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Rating the Tax-Cut Possibilities

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  • Campaign 2000

  • Special Report: Tax Policy

  • By George Hager
    Washington Post Staff Writer
    Friday, May 14, 1999; Page E1

    The legislative year, cut short by impeachment and derailed by the Kosovo conflict, is entering a critical period when the groundwork will be laid for bipartisan deals or partisan confrontation before the session ends.

    Nowhere is this more apparent than in the tax-writing committees of the Senate and House, which this month began crafting bills that many Republicans regard as the centerpiece of their legislative agenda.

    Interviews with key lawmakers, aides, lobbyists and other experts suggest that both sides could come together to produce a bill that would give tax breaks to farmers, married couples, senior citizens, small-business owners and others, pleasing constituencies in both parties and passing muster with the White House.

    But political dynamics within both parties -- especially the GOP -- could instead lead lawmakers to a pick a fight over bills that they know have no chance of becoming law.

    Here is a sort of Baedeker's Guide to the players in the looming tax fight, and why there is at least an outside chance that when the dust settles this fall, President Clinton could sign into law a modest tax-cut bill.

    The threshold decision for Republicans is whether they want actual tax cuts or a vetoed tax-cut bill that would give them an issue to take to voters in next year's elections. Odds seem to favor going for the issue. GOP tax cutters could almost certainly write a bill the president would sign, but it would probably be so modest that it would leave the party's most ardent tax cutters cold and -- in the view of some Republican strategists -- convince the party's key supporters that GOP congressional leaders are too fearful of Democrats to push a bigger bill.

    Potential bills range from a tiny, $3 billion or so, one-year extension of expiring tax breaks to the mammoth, nearly $800 billion, 10-year tax cut (as yet undefined) that Republicans carved out in their budget plan this year. By comparison, the 1997 bipartisan balanced-budget deal contained tax cuts worth about $275 billion over 10 years.

    The good news for Republicans this year is that there is money coming to pay for big tax cuts. Until now, the entire federal budget surplus has been generated by the excess Social Security payroll taxes being collected to pay baby-boomer retirement benefits in the next century. Touching that money for tax cuts is a political no-no -- when Republicans tried to do it last year, the party split at the seams. House Republicans passed a tax-cut bill, but Senate Republicans let it die, fearful that Democrats would hammer them for raiding Social Security to pay for it.

    This year, though, projections show that the rest of the federal budget is in such good shape that it will begin producing surpluses outside Social Security in 2001, and Republicans consider that money fair game. In April, Republicans approved a budget that orders the House and Senate tax-writing committees to produce tax-cut bills by July.

    But the bad news for Republican leaders is that despite that seeming unity, the party is split between those who want a big, aggressive tax cut that will energize their political base and those who fear that will carry the party into a trap, where Democrats will portray them as fiscally irresponsible or friends of the rich -- or both. After all, Clinton has twice routed GOP tax cutters, accusing them of trimming Medicare to fund tax cuts in 1995-96 and blocking their tax-cut plans in 1998 by charging that they wanted to raid Social Security.

    Some Democrats salivate at the prospect of doing it again, especially in the House, where the Republicans' six-seat majority is so thin that a determined group of GOP moderates could conceivably block leaders' plans for a big tax cut, fracturing the party on the eve of the crucial 2000 elections. "We've had that battle now twice; we've won it both times. I'm not sure why Republicans keep coming back for more," said Mark Mellman, a Democratic pollster.

    Perhaps they do it because they feel they have no choice, and because no other issue so clearly draws a line between the two parties.

    "The reason why God put Republicans on earth is to cut taxes, and if they don't do that they face political death," said Marshall Wittmann, director of congressional relations for the Heritage Foundation, a conservative think thank. "It is imperative for the Republicans to produce a tax bill this year."

    Democrats Democrats have happily played spoiler in recent tax-cut battles, enthusiastically joining with Clinton to attack Republicans for supposedly wanting to pay for tax cuts for the rich by slashing Medicare or Social Security.

    But the reality is that Democrats have farmers, married couples, small-business owners and senior citizens among their constituents, just as Republicans do. At some point, it becomes difficult to vote against giving them tax breaks.

