President Bush yesterday sought to revive the fortunes of his $726 billion tax cut plan amid signs that the administration and its Republican allies in Congress are resigned to scaling back the proposal.
The president convened a White House meeting of 13 Wall Street economists as the Treasury Department put the finishing touches on a report that will argue the proposed tax cut is less expensive than official government estimates show. But there were a number of indications that costs from the Iraq war and deficit fears were causing support for Bush's plan to soften.
In recent days, the Congressional Budget Office, under the command of an economist who just left the White House, has dealt a double blow to the administration. The CBO said the effect on the economy of Bush's budget, including his tax plan, "is unlikely to be dramatic," and possibly could be negative. The CBO also gave estimates of the cost of war that were slightly higher than some administration figures, and it warned of the possibility of "substantial costs in later years" and "occupation" costs of $1 billion to $4 billion per month.
Worries about growing deficits -- this year's shortfall is approaching a record $400 billion and Congress is contemplating legislation raising the government's debt limit -- are compounded by fears that an extended conflict in Iraq could further delay a return to economic prosperity.
The Commerce Department reported yesterday that U.S. factory orders fell 1.5 percent in February, the worst showing in five months, while the Institute for Supply Management reported that manufacturing activity contracted in March. Though stock markets rallied on favorable developments in Iraq, economists are predicting the nation's unemployment rate, at 5.8 percent in February, may have climbed to 5.9 percent or 6.0 percent in March; that report is due Friday.
Amid these concerns, lawmakers said yesterday that Bush's $726 billion tax cut proposal will be trimmed by as much as $226 billion in the next week or so, and possibly by more later this year. The House has passed the outline for a $726 billion plan, while the Senate whittled it down to $350 billion. "Somewhere in between is where [a bill] can pass both the House and Senate," House Majority Leader Tom DeLay (R-Tex.) said Tuesday.
Commerce Secretary Donald L. Evans and other administration officials, though they continue to press for the entire Bush tax cut, have said in private conversations with lawmakers and staff that they anticipate a tax cut of around $550 billion. A key GOP leader close to the administration said the number is likely to be close to $536 billion. Reductions in income tax rates and increases to the child tax credit, key components of the Bush plan, are likely to survive, lawmakers said.
Speaking on CNBC Tuesday, Bush's budget director, Mitchell E. Daniels Jr., hinted at a scaling back of the proposal by saying Bush "wants to go for all that he can, recognizing in the end that Congress controls."
With rising Iraq war costs and economic doldrums at home, the administration is seeking to convince lawmakers and the public that the tax cut is both affordable and necessary to restore economic growth. The administration is planning to release early next week a report that the cost of Bush's tax cut is actually 30 percent to 40 percent less because of the economic growth -- and therefore tax revenue -- the plan spurs. It will argue that the Iraq war, rather than being reason to limit the tax cut, increases the need for economic stimulus. "If we put our economy on a growth plan, we'll eventually grow our way back to surpluses," a senior administration official said.
That sentiment, however, was undermined by the CBO, which last week released a report looking at the price tag of Bush's tax cut, taking into account increased economic growth. Conservatives have long argued for such "dynamic scoring" of tax cuts, because it makes them appear less costly to the Treasury.
But CBO said any such effects would be "modest." Rather than the 30 percent to 40 percent reduction in the tax cut's cost predicted by the administration, CBO determined such "supply-side economic effects" would be no more than 15 percent over five years -- and could actually increase the cost of the tax cut by as much as 10 percent. This is because of "opposing effects" that could expand or contract the economy.
The administration dismissed the CBO report because it looked at Bush's overall budget proposal and not the $726 billion tax cut by itself. "They have shed no light" on the tax cut's benefits, a White House economist said yesterday. Other economists, however, said it was necessary to look at the overall budget because tax cuts could force cuts in spending elsewhere or increases in debt payments. The effect on the economy "could be positive, it could be negative, but given the size of this tax cut it's likely to be small in any event," said Dan L. Crippen, a former CBO director.
Democrats said the Bush tax plan will drive deficits to untenable levels and leave future generations with an unbearable amount of federal debt. "What I see is [Bush and Congress] heading us off the cliff to massive debts and deficits at the worst possible time," said Sen. Kent Conrad (D-N.D.).
While all the focus has been on House-Senate budget talks, the real showdown will come later this year when the Senate Finance Committee writes its tax bill. Bush appears headed for a major setback then, too.
Republicans hold a one-seat majority on the Finance Committee, but Sen. Olympia J. Snowe (Maine), an influential Republican moderate, has said she will side with Democrats and seek to hold the final tax cut to $350 billion. Finance Committee Chairman Charles E. Grassley (R-Iowa) suggested in a recent interview that he would drop the plan to eliminate taxation of dividends if Republicans can't win a tax cut significantly larger than $350 billion. Sen. Lincoln D. Chafee (R-R.I.), who often sides with Democrats on key votes, said the four or five GOP senators willing to buck Bush are under pressure to back the president during wartime. "I am sure they will pressure us ever more" as the final votes near, said Chafee.
Sen. John McCain (R-Ariz.), who opposes any new tax cuts until the costs of war is known, said the message from GOP leaders is "hold the line, boys." House GOP moderates don't appear to have the muscle or motivation to fight the president in the House. "We have to have as large of a tax cut as we can," Rep. Christopher Shays (R-Conn.) said at the first official meeting of House-Senate budget negotiations.
Still, even if the House holds strong on a compromise number of around $550 billion and the Senate passes a $350 billion package, as many expect, that means the Bush plan could be scaled back even more later this year when the two chambers seek a final compromise.