In Budget Debate, Fiscal Sanity Is a Relative Term

Like some armchair generals handicapping the war in Iraq, Senate moderates may have declared victory too soon in the fight over the federal budget. A revolt by moderates compelled the Senate last week to take a step toward fiscal sanity when it passed their version of the budget. But only a small step.

The budget the Senate approved still would drive the country deeper into the ditch of deficit and debt. The best that can be said about the Senate plan is that, unlike President Bush's initial budget proposal, it doesn't drive the country off the deficit cliff entirely.

Overshadowed by the war, the Senate made this midcourse correction by trimming the size of Bush's proposed tax cut. In his budget, Bush proposed $1.4 trillion in tax cuts over the next decade -- even though Washington already faces record-setting deficits.

The House gave Bush almost everything he wanted. The Senate seemed poised to go along, until a group of moderates led by Democrats John B. Breaux of Louisiana and Max Baucus of Montana and Republicans George Voinovich of Ohio and Olympia J. Snowe of Maine, on a nail-biting 51-48 vote, passed an amendment shrinking the tax cut by about $400 billion. Other amendments reduced the total cut to $852 billion.

For the deficit, that's better than the alternative. But only in the sense that it's better to be hit by a car than a truck.

The Senate's solution has two fundamental problems.

One is that the final tax cut that emerges from Congress is likely to be larger than the moderates expect. The second is that it's unclear whether the nation can afford any tax cut at all.

Understanding why the tax cut is likely to grow before it reaches Bush's desk requires a detour into the legislative weeds. Hold tight.

The first reason is simple enough. The Senate has to negotiate with the House, which passed Bush's tax cut in full, in a conference committee to produce the final budget bill.

The White House and House leaders have signaled that they will push aggressively to lift the final tax cut number closer to Bush's original proposal.

The other reason it likely will grow is more complex. In the House and Senate, the tax cut was divided into two portions.

Both chambers set aside one slice to be considered under special budget procedures (known as reconciliation) that allow it to be passed with only 51 votes in the Senate; the rest of the tax cut would have to pass under normal procedures, which means it couldn't become law without the 60 votes required to break a Senate filibuster.

For that reason, most of the attention focused on the portion of the tax cut provided protection under reconciliation.

Senate Republicans initially proposed to protect $725 billion in tax cuts. (They didn't try to protect more because they didn't think they could get the votes for it.) Breaux and his allies cut that amount to $350 billion.

And that's where they are hoping to hold the line. The moderates are assuming that very little of the other tax cuts in the Senate budget -- the roughly $500 billion that is not protected under the special procedures -- would attract the 60 votes needed to break a filibuster and thus would never pass.

But their assumptions could crumble on both fronts. The House-Senate conference committee will push to increase both the protected and unprotected portions of the tax cut. Senate Republican leaders are also talking about shifting into the unprotected column some of the most popular ideas -- such as eliminating the marriage penalty -- that Democrats may be reluctant to filibuster.

"I think a substantial part of that [unprotected portion] will pass because they will come with some very popular tax cuts in that package," said Sen. Kent Conrad of North Dakota, the ranking Democrat on the Senate Budget Committee.

Amid these maneuvers, the obvious question is whether cutting taxes makes sense just two years after Bush's $1.35-trillion tax cut took effect in 2001. Three big arguments loom against further tax cuts.

First, Washington is already facing mammoth deficits. Private congressional estimates project that, excluding the money raised for Social Security, the federal government could run a deficit of as much as $530 billion this year, by far the largest ever. Under Bush's plan, the nonpartisan Congressional Budget Office projects huge deficits every year through the next decade.

Second, those deficits are undermining Washington's last opportunity to improve its fiscal position before the baby boom's retirement explodes the cost of Social Security and Medicare.

When Bush took office, the CBO estimated that anticipated budget surpluses would allow Washington to virtually pay off the publicly held national debt by 2008, freeing up roughly $200 billion a year that the government would otherwise pay in interest to help fund the retirement of the baby boom.

Now, the CBO projects that under Bush's plan, the publicly held national debt will hit a record $5.7 trillion by 2013 -- which would force Washington to pay a crushing $300 billion a year in interest. (Even under the Senate plan, the debt would remain so large that Washington would pay at least $250 billion annually in interest.) That virtually guarantees the next generation will face higher taxes to finance the baby boom's retirement.

Third, cutting taxes during a war -- not only the conflict in Iraq but also the broader struggle against terrorism -- is unprecedented in American history. It amounts to asking the next generation to fund the national defense through a higher national debt.

Last week, the CBO rattled another pillar of the case for tax cuts. In a special analysis, the office concluded that Bush's budget was unlikely to have much effect, up or down, on economic growth -- and would produce huge federal deficits even under the best growth scenarios. In other words, there's no free lunch.

That means that sooner or later, Washington will almost certainly have to consider raising taxes to pay the country's bills, as the corporate leaders in the Committee for Economic Development recently concluded. Which is why it's not just premature, but myopic, for anyone to be celebrating a Senate budget that digs the deficit hole still deeper.

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Ronald Brownstein's column appears every Monday. See current and past Brownstein columns on The Times' Web site at: www.latimes.com/brownstein.

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