2004 Race May Pivot on Details of Tax Bills

With little notice, the tax bills moving toward completion in Congress could significantly change the landscape of next year’s presidential campaign.

By accelerating the reductions in income tax rates President Bush won in 2001, the measures would undermine a centerpiece of the political and economic strategy for several of the leading Democratic contenders.

Hoping to avoid Republican charges of raising taxes, Sens. John F. Kerry of Massachusetts, Joseph I. Lieberman of Connecticut, Bob Graham of Florida and John Edwards of North Carolina have all proposed to finance their agendas not by repealing the tax cuts already implemented in 2001, but by blocking income tax rate cuts now scheduled for 2004 and 2006.

All indications are that the final tax bill expected to emerge from Congress would render that strategy obsolete by advancing all of those tax cuts into 2003 -- locking them into law before any Democrat can claim the White House.

In that way, the legislation would force the four Democrats toward a stark choice they had hoped to avoid: either accepting the Bush cuts or explicitly proposing to increase taxes. The first option would leave them with little money to fund the initiatives they are proposing; the second would increase their vulnerability to GOP charges of reverting to tax-and-spend economics.

“It definitely complicates things,” said a senior advisor to one of the four candidates. “It’s a tougher position for all of these campaigns.”

For that reason, the plan to accelerate Bush’s income tax rate cuts could have much greater political implications for the presidential campaign than the fight over his proposal to eliminate taxes on income from dividends, which has drawn far more notice.

“All of the attention has been on the dividend components, but if you are [White House political advisor] Karl Rove, the rate reductions may be a more important thing for you to lock in,” said Peter R. Orszag, a tax specialist at the Brookings Institution think tank in Washington.

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Political Aims

Republican strategists believe Democrats will pay a heavy price in next year’s campaign if they propose to raise taxes by repealing the rate cuts.

“It would do two things,” said one GOP strategist familiar with party plans for 2004. “It would provide a lens with which swing voters would view them as offering the same old Democratic stuff. And secondly, it would be a motivational factor for the Republican base.”

Recent political history, however, offers a mixed verdict on the political risk of proposing tax increases. Most analysts agree that Democratic presidential nominee Walter F. Mondale was hurt in the 1984 campaign when he proposed raising taxes to close the deficits that had swelled under Ronald Reagan. But Bill Clinton won in 1992 even though he openly promised to raise income taxes on the top earners to help reduce the deficits that had persisted under Bush’s father, George H.W. Bush.

“It won’t be hard to win the argument that in a time of national sacrifice the very wealthiest have to chip in a little more,” predicted Bruce Reed, a former top policy aide to Clinton.

The prospect of a subtle but potentially significant shift in the tax debate for the 2004 campaign springs from a central feature of the $1.35-trillion tax cut Bush pushed through Congress in 2001.

To save money, the bill cut taxes only gradually through the next decade. The bill provided an immediate 1 percentage point reduction in the tax rate for each of the top four tax brackets in 2001. But it also scheduled further reductions in those brackets for 2004 and 2006.

So, for instance, the top rate paid by the highest earners was reduced from 39.6% (the higher level that Clinton had established) to 38.6% in 2001; it is scheduled to fall to 37.6% in 2004 and 35% in 2006. The other brackets follow a similar pattern of graduated reductions.

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2001 Cut Assailed

All of the Democratic presidential contenders criticize the 2001 tax cut as damaging to the economy and the federal budget. But they have divided over how fundamentally to challenge it -- with the phase-in feature creating the point of distinction.

Rep. Richard A. Gephardt (D-Mo.) has promised the most sweeping change: He says that as president he would repeal all of the 2001 tax cut, including the rate reductions already implemented that year. He would use the money to fund a sweeping new tax credit for employers designed to create nearly universal access to health care.

Former Vermont Gov. Howard Dean, while not detailing his plans so explicitly, also has said he intends to repeal much of the tax cut -- including the rate reductions already provided--largely to pay for his own plans to expand access to health care.

Although both men argue that working families would be better off under their plan than with the Bush tax cut, one point is indisputable: Both of their proposals constitute tax increases because they would raise income tax rates from the level they are at today.

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Centrists’ Aims

Kerry, Lieberman, Graham and Edwards, the four most centrist contenders in the Democratic field, had been hoping to make a subtly different argument. Rather than proposing to repeal the tax breaks already granted in 2001, they have said that more-affluent families should not receive the further tax reductions now promised in 2004 and 2006.

Lieberman and Edwards proposed to freeze the rate cuts due earners in the top two income brackets (which would affect families earning $172,000 or more a year); Kerry and Graham have called for freezing the cuts scheduled in the top three brackets (which would cover families earning $113,000 or more).

Republicans already had indicated they would argue that blocking those future rate cuts amounts to a tax increase. But Kerry, Lieberman, Graham and Edwards had a ready response: By leaving in place the rate reductions implemented in 2001, they have been able to argue that they are not raising taxes on anyone.*

‘Read My Lips’

In a speech last year, for instance, Lieberman said that under his plan, “Not a single American would be paying more in taxes than they are today.... Read my lips: Keeping current tax rates is not a tax increase.”

The tax bills moving through Congress would render that argument obsolete.

Whatever uncertainties there are about the final shape of the tax cut, a consensus has developed on one part of it: moving up to 2003 implementation of the income tax rate cuts now scheduled for 2004 and 2006. The tax plan that passed the House on Friday and the one pending in the Senate would make all the scheduled rate cuts -- including the top tax bracket for the wealthiest Americans -- effective retroactively to Jan. 1, 2003.

Congressional Republicans appear keenly aware that advancing the tax cuts will create complications for the 2004 Democrats.

“For any of these guys running for president, any of their big spending plans will have a lot more controversy, because they will have to raise taxes or increase the deficit” to pay for them, said Stuart Roy, spokesman for House Majority Leader Tom DeLay (R-Texas).

Neither Kerry, Lieberman, Graham nor Edwards yet will say whether they would propose to repeal those reductions if they became law.

Most Democratic analysts believe the four will have no choice but to eventually propose repealing the rate cuts for the top earners. Orszag calculates that freezing the two top tax rates at the 2001 level would save $211 billion over the next decade. Without that money, it is difficult to see how Democrats could fund any of the other programs they are proposing -- including alternative tax cuts for middle-class families.

“I don’t see where they have any choice but [support] repeal,” said Stanley B. Greenberg, the pollster for Clinton in 1992 and Al Gore in 2000.

And that virtually guarantees a sharp line of distinction between the eventual Democratic nominee and Bush over taxes -- a confrontation that strategists in both parties are relishing.

Said the GOP strategist familiar with party planning: “The Democrats are getting themselves into the situation Mondale got himself in.”

But Reed, now the president of the centrist Democratic Leadership Council, countered: “If a Democratic candidate can’t convince the country that Bush’s tax cuts are giving away money we don’t have to people who don’t need it, that candidate doesn’t deserve to win anyway.”