Candidates far apart on tax, spending issues

Author: Tom Shean

Published: October 22, 2004

For Dennis G. Hustead, candidates' promises of greater tax breaks, a simpler tax code and a shrinking budget deficit don't add up.

The taxes that he and his wife pay on income from their awning installation company won't be a consideration when he casts a vote for president on Nov. 2, Hustead said. What will be a factor is the widening gap between government spending and tax collections.

"I'm very concerned about the budget deficit," said the co-owner of Hustead's Canvas Creations in Norfolk . Ballooning deficits, he said, make the country increasingly vulnerable to a severe economic shock. Meanwhile, the country relies heavily on overseas investors to finance its deficit.

"There's something about China holding billions of dollars of our Treasury debt that scares me," Hustead said. "They aren't a close friend."

In televised debates and campaign speeches, President Bush and Democratic contender Sen. John F. Kerry have battled over the war in Iraq, their responses to terrorism and plans for stemming job losses. However, few issues have set the two apart as much as taxes.

The president has championed sweeping changes to the tax system, including sharply lower rates for the wealthiest taxpayers and an end to the estate tax.

In contrast, Kerry has pledged to reinstate the higher tax rates that applied to the nation's wealthiest individuals before Bush became president. He also has promised tax breaks to spur hiring, to help students pay for college and to assist small businesses seeking health-care coverage for employees.

Both candidates promise to cut the budget deficit in half. President Bush has said he will do it within five years. Kerry said he can do it in four, partly by adhering to pay-as-you-go rules that would require Congress to offset any new spending with tax increases.

Jeff Lewis isn't persuaded by the candidates' promises. The 29-year-old courier for a Norfolk law firm said he is resigned to paying higher income taxes in coming years because of the government's deficits.

"One way or another, they will have to get the money," he said.

The abundance of tax cuts enacted since 2001 and increased government spending are a stark contrast to the raucous campaign in Congress a decade ago for a constitutional amendment that would require a balanced budget. That contrast hasn't escaped the attention of those who closely follow tax issues.

"Congress in the past several years has not been good about addressing tax policy. They've resorted to quick fixes," said Michael E. Mares, a partner with the Newport News CPA firm Witt Mares & Co. "There should be an intense, detailed debate about what the nation's tax policy should be, but I'm not optimistic about that happening."

The federal deficit

For the fiscal year ended Sept. 30, the government deficit hit a record $413 billion. That was 9 percent greater than the deficit for fiscal 2003 and 2 1/2 times the 2002 deficit.

To finance the deficits, the Treasury has had to step up its borrowing. In the process, the government's long-term debt has climbed to $7.3 trillion, a 27 percent jump from three years earlier. Treasury Secretary John Snow and other members of the Bush administration have noted that the 2004 deficit, when measured as a percentage of the nation's output of goods and services, is still below the levels reached during the 1980s and early 1990s.

That argument hasn't won over Hustead, who objects to passing along an onerous amount of debt to another generation. "If I were in my 20s, I'd definitely be worried about the deficit," said Hustead, who is 58.

What provokes concern among specialists in tax and budget issues is the approaching wave of "baby boomers" who begin retiring in 2011 and then collect Social Security and Medicare. Asked whether the country can avoid financial disruptions from the combination of rising deficits and mounting cost of retiree benefits, Federal Reserve Chairman Alan Greenspan told a congressional committee last month that it was unlikely.

"You begin to get some very severe fiscal pressures coming because of the very sharp increase in retirement benefits from an ever-larger increase in retirees," Greenspan said during his testimony before the House Budget Committee.

The government's policy makers, Greenspan said, "should try to keep the debt level down as low as we can because we're going to be running into very severe pressures" as more baby boomers retire and there are fewer members of the work force to support them.

The alternative minimum tax

Much like Dennis Hustead, Larry Waters is skeptical about the campaign promises of tax cuts and smaller deficits. The Virginia Beach stock broker was one of about 3 million taxpayers caught up in the complexities of the alternative minimum tax this year.

"I was anticipating a refund because my income was way down from the previous year due to the bond market, and my charitable contributions were up," Waters, a broker with the securities firm Scott & Stringfellow Inc. recalled. "Instead, I had to pay over $1,000 for the alternative minimum tax. My CPA was shocked and refigured the tax several times."

The tax, dubbed the AMT, was devised in 1969 as a way to collect at least some revenue from exceptionally wealthy individuals who sheltered their income from regular taxes. Today, however, individuals who aren't wealthy are routinely ensnared by the AMT because they've used several deductions, have significant gains or losses from the sale of property or have other adjustments on their tax returns.

Regular tax brackets, exemptions and standard deductions are adjusted annually for inflation. More and more individuals are affected by the AMT because it isn't indexed for inflation, and the tax cuts of 2001 and 2003 provided only minor temporary relief.

"Until it hits you, you are completely unaware of the impact," said Elizabeth J. Atkinson, a tax lawyer at the Norfolk law firm Kaufman & Canoles. Presidential candidates probably have avoided talking about the tax, she said, because "it doesn't fit into a sound bite."

The chorus of middle-income taxpayers angry about the additional tax bite is likely to grow. Unless the law is rewritten, about 29 million taxpayers - about 28 percent of all income-tax payers - will face the tax by 2010, two economists at the Brookings Institution, a Washington think tank, have estimated.

"If it is not amended in the future, the alternative minimum tax would eventually erase all the income tax cuts provided in the 2001 and 2003 legislation," economists William G. Gale and Peter R. Orszag said in a report issued earlier this month.

New tax strategies

It's possible that President Bush, if re-elected, will examine major changes to the tax system, including the use of a consumption tax. House Speaker J. Dennis Hastert, a Republican congressman from Illinois, has advocated abolishing the income tax and adopting a national retail sales tax.

One obstacle to a national sales tax is the high rate that would be needed to generate sufficient revenue. Another is the difficulty of enforcing collections, which would require close cooperation from retailers.

If President Bush is re-elected, the use of a national sales tax "will be discussed, but there won't be the political will to make it happen," said James V. Koch, an economist and president emeritus at Old Dominion University .

Virginia taxes

Amid greater demands to fund road-building in Virginia, it's likely that higher state taxes will come up for discussion when the General Assembly meets in January. But after the bitter battle over tax increases in the most recent session of the General Assembly, legislators aren't likely to support another round of increases, even for road-building, Koch said .

Any additional revenue for road-building will eventually be generated by other means, such as tolls and user fees, he predicted.

Trying to balance taxes and spending at the national level will be much more complicated, no matter which presidential candidate occupies the White House. President Bush has said he wants to make many of the tax breaks enacted in 2001 and 2003 permanent. Kerry has promised to raise revenue by restoring income taxes on the wealthiest individuals while assisting uninsured individuals with health-care coverage and offering other tax breaks.

To curb the nation's budget deficits will require much greater control of spending, including spending for retirement benefits, said Gene Seago, a tax professor at Virginia Tech's Pamplin College of Business. Neither candidate appears willing to do that, but the financial pressures aren't likely to ease, said Seago, a lawyer and CPA .

There will have to be some hard choices made eventually," he said.