Surplus, Slow Growth Fuel Momentum for Tax Cuts

Even though George W. Bush has yet to put his hand on the inaugural Bible, the debate on his core issue of tax cuts already has been transformed in a way making it likely that taxpayers will get a bigger reduction than they have in years.

A protracted argument almost certainly will rage on Capitol Hill about what kind of taxes to slash and precisely how much they should be lowered. But even top Democrats are now agreeing to the need for a larger tax cut than they have in the past.

Powering the political momentum for tax cuts are growing signs of an economic slowdown, projections of a bigger-than-expected federal budget surplus and Bush’s persistence in pushing his ambitious tax reduction plan that includes an across-the-board cut in income tax rates.

The bottom line in Bush’s proposal--a $1.3-trillion tax cut over 10 years--would be more than most Democrats can swallow. But even one of the House’s most liberal members sees prospects for compromise, as long as Bush agrees to include tax cuts targeted at working and middle-income families.

“With that kind of understanding, he can get an across-the-board tax bill and the targeted cuts that we all want,” said House Minority Whip David E. Bonior (D-Mich.). “Those should be the things we could all bend and give on.”

Added Sen. Phil Gramm (R-Texas): “Since George Bush was elected on a platform of this tax cut, two things have happened: the surplus has gotten bigger and the economy has gotten weaker. We might find ourselves, in a short while, debating a bigger tax cut or one that is implemented quicker.”

The debate’s shifting dynamics are a clear example of how shopworn policy issues that followed predictable patterns in recent years may be transformed with the political changes occurring in Congress and the White House.

The Bush camp was especially heartened Wednesday when House Democratic Leader Richard A. Gephardt of Missouri said that, because of the apparent downturn in the economy, he would support a bigger tax cut than the $300 billion he backed in the past.

Gephardt spokeswoman Laura Nichols reiterated that position Thursday, saying: “I think there will be [a tax cut]. It’s just a question of size and who it goes to.”

But those are big, potentially contentious questions that could keep any tax-related bills from becoming law soon. Democrats have favored more narrowly focused tax cuts, such as credits for education costs and health care, usually with strict income limits on eligibility. And the two parties traditionally have been hundreds of billions of dollars apart on the scope of any overall cut.

Still, the sudden willingness among Democrats to accept the prospect of a larger tax cut suggests the potential for significant movement on an issue that has been stalemated in recent years. At the least, the new message from Democrats signals that they are increasingly wary of being cast as opponents of tax cuts.

“This snowball has begun to roll down the hill,” said Robert D. Reischauer, a budget expert and president of the Urban Institute think tank. “[Democrats] are hoping for a majority [in Congress] in 2002, and they don’t want to be portrayed as the party that’s against tax cuts.”

The party’s position on taxes already had begun to change last year, when dozens voted with Republicans in favor of bills to repeal the estate tax and to reduce taxes on married couples. Those bills cleared Congress but died after they were vetoed by President Clinton.

Even Democrats who opposed the GOP bills supported alternatives that would have provided generous tax cuts, if less than Republicans wanted.

Despite that shift, many Democrats fear that their party was portrayed in the 2000 campaign as an obstacle to tax cuts.

“We got a bad rap on taxes in the last election,” said a Democratic pollster who requested anonymity. “The reality is that Democrats are for tax cuts, but everyone who thought a tax cut was important voted for George Bush. People want to be careful we don’t get that rap again.”

New budget projections in late December contributed to the shift in the tax cut debate. Estimates of the surplus outside of Social Security surged to almost $2 trillion over 10 years--up from the $1.5-trillion surplus projected last summer.

Some analysts argue that it still would be a fiscal squeeze to enact all of Bush’s tax cut--or irresponsible not to leave a good chunk of the surplus for other uses, such as retiring the national debt. The nonpartisan Center on Budget and Policy Priorities released a study Thursday that raised questions about whether the budget could accommodate Bush’s full tax cut, arguing that its cost has been understated and that the surplus has been overstated.

“The bottom line is that the cost of this tax cut . . . exceeds the amount likely to be available under realistic assumptions,” said Robert Greenstein, head of the center.

The $1.3 trillion Bush tax proposal would scrap five existing income tax brackets and replace them with four lower rates of 10%, 15%, 25% and 33%. The president-elect also would reduce the so-called marriage penalty, which requires many couples to pay more than if they filed separately, phase out the inheritance tax and double and expand the $500-per-child tax credit.

As a political matter, the new surplus estimates have made it increasingly difficult for Democrats to oppose a big tax cut, especially at a time when Bush officials and other analysts are sounding warnings about the economy.

“You’re hard pressed to say there isn’t room [in the budget] for substantial tax cuts,” said Peter Fenn, a Democratic political consultant.

Even as Democrats recalibrate their position, Republican leaders are still grappling with how best to present Bush’s tax plan to Congress.

While Bush has indicated that he plans to push for his entire package, GOP congressional leaders, especially in the House, have been urging a strategy that would offer its elements a piece at a time.

For instance, House Speaker J. Dennis Hastert (R-Ill.) has suggested that the new administration begin with proposals that already have won bipartisan support in Congress: the bills to cut estate taxes and reduce the so-called marriage penalty.

Other Republicans are adamant about keeping the Bush plan in one piece. “It can’t be separated,” said Gramm. “If you get it separated, you substantially weaken the president’s position.”

Democrats hope that, by showing some give on their position, Bush will not be unyielding in his. “I’m hoping that we both can come halfway,” said Senate Democratic Leader Tom Daschle of South Dakota.