Extending tax cuts in question President Bush's proposal faces concerns over a rising budget deficit, proposed spending hikes and election-year politics

Author: Jake Thompson

Published: February 10, 2004

Three tax cuts that you may have enjoyed the last couple of years if you're married, have children or pay income taxes at all are set to phase out in a year.

You might think that such cuts, with millions of beneficiaries, would be easy for members of Congress to get together on and extend. Or make permanent.

Think again.

Whether you'll still pocket the money from those tax cuts in 2005 is very much up for grabs.

There are several reasons: a sudden alarm in Washington about this year's projected $ 521billion federal budget deficit, a record; plans to boost spending on defense and homeland security; political turbulence expected in a presidential election year; and growing dread among both Democrats and Republicans in Congress about future spending for baby boomers.

All are hitting Washington like a wet winter blanket. As a result, Midlands lawmakers expressed varying enthusiasm and confidence last week about a key item in President Bush's 2005 budget: extending those and other tax cuts.

"It's probably too ambitious, given the size of the deficit," said Rep. Doug Bereuter, R-Neb.

Sen. Chuck Hagel, R-Neb., said: "I do support making those tax cuts permanent. In an election year, whether that's doable, I don't know."

Even Sen. Chuck Grassley, one of the more influential voices on taxes in Congress, isn't totally embracing Bush's plan.

"I think that all of the temporary tax cuts ... would not be done this year," said Grassley, R-Iowa. But "that's what the president is asking us to do."

Bush won tax cuts in 2001 and 2003 with broad support in Congress, first to return surplus money to taxpayers, then to try to stimulate the economy.

Tens of millions of taxpayers have seen smaller tax bills, especially from cuts that reduced income taxes, raised the child tax credit from $ 600 to $1,000 per child and shrank the quirk that had required married couples to pay more than single people.

In presenting his budget last Monday, Bush asked Congress to extend those tax cuts and five others that are to be phased out in later years, including lower tax rates on estates, capital gains and dividends.

Grassley, chairman of the powerful Senate Finance Committee, suggested that Bush might not get all he wants. Keeping the bigger child tax credit, flattening the marriage penalty and retaining a broad 10 percent tax bracket on the first chunk of taxable income may be the best Congress can do this year, he said.

In the House, Budget Committee Chairman Jim Nussle, R-Iowa, is committed to pushing for Bush's full package, Nussle spokesman Sean Spicer said.

Already, the White House is on the offensive with a 50-state breakdown of how it says the previous tax cuts have helped.

In Nebraska, the White House says, 640,000 taxpayers and 215,000 married couples paid less income tax, 160,000 families benefited from raising the child tax credit, and 165,000 small businesses saw savings.

In Iowa, more than 1 million taxpayers and 370,000 married couples paid less income tax, 270,000 families got additional child tax credits, and 280,000 small businesses saved money, according to the White House.

The problem for Bush is that, according to his own budget estimates, the total tax package would cost $ 848 billion over the next 10 years - making Democratic lawmakers, some Republicans and some economists skeptical that he can accomplish his goal of shrinking the deficit.

"I'd be very surprised if anything actually happened this year," said William Gale, an economist at the Brookings Institution. "He admits deficits matter, but he also says he wants tax cuts. It's sort of doublespeak."

Gale said that extending the cuts would fall disproportionately to the wealthy and could hurt the economy by keeping the deficit high and reducing capital to fuel jobs.

Maya McGuineas, executive director of the nonpartisan Committee for a Responsible Federal Budget, agrees. Given the deficit and the enormous drain on the federal treasury when 77 million baby boomers retire and tap into Medicare, and Social Security, she said, "Now is absolutely the wrong time to cut taxes."

Conservatives don't buy that argument.

Rep. Steve King, a Republican who represents western Iowa, is in full support of Bush's proposals, if only to avoid tax increases when existing cuts expire.

"Taxpayers need to be able to keep more of their hard-earned money and invest it as they see fit, in turn helping to grow the economy," King said.

Rep. Lee Terry, R-Neb., said the resulting increases in taxes would hit families and low-income Americans first.

"It would be better politically to just put it up for a vote and see who's got the guts" to raise taxes on families in an election year, he said.

His Nebraska colleague Rep. Tom Osborne also favors solidifying the three family-linked tax cuts but is willing to compromise on estate taxes.

Hagel, meanwhile, favors Bush's approach. He contends that permanent tax cuts would make the tax code consistent, providing needed predictability for business.

Spending also is putting pressure on whether more tax cuts win approval.

Bereuter, a moderate, would support making permanent the three tax cuts that affect middle- and lower-income families, not all eight.

One way to pay for them, he said, would be to cut money from defense and homeland security. He said Congress has overfunded both because it "makes people feel good back in the district."

"Some communities are getting vehicles for riot control when it is clear they would never have a riot," Bereuter said.

Democratic Sen. Ben Nelson of Nebraska, a centrist who voted for previous tax cuts, said that to win his support for extending any tax cut he'll want to know that it will expand the economy, not just the deficit.

"I don't think there's any automatic votes for making the tax cuts permanent," Nelson said. "You have to take a look at each one."

Gale at the Brookings Institution said the tax issue will probably remain hot this year, particularly because Democratic presidential candidates are calling for repeal of some or all of Bush's cuts. The resulting battle will spill into Congress, he said, and get wrapped up in the contest between Republicans and Democrats to retain or regain control of the House or Senate.

Endangered tax cuts

Lower income tax rates

Larger child tax credit

Reduced marriage penalty

Lower rates for taxes on estates, dividends and capital gains