satisfy, and will fight hard to see
that those needs are met. At the same time, some Democrats are insisting
that the tax cut be roughly half as large as the Bush plan. No Rubber Stamp -- Congressional Republicans, who generally like Bush’s proposal, are not prepared to rubber-stamp it. Charged with steering the plan through Congress and working out its details, GOP leaders said after a recent Republican retreat that they will accept many of the pieces of Bush’s tax plan, such as rate cuts, but that the White House should be prepared to compromise on other issues. Senate Majority Leader Trent Lott, R-Miss., who faces the difficult task of moving the tax bill through the Senate, has said that he will push for a cut in the capital gains tax as an economic stimulus. His other priorities that go beyond the Bush plan include pension reform and alternative minimum tax (AMT) relief. Senate Majority Whip Don Nickles, R-Okla., said he too would like to see the individual capital gains tax rate cut from 20 percent to 15 percent, as well as tax breaks for health care costs. For his part, House Majority Leader Dick Armey,
R-Texas, responded to the latest CBO surplus projections with a call for
even larger tax cuts. According to Armey, income tax rate reductions are
the single most important of Bush’s proposed tax cuts. Congress should
seize the opportunity to “set things more right structurally, and that
is done by cutting the rates,” he said January 30. Like Sen. Lott, Armey
also advocates easing the AMT, increasing tax breaks for contributions to
retirement savings plans, and capital gains relief.
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Bush Stands by His Plan Bush, who insists he does not want the bill to become a “Christmas tree” for an unlimited number of tax breaks, now must defend his plan to Republicans who would like to expand or alter it, as well as Democrats who want to shrink it. “The economy is slowing down and we need to act as quickly as we can, including making sure as much of the tax cut as possible will take effect immediately,” Bush said February 6. “We’ll work with Congress on the strategy, but the goal is to get money in the pockets of the working people as quickly as we can.” Bush will also have to address the priorities of the business community, which would like, among other things, a repeal of the corporate AMT in addition to the permanent extension of the research and development tax credit he has proposed. In fact, he may soon face the difficult choice of running up the cost of the package with add-ons or standing up to one of his vital constituencies. Business Provisions --
The Bush plan includes corporate tax proposals to --
Bush has also pledged to veto any increase in corporate taxes. Individual Tax Cuts -- Bush’s plan would reduce income tax rates across the board and collapse the five current brackets into four. The current tax brackets range between 15 percent and 39.6 percent. The proposed new brackets would be set at 10, 15, 25, and 33 percent. Bush has also pledged to --
Although Democratic support for a big tax cut has grown with the size of the estimated surplus, Democrats say they want a tax cut in the $700 billion to $900 billion range -- about half the size of the Bush tax cut. In addition, Democrats insist that the president’s tax cut plan is skewed toward high-income individuals. They maintain that the tax cut should target low- and middle-income taxpayers and that the surplus should be allocated to spending increases and debt reduction as well as to tax relief. Senate Minority Leader Tom Daschle, D-S.D., has repeatedly said he would prefer that a third of the surplus go to tax cuts, a third to spending increases, and a third to debt reduction. Daschle has also warned against a replay of the large-scale Reagan tax cuts of 1981, which he says ultimately contributed to the emergence of huge deficits. Daschle has said that he might support a “dividend” approach to tax cuts, where for instance a third of the surplus would be committed to tax cuts now, with a provision that that amount could grow in proportion to any future growth in the surplus. Such an approach amounts to handling tax cuts on a “pay as you go basis,” according to Daschle. Daschle warned that the White House may be understating the ultimate size of the tax cut by as much as $1 trillion, and that the administration may be planning to raid the Medicare and Social Security trust funds to pay for it. “The tax fight is about whether or not we protect Medicare and Social Security,” he said. Daschle has introduced a Democratic alternative (S. 9), which he touts as better targeted toward the middle class. Among other things, the bill would expand the earned income tax credit, expand the child care tax credit for middle-class families, extend the credit to stay-at-home parents of infants, eliminate the marriage penalty, and protect more than 99 percent of estates from the estate tax. At present, 98 percent of estates pay no estate tax. Senate Finance Committee ranking Democrat Max Baucus of Montana said January 31 that he could support a “significant broad-based tax cut” that would help every American, stimulate the economy, and create jobs. He cautioned that he wants to ensure that federal budget money is available for other national priorities such as paying down the public debt and providing prescription drug benefits to seniors. According to Baucus, Congress should nail down its spending outline before lawmakers move on a tax cut plan. “We’ve got to know the outlines of a budget first,” Baucus said. On the House side, Minority Leader Dick Gephardt, D-Mo., recently said he would back tax cuts up to $700 billion over 10 years, although he also wants to consider Bush’s proposals in the context of a budget, to see how