Partisan War May Rise From Stimulus Bill’s Ashes

Shed no tears for the demise of the economic stimulus plan in Congress last week. Bloated and extravagantly expensive, the bill promised little benefit for the economy even as it threatened great harm to the federal treasury. It amply deserved its burial.

But the manner of the legislation’s death is still ominous, for it signals a return to the partisan polarization that defined--and often derailed--Congress before Sept. 11. It suggests the next few months in Washington could be much more contentious than the last few.

The bill revealed the worst impulses of both parties. Rarely has a major piece of legislation been so devoid of new thinking; it couldn’t have seemed more dated if it were sung to a disco beat. The package, which cleared the Republican House before dying in the Senate, became a museum piece where each party displayed its most shopworn ideas and tired instincts.

For Republicans, the most tired was the tendency to see tax cuts as the solution to every problem. As it moved through the House, the bill became less about stimulating the economy than entrenching and expanding the $1.35-trillion, 10-year tax cut President Bush signed last spring.

Much of the bill was an early Christmas present for business interests denied favors in that original tax cut. Among the baubles the House hung on this tree were $165 million in tax breaks over the next five years for mutual life insurance companies, $82 million for oil drillers and $6.5 billion for U.S. companies with offshore financial subsidiaries. The GOP plan would have cost the government $10 billion over five years by loosening the law requiring profitable companies to pay a minimum tax, no matter how many loopholes they exploit to reduce their obligation.

These scattershot giveaways symbolized the bill’s utter lack of focus. It was larded with tax cuts that would impose significant costs on the treasury long after the economy is expected to recover. It sought to put more money in consumers’ pockets next year by accelerating a reduction in the 27% tax bracket approved in the initial tax cut last spring. But nearly three-fourths of that proposal’s $54-billion cost would come after next year, when the downturn almost surely will be over.

Even one of the bill’s best ideas--increased write-offs for companies that invest in new equipment--was undermined with similar logic. The legislation provided the tax benefit for the next three years, which not only inflated the cost (more than $66 billion in 2003 and 2004) but also undermined the incentive for companies to make investments soon. That suggests the intent was less to stimulate quick investment than to create a lasting new corporate tax break.

“The bill was filled with multi-year corporate tax cuts, which would have a significant probability of being extended when they were due to expire,” noted Bob Greenstein, director of the left-leaning Center on Budget and Policy Priorities.

Democrats didn’t do much better with their contributions. Reverting to their pattern before President Clinton, congressional Democrats defined compassion solely in terms of increased social welfare spending. Focused on expanding unemployment benefits--a worthwhile but profoundly insufficient goal--Democrats offered almost nothing to encourage long-term growth, a far better solution for those on the economy’s margins.

Earlier this year, Senate Majority Leader Tom Daschle (D-S.D.) offered a farsighted plan to reinvigorate the stalled advance of the Information Age economy--with measures to encourage more advanced research, better worker training and more rapid deployment of broadband technologies that would make the Internet more commercially valuable. But none of those ideas made it anywhere near the Democratic stimulus proposal.

“It is frustrating that we have not come up with a cohesive prosperity/growth agenda as a party,” said Rep. Adam Smith of Washington, a leader among House “New Democrats.” “Certainly, compassion is a key component. But the thing that makes me a Democrat is creating opportunity.”

For all these reasons, the stimulus plan won’t be missed. Yet the failure of the two sides to produce a more effective package signals turbulence ahead after the relative political peace following the terrorist attacks. In a broad sense, the bill’s collapse suggests Republicans and Democrats remain so divided about government’s proper role that it will be difficult for them to reach productive compromises on many big domestic issues, especially the need to close the deficit that has suddenly reopened in the federal budget. (The bipartisan education bill Bush will sign next month is the exception that shows what can be achieved when the two sides push each other to new thinking on difficult issues.)

More narrowly, the stimulus bill’s failure signals that it will be very hard for Congress to reach consensus next year on an intensifying problem: the rising number of Americans without health insurance. For what ultimately sank the stimulus bill was an unbridgeable dispute about how to provide health insurance to workers who lost their health coverage with their jobs.

Democrats wanted to provide more money to existing employer-based and government plans to cover the unemployed; Republicans wanted to provide a new tax credit to let the unemployed purchase individual insurance. Republicans say that will give the uninsured more choice. The Democratic fear is that such tax credits will encourage younger and healthier workers to drop out of their existing employer plans, leaving those plans to cover only the old and the sick; eventually that could raise premiums and encourage more employers to drop coverage.

The stimulus fight thus became a warmup for arguments coming next year over how to help the larger pool of uninsured. Congressional Republicans and the White House wanted to establish the precedent of using tax credits to expand coverage; Democrats were equally determined to deny them that beachhead.

If the two sides were inclined, it’s possible to envision a deal that would combine a limited tax credit, reforms in the individual market to prevent insurers from cherry-picking only healthy workers and an expansion of existing government programs to cover the uninsured. But that would require an instinct for both compromise and fresh thinking. And the stimulus debacle shows that in Washington, both are now in short supply.

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Ronald Brownstein’s column appears every Monday. See current and past Brownstein columns on The Times’ Web site at: https://www.latimes.com/brownstein.