Is Budget Deal Coming Unglued Over Tax Cut?

WASHINGTON â€”  That big tax cut being promised by Washington may not be all it’s cracked up to be.

When White House officials and Republican congressional leaders announced a budget compromise last week, they said that it would include new tax credits for families with children, cuts in taxes on capital gains and family estates, new incentives to save for retirement and tax breaks for college expenses.

But now that the initial euphoria has begun to wane, it is becoming clear that full enactment of the wish list contained in the compromise would require far more than the $135 billion allotted for tax cuts in the budget agreement.

To make matters worse, House Ways and Means Committee Chairman Bill Archer (R-Texas) said that to reach the goal of a balanced budget by the year 2002, Congress may not even be able to afford the full $135-billion tax cut.

Lawmakers already are trying to figure out how to squeeze, target, postpone or drop some elements of the tax package to bring the cost into line and the outcome is highly uncertain.

A mad scramble of competing political interests--and not just Republican against Democrat--has been set off. The limited tax-cut pot is also pitting elements of the GOP political base--small businesses, religious activists, big businesses and farmers--against each other.

When the dust settles, there may be some disappointed taxpayers. Families may have to wait a while before they get the $500-per-child tax credit that Republicans have been promising. Investors may not get as steep a rate drop in capital gains taxes as some had hoped. GOP talk of abolishing the estate tax will surely give way to more modest changes.

“Clearly, the tax reduction on each item will not be able to be in there in the way a lot of people would like. . . ,� Archer said in an interview. “We’ll do as much as we can.�

“This thing is really being oversold right now,� said Rep. Robert T. Matsui (D-Sacramento). “People are going to be disappointed.�

White House and GOP negotiators are still haggling over key details of the overall budget agreement, which called for trimming the growth of Medicare by $115 billion over five years and other deficit-reduction initiatives. On the tax front, the proposed $135 billion in cuts over five years is to be partly offset by $50 billion in tax increases, for a net cut of $85 billion.

Archer said, however, that Congress may have to settle for a gross tax cut of less than $135 billion because it will be hard to fully achieve $50 billion in tax increases. “I don’t see any way we’re going to get� to those figures, Archer said.

Although the budget agreement did not spell out details, negotiators said that they intend to include five key elements: tax credits for families with children; cuts in capital gains taxes, which apply to the sale of real estate, stock and other assets; reduction in the estate tax, which now hits inheritances in excess of $600,000; expansion of individual retirement accounts, to which certain groups of people can make tax-deductible contributions, and some version of President Clinton’s proposals to provide tax breaks for college expenses.

On Thursday, in an example of the disputes expected to develop on other issues, White House and Republican officials were at odds over terms of the education compromise. Democrats claimed that GOP negotiators made a specific commitment to include $35 billion over five years for Clinton’s tax breaks. Republicans denied it. Some said that they agreed to no specific figure. Others said that they committed to $35 billion spread over 10 years.

That dispute aside, the other tax-cut proposals endorsed in the budget agreement would cost more than $135 billion if fully embraced. According to an analysis by Congress’ Joint Committee on Taxation, the other four proposals--capital gains cuts, estate tax relief, IRA expansion and the family tax credit--alone would cost the treasury about $193 billion over five years if they were enacted in the form proposed by Senate GOP leaders earlier this year.

In piecing together the tax bill, lawmakers and lobbyists said that Congress is not likely to drop entirely any of the highlighted items but instead would try to find ways to cut the cost of each.

Some GOP leaders already have indicated that they would be willing to postpone or scale back the $500-per-child tax credit. The GOP leadership proposal, estimated to cost $109 billion over five years, would give the credit for all children under the age of 18 to those taxpayers earning less than $110,000 annually for joint filers and $75,000 for individual filers.

Archer said that Congress is unlikely to change the amount of the credit, which has been a top priority of the Christian Coalition and other conservative family groups.

But many Republicans argued that the family credit does less to stimulate economic growth than other proposed tax cuts. Key options for shaving the credit’s cost would be to drop the age or income cap, or phase in the credit gradually.

Capital gains tax cuts have a powerful GOP constituency and may be the area in which Republicans are most loath to compromise.

The top rate on individual capital gains is now 28%. Some Republicans have pushed for dropping the rate to 14%. The compromise could fall in the range of 20%--a figure endorsed by Clinton’s top budget official, Franklin D. Raines, in a recent television interview, and by Senate Majority Leader Trent Lott (R-Miss.) in recent comments.

Archer will push hard for a proposal to subtract the impact of inflation in calculating the tax on capital gains but that costly proposal is likely to meet stiff opposition from Democrats. Archer also noted that there is “tremendous support� for a Clinton proposal to give special breaks for capital gains from home sales.

Cutting estate taxes also enjoys broad support among Republicans--and some Democrats as well. Although House Speaker Newt Gingrich (R-Ga.) has called for abolishing the tax, no one thinks that will happen this year.

Many Republicans have proposed increasing from $600,000 to $1 million or more the threshold at which estates are taxed. That is a top priority of the small business lobby, a key GOP constituency that is pulling out all the stops to keep estate tax relief from losing ground to other competing tax cuts.

The final bill is almost certain to contain some expansion of IRAs because it is a top priority of Sen. William V. Roth Jr. (R-Del.), the chief Senate tax writer. One popular idea is to expand a law enacted last year that allowed certain nonworking spouses to establish IRAs.

Another big question is how Congress will raise the $50 billion needed to keep the net tax cut down to $85 billion. About $30 billion is expected to come from extending the current tax on airline tickets.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tax Cut Tally Sheet

The budget agreement between the White House and Republican leaders of Congress calls for tax cuts totaling $135 billion over five years. But the combined cost of the specific tax reductions endorsed by the agreement’s authors far exceeds that amount.

[COST IN BILLIONS]

Families: Income tax credit for children under 18, phased out for joint taxpayers with incomes exceeding $110,000, single returns above $75,000. [$109]

Higher Education: $1,500 credit for each of first two years of college; separate deduction of up to $10,000 per year for college expenses. (Families could claim either credit or deduction, but not both.) [$35]

Individual Retirement Accounts: Expanded spousal IRAs, phased-out income limits on IRA contributions, penalty-free withdrawals for starting a business, long-term unemployment or higher education. [$33]

Capital Gains: Maximum tax rate on sales of stock, bond, real estate and other investment assets reduced to 14% from current 28% for individual taxpayers; other provisions affecting corporations. [$33]

Estate Tax: Minimum estate subject to taxation gradually increased by to $1 million from current $600,000; some family-owned businesses excluded. [$19]

Total cuts: $229

Congress’ estimate: $135

Difference: $94

Note: Cost for each category is over the five years the plan would be in effect.

Source: Joint Committee on Taxation, White House