Big Tax Cut May Be Long-Term Loser for Bush if Red Ink Flows

When it comes to his tax plan, success may now be a greater risk for President Bush than failure.

The stars are aligning for Bush to win congressional approval of a big tax cut--maybe even bigger than the $1.6-trillion, 10-year reduction package he campaigned on. The question is: Once Bush gets his tax cut, will he be glad he did?

The danger for Bush is straightforward. Most analysts believe that voters now expect Washington to keep the federal budget in balance without dipping into the surplus accumulating in Social Security. But if the tax cut emerges from Congress larger than Bush expects, or if revenue grows more slowly than he expects, the president faces the risk that by 2004 he will reopen deficits that force him to tap the Social Security surplus to finance his program.

And while Bush advisors believe they could survive a return to red ink, most Democrats think he would pay a stiff political price. If deficits recurred, the tax cuts that were the Bush campaign’s calling card in 2000 could easily become the Democratic campaign’s cudgel in 2004.

“To say you were the president who took the largest projected surpluses in the history of the country and turned them into deficits would be devastating,� says Sen. Evan Bayh of Indiana, the new chairman of the centrist Democratic Leadership Council. “How do you explain that to the American people?�

In the short run, the politics of tax cuts look bright for Bush. Federal Reserve Board Chairman Alan Greenspan’s endorsement of rate reductions, the relentless growth of the estimated budget surplus and concerns about the economy have combined to dramatically improve the prospects of Bush winning a much larger tax cut than seemed possible during the presidential campaign. If anything, Bush’s most immediate problem may be restraining his allies.

Pressures already are building that could push the plan’s formidable price tag higher. Experts in both parties believe Congress is certain to roll back the alternative minimum tax, created to keep taxpayers from eliminating their tax liability through deductions and credits. Leaving the minimum tax unchanged could wipe out much of the benefit from Bush’s tax cuts for as many as 12 million middle- to upper-middle-income taxpayers; scaling it back would cost an additional $200 billion over 10 years.

Making Bush’s tax cut retroactive to Jan. 1, as he endorsed last week, would add billions of dollars more. And because the money used for tax cuts could not be used to pay down the federal debt, the Bush plan would increase Washington’s interest costs by about $400 billion over the next decade--pushing the plan’s potential cost well past $2 trillion.

And that’s before the business lobby gets started. Although the distinction got lost during the campaign, Bush initially tried to strike a populist note by targeting virtually all of his program’s benefits toward individuals and small business. But now corporate lobbyists are mobilizing for their share. Last week, a coalition of big business interests launched a new lobbying group to press for major corporate tax reductions. Among other things, the new group is urging a nearly one-third cut in the corporate tax rate, to 25% from the current 35%. Supporters and opponents agree that would cost about $60 billion a year when fully effective.

One senior White House official says that Bush is determined to keep the final package free of such bennies for big corporations. “He will fight this,� predicts the advisor. “He is a little bit of a populist here. He’s not going to come to Washington and say, ‘I am focused on the problem of dealing with marginal tax rates,’ and then turn around and say, ‘I’m going to scrap that in favor of increased corporate benefits.’ �

But driving a tax bill through Congress without paying a substantial toll to business may be virtually impossible. For one thing, Bush may face pressure from inside his own administration; Treasury Secretary Paul H. O’Neill (the former chairman of Alcoa Inc.) recently told the Washington Post he thinks any corporate income tax is misguided because companies simply pass along the cost to consumers. In Congress--which tacks business breaks onto tax bills the way teenage girls tack pictures of Brad Pitt onto their walls--the pressure will be even greater.

“Business is going to get 10% or 20% of this thing,� says attorney Bob Lighthizer, who served as chief counsel of the Republican-controlled Senate Finance Committee during the bidding war over President Reagan’s 1981 tax cut. “I don’t think there is any chance it will go through without that. The only people who would think that is possible are people who haven’t been through the process a lot.�

A bill featuring large business tax cuts would present Bush with two choices, both unpleasant. If he wanted to keep his plan’s overall cost at $1.6 trillion, he’d have to scale back his personal cuts. That’s dangerous for Bush because even presidents who cut taxes have always had trouble convincing voters that they really lightened the load.

Al Gore, for instance, felt voters were so dubious of the claim that he chose not to rebut Bush’s charge that President Clinton had failed to cut middle-class taxes--even though all but the top 20% of American families paid a lower percentage of their income in federal taxes when Clinton left office than when he entered (largely because of the child tax credit approved in 1997). If Bush trims the individual tax cut, he increases the risk that voters won’t notice it.

Alternately, if Bush increases the size of the package, he intensifies the risk of falling back into budget deficits should the economy falter. Bush could then avoid deficits by imposing new spending cuts or deferring future stages of his tax cut. But neither of those options is particularly attractive.

“It is the results that will matter most,� Bush declared last week when he sent his tax package to Congress. He’s right. Voters are likely to be influenced much less by the ideological contrasts between the competing Democratic and Republican tax plans than by the real-world effects of the package Bush ultimately signs into law. If the tax cut gives the economy a jolt, and if that growth keeps the federal budget in the black, the plan could be a huge political lift for the president. But if the slowdown persists, and deficits recur, it might be a victory more costly than any defeat.

See current and past Brownstein columns on The Times’ Web site at: http://ukobiw.net./brownstein.