Kennedy’s Tax Cut Salvo Is a Democratic Dilemma

The brewing congressional tussle over tax cuts won’t be simple partisan sport, pitting party against party. It also will reopen divisions among Democrats over policy and political strategy in a closely fought election year.

That much should become clear today, when liberal icon Sen. Edward M. Kennedy (D-Mass.) proposes blocking the impending repeal of the inheritance tax and suspending some of the income tax relief scheduled to take effect for the nation’s wealthiest classes--two key elements of the 2001 tax cut law that is a cornerstone of President Bush’s economic policy.

Kennedy is not the first Democrat to make such a proposal, but he is by far the most prominent and powerful. And though it may not be surprising from a liberal who opposed the tax cut in the first place, Kennedy comes to the debate with a new standing as a cross-party deal maker. He is fresh from reaching a bipartisan agreement on education reform with Bush that the president has been touting as a model of how Washington should operate.

Kennedy’s proposal, to be made in a speech at the National Press Club, will mark a departure from the caution of Democratic congressional leaders who have been shying away from openly advocating a delay in the tax cut. Their fear is that such a proposal would revive the tax-and-spend image the party has labored to shed.

But a growing number of other Democrats are arguing that the 10-year, $1.35-trillion tax cut signed into law last spring should be revisited in light of the dramatically changed fiscal and political circumstances: the war and a recession that have returned a surplus-laden federal budget to deficits.

Kennedy and the others argue that Congress cannot adequately finance important domestic priorities unless it cancels some of the tax cut, which is being implemented gradually over the next decade. Of the $1.35 trillion in tax cuts the law provided, only $101 billion worth took effect in 2001-02.

“Future additional tax breaks for the wealthy do not deserve higher priority than strengthening education or covering prescription drugs under Medicare or protecting Social Security or meeting other urgent national priorities,” Kennedy will say in the speech, according to a source familiar with the prepared text.

An aide said Kennedy will propose blocking income tax rate cuts scheduled to take effect in 2004 and beyond for the top tax brackets. For example, the top rate--which applies to annual income in excess of $297,350--would be frozen at 38.6%, rather than dropping to 37.6% in 2004 and 35% in 2006.

The aide would not say how many brackets the Kennedy plan would affect but said the rate freeze would yield about $350 billion in revenue over 10 years.

Kennedy also will propose keeping the inheritance tax in place for estates in excess of $4 million. The levy now applies to inheritances in excess of $1 million, but under the new law that threshold is scheduled to rise gradually through 2009, with the tax fully repealed in 2010.

Kennedy will be putting himself at odds with Bush, who argues that delaying or repealing the tax cut would be tantamount to raising taxes in the middle of a recession.

The senator’s speech also comes as tensions have risen between the White House and Senate Majority Leader Tom Daschle (D-S.D.).

Earlier this month, Daschle received widespread attention for asserting that the Bush-backed tax cut had contributed to the economic downturn and helped push the federal budget into deficit. But Daschle stopped conspicuously short of calling for repealing or stalling any part of the tax cut law. Democrats argue that it is Bush’s responsibility to propose a way out of the economic problems they say he caused.

Daschle also has said it makes no sense to take the political risk of pushing for tax changes that Bush would certainly veto.

Still, even some of the Democrats who voted for the tax cut--including Sen. Dianne Feinstein of California and Reps. Ellen O. Tauscher of Alamo and Lois Capps of Santa Barbara--have warmed to the idea of canceling some of the cuts for upper-income people.

As a party position, however, that would pose political risks for several Democrats who supported the tax cuts and who are up for reelection this year. Such risks could affect the party as a whole because, with Democrats controlling the Senate by a one-vote margin, they can ill afford to undercut even a single colleague with a weak hold on his or her seat.

“How do you have as one of your highest priorities to reelect the moderate Democrats from South Dakota, Montana and Missouri on one hand, then on the other hand blame them for voting for a tax cut that [Daschle] maintains has created this recession?” said Sen. Zell Miller (D-Ga.). “Hello?”

Miller was among 12 Senate Democrats who voted for the cuts.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who faces a tough reelection fight, also does not want to rewrite the tax cut he helped negotiate last spring. “He doesn’t feel it’s appropriate to revisit the issue in the midst of a recession,” said Baucus spokesman Michael Siegel.

Republicans, frustrated by Daschle’s refusal to openly call for rolling back the tax cut, are eagerly awaiting Kennedy’s speech to give them a clearer target. And they hope to tar Daschle with the same brush they use on Kennedy.

“We’ve said that the Daschle tax increase was coming, and now we’ve seen Sen. Kennedy propose it,” said Senate Republican Trent Lott (R-Miss.).

Added a White House official who asked not to be named: “Kennedy is saying what Daschle wanted to say. Kennedy is just more blunt.”

Ranit Schmelzer, a spokeswoman for Daschle, denied that the senator is pushing for a tax cut rollback but said he has no problem with other Democrats doing so.

“There have been Democrats on both sides of the tax issue from the beginning,” Schmelzer said. “They can express their views.”