GOP Pushes New Tax Cuts as Elixir for Sagging Economy

Congressional Republicans, increasingly concerned about the souring economy, returned to Washington on Tuesday calling for new tax cuts and other policies aimed at reversing the economic downturn--or at least insulating themselves from political blame in next year’s midterm elections.

House Speaker J. Dennis Hastert (R-Ill.) and Senate Minority Leader Trent Lott (R-Miss.) are mounting a new push to cut taxes on investment earnings known as capital gains--a measure Republicans long have backed as an economic stimulus and Democrats often deride as a sop to the rich.

The idea got a lukewarm reception from President Bush during an appearance Tuesday with Lott. Although Bush declared himself “open-minded” about cutting capital gains taxes, he said he wanted first to see if his signature economic policy--the sweeping tax cut enacted in the spring--on its own will cure what ails the economy.

“I’d like us to just take a look-see to make sure that the stimulus package that we now are implementing works,” Bush said.

The contrast between Bush’s wait-and-see attitude and the growing sense of urgency for further steps among Capitol Hill Republicans underscores a potential divergence of political interest between the administration and its GOP allies in Congress.

Republican lawmakers--especially House members, who are on the ballot every two years--fear political peril if they face voters in 2002 in the middle of a recession.

“A lousy economy means a lousy atmosphere for incumbents to run for office,” said John Feehery, spokesman for Hastert. “After two years [of Republican control of the White House], you’ve got to come up with a positive solution to improve the economic outlook.”

A capital gains tax cut is not likely to be enacted any time soon, especially without energetic support from the White House. But the issue’s reemergence shows how abruptly politicians in Washington have begun viewing the upcoming election year through the lens of the economy.

“If Republicans lose the House [in 2002], it’s because of the economy,” said Glen Bolger, a GOP pollster. “If we [hold on to] the House, it’s because of the economy.”

The byplay also presages a fall congressional session in which Republicans will seek to tie all the other major legislative initiatives--energy legislation, trade policy and spending restraint--to a debate about what is needed to strengthen the economy.

That marks a big shift in emphasis since Congress left town for its summer recess and reflects the dramatic change in the political and economic climate that occurred in the interim. Two government reports came out in August showing that the once-burgeoning budget surplus had dwindled almost to zero, thanks to the tax cut and the flagging economy. The Dow Jones industrial average plunged below the 10,000 benchmark. Figures for the second quarter’s growth showed the nation’s economy had slowed to a crawl.

GOP leaders consulted last week and concluded that economic recovery should be the central theme of their legislative agenda this fall--and that capital gains tax cuts should be the cornerstone.

Lott’s plan would cut capital gains tax rates from 20% to 15% for just two years to bolster investment--a proposal he expects to offer as an amendment to a bill to increase the minimum wage.

Although no capital gains cut was included in Bush’s 10-year plan that will reduce taxes by $1.35 trillion, Republicans have long favored the move as a form of economic stimulus because they believe it increases investment. Democrats traditionally have resisted such proposals on the grounds that most people who would benefit are those wealthy enough to invest in stocks, real estate and other assets. That argument has been blunted somewhat as more and more middle-class people have acquired a stake in the stock market.

Even Democratic Sen. John F. Kerry of Massachusetts, in a Sunday television interview, said a capital gains tax might be considered to spur investment.

Adding to the potential political appeal, Republicans say their capital gains tax cut proposal could actually increase revenue in the short run--because the reduced rate would encourage investments and asset sales that might not have otherwise occurred. That could help shield Republicans from Democratic charges that the Bush tax cut has recklessly depleted the surplus.

White House spokesman Ari Fleischer endorsed the idea that a capital gains cut could bring budgetary and economic benefits.

“I think it’s fair to say that economists, depending on how a capital gains tax cut is structured, do believe it can have a positive effect on the economy,” Fleischer said. But he dampened any hopes for any quick White House push on the issue by adding, “It’s early, very early for the administration in terms of its budget cycle for next year.”

What’s more, Democrats are poised to lambaste Republicans for any fiscal proposal that would further drain the surplus--as a capital gains tax cut eventually would. The Democrats have built their fall strategy around the budget reports that Congress is close to breaking the promise made by both Democratic and Republican leaders to avoid spending surpluses generated by Social Security revenue for purposes other than retiring the national debt.

After meeting with Bush on Tuesday, Senate Majority Leader Tom Daschle (D-S.D.) reiterated his earlier insistence that Bush take the lead in showing how he plans to pay for his proposed increases in defense, education and other areas without further draining the Social Security trust fund. Daschle said a capital gains tax cut would be considered only if its costs were offset.

The economic growth agenda congressional Republicans plan to promote in the weeks to come may also include:

* A measure to make permanent the provisions of this spring’s tax cut law, which as of now would end after 10 years.

* Extension of federal tax credits for companies that increase spending on research and development.

* Legislation to provide Bush with the new power he seeks to negotiate trade agreements with little interference from Congress.

“We will look at all legislation . . . through the prism of whether or not it will help the economy,” said Terry Holt, spokesman for House Majority Leader Dick Armey (R-Texas). “If the answer is yes, we will try to do it.”

Times staff writer Edwin Chen contributed to this story.