A Big Tax Cut This Year?

Dec. 21, 2004
Business wants one, but will have to wait to see whether it'll be a reality.

If there's a single piece of legislation that business groups want Congress to pass this year, it is a tax cut. One -- and a hefty one -- is needed, they contend, to ensure that the U.S.' high-flying economy doesn't nose-dive. Besides, federal taxes have soared to their highest level in peacetime history, reaching nearly 21% of GDP in fiscal 1998, they point out. Isn't the current period of budget surplus, they ask, an appropriate time to grant relief? Unfortunately, it promises to be weeks -- or months -- before it becomes clear whether business will get its tax-cut wish. But after three months of rhetoric, political positioning, and much lofting of trial balloons, the debate over tax legislation at least will start to become more serious next week when Congress returns from its two-week Easter recess. As a top order of business, legislators will continue the debate that began in late March over a federal budget resolution for fiscal 2000. That document, in turn, "will become the arena for the tax debate," Rep. Bill Archer (R, Tex.), chairman of the House Ways and Means Committee, told a recent meeting of the Tax Policy Committee of the National Assn. of Manufacturers (NAM). The Ways and Means panel, which initiates tax legislation, won't take up a tax measure until the budget process is well along, Archer said. Surely, the tax debate will include the call of Republican conservatives for a 10% across-the-board cut in individual and corporate income-tax rates. Such a reduction also is a prime goal of business -- particularly of the NAM, which has collected more than 15,000 signatures of member-company employees on a petition to Congress urging passage. The Washington-based industry group is leading a coalition of some 20 industry associations in lobbying for the cut. Earlier this year a 10% tax-rate slash appeared to be the silver-bullet issue Republicans were seeking in 1999 to recover from the political pasting they sustained in President Clinton's impeachment proceedings. But public indifference to a big cut, spurred by concern that it would mainly benefit the rich, and Clinton's calls to use the budget surplus to "save" Social Security and Medicare prompted the GOP Congressional leaders to endorse a more limited reduction. Indeed, in the broad budget outline proposed by the leadership last month, a tax cut gets only equal priority with several other goals: setting aside payroll-tax surpluses to protect the future of the Social Security system, boosting spending on defense and education, and keeping spending within the caps of the current budget law. Now, says Bruce Josten, executive vice president of the U.S. Chamber of Commerce, "a 10% tax reduction is only a goal. Yes, we will try to get it enacted. But in this political climate, in no way can a cut of that dimension be a short-term objective." A 10% cut won't be realistic, he says, until "the case ultimately is made to the American people why it is so important." The NAM, however, continues to gamely push for the 10% cut now. "It is not dead," insists Fred Nichols, vice president and political director for public affairs. "It is not even on a respirator." But he admits that the concept "is going through a reincarnation," suggesting that it might be melded with "targeted" tax cuts proposed by GOP moderates. "Our goal is to get Congress to commit to a 10% cut, even if it does not take effect this year." The NAM, he says, would support a phased-in approach. Even though Republicans hope to pass a budget bill earlier than usual, the measure -- as well as the companion tax debate -- could be affected by revised projections of the budget surplus due from the nonpartisan Congressional Budget Office (CBO) in late spring. Backers of a big tax cut hope that the CBO, under its new director Dan L. Crippen, will project higher future budget surpluses than it has previously. That would make tax cutting easier. Even if business doesn't get its desired 10% cut, it figures to benefit from the proposed targeted cuts. A targeted package no doubt would include a politically appealing easing of the of the so-called marriage penalty paid by some two-income couples. But business lobbyists are optimistic they can win inclusion of such business priorities as reduction or repeal of the estate tax, permanent extension of the R&D tax credit, relief from the Alternative Minimum Tax, and simplification of the treatment of foreign-tax payments. Yet targeted cuts have a down- side, cautions Barry Rogstad, president of the American Business Conference, a coalition of midsized growth companies. "To those of us interested in simplifying the tax code, targeted cuts can be very counterproductive," he comments. "It's scary. We're well on the way to getting a tax system that no one can understand." ABC supports a 10% across-the-board cut, Rogstad says, "as a lubricant" to its ultimate goal -- fundamental reform of the tax code. Echoing other business groups, he also argues that if the budget surplus "is left in Washington, the government will spend it." The likely outcome? "At this stage of the debate, there's no settled ground on the size, timing, and composition of a tax cut," says NAM President Jerry Jasinowski. "Things won't become clear until the middle of the year." The U.S. Chamber's Josten agrees. "Three things will affect the tax debate -- Social Security, Medicare, and defense spending," he says. "Until decisions are made on those, we won't know what the tax bill will look like. All these debates are interdependent." One group venturing a prediction, though, is the Committee for a Responsible Federal Budget, a nonpartisan Washington organization that promotes budgetary discipline. It foresees a compromise built around "a tax cut for the Republicans and lots of new spending for the President." Most of the financing for these twin goals, the group fears, will come from Social Security surpluses, which will limit debt reduction, raise interest costs, and burden future taxpayers. "This rush to instant gratification," the committee warns, "could make Social Security and Medicare reform even more difficult than they always promised to be."

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