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As House Passes Marginal Rate Cuts, Lawmakers Still Divided Over Dividing the SurplusThursday, March 8, 2001 Deloitte & Touche OnLine
The House of Representatives on March 8 voted 230-198 to approve an across-the-board cut in income tax rates modeled largely on a proposal put forward by President George W. Bush. Ten Democrats joined a unanimous GOP contingent in approving the measure. Lawmakers rejected a Democratic substitute by a vote of 273-155. The Economic Growth and Tax Relief Act of 2001 (H.R. 3) would provide approximately $958 billion in tax relief over 10 years -- almost 60 percent of the $1.6 trillion in tax cuts called for in the budget outline Bush sent to Congress on February 28. It is the first in what is expected to be a series of tax cut bills that the House will consider in the coming weeks. With President Bush’s recent budget submission and House action on the first part of his proposed tax relief package, the seeds for this year’s tax debate have been sown. That said, however, lawmakers disagree over the best way to harvest the projected budget surplus. How Big? -- Although there is general support in Congress for some form of tax relief, the actual size of a tax cut is proving to be a sore point. Bush and many House Republicans say a $1.6 trillion cut is easily affordable, but Democrats -- and some moderate Republicans -- argue that a greater chunk of the surplus should be allocated to new spending and debt reduction. Moreover, Bush’s budget outline leaves no room for other substantial tax cut priorities -- such as pension reform -- that lawmakers may wish to pursue this session. Trigger-Happy Moderates -- A bipartisan coalition of 21 House and Senate moderates -- including five Senate Republicans -- added a new layer of complexity to the debate on March 7 when they unveiled a proposal that would tie tax cuts to a trigger -- a safety mechanism making continued tax cuts dependent upon whether the projected budget surpluses materialize. The trigger would delay implementation of tax cuts and spending proposals if debt-reduction goals are not met in a given year. It would not, however, repeal earlier tax cuts or spending. Led by Sens. Olympia Snowe, R-Maine, and Evan Bayh, D-Ind., the coalition said its plan would link tax cuts to future efforts to reduce the national debt. A bipartisan coalition of 21 House and Senate moderates -- including five Senate Republicans -- added a new layer of complexity to the debate on March 7 when they unveiled a proposal that would tie tax cuts to a trigger -- a safety mechanism making continued tax cuts dependent upon whether the projected budget surpluses materialize. The senators have not determined to what legislative vehicle they intend to attach the eventual trigger language. One option is to offer the resolution as an amendment to the FY 2002 budget resolution and the actual trigger language as an amendment to the tax bill. Triggers were not incorporated in the House bill (H.R. 3). Although a final resolution to this year’s tax cut debate is still months away, here is a look at how the Republican and Democrat plans stack up against each other. The
Republican Plan Who’s Counting and What’s Available? -- President Bush’s budget officials at the Office of Management and Budget (OMB) estimate a budget surplus of $5.6 trillion over the next 10 years. Of this amount, $2.6 trillion is generated from excess Social Security revenue. The remaining $3.0 trillion surplus comes from outside Social Security. Carving It Up -- Bush proposes to use the $2.6 trillion in Social Security surplus funds to begin repaying the publicly held debt, currently at $3.2 trillion. OMB estimates that only $2.0 trillion of debt can be repaid over the next 10 years, while the remainder is held in illiquid securities that would require the government to pay a hefty premium to redeem prior to maturity. Consequently, Bush proposes not to allocate the approximately $600 billion in remaining Social Security surpluses. The administration has, however, indicated that the money could be used to repurchase more debt, if possible, or to fund private retirement accounts as part of a comprehensive overhaul of Social Security. Bush would use the $3.0 trillion in non-Social Security surpluses -- including Medicare Part A surpluses expected to total approximately $400 billion over the next 10 years -- to reduce taxes and create a contingency fund for spending increases. Bush’s proposed 10-year $1.6 trillion tax cut would leave $1.4 trillion for spending. Of that amount, the president recommends using $590 billion for immediate spending and putting $842 billion in a contingency fund for future needs. He would spend $417 billion to fund increased financing costs on the publicly held debt brought about by tax reductions, $153 billion on a Medicare prescription drug benefit, and $20 billion on as yet unspecified programs. Backloaded Tax Relief -- The Economic Growth