    When the House Ways and Means Committee approved a tax-cut bill last year, Chairman Bill Archer (R-Tex.) tried to lure Democratic votes by including tax breaks that Democrats had supported in the past. Democrats applauded the tax cuts but voted against the measure on the grounds that it would have tapped into budget surpluses generated by excess Social Security payroll taxes to pay for them.

    But now that the rest of the budget is projected to start producing surpluses as well, Democrats have lost a big reason for voting no.

    A modest bill that taps into a piece of the surplus "may be very difficult to vote against," a senior House Democrat said.

    "If Archer is smart, he'll come up with a package very much like last year's," said a House Democratic aide. "That poses the hardest challenge for us."

    If the GOP does propose a modest package, Democrats also will confront a political problem: Passage of a modest but signable tax bill could make the Republicans look competent and productive at a time when Democrats are only six seats short of regaining control of the House. "You achieve incremental advances and what you're saying to the American people is, divided government works," said Robert D. Reischauer, a senior fellow at the Brookings Institution.

    White House
    At least for now, administration officials are sticking to the edict Clinton laid down in his State of the Union address in January: We will not consider using the surplus for tax cuts until Social Security and Medicare are fixed.

    "Everyone's tax-cut priorities should only be considered in the context in which Medicare and Social Security have been successfully addressed," said Gene Sperling, the president's national economic adviser.

    Since trouncing GOP presidential candidate Robert J. Dole in 1996, Clinton administration officials have felt confident in confronting Republicans over tax cuts. Dole's proposal for a 15 percent across-the-board tax cut failed to do much for his candidacy, especially after Clinton and other Democrats attacked it on the grounds that it was risky and fiscally irresponsible.

    For years Republicans profited from attacking "tax-and-spend" Democrats and casting the GOP as the party of fiscal discipline. Clinton has tried with some success to reverse that dynamic, casting Democrats as the party of restraint while portraying Republicans as fiscally irresponsible for pursuing huge tax cuts funded by budget surpluses that might never materialize.

    Here are four tax bills Congress could consider this year, in decreasing order of likelihood of enactment:

    Minor bill. Probability: good. If they do nothing else, the GOP Congress and Clinton will probably agree to a small measure that extends expiring tax breaks known in tax jargon as "extenders." These go mostly to businesses for activities such as research and development or hiring long-term welfare recipients. Clinton signed a similar bill just last fall, but some of the tax breaks expire again as soon as next month.

    Minimum-wage package. Probability: not bad. Democrats want an increase in the minimum wage, which Republicans might be willing to accept if they could package it with tax breaks that would make it more palatable to the businesses that will have to pay the higher wages -- just as Congress did in 1996. This bill is a natural home for the extenders, but lawmakers also are talking about adding more tax breaks, such as increasing the deductibility of restaurant meals from the current 50 percent to 80 percent.

    Modest package. Probability: less than 50 percent. Republicans, Democrats and administration officials are in surprising agreement on a modest package of tax cuts. It could include provisions to ease the "marriage penalty," raise the limit on the amount of outside income Social Security beneficiaries can earn without losing benefits, underwrite school construction bonds and accelerate a plan to allow self-employed people to deduct the full cost of their health insurance. Rep. Nancy L. Johnson (R-Conn.) and a group of almost two dozen House GOP moderates -- which along with Democrats would produce a majority -- have introduced a bill with some of these provisions. One big problem: It is weak tea for the GOP's aggressive tax cutters, who favor something much bigger.

    Shoot the moon. Probability: zero. Since last year, GOP leaders have been agitating for big, party-defining tax cuts, such as a 10 percent across-the-board reduction in income tax rates. But Democrats attacked that on the grounds that it would give the biggest benefits to the wealthiest taxpayers, and support evaporated as most GOP tax cutters began looking for a package that would protect them against charges that they favor the rich. If Republicans succeed in passing such a bill, they will be inviting a veto.

    Whose Tax Cut?
    Democrats and Republicans are generally in agreement on getting tax breaks for such constituents as farmers and married couples. But other factors may make a deal impossible.

    © Copyright 1999 The Washington Post Company

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