Hill Forecasters Dampen GOP Hopes for Tax Cut
By Eric Pianin
The Congressional Budget Office (CBO) is drafting a new economic forecast showing that the federal budget surplus will be slightly larger than previously projected in the coming years further good news for the government's balance sheet, but a serious setback for congressional Republicans hoping for a major tax cut.
The forecasts, due to be released next month, will fall far short of the "July surprise" that House Speaker Newt Gingrich (R-Ga.) and other GOP leaders were counting on to help underwrite an election-year tax relief package. Gingrich and other Republicans have been stumped by how to pay for as much as $100 billion of tax cuts over the next five years without goring important political constituencies by cutting their programs.
CBO officials cautioned that lawmakers who thought there would be a dramatic shift in the budget picture are in for a disappointment. While estimates of future surpluses may be revised upward by an average of $15 billion a year, "I wouldn't think there would be a sea change beyond what we've already announced," CBO Director June E. O'Neill said yesterday.
The controversy over the anticipated forecasts underscores the make-or-break influence that the CBO Congress's chief budget scorekeeper and analytical arm sometimes exerts over the legislative process. It also suggests the tenuous nature of the Republicans' large tax cut proposal.
The House leaders have tried to pressure the CBO to revamp its forecasting policies to produce much rosier surplus estimates of as much as $100 billion to $300 billion a year through early in the coming century.
"The surplus is going to be bigger," Gingrich said late last week. "I don't think anybody doubts that."
In the face of a torrent of tax revenue, the CBO in May revised its economic forecasts and predicted a surplus in the range of $43 billion to $63 billion this year, followed by $39 billion in fiscal 1999 and nearly $80 billion by 2002. At the behest of congressional budget negotiators, CBO now is rushing to complete its midsession refinement of those figures by early July a month ahead of schedule to determine whether the revised surplus figures might make it easier to write new tax legislation.
According to the latest thinking of CBO officials and an advisory panel of 21 prominent economists, including Michael Boskin and Nobel laureate James Tobin, there will be no further change in this year's surplus forecast. Future surpluses will be pegged in the neighborhood of $49 billion in fiscal 1999, $36 billion in 2000, $43 billion in 2001 and $92 billion in 2002.
CBO officials stressed that these estimates still could be revised upward or downward based on "technical corrections" before the report is finally issued, shortly after Congress returns from its July 4 recess. In any case, the surplus estimates are roughly a third of what some congressional leaders and two prominent CBO critics Stephen Moore of the Cato Institute and former Reagan administration economics adviser Lawrence Kudlow say is possible.
Moore and Kudlow argued in a recent analysis that CBO has dramatically low-balled its economics estimates and consequently has overstated the budget deficit and understated the looming surpluses. For example, CBO's predictions in May 1996 called for a $174 billion deficit this year an estimate that was off by almost $240 billion.
CBO like other government and private forecasters failed to anticipate the huge increase in government revenue brought on by the economic boom and an accompanying decline in demand for government health care programs.
"My feeling is that they're perpetually six months behind the curve . . . and it's torpedoing the chances of any major tax cut this year," Moore said yesterday. "But it's not just CBO doing this, but the [Office of Management and Budget] and a lot of the Blue Chip economic forecasters."
With so much riding on the new forecasts, Gingrich, House Majority Whip Tom DeLay (R-Tex.) and other GOP leaders have openly attacked CBO's accuracy and threatened retribution including cutting the agency's budget or replacing O'Neill when her term expires in January unless the agency agrees to changes in its approach. Although GOP leaders once touted CBO estimates of economic growth, revenue and spending as far superior to those of the Clinton administration, now they charge that those projections are far too conservative.
"We don't feel we're getting accurate projections in the estimates," said House Ways and Means Committee Chairman Bill Archer (R-Tex.), Congress's chief tax writer. "We're making big decisions that affect the American people . . . and we need the best information at the moment of the decision, not six months later."
CBO is forecasting a 2 percent increase in the gross domestic product (GDP) this year and long-term growth of 2.3 percent to 2.5 percent, contrasted with the more robust 3 percent rate of economic growth that Kudlow and Moore have predicted through 2002. At the same time, CBO is anticipating that government revenue will increase by 8 percent this year before tapering off in subsequent years to 5 percent gains, while Kudlow and Moore predict 10 percent more this year and 7 percent gains thereafter.
O'Neill, who has met twice with Gingrich and his advisers to discuss their differences, agreed to consider recommendations from the speaker, ranging from upgrading its long-term economic growth forecast model to giving greater weight to the economic benefits of reductions in the capital gains tax rate. However, CBO officials say they will not bow to political pressure to make it easier for the Republicans to cut taxes.
"Whatever we produce next month will not make a material difference to that problem by adding a large amount of surplus," said a senior CBO official.
While both House and Senate GOP leaders are committed to a tax cut, there are sharp differences among Republicans over how to finance it.
The House barely approved a budget plan this month that would provide $101 billion of tax relief over five years and require a corresponding reduction in domestic spending. Senate GOP leaders have indicated a willingness to go along with $60 billion to $70 billion of tax cuts over five years but say it would be impossible to sell big spending cuts in the Senate or to muster the 60-vote super majority necessary to change the budget rules to accommodate the tax cut.
© Copyright 1998 The Washington Post Company