Tax Cut Seen as Achilles’ Heel for Bush

The post-Sept. 11 truce is over for President Bush’s signature domestic achievement: the sweeping tax cut he pushed into law last spring.

After weeks of deferential restraint, leading congressional Democrats have renewed efforts to blame the $1.35-trillion tax cut for the slow economy and the disappearing federal budget surplus--an opening salvo in what party strategists say will be a sustained political offensive through the 2002 election.

The argument is being carried forward on a tide of red ink: Bush administration officials acknowledged recently that the government will run budget deficits at least through 2004 and said they would seek to increase the limit on government borrowing for the first time since 1997.

Those concessions have provided the opening for Democrats to resume the criticism of Bush’s economic management they had muted since the terrorist attacks. “I don’t think there’s any question that the deficits have been created in large measure because of the tax cuts that were passed at the insistence of the administration,” Senate Majority Leader Tom Daschle (D-S.D.) said earlier this week.

But Democrats remain deeply divided about whether to turn that criticism into action by forcing reconsideration of the tax cut. Although most House Democrats have backed a proposal to rescind future installments of the tax cut aimed at the highest-income families, Daschle has refused to urge changes in the Bush plan.

Daschle’s reticence is inspiring grumbling from some liberals who complain he has undermined his indictment of the tax cut by refusing to offer an alternative. “He needs to tell us what his solution is,” said Ruy Teixeira, senior fellow at the Century Foundation, a liberal think tank. “They are holding back a lot more than they need to.”

Daschle advisors insist he sees no point in pushing for a reconsideration of the tax cut unless some of the 12 Senate Democrats who voted for it last May shift their views. But the deteriorating federal balance sheet may force Democrats into a collision with Bush and the GOP when Congress turns, in just two months, to writing next year’s budget.

Democrats could find it difficult, if not impossible, to construct a budget that funds priorities from prescription drugs to homeland security without proposing retrenchments in the tax cut. The political risk is that rescinding part of the tax cut would restore the big-government, high-taxes image their party has labored to shed.

Still, some Democrats argue that pursuing a tax cut rollback is unavoidable.

“I think it absolutely has to happen,” said Rep. Adam Smith (D-Wash.), a leader among centrists known as “new Democrats.” “When you’ve got massive increases in obligations that everybody wants . . . you’ve got to be honest about what it is going to cost to get those things done.”

Indeed, at least one of the Democrats who voted for the tax cut now wants to cancel part of it.

Sen. Dianne Feinstein (D-Calif.) said she was “strongly in favor” of canceling scheduled rate cuts for the upper brackets because of the growing deficits and increasing demands for post-Sept. 11 spending.

“We now find we have need for extra things like homeland security and infrastructure,” Feinstein said. “At the time [the tax cut] was passed, the situation was very different.”

Republicans Push Hard for Faster Tax Cuts

The continuing divisions over the tax cut form the backdrop of the current stalemate over legislation to stimulate the economy. Republicans are pushing hard for the bill to include an acceleration of scheduled income tax rate cuts--in part, GOP aides say, because the administration wants to be sure that Bush’s tax reduction scheme gets credit when the economy eventually recovers.

The tax cut law calls for income tax rates for all brackets to drop gradually until 2006. The proposal by House Republicans would cut the 27% rate to 25% in 2002, rather than phasing in that reduction over four years. And Senate Republicans are pushing to accelerate into 2002 all of the rate reductions scheduled for the next four years.

Most Democrats strongly oppose accelerating the rate cuts because they believe that would make it much tougher to reconsider the reductions later.

As the economy slowed in the weeks just before the Sept. 11 terrorist attacks, Daschle and other Democratic leaders had been steadily escalating their criticism of the tax cuts. After the tragedy, they largely fell silent.

But the dispute resurfaced in late November, after Office of Management and Budget Director Mitchell E. Daniels Jr. acknowledged that the budget picture was bleaker than most expected. Daniels said the government could run deficits through the next three years--and that a surplus would return in 2005 only if an array of economic factors went right.

The government had run surpluses and paid down the national debt in each of the three years before Bush took office.

In response, Daschle took to the Senate floor last week with a sharply worded attack on the tax cut law. The next day, the Democratic staffs at the House and Senate budget committees issued reports concluding it was the principal reason for the disappearing surplus.

The administration staunchly rejects that conclusion, fingering instead the slowing economy and the new spending demands inspired by Sept. 11. “The shift in these projections is definitely dominated by slower economic growth and increased spending,” said Amy Call, spokeswoman for the OMB.

Administration officials say Bush continues to see no reason to revisit the tax cut. “We believe the fiscal discipline that’s needed should come through spending restraint rather than tax increases,” said R. Glenn Hubbard, chairman of Bush’s Council of Economic Advisors.

Future Cuts Now Focus of Attention

No Democrats have proposed to raise taxes by repealing the portions of the tax cut that went into effect last summer. Instead, discussion has centered on deferring or canceling tax cuts promised for the future, particularly those for the top bracket.

For instance, four-fifths of House Democrats backed a failed bid earlier this fall to freeze the top rate paid by the highest income families at 38.6%, canceling two further reductions scheduled for 2004 and 2006.

Sen. Jon Corzine (D-N.J.) may introduce legislation next year to retrench the tax cut. “I think it is going to be very difficult to talk about fiscal stability . . . and live with the tax cut that has been put in place,” he said.

But any push to reconsider the tax cut would ensure intense conflict not only with the administration but also among Democrats themselves. Many Democratic insiders say the principal reason Daschle has been slower to challenge the tax cut than House Democrats is because so many members of his caucus supported it last year--and are unenthusiastic about revisiting their votes.

Political calculations add to the hurdle.

Of the 12 Senate Democrats who voted for the final plan, half face reelection in 2002. All of those six--Tim Johnson of South Dakota, Max Baucus of Montana, Mary Landrieu of Louisiana, Max Cleland of Georgia, Robert G. Torricelli of New Jersey and Jean Carnahan of Missouri--are running in states generally considered among the most hostile to taxes. “My guess is an awful lot of Democrats, both House and Senate members, who voted for the original tax cut are not going to want to step back up to the plate,” said one senior party election strategist.