Anthem for '98: Tax Cuts

Here's a pretty safe prediction for 1998: Folks in Washington will talk a lot about lowering your taxes.

In fact, taxes might become the most prominent issue of the year - though that doesn't mean Reagan-style broad reductions are likely.

"Wait," you say, "didn't Congress pass tax breaks last year? There was that $500 child credit, and then a bunch of stuff that not even my accountant can understand."

True. But there are two reasons Capitol Hill and the White House will venture into tax territory again:

* They want to. 1998 is an election year, and there is nothing so good as tax policy to differentiate the parties and fix their identities in the minds of voters.

* They can. The government is doing so well, fiscally speaking, that it might run a '98 surplus. Some lawmakers are already planning to dole out that money, either via tax cuts or actual spending increases.

"The dark clouds of perpetual deficits have begun to break up and the children are running out to play," says Robert Reischauer, a Brookings Institution fellow.

Recent comments from both ends of Pennsylvania Avenue indicate that a wide-ranging debate over tax policy in an era of balanced (or nearly balanced) budgets has already begun.

On Sunday, White House adviser Rahm Emanuel said that the Clinton administration won't include an across-the-board tax cut, or reform of the tax system, in its upcoming 1999 budget.

But he also reiterated that the White House does plan to put forward a targeted tax cut aimed at helping middle-class families pay for child care. And he said the president wouldn't necessarily veto any other tax cut passed by the GOP-controlled Congress.

The key, he said, is that any fiscal changes shouldn't break last year's balanced-budget agreement.

"If others have an approach, we'd love to see it," Mr. Emanuel said in a broadcast interview.

Other White House officials have talked about tax incentives for technologies that would reduce emissions of "greenhouse" gases. President Clinton has mused publicly about the so-called "marriage penalty" that increases taxes on joint filers, though it isn't clear if he would go along with an attempt to eliminate it.

Meanwhile, Republican leaders are focusing on tax reform and cuts.

House majority leader Dick Armey (R) of Texas, and ex-presidential candidate Steve Forbes have proposed "flat tax" systems that would eliminate most deductions and then tax everyone at the same rate. Other Republicans want to swap the income tax for a national sales-tax system.

Don't look for the parties to find common ground between these positions soon. Last year, the political equation pushed the White House and Congress together, into a balanced-budget agreement. Voters were tired of argument, and both sides needed a real accomplishment to point to. This year the equation is pushing them apart. With an election coming up, the parties need to position themselves in the political marketplace, and offer a choice instead of an echo.

"The situation we had in 1997, where both parties could benefit from resolving the deficit problem, no longer holds," says Mr. Reischauer. "They want to differentiate their products at this point."

Current law actually presents a number of obstacles to any broad tax-cut program. The balanced-budget agreement calls for spending cuts to accompany any future government revenue reductions.

But the prospect of a surplus changes this equation. Theoretically, if Uncle Sam is running in the black, he has an extra pile of cash that might be more freely used for taxpayer goodies.

That's why the latest figures are so important. Right now the White House is projecting a deficit of $58 billion for the current fiscal year. But privately officials say their projections now show a deficit number of some $28 billion, and falling. With good economic news continuing to roll in, some Wall Street analysts project surpluses of $20 billion to $40 billion.

The prospect of a surplus has created some fracture lines within each party.

On the Republican side, some chiefs, such as Senate majority leader Sen. Trent Lott (R) of Mississippi, want to use the money to pay for a round of election-year tax cuts. Others want to use the money to pay off part of the national debt. Still others want to spend it - Rep. Bud Shuster (R) of Pennsylvania, the chairman of the House Transportation Committee, has been agitating for more funds for roads, bridges, and other projects.

Liberal Democrats have visions of job training and education spending increases dancing in their heads. More centrist veterans, including the president, believe that sticking to the balanced budget plan is an important way to rid the party its reputation for fiscal largesse.

This money pot might never appear, of course. And budget experts point out that any cash overage would largely be due to the fact that Social Security - a big part of the unified federal budget - is itself running heavily in the black.

"The 'surplus' we're talking about is the Social Security trust fund surplus," says Martha Phillips, executive director of the Concord Coalition budget watch group. "This is not loose change under the cushions."