Despite Surpluses, Congress Still Dodging a Deficit

It was the South William Faulkner had in mind when he said the past is never behind us--it is never even past. But he might just as well have been speaking about Washington.

Few arguments in the capital ever truly end; they just reconfigure to account for new circumstances. The best example is the perennial haggling over taxes and spending--a struggle that’s proved equally cantankerous in good times and bad. Through the 1980s, Republicans and Democrats battled relentlessly over how to eliminate the federal deficit. Once the budget tipped into the black, that argument seamlessly morphed into the dispute over how to allocate the federal surplus.

President Bush’s election, and his success at passing his $1.35-trillion tax cut this spring, seemed to settle the surplus argument. But look again--the tax cut dispute is already reopening. Indeed, some key Democratic strategists believe the party can focus its case in 2002 and especially 2004 around an indictment of Bush’s tax and spending priorities. “In the next presidential election,” says Stanley B. Greenberg, Al Gore’s pollster last year, “there is no choice but this tax package be at the center of the choice that the country faces.”

Economics are driving these politics. With the economy slowing, government tax receipts are not meeting projections. Larry Lindsey, Bush’s White House economic advisor, recently suggested that revenue could run as much as $56 billion below estimates this year; Wall Street economists told the Senate Budget Committee the shortfall in next year’s receipts could be $50 billion to $75 billion. “This could be a protracted period of slow growth, and that has serious implications for the budget numbers,” says Steve Moore, a conservative budget expert.

That prospect has Washington suddenly seeing red--literally. If revenue shrinks that much, Bush could be confronting renewed federal deficits as soon as next year.

That’s a breathtaking reversal in fiscal direction. After the balanced-budget act that President Clinton and the Republican Congress negotiated in 1997, Washington marked a series of fiscal milestones. In 1998, it enjoyed the first surplus since 1969 in the unified federal budget--that is, the combined ledger of both Social Security and the government’s operating account for all other programs. In 1999, the surplus grew to the point where Washington was in the black, even setting aside excess Social Security funds--something it hadn’t done since 1960. In 2000, the surplus, for the first time ever, grew so large that the budget was above water, even setting aside both Social Security and the excess funds accumulating in the portion of the Medicare program that funds hospitalization (the so-called Medicare trust fund).

Now, the slowing economy, combined with the big tax cut and upward pressure on spending, are rapidly shrinking the projected surpluses. This year, the squeeze may grow tight enough that Bush has to tap the Medicare trust fund to stay out of deficit. Senate Democrats have projected that next year’s budget could consume all of the Medicare surplus and dip slightly into the Social Security trust fund--the point at which both sides agree the government would be back in deficit. That’s hardly the way Republicans want to head into the 2002 elections. “This administration is going to have to be held responsible,” insists Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee.

Last week, Conrad previewed what’s likely to be a central Democratic theme in 2002, when he charged that the cost of Bush’s tax cut--projected at $74 billion this year--is forcing the administration to “raid” the Medicare and Social Security trust funds. The Democrats are on relatively thin ice in complaining about the use of Medicare money: Though the trust fund that pays for hospitalization is indeed in surplus, the rest of the Medicare program (which pays primarily for doctor visits) still consumes billions of dollars in general revenue every year. It’s hardly unreasonable, as the White House argues, to view Medicare as an integrated whole, and to apply the trust fund surplus toward the rest of the program’s cost.

But Social Security is a much more serious issue. Both parties have now agreed that Washington should balance its books without tapping the surpluses temporarily accumulating in Social Security before the baby boom’s retirement. If Bush and Congress break that consensus, the political consequences could be devastating, not only for the president but congressional incumbents in either party.

So both sides are likely to propose doing whatever it takes to avoid tapping Social Security. In the short run, the squeeze will make it much tougher for those advocating new expenditures--either the increased education spending Democrats want or the boost in defense dollars and energy tax credits that Bush has been pushing.

The longer-term argument is more significant. Republicans believe the threat of renewed deficits provides the best lever they’ve had in years to fight increased domestic spending. Sen. George Voinovich (R-Ohio) has drafted legislation to impose automatic spending cuts if it appears the government will tap Social Security funds. By contrast, Democrats, such as Conrad and Senate Majority Leader Tom Daschle (D-S.D.), have hinted they may eventually seek to scale back or delay the tax cut, whose cost rises rapidly after 2003.

This could prove the pivotal argument in the next two elections. In a June poll, Greenberg found majorities of three-fifths or more would support repealing the cut in the top tax rate to increase education spending, fund a prescription drug plan or avoid tapping the Medicare trust fund. “It could be as defining a set of choices as we’ve had in our politics for many years,” Greenberg says. Unfazed, conservatives like Moore are eager to accuse Democrats of scheming to “take away” voters’ tax cuts even before they cash the checks.

In fact, the vulnerability of Bush’s tax plan is that it is phased in so slowly (with the next rate reductions not coming until January 2004) that Democrats don’t have to run on repealing the tax cuts already provided; they can merely call for deferring further reductions, especially in the upper brackets. Democrats trying to scale back the tax cut could be open to the same big government arguments that Bush effectively used against Gore. But if the budget trend lines don’t improve, Bush in 2004 could be at least as vulnerable to a Democratic counterattack built around four simple words: We told you so.

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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.