Proposed Cuts a Dream Deferred for Taxpayers

A word to the wise, taxpayer: Don’t start spending the money politicians are promising from federal tax cuts.

Amid all the uncertainty about competing tax-reduction plans bouncing around Washington, one thing is clear: Even if compromise is reached, taxpayers would not see much tangible benefit any time soon.

Indeed, many major provisions of the GOP-backed tax bills in Congress would not take effect for years to come. That is because they hinge on budget surpluses that officials say will not become reality until well into the next decade.

For example, a much-vaunted plan to eliminate the so-called marriage penalty, a key element of the bill coming before the Senate today, would not take effect until 2005. A lot of today’s married couples are likely to be divorced by then. And a House proposal to abolish the inheritance tax would not take full effect until 2009.

Both the House bill, which passed last week, and the Senate measure would slash taxes by a total of $792 billion over the next 10 years. But of that, only $156 billion would go back to taxpayers between now and 2004. And the impact in 1999 and 2000 would be virtually nil.

With the tax cuts deferred, a key question is whether Republicans would get any political boost if few voters feel any effect before the 2000 election.

Voters would not be “going to the polls with a fatter wallet,” said Robert D. Reischauer, a budget expert at the Brookings Institution. “This is a matter of promises.”

Some warn that public discontent would be fueled by the gap between tax-cut rhetoric and the delayed effect of proposed reductions.

“It adds to public cynicism if [citizens] keep getting told they are getting a big tax cut and they don’t get it,” said Dan Maffei, spokesman for Democrats on the House Ways and Means Committee.

GOP strategists are unconcerned, saying that the main point of passing a tax bill is to send a clear message about what the party stands for. “It’s putting our marker down,” said Ed Blakely, communications director for the National Republican Congressional Committee. “If you want to talk about big wedge differences between Republicans and Democrats, this is it.”

President Clinton and Congress are considering tax cuts as part of a broader debate about what to do with the $3-trillion budget surplus expected to accumulate over the next decade.

Both sides are in accord on one matter: none of the surplus attributable to Social Security taxes--about $2 trillion--should be used for anything but Social Security. But a bitter debate is raging on two issues--how much of the remaining $1-trillion surplus should go for tax cuts and precisely what kind of cuts should be made.

Republicans want most of the non-Social Security surplus to be used to lower taxes, including broad-based cuts that affect the rates of every taxpayer. But within the party, disagreements persist on the details--while the House bill ultimately would phase out the inheritance tax, for instance, the Senate measure would raise the amount exempted from the levy.

Clinton, meanwhile, has proposed $250 billion in tax cuts targeted for specific purposes, such as boosting retirement savings.

As the Senate prepared to take up its version of the bill, Democrats on Tuesday stepped up their attack on the GOP plans. They argued that it would be reckless to use most of the surplus to cut taxes rather than reserving more money to shore up Social Security and Medicare to cope with the retirement of baby boomers, especially given the deferred nature of the Republican proposals.

“The whole impact of [the GOP plans] will hit us right between the eyes as the baby boomers retire, Medicare nears insolvency, Social Security starts to show strains,” Clinton said Tuesday.

Republicans responded that, if the money is not given back to taxpayers, it will be squandered by federal bureaucrats on wasteful government programs.

“We should not be bringing this money to Washington,” said Senate Majority Leader Trent Lott (R-Miss.). “We ought to leave it with the people.”

With a final Senate vote expected by Friday, Lott told reporters he hoped for compromise talks beginning this weekend to resolve differences with the House plan.

And exactly how that chasm between Clinton and the Republicans will be bridged remains to be seen. But it is clear that whatever tax cut is enacted, it will have to start small and grow only as the surplus grows because of the commitment both sides have made to finance any tax cut from non-Social Security surpluses.

In 2000, that part of the surplus is expected to total only $14 billion. And Republicans already have begun to eat into that sum with proposals to avoid deep cuts this year in some domestic programs mandated by the 1997 balanced-budget agreement.

Both House and Senate bills assume that only $4 billion of the proposed tax cut would take effect in 2000. So, for example, the Senate bill would cut the tax rate on the lowest income tax bracket from 15% to 14%--but not until 2001. It would expand the number of people who qualify for that bracket--but not until 2007.

The House would cut all income tax rates by 10% over 10 years--but the cut would be only 1% until 2004, then get gradually bigger and only reach 10% in 2009.

In an effort to eliminate the marriage penalty--a quirk in the tax code that forces many couples to pay more when they file jointly than if they filed as single individuals--the Senate would give spouses a choice. They could file separately or jointly, whichever is more advantageous. But that new option would not be available until tax returns are due for 2005.

Many tax cuts are phased in gradually over the 10-year period. So, for example, the House bill would start to phase out inheritance taxes--which now apply to estates worth more than $650,000--starting in 2001. But the tax would not disappear until 2009.

The Senate proposal would raise the amount exempted to $1.5 million, but that would not take full effect until 2007.

One of the few major provisions that would take place immediately is the House proposal to cut capital gains taxes. In fact, that would take effect retroactively to all investments made after June 30. But the Senate bill contains no provision to reduce capital gains.

There are several other pending proposals that, if approved, would show up on 2000 tax forms, but they are relatively narrow. These would:

* Allow more taxpayers to take a deduction for student loan interest.

* Increase deductions for health insurance costs of self-employed individuals.

* Reduce the alternative minimum tax, a mechanism designed to ensure that taxpayers do not eliminate all their taxable income through deductions and other tax breaks.

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Tax Savings

The dueling House and Senate tax cut plans share one trait: Their most sub-stantial reductions do not occur for several years.

Overall tax cut each year in Senate plan

2009: $155 billion

Source: Joint Committee on Taxation