For Congress, election imperils balanced budget

Facing an out-of-whack federal budget and a ballooning debt, congressional Democrats made a simple pledge when they took power in January: If lawmakers increased spending or cut the taxes needed to pay bills, they would find money elsewhere to balance the national checkbook.

But less than a year later, the plans for what was portrayed as a more responsible fiscal future -- enshrined in stringent new budgeting rules -- have collapsed amid a politically explosive debate over taxes.

And as the two parties head into a hotly contested election year, the moment for tough choices and sound fiscal planning appears to have passed, overtaken by political expediency.

“On any given day, it’s easier to pass tax cuts and spending increases without paying for them,” said Jason Furman, a senior fellow at the nonpartisan Brookings Institution think tank and a former economic advisor in the Clinton White House.

“You get more credit for an exciting new program and a tax cut than for being responsible. . . . And that’s exactly what has happened.”

Republicans, intent on claiming a mantle of fiscal responsibility, are nonetheless demanding that the pay-as-you-go rules be suspended so that $50 billion in tax relief next year need not be offset by other tax increases.

Senate Democrats, sensitive about accusations that they are eager to raise taxes, are backing away from a precept they once said would be central to their leadership.

And few budget watchers expect that Congress will make the difficult trade-offs to bring down a national debt that tops $9 trillion, or roughly $30,000 for every American.

“I wouldn’t bet on fiscal courage,” said Robert L. Bixby, executive director of the nonpartisan Concord Coalition, which is a leading advocate of balanced budgets.

“It doesn’t seem to win very often.”

Bixby is among many deficit hawks who looked on in dismay as President Bush and his allies on Capitol Hill turned the budget surpluses that emerged in the late 1990s into deficits. Tax cuts pushed through early in Bush’s first term sapped government revenue. At the same time, Bush signed appropriations bills that boosted federal spending by 25% in just seven years, inflation-adjusted figures indicate.

That in turn produced the record debt. Last year, the interest payments on that debt topped $250 billion, more than was spent in the same period on the wars in Iraq and Afghanistan.

When Democrats assumed the majority on Capitol Hill in January after 12 years of almost complete GOP control, they promised to confront the budget mess head-on, hoping to solidify a reputation for fiscal responsibility that President Clinton had fostered.

“After years of historic deficits, this 110th Congress will commit itself to a higher standard,” House Speaker Nancy Pelosi (D-San Francisco) said at her swearing-in ceremony. “Our new America will provide unlimited opportunity for future generations, not burden them with mountains of debt.”

The House adopted the pay-as-you-go rule -- known as “paygo” in Washington’s abbreviation-rich argot -- the next day. Forty-eight Republicans joined 232 Democrats in backing the proposal; 152 Republicans voted against the package, which also included other new House rules.

In the Senate, where Democrats hold a one-vote majority, the rules were incorporated in the annual budget resolution, which passed 52-47 in March with just two GOP votes.

The paygo rules were based on similar standards worked out in 1990 by congressional Democrats and GOP President George H.W. Bush as the two parties struggled to rein in the huge budget deficits of the Reagan years. The rules were reaffirmed during the Clinton administration. But they were subsequently suspended by lawmakers after helping in the late 1990s to produce the first budget surpluses in three decades.

Today’s rules are vulnerable to budgetary gimmickry by allowing offsetting revenue to be counted years into the future. And although Democrats have cut back pork-barrel spending from its heights under the GOP, they continue to tuck millions of dollars in earmarks into spending bills, sparking criticism from budget watchers.

But paygo has forced Congress to make some tough choices.

This fall, Democrats tried to offset the cost of expanding health insurance to millions of children by voting to raise taxes on tobacco products, including a 61-cent-per-pack increase in the federal cigarette tax. Democratic lawmakers also compensated for a $20-billion expansion of the federal student loan program by cutting federal subsidies to loan companies.

Those measures attracted substantial GOP support, although Bush vetoed the children’s health insurance expansion, citing his opposition to the tobacco tax.

But when House Democrats sought to balance $50 billion in tax relief next year for mostly middle-class taxpayers with a tax hike on some of the country’s wealthiest people, Republicans jumped on them, calling them incorrigible tax collectors. And any consensus behind the paygo budgeting rules crumbled.

At issue now is a plan to spare some 23 million taxpayers from a surprise tax increase next year by exempting them from the Alternative Minimum Tax, an arcane tax provision created three decades ago to prevent a handful of wealthy Americans from avoiding income taxes.

Because the minimum tax was not indexed for inflation, however, it will hit some taxpayers with annual incomes as low as $75,000 next year unless Congress acts.

Adhering to paygo, Democrats have proposed offsetting the lost revenue in part by raising the tax rate on some investment fund managers and partners in private equity firms, many of whom make millions of dollars but pay only a 15% tax rate on much of their income, which they classify as capital gains. If they were subject to the standard income tax, they would pay a 35% rate like other high-income Americans.

“The issue has to be ‘How do you pay?’ ” said House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.), who has argued that lawmakers have an obligation to plug the anticipated budget hole.

But Republicans have demanded that the tax simply be ditched. And they have lambasted Democrats for rushing to raise taxes.

“For Democrats . . . fiscal responsibility means one thing: raising your taxes,” said Utah Sen. Orrin G. Hatch.

Louisiana Rep. Jim McCrery, the senior Republican on the House Ways and Means Committee, explicitly blamed paygo. “The majority has created a rule under which Congress must raise taxes in order to prevent a tax increase,” he said, complaining that the rules make it impossible for lawmakers to cut taxes to stimulate the economy. McCrery and other Republicans argue that the budget rules should not apply to taxes.

The president labeled the Democratic plan to abide by the paygo rules “political theater” and promised to veto any legislation that would increase taxes. “To them, every bill on the floor is an opportunity for a tax hike,” Bush said in a recent speech to Indiana business leaders.

Rangel’s plan to adhere to paygo passed the House 216-193, without a single Republican vote.

In the Senate, Republicans have used procedural rules to block consideration of the House bill on the Alternative Minimum Tax.

And with several moderate Democrats facing potentially tough elections next year, it appears increasingly unlikely that a majority of senators will back a $50-billion tax increase, even if it is coupled with a $50-billion tax break.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who is running for reelection in a state that has voted for Republican presidential candidates in eight of the last nine contests, rejected Rangel’s proposal to adhere to paygo by raising taxes.

And Sen. Charles E. Schumer (D-N.Y.), chairman of the Democratic Senatorial Campaign Committee and a major beneficiary of contributions from the private-equity industry, has been cool to the proposed tax increase.

“Tax is a four-letter word for us,” said one centrist Democratic lawmaker, who fretted that Democrats, by adhering to their pledge to be responsible budget-writers, may be opening themselves up to the tax-and-spend label that dogged the party for decades.

Republicans also are in the unusual position of advocating $50 billion in additional deficit spending while trying to make the case to the American public that theirs is the more fiscally responsible party. Neither the president nor Republican leaders on Capitol Hill -- under whose watch the national debt increased 50% -- have proposed any spending cuts to keep the budget balanced.

Bixby of the Concord Coalition doesn’t expect they will, he said.

“Republicans have hit on tax cuts as a popular theme. And frankly, there is nothing wrong with tax cuts if you cut spending. The problem is, they only want to do half of it,” he said. “This is really a test of whether Congress can set priorities. . . . It’s not looking good right now.”

noam.levey@latimes.com