By Peter Baker and Eric Pianin
While producing their own tax simplification formula had political appeal, senior administration officials said they kept coming back to the conclusion that there was no way to do so without increasing taxes on the middle class or derailing the plan to balance the federal budget by 2002.
But House Speaker Newt Gingrich (R-Ga.) yesterday said that not only should President Clinton move to cut taxes further, but he also should submit a budget for the coming year that is in balance, three years earlier than called for under an agreement last summer between the White House and Congress.
Gingrich said in an interview that tax revenues, which are growing faster than anticipated, coupled with selected spending cuts should enable the White House and Congress to find a way to make additional tax cuts, provide for high-priority new spending and still produce the first budget without a deficit in three decades.
"If he proposed a balanced budget next year we in Congress would be very responsive to it," Gingrich said. "We don't view that as repudiating the budget agreement, but building on it. It would electrify the country for the president to propose balancing the budget next year."
But the White House has already decided that any attempt to eliminate the deficit in fiscal 1999, even under the rosiest scenarios, would cause too many upheavals. "The best way for us to get a balanced budget earlier is to stay with this fiscal discipline the president has led over the last five years and resist the temptation to spend money we don't yet have," said Gene Sperling, head of the White House National Economic Council.
Rather than make major tax proposals, Clinton and his aides probably will sit back and let congressional Republicans take the lead, on the theory that they are too divided among themselves to forge a unified approach and, even if they do, restructuring the tax code would require unpopular trade-offs that could be exploited by Democratic candidates in the 1998 midterm elections. "This is an issue where we're better off counterpunching," said one top official.
Clinton tipped his hand during a news conference last week, when he suggested that preserving the progress made in reining in decades of deficit spending was more important than further reducing the tax burden.
"I can't say at this time that I will have anything to say about tax cuts in the State of the Union," he said. "Keep in mind that . . . we have worked so hard to make this country work again. And we need to be looking to the future and our long-term challenges now."
Even as Gingrich called for changes in Clinton's 1999 budget proposal, White House officials said Clinton has completed the major conceptual choices in that budget, which will not be unveiled until February. Only some "cleanup" decisions" are left to be made in the next few days.
According to aides, the spending blueprint includes several targeted tax cuts intended to further specific policy goals, such as increasing the tax credit for child care costs and providing tax incentives for energy efficiency as part of the administration's strategy for curbing the greenhouse gases blamed for global warming.
All told, the tax breaks will amount to more than $10 billion over five years, according to aides. That is a fraction of the $124 billion in tax cuts approved as part of the balanced-budget agreement reached by the White House and Congress.
Even before Gingrich's comments yesterday, key Republicans said they were disappointed in Clinton's reluctance to embrace a tax overhaul but were prepared to turn it into a defining issue for the 1998 elections.
"At first, I thought it was something where we could reach accommodation and get something done," said Rep. David M. McIntosh (R-Ind.), who is sponsoring legislation to repeal the "marriage penalty" that increases taxes on joint filers. "If the president gets cold feet and doesn't want to do something about tax reform, I'm happy to take it into the election and I think that's a winner politically for us."
While the budget proposal is essentially complete, high-ranking administration officials were not willing to rule out conclusively that Clinton will come out with his own, more significant tax plan later, perhaps in his State of the Union address next month. However, they said they considered it highly unlikely. If he did so, the plan would be more general in nature rather than a detailed scheme.
During last week's news conference, Clinton said any tax restructuring presented to him should be judged against certain criteria, such as being fiscally responsible, fair to the middle class and good for the economy. No plan he has seen so far, aides said, would satisfy those standards.
"We are still reviewing options," said Sperling. "But when you get to the details, meeting the president's test of fiscal discipline and fairness is harder than it seems."
Since September, senior economics officials have been meeting as often as three times a week in Sperling's office to study tax reform and other long-term issues, including how to fix Social Security and what to do once the budget produces surpluses. Among those who attend are Treasury Secretary Robert E. Rubin and his deputy Lawrence H. Summers, budget director Franklin D. Raines, economics adviser Janet Yellen, White House lobbyist John L. Hilley, presidential advisers Rahm Emanuel and Paul Begala and Vice President Gore's chief of staff, Ron Klain.
The White House flirtation with a tax code revisions increased during the fall battle over the Internal Revenue Service. Senate hearings on IRS abuses allowed Republican leaders to outflank the president, who stood in the way of plans to restructure the much-loathed agency. Finally, after winning face-saving changes in the legislation, the administration reversed itself and agreed to support it.
To recover political momentum, and prevent the GOP from capturing an issue that could help them in the election, administration officials considered options that would simplify the tax system.
One problem they ran into was that any system that had fewer tax brackets or just one, so-called flat tax rate that applied to every taxpayer would cut taxes for some and raise them for others, namely the middle class. The only way to make sure that no one had to pay more, officials said, would be to set rates so low that it would cost the government many billions of dollars and jeopardize a balanced budget.
Moreover, officials concluded that getting rid of deductions and credits to simplify the tax code would move in a direction opposite of where the administration has been going. In the last year, for instance, Clinton pushed through a child tax credit, a new credit and deduction for higher education and other breaks to encourage businesses to hire welfare recipients. Among ideas on the table for next year are more tax incentives for retirement savings.
All of those would be eliminated under Republican "scrap the code" proposals. The GOP has two main ideas for a simpler system setting a single flat income tax rate without most deductions and credits, or replacing income taxes altogether with a national sales tax.
Congressional leaders hope to start a national debate about how to replace the current code during 1998 and then move toward crafting specific plans in 1999 either for legislative action or as a precursor to the 2000 presidential election. In the meantime, they plan to push for significant tax cuts in the coming year, including the proposal to repeal the marriage penalty. Some congressional Democrats, including House Minority Leader Richard A. Gephardt (D-Mo.) and Sen. Edward M. Kennedy (D-Mass.), are jumping into the debate with their own tax revision plans.
White House officials are counting on the prospect that tax simplification will spark a backlash against Republicans once voters begin examining the consequences, particularly if popular deductions for mortgage interest and charitable contributions are to be sacrificed.
"They're walking right into a political disaster," said one senior aide to the president. Another cited an old maxim of the late Republican strategist Lee Atwater in saying, "Don't get in the way when your opponents are destroying themselves," and added: "If we just sit tight over time, the Republicans will destroy themselves."
GOP officials don't see it that way and believe Clinton will suffer by not offering his own plan. "It was almost like they were toying with tax reform a couple weeks ago because they didn't have anything else," said Michele Davis, press secretary for House Majority Leader Richard K. Armey (R-Tex.). "Now they seem to have dropped it but don't have anything else."
"While the president may not be ready for tax reform," added Ken Johnson, spokesman for Rep. W.J. "Billy" Tauzin (R-La.), "it's clear that the American people are."
The balance-the-budget-early concept Gingrich endorsed yesterday was first advanced by House Budget Committee Chairman John R. Kasich (R-Ohio) and other deficit hawks. Among the programs in which Gingrich said money could be saved was the earned income tax credit, a subsidy for the working poor that Republicans long have contended contains fraud and waste.
To cut taxes, balance the budget and increase spending in areas Democrats and Republicans determine to be high priority, "We should be as aggressive and creative in 1998 as we were in 1996 and 1997. There's no reason we should relax and coast," Gingrich said. But a senior White House official was critical of Gingrich's targeting of the earned income tax credit, saying that once again a Republican is proposing to pay for tax cuts that benefit the wealthy at the expense of the poor.
© Copyright 1997 The Washington Post Company