Bush administration officials said yesterday that they could accept slowly phasing in their plan to slash taxes on corporate dividends as a way to squeeze President Bush's $726 billion "jobs and growth" package through the $550 billion window approved by the House.
The comment kicks off what promises to be heated negotiations next month over the shape of a tax cut. A smaller, phased-in tax cut may appeal to some moderate Republicans, and even some Democrats, who are primarily worried about the ballooning budget deficit, administration officials said. But even administration allies said that scaling back the proposal also would undercut the White House's contention that the plan would stimulate the flagging economy.
"It certainly undermines the magnitude of the stimulus," a Republican business lobbyist said.
Treasury officials said that while all of the elements of the Bush plan -- including an acceleration of tax cuts passed in 2001, tax breaks for small business investment and the centerpiece dividend proposal -- could fit into the House budget package, they could never be crammed under the Senate's $350 billion 10-year limit on tax cuts.
Budget blueprints passed in the House and Senate allow tax cuts to be approved in an expedited fashion, especially in the Senate where any tax package that adheres to the budget's window would require 51 votes in the 100-seat body rather than the 60 votes required to overcome filibusters.
Even with the House's larger sum, it will take some doing, however. Bush wanted dividends paid out of fully taxed corporate profits to be tax-free immediately, a proposal that would cost the Treasury $396 billion through 2013. The White House would consider lowering that cost by phasing it in over 10 years. Another way to cut costs would be to make the tax cuts effective when the president signs the bill, instead of making them retroactive to the beginning of this year.
Rep. Jim McCrery (R-La.), chairman of the House Ways and Means subcommittee on select revenue measures, said he will propose including in an initial tax bill Bush's entire dividend proposal, plus the president's plan to accelerate income tax rate cuts scheduled for 2006. Those measures would cost a total of $522 billion over 10 years.
Republican leaders would then hold separate votes on the president's proposals to accelerate the cut in the "marriage penalty" tax, expand the child credit and expand the small-business investment tax break. In effect, they would dare Democrats to oppose those popular tax cuts, hoping they could muster 60 votes in the Senate.
Ways and Means Committee Chairman William M. Thomas (R-Calif.) has floated a different idea: Taxing both capital gains and dividends at 8 percent for taxpayers in the lowest tax bracket and 18 percent for all others. That idea would cost the Treasury about $234 billion over 10 years, a Senate tax aide said.
"It's going to look like sausage, no question about it," said a Republican tax lobbyist.
No matter how it is sliced or packaged, it is still unclear how a $550 billion tax cut could pass the Senate. The administration is applying intense pressure on two Senate Republicans -- George V. Voinovich of Ohio and Olympia J. Snowe of Maine -- as well as some Democrats to accept a tax cut of that size that would be agreed to by House and Senate negotiators before Memorial Day.
Allies of the president say the end of the war in Iraq has strengthened his political hand while undermining the contention that Congress should not be cutting taxes during a war. Before the war, some economists, including Federal Reserve Board Chairman Alan Greenspan, had suggested that no stimulus was necessary because the economy would accelerate on its own after hostilities ended. That, so far, has not happened.
But Republican opponents of the Bush tax plan said yesterday that they have not changed their minds. If anything, the most fundamental reason to oppose the tax cut -- the budget deficit -- appears to be getting considerably worse. Initial tax receipt tallies for the pivotal month of April indicate a deficit for the year that will be $20 billion to $30 billion higher than anticipated when the White House projected a deficit of $304 billion for 2003, said G. William Hoagland, a senior budget analyst for Senate Majority Leader Bill Frist (R-Tenn.).
"That's bad," he said.
And that does not count the $79 billion emergency spending bill passed to fund the war and its aftermath. For the first six months of the fiscal year, the government ran a deficit of $248 billion, according to the Congressional Budget Office, suggesting that the dire forecasts of a $500 billion deficit this year may not have been so outlandish.
Those are the numbers that Snowe is watching, said her spokesman, Dave Lackey. "She disagrees with deficit-financing long-term changes like the dividends plan," he said. "She's drawn that line. She's comfortable with it."