What Americans can expect for tax cuts

Tight federal-spending caps and fight to save Social Security likely

Americans smarting from April 15 income-tax payments are unlikely to derive major tax relief from Congress - at least not for a few years, experts say.

Despite the first projected federal budget surpluses for three decades, any near-term tax cut is likely to be modest, ranging from $13 billion to $15 billion, say fiscal experts and lawmakers. "We'll start small," says a spokesman for House Speaker Dennis Hastert (R) of Illinois.

One main reason for the anticipated modest tax relief is that short-term surpluses not already earmarked for Social Security are also small. They would fund no tax cuts in 2000 and only $42 per household in 2001, says the Congressional Budget Office.

Other reasons include competition from major funding priorities, as well as what experts agree are unrealistically tight - and likely to be broken - federal spending caps. Finally, ordinary Americans are not clamoring for tax cuts, polls show.

Indeed, Congress, the Clinton administration, and the public believe shoring up Social Security is more pressing. The nation's retirement system is now projected to go into the red in 2034. Polls show most Americans favor preserving Social Security and Medi-care over cutting taxes.

"It's not clear there's a huge demand" for lower taxes, says Stan Collender, editor of the biweekly Federal Budget Report.

Once those goals are attained, however, polls suggest the public strongly prefers tax cuts to additional spending on government programs.

Congress's budget plans, expected to be passed this week, call for locking away $1.8 trillion of the surplus for Social Security over the next 10 years.

In theory, that would leave $800 billion for tax cuts from fiscal 2000 to 2009. But in the initial years, the tax cut projections require steep - some say politically impossible - cuts in government programs. The GOP-led Congress pledged to stay within the tight spending caps set down in the 1997 balanced-budget agreement. "The caps are unrealistic," complains one GOP aide on the House Appropriations Committee. "We don't know how to get there from here."

To meet the caps for the fiscal 2000 budget, appropriators say they must trim $15 billion in spending. That figure does not include additional cuts that would be required to offset funding boosts for defense and education sought by both Republicans and Democrats.

Moreover, hopes are fading in Congress that the fiscal bind will be eased by a "surprise" surge in the 2000 surplus predicted by some expects. Senate Budget Committee Chairman Pete Domenici (R) of New Mexico told reporters this week he does not expect the Congressional Budget Office to repeat last year's sharp upward revisions in federal revenue projections. "We can't count on some magic money tree," says the House appropriations aide.

Meanwhile, the war in Yugoslavia could cost billions of dollars, putting additional pressure on spending, some experts say. "What the economy giveth, Kosovo might take away," says Robert Reischauer, a senior fellow at the Brookings Institution here and former head of the Congressional Budget Office (CBO).

What is most likely in the coming two years, experts predict, is a modest tax-cut package including a hodge podge of targeted relief. (A GOP plan for an across-the-board tax cut - the type most favored by the public, polls show - has failed to win broad party support, and fallen under criticism that it would unfairly benefit the rich.)

Targeted relief could encompass a reduction in the so-called "marriage penalty" that causes some 40 percent of couples to pay higher taxes after marriage. This cut, favored by GOP social conservatives, would disproportionately benefit middle- and high-income couples, according to a CBO study.

Other popular candidates for targeted cuts include reducing estate taxes and repealing the Social Security earnings limit to allow senior citizens to work more without losing benefits. Education savings plans, expanding IRA accounts, and other savings incentives linked to tax reductions are also being discussed.

Despite the immediate fiscal constraints and the lack of urgent popular demand for tax relief, congressional Republicans are forging ahead with an agenda that anticipates significant tax cuts over the longer run. Experts say the GOP continues to push for cuts for economic, ideological, and political reasons.

A tax cut would benefit the nation by providing a buffer against a possible economic downturn, say some analysts. "With a lot of the global turmoil in Asia and Latin America, it makes sense to have an insurance policy against a slowdown in the economy," says Stephen Moore, director of fiscal policy studies at the conservative Cato Institute in Washington.

Other economists disagree, however, arguing that today's robust economy needs no stimulus and it would be wiser to use the surplus to pay down the national debt. "When the economy is running flat out, added demand only boosts inflationary pressure," says Mr. Reischauer.

Republicans are also driven by a strong ideological tradition of limiting government and reducing taxes, which the GOP points out are the highest today since World War II as a percentage of gross domestic product. However, Democrats counter that average income and payroll tax rates for median income tax payers are the lowest in a decade.

With the approach of the 2000 election, GOP congressional leaders and presidential candidates are also touting major long-range tax cuts in an appeal to core Republican constituents.