Boom Times Put Brakes on GOP Tax Cut Drive

The myriad details in President Clinton’s $1.8-trillion budget may never become law in this election year, but this lame duck’s valedictory wish list may accomplish something much broader in the GOP-controlled Congress. For the third straight year, Clinton has found ways to stymie Republicans who want to use the surplus to finance a big tax cut.

The budget surplus has grown into an increasingly bounteous resource for those who would like to cut taxes. But ever since Clinton and the GOP agreed in 1997 to balance the budget, he has argued that there are better things to do with the money.

Two years ago, Clinton kept Republicans from dipping into the emerging surplus with four magic words: Save Social Security first.

Last year, surplus projections burgeoned and Clinton got more specific: Fence off two-thirds of the surplus for Social Security.

This year, he wants to do all that and more: give a $135-billion prescription drug benefit to Medicare recipients, pay off the national debt and spend money on an array of politically appealing programs.

It adds up to an infuriating irony for Republicans. Even as the surplus has grown, it never seems to get any easier for them to cut taxes.

This is not just because of Clinton’s political skills but also because the public, besotted by economic growth, has been cool to the idea of a tax cut as the surplus created by the booming economy has made such cuts possible. That, analysts say, is in part because economic and demographic shifts have wrought a sea change in public priorities. An aging, prosperous populace cares more about retirement and health care than it does about tax cuts.

“Most people don’t feel they need a tax cut, and that plays right into Clinton’s hand,” said Rudolph Penner, a former director of the Congressional Budget Office who is a senior fellow at the Urban Institute.

And many economists think you do not need a tax cut when the economy is already on the verge of overheating.

For the average family, taxes as a share of real family income are down, not up, over the last 20 years, according to Laura D’Andrea Tyson, dean of the Haas School of Business at UC Berkeley and the former chairwoman of Clinton’s Council of Economic Advisors. “And for the majority of American families, tax cuts in a good economic environment are just not on the agenda and are not ranked as highly as concerns about prescription drug coverage and health care.”

While Republicans have persisted in making tax cuts their signature issue, they are beginning to see that Clinton has outflanked them on the issue. On the campaign trail, GOP presidential hopeful Sen. John McCain of Arizona has challenged his party’s tax-cutting orthodoxy. And in Congress, Republicans are scaling down their tax cut ambitions somewhat--pushing primarily for smaller, individual tax measures rather than a sweeping tax cut this year.

Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) essentially accused the Clinton administration of crafting its budget expressly to keep Republicans from cutting taxes. “I sometimes wonder how late of a night they stay up dreaming up ideas so they could tell people you really don’t need a tax cut,” Domenici said.

In this budget and the previous two, Clinton has found ways to capitalize on a dramatic shift in public sentiment that began soon after the 1997 budget deal, the last time that the Republicans got a major tax cut signed into law. At the time the government still operated in the red.

When the deficit first began to drop, the public still tended to look favorably on a big tax cut, according to Robert Blendon, a Harvard University professor who tracks public opinion. As the economy boomed, the appeal of cutting taxes dwindled because people with fatter paychecks were less sensitive to the tax collector’s bite. And people pleased with the economy’s trajectory did not want to rock the boat.

Clinton, in each of his last three budgets, has offered selected spending proposals in areas that voters cared more about than tax cuts, things like Social Security, Medicare, schools and health insurance coverage.

“What Clinton did was identify highly popular programs in a world where a lot of government isn’t popular,” Blendon said.

In the budget Clinton unveiled in early 1998, he took the political initiative and said that the priority should be to shore up Social Security for retiring baby boomers. That put Republicans in a political box. If they were to cut taxes, it would look like it was at the expense of Social Security.

No Social Security reform effort followed, but the surplus continued to grow. Then Clinton proposed last year that Congress fence off 60% of the emerging surplus for Social Security. Republicans responded by upping the ante. They said that they would fence off 100% of all Social Security surpluses for the retirement program--even though that made it harder for them to offer a big tax cut.

The politicians’ choices hewed closely to public opinion. A Los Angeles Times Poll taken in November found that 80% of voters preferred shoring up Social Security, Medicare and education to a big tax cut.

The modest tax cuts that Clinton included in his 2001 budget aim carefully at middle-class and lower-middle-class voters, with the largest share going to a new kind of retirement account. Employers would receive a tax credit if they matched funds set aside by low-income workers in these retirement savings accounts.

Ranking second among the president’s tax proposals is a reduction in the so-called marriage penalty paid by some two-earner couples. A House-passed marriage penalty relief bill is pending in the Senate.

In education, Clinton would increase the credit for post-secondary education expenses to 28% of qualified tuition costs, up from 20% now. Also earmarked for expansion is a tax break for school construction bonds.

Altogether, Clinton’s tax cuts would cost $350 billion over 10 years, enough to steal some of the thunder from Republicans’ larger and less-targeted proposals. Clinton’s spending proposals also would have the effect of denying the Republicans maneuvering room in their drive for still deeper tax cuts.

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Getting Out of Debt

National debt held by the public grew almost every year from 1940 until 1998, when budget surpluses suddenly reduced the debt. President Clinton says the entire publicly held debt can be reduced to zero by 2013. Figures in billions of dollars:

Source: Office of Management and Budget

Compiled by SUNNY KAPLAN/Los Angeles Times

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Social Security to the Rescue

The Social Security part of the budget has been running an annual surplus for many years. But the rest of the government began running surpluses only in 1999. President Clinton would apply the Social Security surplus to buying down the national debt and use the surplus in the rest of the budget to buttress the Medicare program and finance a variety of new spending programs. (surplus or deficit figures in billions of dollars)

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Source: Office of Management and Budget, compiled by SUNNY KAPLAN/ Los Angeles Times