December 26, 2002


Sizing up options for tax cuts



Donald Lambro

Democratic Sen. Max Baucus of Montana met recently with White House officials in a reportedly secret discussion to cut a deal on a tax-cut plan to stimulate faster economic growth.
Mr. Baucus, the outgoing chairman of the tax-writing Finance Committee, was one of the maverick Democrats who helped forge last year's compromise with the White House that led to enacting President Bush's $1.3 trillion tax-cut plan. Mr. Baucus wants to play broker again, and Mr. Bush's advisers are all too willing to deal.
At $160 billion, Mr. Baucus' stimulus plan is nowhere near the $300 billion package Mr. Bush wants and believes is necessary to push the economy forward.
Mr. Baucus' plan hews closely to liberal Democratic theology, with most of it for public works jobs and social welfare assistance — $75 billion in grants to the states; $4 billion in highway construction grants; a one-time $300 income tax cut for middle-class taxpayers; and $16 billion in tax incentives for businesses to boost capital investments.
Mr. Bush's plan would speed up and make permanent the 10-year income tax cuts passed last year, give businesses added incentives to buy new equipment, cut the tax rate on investor dividends to help strengthen stock prices and enlarge investment retirement plans.
Mr. Baucus told Mr. Bush's aides there were things in the president's plan that he liked, but could not embrace now for fear of angering Senate Democratic leader Tom Daschle of South Dakota.
In return, the senator, who gives up his chairmanship in January when Republicans assume power, was told that there was a lot in his plan that the White House liked. At one point in the secret meeting, Joshua Bolten, the president's domestic policy adviser, asked Mr. Baucus if he could support Mr. Bush's stepped-up tax cuts and dividend tax reductions.
"I said I was open," Mr. Baucus replied, according to an account in The Washington Post.
That raised eyebrows in Mr. Daschle's office. Mr. Baucus had worked hand-in-glove before with Mr. Bush on the core of his economic agenda. Now, it appeared, he was ready to do so again.
Administration officials tell me that other Senate Democrats who voted for the Mr. Bush tax plan last year have been sounded out, too, and several "are willing to play ball," the White House was told.
With the economy on tenterhooks over the likelihood of a war in Iraq or another terrorist attack here, the White House isn't willing to trust blue-chip forecasts of between 3.5 and 4 percent growth next year.
Not when Fed Chairman Alan Greenspan says, as he did last week, that the economy seems stuck in a "soft patch" that began this summer and shows few signs of abating.
"And the patch has certainly been soft," Mr. Greenspan told the New York Economic Club.
"The labor market has remained subdued, as businesses apparently have been reluctant to add to payrolls. The manufacturing sector remains especially damped, and non-residential construction has trended lower. By all reports, state and local governments continue to struggle with deterioration in their fiscal conditions. Oil prices have recently risen and, not least, the economies of most of our major trading partners have shown little vigor," he said.
A big factor holding back the economy is the reluctance of the business community to invest in the future. The reasons are "the uncertainties surrounding the business outlook and the geopolitical situation," he said. In other words, war in Iraq.
Taken together, these fundamentals "impose a rather formidable barrier to new investment," he said.
Not a pretty picture, and certainly not one that Mr. Bush wants to enter next year, as he kicks off the two-year presidential election cycle. The war in Iraq will likely will be quick, decisive and successful. But he knows from his father's sad experience after the Persian Gulf war that the voters could still turn against him if the economy continues to weaken.
Of course, the economy could bounce back on its own next year after a weak fourth quarter. Incomes are up because of Mr. Bush's tax cuts. Consumers continue to spend, especially for autos. Lower interest rates have fed a surge in new home sales and refinancings.
But as Mr. Greenspan points out, there are still many negatives in the U.S. and global economies to overcome. The banking crisis in Japan still looms. Venezuela is in political turmoil, raising fears of oil shortages. And higher gas prices will impose further cost pressures on our economy at a time we can least afford it.
That's why Mr. Bush's early deal making with Mr. Baucus and other like-minded Democrats are critical at this juncture in his presidency. If he is to win a second term, Mr. Bush must win two wars next year, the one in Iraq and the tax cut war in Congress for a stronger economy.

Donald Lambro, chief political correspondent for The Washington Times, is a nationally syndicated columnist.