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Congress, White House floating tax cuts to jump-start the economy: analysis.

Tax cut plans

Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) unveiled a $72.5 billion tax package on national television last week as pressure in the White House and Congress mushroomed to cut taxes on middle income and wealthy Americans as a means of jump-starting the economy. Bentsen proposed cutting national defense 5 percent to pay for the tax cut.

The tax cut proposals would swallow any potential peace divident, eliminating any use of defense savings for city and town priorities. Most of the proposals would significantly increase the federal deficit. All would violate last year's budget summit agreement.

In the House, Speaker Thomas Foley (D-Wash). indicated he intended to meet with the House Democratic leadership on a middle-income tax cut package and that he hoped for action by Thanksgiving.

Senate Majority Leader George Mitchell (D-Me) stated he would like to see middle income tax relief legislation enacted by Congress this year and believed such cuts should come out of the defense budget.

The White House joined the chorus, endoring the concept of middle income tax cuts, but indicated that more was needed. Among the additional tax cuts under active discussion within the administration are: capital gains, expanded individual retirement accounts, the investment tax credit, permanent extension of the R&D tax credit, enterprise zones, and an increase in the Social Security earnings limit.

The administration did not indicate reservations about paying for the cuts out of defense, instead, indicating it was considering cuts in domestic programs.

While House and Senate Republican leaders who had met with President Bush on October 17 had predicted the White House would official endorse a major tax cut package on Friday. White House spokesperson Marlin Fitzwater Wednesday indicated there was no firm timetable.

Conservative Sen. Phil Gramm (R- Tex.) indicated he and House Minority Whip Newt Gingrich (R-Ga.) could support Bentsen's proposal, including the cuts in defense, but that it would not go nearly as far as their proposals (HR 3130 and S 1603) to stimulate the economy.

The Joint Congressional Tax Committee estimated the Gramm-Gingrich proposal would increase the federal deficit by $20 billion, providing annual tax subsidies to wealthy families of $12,500 and to middle income families of $250 to $380 per year.

Liberal Sen. Bill Bradley (D-N.J.) introduced a similar $116 billion tax cut bill, which he proposed to pay for out of a combination of cuts in defense and domestic programs.

Sen. Budget Committee Chairman Jim Sasser announced his own $30 billion temporary tax cut plan on October 23.

Against the growing tide, only 4 bipartisan leaders indicated concern and opposition. In the House, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) made clear he would not mark up any tax cut legislation unless directed by the Democratic leadership. Rostenkowski has made it clear to NLC that he will oppose any effort to violate last year's budget agreement.

In the Senate, Sen. Pete Domenici (R-N.Mex.), a former municipal elected official from Alberquerque and the Ranking Republican on the Senate Budget Committee, stated he would oppose any effort to violate the budget agreement. Domenici's counterpart in the House, Rep. Bill Gradison (R-Ohio), the former mayor of Cincinnati, wrote to all members of the House urging his colleagues to oppose efforts to break the budget to adopt tax cuts. In his letter, Gradison wrote that during the last quarter, the federal government borrowed more than the rest of the American economy combined and urged that the best way to improve the economy would be through reducing the national debt and federal deficit.

House Budget Committee Chairman Leon Panetta (D-Calif.) spoke out against the fever on the House floor, urging against a "tax cut bidding war." Panetta said the proposed tax cut packages would increase the national debt and create an "unmitigated disaster for our economy and our country."

Proposals

The extraordinary pressure as Congress nears adjournment next month focuses on the dismal economy, different incentives for saving or consumer spending, and a growing divide over the definition of "middle income." The tax debate is also certain to heat up the issue of how estimates are made of the cost of tax cuts, and, therefore, how to pay.

Bentsen proposed to pay for the tax cuts by opening up last year's budget agreement and cutting defense by 5 percent. The budget law prohibits cuts in defense spending from being used for any porpose until 1994, when they may only be used for domestic discretionary or foreign and spending. Under the agreement, tax cuts may only be paid for by either cutting entitlement programs or raising offsetting federal taxes.

Bentsen would use $60 billion to provide a $300 tax credit for each child under 18 who lives in the same household. The credit would not be refundable, so that it would not be available to low income families. He would use an additional $12.5 billion to expand Individual Retirement Accounts (IRAs) to families earning in excess of $40,000 annually, and to permit penalty-free IRA withdrawals to pay for a first-time home, college tuition, or medical expenses.

