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Partisan Payback Over 'Pay-as-You-Go'
Democratic Efforts at Fiscal Discipline Provide Republicans With Easy Targets for Attacks

By Jonathan Weisman and Lori Montgomery
Washington Post Staff Writers
Thursday, August 2, 2007

When Democrats took control of Congress, they declared that any expansion of government programs would be paid for by tax increases or spending cuts. But now the new pay-as-you-go rules, meant to highlight Democratic efforts at fiscal responsibility, are becoming a potent political target for Republicans.

In recent days, the farm bill, which had bipartisan support, has taken Republican fire over a provision to raise taxes on foreign corporations funneling U.S. profits through offshore tax havens. The expansion of the federal children's health insurance program, passed by the House yesterday, has taken heat over plans to pay for it with tax boosts for tobacco and spending cuts for managed-care companies in Medicare.

And a promised middle-class fix for the alternative minimum tax has stalled because Democrats propose to pay for it with tax increases for the wealthy. Even a proposal to raise taxes on billionaire equity investors who are paying a tax rate of 15 percent has elicited GOP attacks.

For Republicans, pay-as-you-go -- or paygo -- is a new political opportunity.

"They are Democrats, and they create the issues we want them to create -- higher taxes, higher spending, more regulation," said Rep. Tom Cole (R-Okla.), chairman of the National Republican Congressional Committee. "Paygo just makes them get to it quicker."

Fiscal watchdogs, and even deficit-minded Republicans, say the Democrats' struggles show that they are trying to stick to their campaign promise of fiscal integrity after the federal debt ballooned on the GOP's watch. Republicans had it much easier, said G. William Hoagland, a longtime Senate Republican budget aide. They had exempted their political priority -- tax cuts -- from the strictures of pay-as-you-go rules, so they never had to wrestle with finding ways to offset their costs.

"That was the problem for Republicans. They could never see the advantage [of budget controls] because they never saw that deficits mattered," Hoagland said.

But what might be good for the deficit might not be good for Democrats' political livelihood. "In the short term, it's not very politically popular, and it is risky," Hoagland said. "But in the long term, it's good for our children and good for the country."

Last week, the politically popular farm bill nearly came unglued when Democrats agreed to pay for an increase in the minimum food stamp benefit with a $4 billion tax increase on U.S. subsidiaries of foreign companies that reduce their U.S. tax bills by passing profits through international tax havens.

To Republicans eyeing the upcoming election season, the details of the tax increase was not at issue. A tax increase is a tax increase. "We can just say they're raising taxes because people have such a low opinion of the Democratic Congress that they are certainly willing to believe that they are raising their taxes," Cole said.

The House bill passed yesterday to expand the 10-year-old health program insuring children of the working poor would pay for its costs with a tax increase on tobacco -- to the tune of $53.8 billion over the next decade.

House Democrats also plan a variety of cuts for Medicare programs. The biggest cost savings, at $157 billion over a decade, would make federal reimbursements to managed-care plans under Medicare equal to the payments that go to federally run Medicare plans.

But the smaller cuts proposed mirror the kind of cost cutting that Democrats attacked when Republicans were in charge. Those include a 10-year, $9.3 billion trim on inpatient hospital and rehabilitation services payments, a $9.1 billion cut on subsidies for electric-wheelchair and oxygen-equipment rentals and purchases, even a $1.2 billion reduction on some treatments for kidney disease toward the end of life.

House Budget Committee Chairman John M. Spratt Jr. (D-S.C.) said the new budget rules have forced Democrats to continually make trade-offs, scale back their wish lists and assess whether existing federal programs are worth continuing.

House Agriculture Committee Chairman Collin C. Peterson (D-Minn.) said that last week he had to cut into crop insurance programs cherished by rural lawmakers to make room for environmental programs and legal assistance for black farmers in a bid to keep the Democratic coalition together.

For all those efforts, Democrats have not gotten much credit with conservatives. Brian M. Riedl, a budget analyst at the Heritage Foundation, charges that Democrats are using budget gimmicks -- such as assuming that the expansion of children's health insurance would simply end in five years -- to make a mockery of their paygo pledge.

Democratic leaders acknowledge that they are making compromises in the name of fiscal discipline and that the resulting attacks have rattled their members.

"Buyer's remorse? No. But if I said it hasn't led to frustration, that wouldn't be accurate," said House Democratic Caucus Chairman Rahm Emanuel (D-Ill.). But to watchdogs who have long encouraged such tough choices, the fights are a good sign.

"I've actually been pleasantly surprised at the extent to which they've sustained the discipline," said Robert D. Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office.

The biggest test for Democrats' commitment to the budget rule is likely to come this fall, when Congress finally confronts the alternative minimum tax, or AMT. The parallel tax structure designed in 1969 to catch a few wealthy tax dodgers ensnared an estimated 4 million families this year. Next April, that number is projected to climb to 23 million taxpayers -- many of them making as little as $50,000 a year -- unless Congress acts.

House leaders are pushing for a complete overhaul of the AMT that would spare families earning less than $250,000 a year, while raising taxes on those who earn more than $500,000. But House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) has repeatedly delayed introducing an AMT reform bill amid hand-wringing over the political wisdom of eliminating a tax burden for people who have never paid it and are unlikely to feel the benefit, while hitting others with a substantial tax increase that is certain to pinch them.

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