Bush's Tax Cut Takes a Hit in Senate

Times Staff Writer

A deficit-conscious Senate on Tuesday voted to slash by more than half the $725-billion tax cut that President Bush had proposed to spur the economy -- a surprise domestic-policy setback to the administration as it wages war abroad.

The vote to scale back the tax cut to $350 billion was 51 to 48, as united Democrats joined forces with three Republicans. They argued that Bush's tax cut was unaffordable in the face of the growing federal budget deficit and the costs of the war with Iraq.

Bush's Senate allies remained hopeful that they could restore some of the tax cut -- either in another Senate action as early as today or in later negotiations with the House, a bastion of White House loyalists that has endorsed the president's $725-billion tax cut plan.

Still, Tuesday's vote -- part of a weeklong Senate debate on the annual budget resolution -- hurt Bush's aura of command on Capitol Hill. His public approval ratings have soared since the war in Iraq began, and the conflict has won bipartisan support in Congress. But these factors are not translating into a congressional rubber stamp for his ambitious domestic agenda.

That is especially true in the narrowly divided Senate, which just last week voted against Bush's plan to open a part of the Arctic National Wildlife Refuge to oil and gas drilling. With 51 Republicans, 48 Democrats and one independent in the Senate, the balance of power is held by a handful of GOP centrists. On fiscal matters, they are uncomfortable with the administration's argument that deficits do not matter when the country is at war and its economy is sluggish.

They have watched with concern as the GOP's traditional devotion to balancing the budget has taken a back seat to Bush spending and tax policies that would create deficits totaling $1.8 trillion over the next decade if enacted, according to the Congressional Budget Office.

These anxieties about the government's financial picture were heightened when the White House said Monday that it needed about $75 billion more in this year's budget, mostly to cover the costs of war with Iraq and its aftermath.

Quick Approval Urged

During a visit to the Pentagon on Tuesday, Bush called on Congress to quickly approve the spending, and lawmakers are expected to do so. But the funding request came just as the Senate was wrapping up its debate on the annual budget resolution -- the measure that has sparked recent skirmishing on the size of the tax cut.

The resolution sets general spending and revenue targets for the coming year; the details of a tax cut would then be worked out in later legislation. Still, the resolution's provisions for a tax cut will be crucial because a $350-billion ceiling on it would doom the cornerstone of Bush's economic growth plan -- eliminating taxes on dividend income, which would cost $396 billion.

Many lawmakers -- including Republicans -- have questioned the dividend proposal, and Tuesday's Senate vote is "another blow" to it, said Sen. Max Baucus (D-Mont.).

Bush's Republican allies said the amendment to cap the tax cut at $350 billion guts an initiative that is needed to boost the economy and spur the growth that could eliminate the deficit in the long term.

"It would cut the growth out of the growth package," said Senate Budget Chairman Don Nickles (R-Okla.). "The president has a package that would help create jobs, that would put people to work, that would encourage investment."

At the White House, spokesman Ari Fleischer held out hope that the Senate tax cut decision would be reversed or revised before the Senate finishes work on the budget resolution.

"We'll see what ultimately comes out of the Senate," Fleischer said. "They have a lot more voting to do."

Whatever the Senate approves, it will be subject to negotiation with the House before a final resolution is adopted. But Bush's critics said Tuesday's vote was a signal that no tax cut larger than $350 billion would clear the Senate.

If Bush and his GOP allies want a tax cut, "they're going to have to respect the vote in the Senate," said Sen. Kent Conrad (D-N.D.).

'Precarious' Picture

The three Republicans supporting the $350-billion cap were Sens. Olympia J. Snowe of Maine, George Voinovich of Ohio and Lincoln Chafee of Rhode Island. "Our current fiscal picture is precarious," Voinovich said. "This amendment is a responsible way to stimulate the economy while still being responsive to our looming deficit."

Even before the war with Iraq started, it was clear that the deficit was dampening many lawmakers' appetite for Bush's big tax cut agenda. Just two years ago, a budget surplus of $5.6 billion was projected over the next decade.

Democrats say much of the fiscal reversal since then resulted from the $1.35-trillion, 10-year tax cut that Bush pushed through Congress in mid-2001. The president and Republicans dispute that assertion, blaming the ballooning deficit on an economic recession and the financial effect of the Sept. 11 terrorist attacks and the U.S. response to that assault.

Bush began this year by unveiling his $725-billion, 11-year tax cut plan aimed at increasing business investment and consumer spending. Then he added another round of tax cuts to his budget proposal, including an expansion of tax-free savings accounts. That brought the total tax relief he was seeking to $1.6 trillion, an amount many lawmakers -- including Republicans -- viewed as out of touch with deficit qualms in Congress.

The budget resolution approved by the House provided crucial parliamentary protections only for the $725-billion economic growth plan -- a maneuver viewed as the death knell for the rest of Bush's proposed tax cuts.

And in the Senate, Bush critics focused their efforts on trimming the $725-billion economic plan because it was the only tax cut considered likely to become law.

On Friday, a bid to trim the tax cut to $350 billion lost on a 62-38 vote. However, the roll call obscured how close the vote really was. Many Democrats were prepared to support the amendment, but they switched to vote against it when it became clear it would narrowly fail.

Baucus and Sen. John B. Breaux (D-La.), a lead sponsor of the amendment, said the effort to find another, more successful version of the proposal was helped by mounting concern about the cost of the Iraq war.

"We've never cut taxes in time of war," Baucus said.

When Baucus and Breaux brought the measure back Tuesday, they had rewritten it to specify that the money taken away from the tax cut would be set aside to pay for reforming Social Security. That was enough to win over support from Democratic Sens. Ernest F. Hollings of South Carolina and Tom Harkin of Iowa, both of whom voted against the first amendment because they did not support any tax cut.

That cleared the way for the amendment to be backed by every Democrat but Sen. Zell Miller of Georgia, who supports Bush's plan but was absent for Tuesday's roll call.

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