Democrats, Bush at odds over tax cuts

As signals of a weakening economy grow louder, the Bush administration and congressional Democrats are considering new measures, including a fresh round of tax cuts, designed to stave off recession.

But while both sides of Washington’s policy debate appear to favor some kind of tax-cut package to spur economic growth, there is little sign that they are near agreement on what kind of cuts should go to whom.

“I’ve worked with Congress to cut taxes, and pro-growth economic policies work,” President Bush told business and civic leaders in remarks Monday to the Union League Club of Chicago. “When you cut taxes, it means that people have more money to save, spend or invest.”

Bush acknowledged that recent economic signs had been worrisome, particularly a weak job-creation report last week that pushed the unemployment rate to a five-year high.

“We cannot take economic growth for granted,” Bush said in some of his most sober remarks to date on the flagging economy, citing the housing sector slump and record-high energy prices. “Recent economic indicators have become increasingly mixed.”

But while favoring tax cuts as the likely solution, the only ones that the president proposed are ones that he has long advocated -- and that Democrats in Congress have repeatedly rejected. Those include extending two rounds of tax cuts set to expire in 2011, and repealing the estate tax.

“A tax change in 2011 will provide no help to consumers and businesses in 2008, and will not spur economic activity now,” Sen. Richard J. Durbin (D-Ill.), the Senate’s No. 2 Democrat, said in a conference call after Bush’s remarks.

In recent days, the administration has sought to reassure jittery financial markets by emphasizing the economy’s strength while acknowledging the increasing anxiety felt by consumers, workers and Wall Street.

Speaking to financiers in New York on Monday, Treasury Secretary Henry M. Paulson Jr. said he expected more bad news.

“The housing downturn and credit disruption will, as I have said for some time, weigh on our economy and impose a penalty on our economic growth,” Paulson said. “We will likely have further indications of slower growth in the weeks and months ahead.”

Administration officials, including Paulson -- a former chairman of Goldman Sachs who in recent months has taken the lead in forming the administration’s economic policies -- are evaluating various measures that could slow or stop the feared slide into recession. Such measures are expected to be announced during Bush’s State of the Union address Jan. 28.

Meanwhile, Democrats are discussing an economic stimulus package of their own.

Rep. Rahm Emanuel (D-Ill.), a member of the House Democratic leadership who was praised by Bush for attending the speech in his hometown of Chicago, indicated that his party was unlikely to support the president’s proposals.

“We’re not taking into account what he said today or what he has said in the past,” Emanuel told reporters afterward. The president’s policies are “skewed to the well-off and upper class, and we think that after seven years, the middle class deserves a tax cut.”

House Speaker Nancy Pelosi (D-San Francisco), in a statement from Washington, accused Bush of wanting to “maintain the status quo.”

“We will propose pro-middle-class, pro-growth and pro-job-creation initiatives that ensure our economy works for all Americans, not just the privileged few,” Pelosi said.

According to a Democratic staff member familiar with the party’s discussions, Democrats also favor new tax cuts -- probably in the form of tax rebates -- but are likely to increase unemployment benefits and other programs assisting those facing economic hardship.

“It could be a hundred different things,” said the staff member, who spoke on condition of anonymity because the discussions were still preliminary. “The Democrats are going to want to address the meat-and-potatoes issues people face -- keeping their homes, access to affordable healthcare and [making] sure that folks who are losing their jobs have some help. Middle-class tax cuts and credits would be along those lines.”

Although there appears to be little common ground among the administration and Congress, and Democrats and Republicans, no legislation is likely to pass without some agreement. Democrats hold a slim majority in each house, and the president has a record of vetoing spending bills he doesn’t like.

Durbin acknowledged that the capital’s partisan fighting would have to ease in order to get any plan passed.

“It will be extremely difficult to pass anything if the Republican leadership continues their filibuster philosophy,” he said.

maura.reynolds@latimes.com

p.j.huffstutter@latimes.com

Reynolds reported from Washington and Huffstutter from Chicago.