Dip in Surplus Cures Capitol's Tax Cut Fever


Pity the poor liquor lobby. For years it tried to get Congress to repeal a steep tax on scotch, bourbon and the like. Finally, with federal coffers burgeoning and a Republican in the White House, the time seemed ripe for erasing the levy.

But no sooner had the repeal bill been introduced than dire warnings surfaced of a diminishing budget surplus. Those reports, in turn, may have ended the liquor lobby's chance of abolishing the tax on its products any time soon.

"It's going to be very, very tough," acknowledged Frank Coleman of the Distilled Spirits Council of the United States.

That's just one example of how the once-bullish market for tax cuts has turned distinctly bearish as the size of the surplus has dwindled due to a faltering economy and the reduction in income tax rates passed earlier this year.

Another sign has emerged in President Bush's cherished initiative to bolster federal help for the charitable work of faith-based institutions. The bill headed to the House floor today includes a proposal to provide tax breaks to encourage charitable giving, but it is a pale shadow of its former self. Bush's original plan provided $91.7 billion in relief; the House bill proposes only $13.3 billion, sharply limiting the deduction and taking longer to phase it in.

"Republicans have shown some signs of retreating from the unfinished tax-cut agenda," said Stephen Moore, head of The Club for Growth, a group that has pushed hard for tax reductions.

The dimming prospects for enactment of a second round of tax cuts this year is a particularly tough blow to the business lobby. Under pressure from the White House, it fell in line behind an administration strategy of keeping the initial reductions focused on income tax cuts, with virtually no provisions to address corporate concerns. They hoped they would get a "second bite of the apple," as one business lobbyist put it, with other bills that would focus on their interests.

"Certainly right now, it does not look as if there will be another tax bill this year," said Johanna Schneider, spokeswoman for the Business Roundtable. "The political winds were always blowing pretty stiffly against any kind of corporate bill. They are even gustier now."

Added Dan Maffei, spokesman for Democrats on the House Ways and Means Committee: "The tax cut boat has left the pier and the business lobby is still stuck on the dock."

This change became pronounced when analysts from both parties began warning recently that the surplus estimates would shrink later this summer for the first time since the government started running in the black in 1998.

Office of Management and Budget Director Mitchell E. Daniels Jr. has said the federal budget surplus for 2001 could be as much as 40% smaller than the $275 billion forecast earlier this year.

Republicans argue that the 10-year, $1.35-billion tax cut Bush shepherded into law eventually will kick the economy back into full throttle, causing government revenue to again accelerate. But for now, the tax cut's immediate effect will be to eat up part of the $5.6-trillion surplus that had been projected over the next 10 years.

This has created challenges for Congress. Defense hawks worry that Congress cannot provide the Pentagon the $30-billion increase that military officials want. Education advocates wonder how lawmakers will fund the big increases in education aid that both parties have proposed. These and other spending pressures further undercut any tax cut push.

Another factor is the takeover of the Senate by the Democrats, whose leaders are far less eager to bring additional tax cut bills to the floor than were Republicans. New Senate Majority Leader Tom Daschle (D-S.D.) has said that further tax cuts will be passed if they are "offset," that is, paired with a spending cut or revenue raiser to neutralize the effect.

But for many Republicans, "offset" is a euphemism for "tax increases," which they are loath to support. "That is certainly not the way I want to go," said Senate Minority Leader Trent Lott (R-Miss.).

It wasn't supposed to be like this. In the early days of the Bush administration, tax cut fever raged as surplus projections kept getting larger. Some Republicans, especially in the House, began clamoring for an even bigger tax cut than the $1.6-trillion package Bush proposed. Lobbyists gleefully started polishing their wish lists.

But GOP leaders decided to hew to the Bush plan, which, along with slashing income tax rates, will phase out estate taxes and provide an array of tax breaks for married couples, families with children and people saving for education or retirement. The Republicans suggested that other tax cuts, especially those sought by the business community, could be addressed in bills offered later this year.

The sagging surplus estimates, however, have made that an increasingly unlikely scenario.

Many Republicans say they will continue to push for tax breaks on more targeted fronts. They may succeed on energy policy: Some of the most popular elements of the plan Bush sent to Congress are proposals for tax breaks to increase power supplies and conservation.

Republicans also hope to include measures in patients' rights legislation that would expand tax breaks for small businesses and individuals who buy their own health insurance. But the Senate has already rejected these proposals.

Another occasion for tax cutting may come when Democrats push for a raise in the minimum wage. Earlier this year, when the GOP still controlled all of Congress and surplus projections were not a concern, many Republicans and business lobbyists eyed the minimum wage bill as a possible vehicle for a cut in capital gains taxes and broader business tax breaks.

But those ambitions are now on ice. "That seems like it's out the window," said Rep. Robert T. Matsui (D-Sacramento), a member of the Ways and Means Committee.

Even relatively small tax cuts that have enjoyed broad support now face uphill battles. This includes a repeal of a telephone excise tax imposed in the late 1800s to help fight the Spanish-American War--a bill that passed in the House last year, 420 to 3.

"I find it hard to believe it would make it," Matsui said. "I don't know where the money comes from" to offset the estimated revenue loss of $5 billion annually.

In this climate, some Republicans are taking a new tack. Lott and others have begun emphasizing the importance of making the newly enacted tax cut permanent; it now expires after 10 years. Others are reviving talk of reforming the tax code--by, for example, replacing the income tax with a sales tax.

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