Bradley proposed a refundable child tax credit of $350 per child, indexed to keep pace with inflation. Bradley proposed to offset the cost by cutting defense by $80 billion and domestic spending by $38 billion over the next 5 years.

Analysis

Congress and the White House are headed towards a great tax giveaway that may threaten the nation's economic security and its cities and towns.

The tax cut proposals would ignore the lessons of 1981, the escalating deficit and national debt, and the structural crisis facing the nation in infant mortality, violent crime, crumbling infrastructure, health care, education, rising poverty in urban and rural communities, and joblessness.

With the economy in serious trouble, the justification for current levels of defense spending in question even by many Administration supporters, and Election 1992 just around the corner, the idea of cutting federal taxes has attracted Congressmen and Senators alike.

As attractive as federal tax cuts might be to city officials and to city residents, there is overwhelming evidence that such a measure could be a serious mistake. Tax cuts could irreparably interfere with the ability of local elected officials to serve their taxpayers and constituents over the remainder of the decade.

Action on a tax package would virtually eliminate any chance to reinvest in America's hometowns.

The tax packages under discussion by Democrats and Republican in Congress and the White House would:

[Section] bust the budget;

[Section] guarantee increased, unfunded federal mandates for cities and towns;

[Section] increase the cost of capital borrowing -- not just for cities and towns, but for families and small businesses;

[Section] force further cuts in federal programs directed to investment in human and physical resources to make the American economy competitive;

[Section] severely undercut the ability of state and local officials to balance their budgets through cutting services and increasing revenues.

A senior Republican budget expert describes the effort as "deja voodoo" all over again, referring to the tax cut bidding war of 1981. That effort, $750 billion worth of tax cuts, produced a presidential promise that it would unleash a supply side revolution which would balance the federal budget by 1983.

Instead, 1981 marked the beginning of a profound disinvestment in America and the accumulation of unfunded federal mandates and national debt such as the nation has never known. Congress and the White House cut investment in education, health care, public infrastucture, environment, community development. They cut-investment in cities and towns more than 70 percent, but replaced it by quadrupling the national debt.

Instead, 1981 marked the last year in American history that the federal deficit was less than $100 billion. By 1983, the federal deficit had escalated to $231 billion. Next year the on-budget federal deficit is projected to be $362 billion. Interest on the national debt now exceeds all investment in domestic America and has become the fastest growing uncontrollable part of the federal deficit.

What a tax package means

[Section] A tax package is a mandate package for local governments.

Less than a year after the federal government imposed state and local governments with mandatory Social Security at $11 billion and in the same year in which the federal government is imposing prohibitive costs by mandating municipal stormwater permit requirements, a tax cut would leave even less federal ability to help local governments and taxpayers pay for federal goals and priorities.

[Section] A tax package will hurt the ability of cities and towns, their families, and their businesses to raise capital.

First, such a package will increase the deficit and national debt. The Congressional Budget Office is already projecting that interest on the national debt will exceed $300 billion by the end of the decade--or 100 times as much as the Community Development Block Grant program.

Second, the White House and Congress are discussing tax breaks which would harm the municipal finance market. The would provide subsidies to make other vehicles safer and more attractive investments than tax exempt municipal bonds--increasing the cost to cities and towns of building and repairing schools, jails, drug treatment centers, hospitals, roads, and bridges.

[Section] Many of the tax cut packages propose to use non-existent defense cuts--the so-called peace dividend--to finance the tax giveaways. This would not only violate last year's budget law--which prohibits defense cuts from being used to pay for tax breaks, but would force cuts in domestic investment.

Under the current budget agreement, defense savings may be used in 1994 and 1995 to increase reinvestment in America. Under the current law, in fact, unless there are further cuts in defense spending which can be used for domestic discretionary priorities, city and town programs will be cut in those years.

And the defense cuts that have been promised are only that--promises.

[Section] Most threatening would be the impact on state and local governments.

As city after city and state after state are laying on employees, cutting vital services and programs, and/or raising taxes for revenues; what kind of impression will it convey to voters and taxpayers to watch the federal deficit increase while federal taxes are cut?

What kind of impact will that have as city and state leaders face a decade of paying for the federal debt bringe, mandates, and disinvestment?
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Oct 28, 1991
Words:1716
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