A Blueprint With Bold Letters

Times Staff Writer

The huge new round of tax cuts President Bush proposed Tuesday, building on policies he has already advanced, could reshape the federal government's role in society as profoundly as the tax and spending plans President Reagan drove into law more than 20 years ago.

By proposing nearly $700 billion in additional tax cuts when the government is already facing large budget deficits and projecting steady increases in military spending, Bush has laid out a fiscal blueprint that could constrict spending for years to come on the domestic priorities Democrats favor.

And by building his tax proposal around eliminating individual taxes on stock dividends and accelerating reductions in income tax rates, Bush has drawn a bold line between himself and the vast majority of Democrats, who believe both proposals tilt too heavily toward the rich.

"It is sort of an in-your-face move," said Steve Elmendorf, the chief of staff for Rep. Richard A. Gephardt (D-Mo.), the former House minority leader.

Combined with the prospect of war in Iraq and the administration's promise of major structural reform in Medicare, the plan underscores Bush's determination to leverage large changes in policy from a small majority in Congress.

It also demonstrates his willingness -- even eagerness -- to advance ideas that sharpen the differences between the parties, even at the cost of polarizing opinion in Washington and around the country.

"If you seek a smaller, more incremental change, there is always room for people to seek middle ground or a third alternative," said Vin Weber, a Republican lobbyist close to the White House. "If you seek a big change, it's almost like he is saying to the Congress the same thing he said to the world on terrorism: 'You've got to choose, are you with us or them?' "

The new plan would dramatically accelerate the shift in fiscal policy Bush began in 2001.

When he took office, the nonpartisan Congressional Budget Office projected federal budget surpluses over the next decade of $5.6 trillion -- enough to fuel Democratic hopes of significant new initiatives on education, health care, prescription drugs for seniors and scientific research, among other programs.

But Bush's policy choices -- and the pressures created by the Sept. 11 terrorist attacks -- have now redirected the government toward a path of large tax cuts, growing defense spending and sustained projected deficits. That could squeeze spending on domestic programs for years, reprising the dynamic created by Reagan's large tax cut and military buildup in the early 1980s.

"The implications are that we will either accept large and growing budget deficits or impose draconian cuts on domestic programs not associated with homeland security," said Robert D. Reischauer, president of the nonpartisan Urban Institute and former CBO director.

Even before Tuesday's proposals, the CBO recently estimated that the federal books had fallen so deeply into deficit that Washington would need to divert more than $2.2 trillion in money raised for Social Security to operate the rest of government through 2012.

Tuesday's proposal could result in hundreds of billions of additional dollars being diverted from Social Security taxes -- just two years after Bush and Al Gore both pledged in the 2000 presidential campaign to reserve that money in a "lockbox" for paying down the national debt.

While Bush has vowed to protect some priorities -- such as aid to low-income schools and medical research -- his aides are trying to freeze overall domestic spending. And Democrats say that means even the programs Bush claims to favor will be shortchanged.

This bold redirection of government's priorities has surprised and pleased conservative activists, many of whom feuded with his father's administration and initially resisted the younger Bush in 2000.

"There has always been a suspicion that Bush isn't really one of us, like his father wasn't," said Steve Moore, president of the Club for Growth, a conservative political group. "But Bush has spent the last two years of his presidency trying to establish those Reagan-esque credentials."

Yet by so emphasizing tax cuts, Bush may be threatening his efforts to define himself as "a different kind of Republican," as he often said in 2000. Democrats are already arguing that the tax cut plans, piled atop the $1.35-trillion reduction Bush won in 2001, will demand long-term domestic spending cuts that undermine his promise to be a "compassionate conservative."

"He is blowing up the bridge that he promised to build to a different Republican future," said Bruce Reed, a former top aide to President Clinton who now heads the centrist Democratic Leadership Council.

By inciting partisan conflict, the economic plan follows Bush's pattern since taking office. Like most of his major domestic proposals, the plan seems aimed more at reinforcing his core supporters than converting swing voters.

"I think this is all about deepening support with your loyalists and taking a very enthusiastic loyalist base into the [2004] election," said Democratic pollster Stanley B. Greenberg.

Almost all of the package's key elements -- particularly the end to taxing dividend income -- provoke Democratic constituencies almost as much as they excite GOP ones.

The plan ignores a top Democratic priority by offering no direct aid to fiscally pressed states. The plan waves another red flag at Democrats by proposing to accelerate into this year all of the reductions in income tax rates scheduled for 2004 and 2006 under the initial Bush tax cut.

Most of the 2004 Democratic presidential candidates have called for rolling back those cuts; even if any of them beat Bush, it would be much more difficult to repeal those cuts if they have already taken effect.

"Once you've gotten those rates down, you can put them in the bank," Moore said. "That's why there is resistance on the Democratic side to fast forwarding them."

Other elements of the plan -- particularly accelerated tax relief for families with children -- will have broader appeal. But the overall package appears guaranteed to generate an acrimonious debate in the months ahead and to divide the Congress largely along party lines.

In a telling signal, Sen. John B. Breaux (D-La.), who helped negotiate the final compromise on Bush's 2001 tax plan, said the new proposal had little appeal for centrist Democrats. "The bulk of the plan provides very little stimulus at all," he said. "Bear in mind tax cuts are not free. We have to pay for them by increasing the size of the deficit. And we have a lot of other competing demands for dollars this year. Who knows what Iraq is going to cost? Who knows what Medicare reform and prescription drugs are going to cost?"

Breaux said some moderate Republicans have privately indicated they believe the plan will increase the deficit too much and may seek to retrench it. Bush is "going to have to compromise on a lot of things, or it is not going to get passed," he said.

Others in both parties aren't so sure that after demonstrating such strength in the 2002 election, Bush will be forced to accept major changes. The White House is not expecting broad support from congressional Democrats, but believes it can muscle the plan through Congress by holding virtually all Republicans and peeling off a handful of Democrats from states Bush carried in 2000.

"The president is in a more commanding position than he was in 2001," said one White House official. Only on one point do both sides agree. Political strategists for the White House and likely Democratic presidential contenders believe voters will judge the plan primarily on its impact on the economy and their own bottom line.

In other words, the plan may be an asset for Bush if the economy improves, but a liability if it doesn't.

"One doesn't have to be too cute about this in terms of ascribing political motive," said the White House official. "Obviously, [Bush] is going to propose what he considers to be in the country's best interest because what's in the country's interest is in his interest."

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