and Tax Relief Act of 2001 closely mirrors Bush’s original campaign proposal. Although in
recent weeks the president has pushed for a retroactive tax cut, the Joint
Committee on Taxation estimates that under the House-passed bill, the bulk
of the tax relief -- 62 percent -- would not occur until the years
2007-2011. The bill would reduce all income tax rates and consolidate the rate
brackets. By 2006, the present-law structure of five income tax brackets
(15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent) would
be reduced to four brackets of 10 percent, 15 percent, 25 percent, and 33
percent. The current 15
percent tax rate on the first $12,000 of taxable income for couples
($6,000 for singles) would be reduced to 12 percent and would apply
retroactively to the beginning of 2001. House Ways and Means Committee Chairman Bill Thomas, R-Calif., characterized the bill as a long-overdue refund to taxpayers. “The problem is that the federal government has been eating the American people’s dinner for far too long -- we’d just like to give a little of it back,” Thomas said during floor debates on March 8. “Every taxpayer gets exactly the same tax rate reduction.” But Ways and Means ranking Democrat Charles Rangel of New York blasted the bill as favoring the wealthy. “As we have said, we’d all like to have a tax cut. Some of us believe that it should be responsible; all of us hope that it would be bipartisan. We want it to be fair we want it to be honest. We think that it is unfair that 44 percent of benefits from this tax bill before us would go to the top 1 percent of taxpayers. Some of GOP proposals may have to be scaled back to be sure the whole package fits within a $1.6 trillion tax cut framework. Others may be recast to accommodate other tax breaks being pushed by congressional Republicans. Other Priorities -- Other elements of the Bush tax cut plan that Congress will address include proposals to --
Given that reducing marginal rates has turned out to cost about $80 billion more than Bush budget officials had originally envisioned, many say that some proposals may have to be scaled back to be sure the whole package fits within a $1.6 trillion tax cut framework. In addition, some provisions may be recast to accommodate other tax breaks being pushed by congressional Republicans. For example, a full repeal of the estate tax could become a partial repeal to make room for pension reform, small business tax breaks, individual alternative minimum tax relief, or a repeal of the telephone excise tax. |
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The Democratic Response Who’s Counting and What’s Available? -- Congressional Democrats would divide the surplus in a different manner. Using projections from the legislative budgeting arm, the Congressional Budget Office (CBO), Democrats also envision a $5.6 trillion surplus over the next 10 years. Of this amount, nearly $2.5 trillion is generated from excess Social Security revenues. Carving It Up -- Democrats would allocate the entire Social Security surplus -- and $392 billion in projected Medicare Part A surpluses -- toward debt reduction. They estimate $2.3 trillion of publicly held debt -- not $2.0 trillion as Republican say -- can be repaid over the next 10 years. Democrats have not indicated what they would do with the $550 billion that is projected to be left over from this strategy, but presumably the funds would be used for Social Security and Medicare reforms. It is important to consider that this money would only become available beginning in 2010 because all surpluses prior to that point would be used to purchase redeemable debt. Republicans would not explicitly save Medicare Part A surpluses because they claim that when Medicare Part B is included in projections, the entire program is expected to run large deficits. Under the Democratic plan, approximately $2.7 trillion of non-Social Security and Medicare surpluses remains for other priorities. Democrats would divide the surplus into three equal parts, providing $900 billion for tax cuts, $900 billion for spending increases, and $900 billion for long-term debt liabilities in Social Security and Medicare brought about by the retirement of baby boomers. Senate Budget Committee Ranking Democrat Kent Conrad, D-N.D., has suggested that policymakers use these funds to help pre-fund liabilities in these programs. Tax Relief Alternative -- The Democratic substitute that the House rejected on March 8 included proposals to--
“We think this substitute is fiscally responsible and honest and we think it warrants the support of Democrats and Republicans alike,” Rangel said in remarks on the House floor. For his part, Thomas dismissed the measure as a “hastily thrown together substitute.” |