the cuts would be financed. Given the right budget framework, Democrats can support measures to reduce the estate tax and the marriage penalty, as well as to provide tax cuts for child care, health care, and college tuition, Gephardt said. No Cakewalk, Despite Republican Support Although Republicans have many competing priorities, there is broad support for the basic pieces of the Bush tax plan. Senate Finance Committee Chairman Chuck Grassley, R-Iowa, said February 5 that Bush’s tax cut agenda would help foster economic growth. “With a projected surplus of $5.6 trillion, including $2.5 trillion set aside for Social Security, there’s $3.1 trillion available for tax relief,” he said. The $3.1 trillion Grassley refers to includes the projected surplus in the Medicare Health Insurance trust fund, which some GOP legislators are thinking about using to fund a prescription drug benefit. House Ways and Means Committee Chairman Bill Thomas, R-Calif., said February 5 that he is ready to start work on a broad-based tax relief plan. “The surplus means it’s time for immediate, across-the-board tax relief for all taxpayers -- to boost our economy, create jobs, and give Americans more confidence,” Thomas said. Congressional
Initiatives Not in the Bush Plan -- Bush and congressional Republicans will have to factor in
other issues as they consider their strategy for promoting the $1.6
trillion tax package. Last session, members on both sides of the aisle
pursued pricey priorities such as the telephone excise tax repeal, pension
expansion, Social Security tax relief, and small business tax relief. In
addition, Congress will likely vote to extend certain expiring tax
provisions, such as the Welfare-to-Work Credit and the Work Opportunity
Tax Credit. Taking
into account the over $500 billion, 10-year cumulative cost of these
initiatives, the $1.6 trillion Bush plan, and the new projected budget
surplus numbers, some of these measures will likely be passed over in an
effort to balance the government’s books. |
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JCT Caveat -- Bush could face other difficulties as well. In a study done last year at the request of House Ways and Means Committee ranking Democrat Charles Rangel of New York, the staff of the Joint Committee on Taxation (JCT) concluded that Bush’s tax cut plan would exacerbate the expected rapid growth in the number of individual taxpayers that are subject to the AMT. Under current law, the study said, the number of returns subject to AMT would hit 1.6 million in 2002, and grow to 10.5 million by 2010. Under Bush’s tax plan, however, the number of returns with AMT liability would grow to 13.6 million by 2010. Bush’s child care proposals “would be expected to reduce the number of individuals affected by the alternative minimum tax, but the interactive effects of other Bush proposals would be expected to increase the number of individuals affected,” the JCT said. It would cost about $200 billion over 10 years to fix the Bush AMT problem, according to the study. A Tricky Business: Getting to Yes Although this year’s tax debate begins in earnest with the release of the president’s tax proposal, it will be some time before any changes in tax law are enacted. The legislation that is ultimately signed into law may be quite different from that which Bush is now proposing, as it confronts many of the obstacles noted in this report. Budget Resolution -- Once Congress receives the complete budget package, it will develop its own fiscal policy blueprint -- the budget resolution -- which is due on or before April 15. The resolution lays out the amount of money Congress will set aside for tax reductions. This number is expected to be close to $1.6 trillion, the 10-year cost of Bush’s tax proposals. Reconciliation -- The budget resolution may provide for so-called reconciliation -- instructions calling for expedited consideration of tax legislation in the Senate by limiting debate to 20 hours and prohibiting filibusters. Certain senators have already indicated that, as with recent major tax legislation, this year’s bill will utilize the reconciliation process. In the House, tax bills can more easily move in the form of freestanding legislation, as the powerful Rules Committee can set the parameters of debate. Moving tax legislation in pieces would allow House Republicans to highlight each piece of a series of tax reductions. House leaders have expressed a preference for that strategy. Finishing Up -- With a budget blueprint in place, the two congressional taxwriting committees -- the House Ways and Means and the Senate Finance Committees -- can begin to write tax legislation that may significantly alter the content of the Bush proposal. After the House and Senate pass their versions of tax legislation, the two chambers will convene a conference committee to resolve any differences between the two bills. Imposing a timeline on this process is an inexact science and prognostications made early on are almost inevitably pushed back later, but two Republican leaders have already weighed in with their predictions. Lott, who has indicated that he would prefer to wait until a budget resolution is in place before moving a tax cut bill, has said he expects the Senate to pass a bill before the July 4 recess. House Speaker Dennis Hastert, R-Ill., said January 24 that the first few pieces of the president’s tax cut package will probably pass the House within the first 100 days of the new administration. His comments reinforced the idea that the House may move Bush’s tax package in parts rather than as one big bill. Following a January 22 meeting at the White House, Hastert said he thinks it should be possible to pass a tax bill before August recess.
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