Clinton Expected to Offer Tax Cut of $55 Billion

In his nationally televised speech tonight, President Clinton is expected to unveil a package of tax cuts totaling $55 billion to $60 billion over five years that would include a tax credit for middle-class families with children who are 6 or younger and a separate deduction for the costs of post-secondary education, Administration sources said Wednesday.

The per-child tax credit--limited to families with incomes of $100,000 and under--would deprive the government of about $7 billion in tax revenue annually--about $35 billion in five years. The five-year cost of the education and training deduction will be about $20 billion, sources said.

The exact size and scope of the per-child credit was still under discussion late Wednesday, Administration officials cautioned, but it is likely to be in the range of about $300, and thus would provide less tax relief than a Republican proposal for a $500 credit for all dependent children.

To prevent an increase in the size of the federal deficit under its plan, the Administration has been considering a series of dramatic spending cuts in its upcoming budget, which is scheduled for release in February.

Included would be the imposition of a new cap on the federal portion of spending on Medicaid, which pays for medical care for the poor, sources said. That cap would rein in one of the government’s fastest growing programs and could represent one of the biggest single spending cuts proposed by the White House.

While the Administration has backed away from proposing the elimination of any Cabinet departments, it is likely to call for spinning off major functions of the Energy Department to private industry, sources said. In addition, the Administration is planning to consolidate major programs at the Department of Housing and Urban Development, while transforming many of the agency’s spending programs into block grants for states and localities.

The announcement of the tax package is likely to be the highlight of President Clinton’s brief address, which is designed to lay out the Administration’s agenda for the coming year. But in the 10-minute speech, scheduled for 6 p.m. PST, the President is unlikely to detail his spending cut proposals.

While senior Administration officials cautioned that the details still are subject to last-minute tinkering, they noted that the tax credit for young children likely would be fully available for families with incomes up to $60,000. It then would be phased out gradually for families with annual incomes of between $60,000 and $100,000.

Clinton clearly hopes to use the proposal as proof that he is living up to his 1992 campaign pledge to provide tax relief for the middle class. After he took office in 1993, Clinton argued that he had to abandon the pledge to focus on deficit reduction, which he said was much worse than he had realized during the campaign. His decision to abandon that pledge haunted Democrats during the 1994 midterm election campaign, when Republicans proposed their own tax cut.

The White House has been deeply divided over whether the President should reverse course and call for a tax cut at all. During sharp, internal debates that continued until late last week, some of Clinton’s most senior economic advisers, including Alice Rivlin, director of the White House Office of Management and Budget, argued that a middle-class tax cut would endanger the progress the Administration has made on deficit reduction. What’s more, they argued, a middle-class tax cut would not provide a significant boost to the economy.

Indeed, with the economy already operating at close to full capacity, a tax cut would almost certainly prompt the Federal Reserve to raise interest rates to offset any stimulative effects--unless offsetting spending cuts are enacted at the same time.

“The question of the timing of a tax cut is a very serious issue,” noted one senior Administration official Wednesday. “If you cut taxes and only say you will pay for it down the road, you will have real fiscal problems and the Federal Reserve will raise rates and take away the gains.”

But the political necessity of responding to Republican plans for lower taxes finally won out.

“There was a huge battle inside the Administration over whether to do it but the people arguing against it lost,” one source familiar with the debate said.

Yet Clinton will still find that his plan looks like little more than a pale imitation of the Republicans’ proposal to give almost every family a $500 tax credit for each child. That per-child tax credit, included in the House Republican “contract with America,” would be available to all families earning up to $200,000 a year and would reduce government revenue by $107 billion over five years.

The Republicans have been freer with their promises of sweeping family tax cuts than Clinton because the White House insists that it must find spending cuts to offset the revenue lost because of any tax cut--while GOP lawmakers have not said how they would make up for lost revenue.

However, as criticism of the Republicans’ failure to identify offsetting cuts has mounted, the new House GOP leadership has begun to scramble to develop a full alternative budget proposal, including deep and specific spending reductions. Rep. John R. Kasich (R-Ohio), slated to become House Budget Committee chairman, has been asked by incoming Speaker Newt Gingrich (R-Ga.) to come up with a complete list of spending cuts to offset the tax cut proposals in the party’s so-called contract.

Besides financing the Republican tax cut agenda, Kasich’s budget proposals may serve to make Clinton’s spending cut plans look modest. Republican leaders have noted that Kasich is planning far more dramatic budget cuts than the White House. Kasich’s budget plans are not likely to be unveiled until well after the new Congress convenes in January, however. And it remains unclear whether the House leadership will call for votes on the Republican tax cuts before Kasich delivers his spending plans.

Meanwhile, Clinton is flanked on the left by congressional Democrats, who are proposing a middle-class tax cut focused on a lower income range than the White House is targeting. Rep. Richard A. Gephardt (D-Mo.), who will be House minority leader in the next Congress, on Tuesday announced a plan for a tax cut aimed at families earning $75,000 a year or less.

On the spending side, Administration sources noted that the White House has been looking for savings in Medicaid.

The Administration also is considering a “back-loaded” individual retirement account. That proposal, similar to one in the GOP “contract with America,” would limit the deductions taxpayers could take when they make contributions to their IRAs but would allow them to make tax-free withdrawals when they retire.

The proposal, originally championed by outgoing Treasury Secretary Lloyd Bentsen when he was in the Senate, is popular because it will not cost the federal government much until long into the future and does not require immediate offsetting spending cuts.

* HUD TARGETED FOR CUTS: Sharp reductions are planned for agency next year. A42

Tax Planning

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