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Where Do We Go From Here? In most years, once the president submits a budget, Congress, led by the House and Senate Budget Committees, would begin drafting its budget resolution -- a non-binding bill agreed to by both the House and Senate that essentially lays out the congressional budget strategy. The two chambers report separate resolutions, which are subsequently merged into one after any differences are resolved in a House-Senate conference committee. Once a budget resolution is in place, the two chambers would begin the process of drafting their respective versions of a tax bill. The budget resolution can also include reconciliation instructions that provide procedural safeguards for one or more revenue bills in the Senate. Legislation brought up under reconciliation in the Senate can only be debated for 20 hours, and amendments must be limited to the substance of legislation being considered. (In contrast, bills brought up under regular order can be debated until 60 senators vote to end debate and force a vote.) Although reconciliation can be a powerful tool used to shepherd a tax bill through the Senate, a little-known provision in budget law called the Byrd Rule forces tax cuts debated under reconciliation to expire at the end of the budget window considered in the budget resolution, typically five or ten years. The Byrd Rule could prove to be a real problem for the proposed repeal of the estate tax because it would force lawmakers to debate and extend the repeal every few years. In the House, the Rules Committee can set the terms of debate and limit the number of amendments. In most years, once the president submits a budget, Congress, led by the House and Senate Budget Committees, would begin drafting its budget resolution. . . . This year, citing economic weakness, House Republicans have decided to move forward on tax cuts before Congress passes a budget resolution. But This Isn’t ‘Most Years’ -- This year,
citing economic weakness, House Republicans have decided to move forward
on tax cuts before Congress passes a budget resolution.
Having just passed legislation to reduce marginal income tax rates,
the House is expected to take up other tax reduction measures in piecemeal
fashion. The Senate, however, will wait until the House completes action
on several bills before crafting one large bill later this spring or
summer. In the evenly divided Senate, a tax package will have to wait until it has reconciliation protection. Consequently, both chambers will have to agree to a budget resolution. The House is expected to have little problem passing a budget resolution calling for the full $1.6 trillion in tax cuts. Senators remain optimistic that a budget resolution and tax cuts can be passed relatively quickly. Senate Majority Leader Trent Lott, R-Miss., expects the chamber to take up the budget resolution the week of March 23, and Finance Committee Chairman Charles Grassley, R-Iowa, expects the body to complete work on a tax relief package the Friday before Memorial Day. Senators want to move expeditiously, but budget resolutions are typically not adopted before the statutory deadline of April 15, and this year may be no exception. Moreover, moving a budget resolution that calls for a $1.6 trillion tax cut through the Senate Budget Committee may be difficult. Budget Committee Chairman Pete Domenici, R-N.M., reportedly has told the White House that he currently does not have the votes to move the bill, and Finance Committee member Phil Gramm, R-Texas, recently speculated that his own panel may not be able to pass a tax cut of that magnitude. If the Budget Committee is unable to report legislation by April 1, under budget law it could be brought directly to the Senate floor, but it is as yet unclear if Republicans have enough votes to pass it in the full chamber. Even after both chambers report a resolution, the House and Senate still must resolve and approve differences, which could further delay adoption and authorization of reconciliation. So How Long Will It Take? -- Although the House has passed marginal rate tax cuts and there is much support for action in the Senate, it may be some time before the president is able to sign legislation into law. Multiple chokepoints in the Senate could delay action. The Senate could take longer than expected to adopt a budget resolution. In addition, it could be difficult to craft a tax package that has the support of a majority of senators. Finally, if the Senate passes a vastly different bill than the House -- one that, for example, includes a trigger -- resolving differences could prove tricky. Given all this, few observers expect a tax bill will be ready for the president’s signature before July, and many feel a tax package will be on the president’s desk only after the Labor Day recess in September.
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