A Bid for Permanent Tax Cuts

As part of his ambitious second-term agenda, President Bush renewed the drive Monday to make his first-term tax cuts permanent and add some hefty new tax breaks -- an effort that experts said would cost the government at least $1.4 trillion in revenue over the next decade, possibly much more.

Bush coupled his latest tax-cut plan with a proposal that, if approved, would require congressional budget-makers to count most of the first-term tax cuts as permanent even before approving their extension beyond 2010, when they are set to expire.

For the White House, the procedural device offers the political advantage of making it appear that the tax-cut extensions would have no effect on federal revenue and deficits beyond what they already have had.

Analysts said the proposal neatly captured Bush’s desire to make the cuts so much a part of the nation’s economic landscape that they would become untouchable.

“The administration seems to want to give its tax cuts the same kind of permanency that our spending on entitlement programs now has,” said C. Eugene Steuerle, a former Reagan Treasury official now at the centrist Urban Institute.

Although Bush proposed permanent extension of almost all his first-term tax cuts, there was one notable exception: He did not call for extending the protections given to middle-class taxpayers against the so-called alternative minimum tax, or AMT.

The AMT was designed to make sure that wealthy Americans paid at least some income tax every year. The AMT recalculates one’s taxes, imposing slightly lower rates and eliminating deductions for children, state income taxes and many business expenses. But with inflation and the general rise of wages, it has begun to affect more middle-class taxpayers as well.

Treasury officials said Monday that the administration had decided to hold off on extending the current protection against the AMT, set to expire at the end of this year, until a Bush-appointed commission came up with a way to simplify the entire federal tax system. The panel is scheduled to make its proposal at the end of July.

In the meantime, the administration appears to be counting on the AMT, as well as on economic growth and inflation, to keep government revenue rising and to hold down the deficit. According to White House projections, measured both in dollars and as a fraction of the nation’s economic output, federal receipts will climb in each of the next five years -- the time frame covered by the proposed budget.

Treasury officials said that an estimate of the cost involved in extending protections against the AMT was not immediately available. But the nonpartisan Congressional Budget Office set the 10-year cost, together with the additional federal borrowing that it would require, at half a trillion dollars.

Extension of the president’s first-term tax cuts might have seemed a political cakewalk at another time. But the administration is now predicting that the deficit will hit a record $427 billion this year. And the declines projected for subsequent years depend largely on Congress approving substantial cuts in such politically sensitive programs as farm subsidies and healthcare payments for poor people and veterans -- cuts that may well fail to win approval.

As a result, the proposal to make the tax cuts permanent seems certain to meet stiff opposition. Indeed, Democrats were lining up Monday to hurl insults at the White House tax-and-spending plan.

Critics were especially incensed at what they charged was an administration attempt to mask the full price of its proposed tax cuts by pushing costs outside the budget plan’s official five-year window.

Administration officials provided both five- and 10-year figures. But as is customary, the latter numbers did not appear in the budget, only in an ancillary document.

Chief among the administration’s proposed new cuts would be a pair of tax-break-heavy savings plans, a so-called retirement savings account, or RSA, and a lifetime savings account, or LSA.

Administration officials predict that the two accounts would actually make money for the government in their first five years as investors rolled out of existing tax-advantaged accounts such as IRAs and 401(k)s, paid the taxes they owed and deposited what remained in the new accounts. But independent analysts said that once the rollovers were completed, the accounts could cost the government huge sums in foregone tax revenue.

An analysis by the nonpartisan Congressional Research Service concluded that when fully phased in, the accounts would carry a 10-year price tag of $300 billion to $500 billion.

Americans could contribute up to $5,000 a year in an account and families could create separate accounts for children and deposit still more. Although there would be no tax break for making the contribution, anything that account holders earned on their money would be free of taxation.

Critics say that rich Americans could use the accounts to shield much of their investment income from taxation, while others could not reap significant benefits from the program because they would not have enough surplus money to invest in the accounts.

Steuerle, the former Reagan administration official, criticized the administration for proposing more tax cuts without explaining how it would pay for them. He said that Bush, in proposing to lock in his first-term tax cuts and in pushing the new tax-favored savings accounts, was promoting what amounted to a mirror image of entitlement programs he regularly criticized.

“The administration wants to establish a permanently lower level of taxation even before enacting the lower expenditures needed to make the system come into balance, just as entitlement programs try to build in a permanently higher level of spending without saying how the benefits will be paid for,” Steuerle said.

What’s emerging, he said, is “a game of chicken” between Bush and Republican tax-cut advocates and Democratic defenders of programs such as Social Security and Medicare.