Tax Cut Is a Victory and a Risk for Bush

With congressional approval of his third tax cut in three years, President Bush has deepened his imprint on the economy and accelerated his redirection of the federal government -- achievements that may present as many risks as opportunities for him.

Although reduced from his original proposal, the $350-billion package passed by the House early Friday and the Senate several hours later still represents a remarkable legislative accomplishment for him.

Never before has Washington approved a major tax cut in the shadow of war. Nor has it agreed to cut taxes while the federal government faced such deep budget deficits. And the bill’s ultimate size may come closer to -- or exceed -- what Bush wanted because many of its most popular elements may be extended beyond their expiration dates.

The bill’s passage underscores the willingness of Bush and congressional Republicans to leverage big changes in policy on a narrow legislative majority, and is likely to reinforce one of the president’s most valuable political assets: the view of him as strong and decisive.

“It gives Bush the image of a leader, an impression as someone who cares and someone who is effective -- all of which are good arguments for people to hire you for four more years,” said Allen Lichtman, an American University historian who studies presidential elections.

Yet in the near-term, the tax cut will swell a federal deficit already expected to be the largest ever this year -- an abrupt reversal from the surpluses Bush inherited. And by reinforcing the sharp change in economic policy Bush engineered in 2001 -- from President Clinton’s focus on public investment and deficit reduction to an emphasis on repeated tax cuts -- the legislation could leave the administration more open to blame if the economy doesn’t revive before next year’s election.

“He completely owns the economy now,” said Steve Elmendorf, chief of staff for the presidential campaign of Rep. Richard A. Gephardt (D-Mo.). “There’s nothing he’s tried to do in a significant way economically that Congress hasn’t approved. To the extent people now focus on the economy, it’s his economy.”

With polls indicating that few Americans expect to personally benefit from the new tax cuts, many believe the bill is likely to help Bush in 2004 only to the extent it succeeds in jump-starting the economy. If growth picks up, Bush can claim credit, experts in both parties agree.

But if the economy doesn’t improve, many analysts say Bush’s success at passing his new plan could make it more difficult for him to place the blame on Clinton, Congress or the 2001 terrorist attacks, as the administration did during last year’s midterm election.

With the latest bill, Bush has left little doubt that tax cuts constitute the unchallenged core of his domestic priorities. Arguably no president in modern times has invested more of his popularity on the economic value and political appeal of cutting taxes.

Measured as a share of the economy, the $1.35-trillion tax cut Bush pushed through Congress in 2001 was smaller than the reductions that President Reagan won in 1981, according to calculations by Peter Orszag, a tax expert at the Brookings Institution think tank. But when deficits surged, Reagan reversed course in 1982 and accepted a significant tax increase.

Bush, in the face of deficits, has pressed further down the tax cut path. He won small additional reductions for investment last year. And now he has squeezed through Congress these latest tax cuts officially valued at about $320 billion over 11 years, with the remaining $30 billion composed of aid to states and tax refunds for low-income families with children.

In fact, the 2003 tax cut is likely to cost far more than that. Congress held down the package’s cost only by”sunsetting” many of its provisions so they expire in the next few years. The strong likelihood is that Bush and congressional Republicans will seek to extend all of those provisions -- from increased tax credits for children to the reduction in taxes on capital gains and dividends -- before they expire.

If all those provisions are extended, the full cost of the plan will range from $800 billion to $1 trillion, even more than the $725 billion Bush initially requested, according to a study by the Center on Budget and Policy Priorities, a liberal think tank.

If those full costs are added to the 2001 and 2002 packages, Bush’s tax cuts would be about as large as the reductions Reagan won -- an amount equal to roughly 2% of the gross national product, according to Orszag. By 2013, assuming all provisions are extended, the three Bush tax cuts would reduce federal revenues by about $400 billion annually, Orszag calculates.

And Bush may not be done trying to cut taxes. “The president will propose a major tax cut next year,” flatly predicted Grover Norquist, president of Americans for Tax Reform, a conservative group close to the White House.

