Boost in refunds on tap, but tax debate won't die

Author: David Westphal

Published: December 27, 2003

WASHINGTON (McClatchy) - American taxpayers are about to reap their last big bonanza from an extraordinary three-year run of federal tax cutting, pocketing substantially higher refunds on their 2003 income tax returns.

But that doesn't mean anti-tax talk in Washington will fade away. The White House and Republicans leaders plan to keep tax-cut legislation front-and-center during next year's presidential election campaign, in part to remind voters of the thousands of dollars in lower tax payments they have pocketed since George W. Bush became president.

Bush is expected to push Congress to enact new savings programs that rely on tax breaks to lure participants. In addition, because of the way the last tax cut was structured, Congress in 2004 must act to extend current provisions or taxes automatically will be increased for many in 2005.

Grover Norquist, a Republican strategist influential on tax policy, said the new year's tax-cutting plan is part of a White House strategy to reduce federal taxes every year that Bush is in office.

"Taxpayers do not reward you for your tax cut of last year," said Norquist, president of Americans for Tax Reform. "They want to know next year's tax cut."

But most Americans will get one more taste of the old tax cut when they file their 2003 federal returns, which will reach millions of mailboxes in the next couple of weeks. Tax experts say the average refund next year should be up about $500 to a record $2,500 per household.

The big jump is a result of legislation that applied last spring's tax cut retroactively to the entire year. With payroll withholding reduced for only for the last half of the year, the government is holding an extra $60 billion that will be refunded to taxpayers, according to Merrill Lynch estimates.

For most taxpayers, this will be the last hurrah from Bush's successful campaign to reduce federal taxes. Politicians disagree about whether the tax-trimming's main legacy will be as a critical tonic for the economy or as an ill-advised contributor to record-breaking federal deficits.

But the direct impact on taxpayers is undisputed. All told, the reductions have shaved $450 billion off tax bills over the last three years and are expected to achieve $3 billion in savings over 10 years, according to Citizens for Tax Justice. As a share of the total economy, federal receipts have fallen to 16.5 percent, the lowest margin since 1959.

In a series of reductions rivaling those of legendary tax-fighter Ronald Reagan, federal income taxes were trimmed an average $440 per household in 2001, $1,012 in 2002 and $1,814 this year, according to the Institute on Taxation and Economic Policy. Aided by big refunds this spring, the tax saving in 2004 is expected to approach $2,000.

The Bush cuts have reduced marginal rates, taken a big cut out of the estate tax, and benefited most married couples and families with children.

In the process, the tax reductions have been a powerful force in propping up a weak economy. Although initially opposed by most economists as an ill-advised stimulus, the tax cuts now are regarded as having prevented a much more serious recession in 2000 and 2001.

"Many economists attribute the brighter economic outlook for the next several years to the president's second round of cuts," said Ronald Utt, an analyst at the Heritage Foundation in Washington.

In the process, though, the reduced tax revenue - combined with a slowed economy and sharply higher military spending - has given new life to large federal deficits. The 2003 deficit hit $380 billion and, according to the Congressional Budget Office, could reach the $500 billion range in 2004.

Democrats running for president have made much of the rapidly growing deficit, and all are seeking to roll back at least a portion of the Bush tax cuts. "Our president has spent his term squandering everything we worked so hard to build," said former Gen. Wesley Clark in a speech earlier this month. "He's turned record surpluses into record deficits."

With the presidential campaign in full swing, a raucous debate over tax policy seems assured in 2004, with Republican attempts to enact additional tax cuts likely to be met with substantial Democratic resistance.

But Congress will be under heavy election-year pressure to act. Taxes would increase, in some cases substantially, under at least five separate provisions if Congress doesn't extend current law beyond Dec. 31, 2004.

The child credit would be reduced from $1,000 to $700. Marriage penalty relief would be rolled back. The lowest, 10 percent tax rate would be narrowed. And the number of Americans coming under a special tax for high-income earners - the Alternative Minimum Tax - would increase sharply.

The idea of increasing taxes on any of these fronts is anathema to most politicians, so Congress is almost certain to accept some or all of GOP leaders' proposals to prevent that from happening.

"The most important item on the economic agenda is to check Democrat tax-and-spend plans to hamstring the recovery," said House Majority Leader Tom DeLay of Texas.

But none of this will be cheap. According to the Congressional Budget Office, extending the expiring tax provisions would cost $59 billion the first year and $1.5 billion over 10 years. Stopping the fast expansion of the Alternative Minimum Tax would cost another $400 billion over 10 years, according to the agency.

Some think the AMT is a sleeper issue that is about to emerge as a national priority.

In the last four years, the number of taxpayers stung by the tax has more than doubled and is expected to reach 2.4 million this year. Unless the current law is extended, its impact will grow rapidly, to 17.5 million taxpayers in 2005 and 33.5 million by 2010, according to the Urban Institute.

More problematic for lawmakers is that the AMT's reach will expand quickly even if the law is extended, affecting 12.7 million taxpayers by 2005.

The Alternative Minimum Tax was enacted in 1970 in response to news stories detailing how 155 wealthy Americans were able to pay zero federal income taxes. But because the tax was never adjusted for inflation, its impact now is growing rapidly. The Urban Institute concluded that the AMT is being transformed from a "class tax to a mass tax," and said a solution will cost closer to $600 billion over 10 years.

Somewhat perversely, the AMT penalizes large families because it prohibits dependent exemptions that are allowed in the regular tax. Also excluded in the tax's calculations are the standard deduction and, for those that itemize, deductions for state and local taxes and miscellaneous expenses.

Administration officials have acknowledged the AMT problem but have offered no proposal for stopping its rapid growth. As a result, most experts don't expect significant congressional action until after next year's election.