Archer's Opening Salvo in the 1999 Tax War

Clint's Window
by Clint Stretch, Director of Tax Policy,

Monday, July 19, 1999

Let me summarize the things that Archer spends his $850 billion dollars on:

• A 10 percent across-the-board income tax cut;
• A cut in the individual capital gains tax to 15 percent from the 20 percent rate, and to 7.5 percent for the folks who currently have the lower rate of 15 percent;
• A phased-in reduction of the corporate capital gains tax in one point increments until it eventually hits 25 percent;
• Repeal of the corporate and individual alternative minimum tax;
• Some international tax relief; and
• Repeal of the estate, gift, and generation-skipping transfer tax regime.

The business community for the first time in nearly 20 years won relief in this bill from some parts of the tax code it finds most onerous. Also, for the first time, it was not asked to pick up most of the tab for tax cuts for low- and middle-income taxpayers.

No one should expect to see significant tax relief any time soon. Archer proposes rolling out these tax benefits in a slow pitch. If enacted, most of the tax benefits won’t be significant until seven to ten years from now.

Of the proposed $864 billion in tax cuts, only $4.6 billion are offered in the first year. Only 23.1 percent of the tax cuts are available in the first five years after enactment. More than half of the tax cuts become available in the last three years of this heavily backloaded 10-year plan. Fully 23.5 percent of the benefits are offered in the last year alone.

Passage Is Not Guaranteed

The House Republican tax package adds up to a vast sum of money and a political statement with which the President disagrees. He pledged this week to veto the bill in its current form.

We expect Congress will spend the next few weeks trying to move this tax bill through the House and the Senate. It is not a foregone conclusion that the Republicans can muster enough support to win a majority on the House floor. We face a three-party government now: the spend-its (mostly liberals); the give-it-backs (conservatives); and the save-its (moderates in both parties who want to go slow, and pay down the national debt first). Some of each of these elements are in each party.

House Minority Leader Dick Gephardt, D-Mo., is trying to undercut the Republican tax bill by putting together his own measure. The GOP leadership must worry about the Democratic bill attracting the support of six or seven of their moderate members from the "save-it" element, which would be enough to doom the fate of the GOP bill in the House.

If the House does pass the bill, there is no guarantee it will ever get out of the Senate. There are signs the same thing that happened in the upper chamber last year could be happening again. Last year, the House passed a large tax-cut bill that got totally bogged down in the Senate.

This year there already are rumblings of discontent with the tax measures. Conservatives complained the bill doesn’t cut taxes enough. Moderates complain the tax cut is too big. Conservatives associated with the Christian Coalition complain the bill does not offer enough relief from the so-called marriage penalty. Sound familiar?

A procedural hurdle because of budget rules also could doom the bill in the Senate. House Republicans interpreted the rules to say that an $864 billion tax cut is acceptable, but the Senate thinks the budget authorizes a tax cut that is no larger than $792 billion. If the House passes a bill that is ruled out of order in the Senate, there would be no limits on the length of debate or the number and type of amendments that could be added to the bill, making it virtually impossible for the bill to ever move out of the Senate.

If the bill overcomes all these pitfalls and is passed by Congress, it could end up on the President’s desk before the August recess. It probably won’t win enough votes to override a promised veto. In September, when Congress comes back after Labor Day to finish their appropriations work, they then will have to return to the subject of negotiating a much smaller tax package, one that is likely to fall somewhere between the President’s proposed $250 billion in cuts and the Republicans’ preferred $800 billion. The compromise may end up as something along the lines of the $295 billion measure put together by Senate Democrats, which was announced July 16.