The passage of this year’s bill, beyond underscoring an image of effectiveness, may offer Bush several other political benefits.

Tax cuts excite his core GOP base, and could help him replicate in 2004 the heavy turnout among these loyalists that keyed the party’s gains in 2002.

By accelerating into 2003 cuts in income tax rates that were scheduled for 2004 and 2006, the new bill creates a political headache for Democrats. Several of the party’s presidential contenders had hoped to finance their agenda not by repealing the tax breaks that took effect in 2001, but by merely blocking the future reductions -- a nuance that would allow them to argue they were not raising taxes.

Now, to fund their initiatives, those Democrats may have to propose raising taxes -- at least on affluent families -- by repealing the rate cuts that will be advanced into this year. Such Democratic proposals could activate the Republican base even more than Bush proposals to cut taxes.

“It’s a killing field for the Democrats,” said Norquist. “I don’t know quite how they walked themselves into it.”

Still, the politics of tax cuts may not be that cut-and-dried. In an NBC/Wall Street Journal survey this week, just 25% of those surveyed said they believed Bush’s 2001 tax cuts have helped the economy, and just 29% thought further tax cuts were the best way to stimulate growth now.

In a survey earlier this month by the Pew Research Center for the People and the Press, less than one-quarter of Americans said they expected the new cuts to significantly reduce their own taxes.

All of the Democratic presidential contenders have been arguing that Bush’s tax cuts have slighted average families, triggered the return of massive federal budget deficits and undermined the prosperity that marked the Clinton years. Key aides to several Democratic candidates insist Bush’s legislative victory helps them by sharpening the contrast over domestic priorities and economic strategy.

“Democrats have a cleaner and cleaner shot at making this election one about stark and fundamental choices,” said Jim Jordan, campaign manager for Sen. John F. Kerry of Massachusetts.

Recent political history suggests that the state of the economy could play a decisive role in how voters divide over tax policy.

In 1984, when the economy was strong, Democratic nominee Walter F. Mondale gained little ground by condemning the budget deficits under Reagan -- and lost ground, most analysts agree, by proposing tax hikes to close those shortfalls.

But in 1992, when the economy was weak, Clinton beat Bush’s father despite proposing to raise taxes on the affluent to reduce the deficit and increase funding for such programs as education and health care -- roughly the same argument most of the Democratic contenders are marshaling for next year.

The economy alone won’t settle Bush’s reelection fate; he has benefited from a public consensus that he’s effectively defended the country since the 2001 terrorist attacks.

But the economy is expected to weigh heavily on the campaign -- and the new tax cuts may represent Bush’s last chance to substantially revitalize it before voters harden their judgments on his performance. The nation has lost 2.1 million jobs since he took office. Unless growth accelerates soon, Bush could be the first president since World War II whose term is marked by a net loss of jobs.

“The key [on the tax cut] is: Does it make life in America better,” said independent pollster John Zogby. “Right now, people may say, ‘the economy’s sluggish, but I like the guy.’ But think about May 2004; that’s a long time to be in a sluggish economy.”

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Tax bill highlights

The tax bill passed Friday by the House and the Senate:

* Will cut taxes by $320 billion through 2013. It also provides $20 billion to state and local governments for Medicaid and other programs and $10 billion in refunds to low-income families with children.

* Will lower the top tax rate for stockholders on corporate dividends and on capital gains to 15%. The current top rate is 38.6% for dividends and 20% for capital gains. Lower-income people will pay a 5% tax rate on both. The new rates will run through 2007; in 2008, the rate for lower-income people will drop to zero. In 2009, today’s current rates will return.

* Will accelerate to this year several income tax reductions that had been scheduled to occur later this decade.

* Will increase the child tax credit to $1,000 a child from $600 a child. This provision will expire after 2004.

* Will increase from $25,000 to $100,000 the equipment investment that small businesses can write off. Many companies could depreciate more of their assets sooner.

Source: Associated Press and Los Angeles Times