Tax-cut momentum waning

The push to cut taxes - an annual rite for the Bush presidency - is facing a tougher sell in Congress, as concern grows about swelling deficits and budget cuts that target programs for the poor.

At stake is a relatively modest package of tax extenders, including a 2003 tax break on capital gains and dividends, research and development tax credits, and a tuition tax deduction, all of which once enjoyed broad support.

But amid costly post-hurricane cleanup and soaring budget deficits, the Democrats and moderate Republicans who once rallied behind tax cuts are now hanging back.

"There's waning enthusiasm on the Republican side for tax cuts because of rising deficits and little traction for the issue, even among conservatives," says Marshall Wittman, a former conservative activist, now with the Democratic Leadership Council.

At the same time, Democrats are more united than at any time in the Bush presidency on opposing tax cuts that they say primarily benefit the wealthy. While scores of Democrats have supported Bush tax cuts in the past, a vote on the tax-cut bill pending in the House could find no minority support.

After a close vote on $50 billion in mandatory spending cuts, House Republicans put off a vote on a $56.1 billion tax cut plan until after the Thanksgiving recess. They plan to return Dec. 6.

But the biggest obstacles to a tax deal before Christmas are coming from within the Republican caucus. Under pressure from GOP moderates, the Senate dropped an extension of tax breaks on capital gains and dividends from their $59.6 billion tax package and added a tax on big oil companies, which the White House is threatening to veto.

In the face of opposition from GOP moderates, especially Sen. Olympia Snowe of Maine, the Senate Finance Committee rejected even a one-year extension of dividend tax breaks, viewed as mainly benefiting the wealthy, in favor of easing the impact of the Alternative Minimum Tax, which otherwise is expected to impact 14 million taxpayers in 2006.

It's a sea change from the politics of tax cuts earlier in the Bush administration, when the president could count on disciplined GOP ranks in the House and a significant number of Democratic votes to move big tax bills. In 2001, when budget analysts were projecting surpluses for the next 10 years, Congress passed a $1.35 trillion tax cut that reduced individual income tax rates and cut taxes for married couples. Those cuts were accelerated in 2003, at a cost of $330 billion over 10 years, and extended in 2004 at a cost of $146.9 billion.

But both conservatives and GOP moderates are now balking at the prospect of extending those cuts further, as they also negotiate high-profile cuts in the growth of programs affecting poor families.

"People are now more aware that we have a really serious deficit situation," says James Horney, senior fellow at the liberal Center on Budget and Policy Priorities.

"In 2001, the administration had budget projections that showed we were looking at considerable surpluses over the next 10 years. Things have changed very much since then, partly as a result of the tax cuts passed then," he adds.

For Democrats, the tax cuts are already emerging as a key issue in 2006 elections. "House Republicans are hoping that people will forget over the course of the holidays that right before they left they cut programs for the poor, saying that they needed to do something about the deficit and Katrina, then [proposed] very regressive tax cuts," says Joan Entmacher, vice president for family economic security at the National Women's Law Center.

But conservative analysts say Republicans should be proud of their tax record.

"Republicans have a huge argument to make that the 2003 tax cuts have been a giant success. The economy has grown 4 percent per year since those tax cuts, but extending them even a year is proving to be extremely difficult," says Daniel Mitchell, a senior fellow at the Heritage Foundation, a conservative think tank. "The White House and congressional leadership aren't doing a very good job about it."

Unless Congress extends them, tax cuts signed by President Bush will soon expire. Among them:

• Tuition tax deduction will expire at the end of this year.

• State and local sales tax deduction will expire at the end of this year.

• Alternative Minimum Tax exemptions will decrease by $6,500 per filer at the end of this year.

• Dividend tax rates will rise to match standard income tax rates in 2009.

• Capital gains taxes will rise to 10 or 20 percent, based on income, in 2009.

• Child credit will shrink from $1,000 to $500 in 2011.

• Federal income tax rates will rise between 3 and 4.5 percentage points in each bracket in 2011.

Source: The Heritage Foundation