Thanks to a surprisingly strong economy, tax dollars are rolling into Washington and into state coffers at stunning, surplus-producing rates. So are politicians thinking about paying down debt? Of course not. This is an election year. And politicians have a more appealing thought: Cut taxes. Governors from Connecticut's John G. Rowland to California's Pete Wilson are working on legislation to return most of the booty--a total that could top $24 billion in fiscal 1998--to taxpayers.
In Washington, where a surplus in the coming year is still more hope than reality, Hill Republicans already are fighting among themselves over just which taxes to trim. House Speaker Newt Gingrich (R-Ga.) is claiming that a small surplus already exists if you calculate the year from November to November. Clintonites, while cautioning that the surplus is still theoretical, are mulling their own election-year cuts. "Nobody is talking about the safety net," laments one House liberal. "Everybody is talking about reducing taxes."
"TOUGH CHOICES." It's too soon for anybody to start parceling out a federal surplus in the form of tax cuts or new programs. While some private economists foresee $40 billion in black ink this year, the government is still expected to forecast a $20 billion deficit for fiscal 1998.
gop lawmakers are not letting such numbers stand in their way. At minimum, they expect to push through at least a five-year tax cut of $25 billion--a tenth the size of the cut enacted last summer. The gop's top priority will be easing the so-called marriage penalty. Today, married couples often pay higher taxes than singles earning the same income. But eliminating the penalty would cost up to $30 billion a year. A more likely solution is a modest deduction for couples. The political downside: resentment from single-earner families. Says Gillian Spooner, partner at accountants kpmg Peat Marwick: "This will require some tough choices."
House Ways & Means Chairman Bill Archer (R-Tex.) is more focused on pro-investment breaks. The '97 tax bill set three top rates for capital gains: 39.6% for short-term, 28% for medium-term, and 20% for long-term. Archer would like to dump the 28% rate and set a 20% rate for all investments held a year or more.
Another target will be the alternative minimum tax. Archer failed to get it repealed in 1997, but he may try again. The levy hits taxpayers who have unusually high deductions, excess depreciation, or income from certain tax-exempt bonds. The Republicans also may push an exemption for the first $400 of interest and dividends.
Well-off taxpayers also may benefit from a proposal to restore tax breaks that vanish as income rises, such as the personal exemption and income caps for investors in individual retirement accounts. But Congress may pay for the shift by raising the top 39.6% rate, a step that would help families earning up to $270,000 at the expense of those making even more.
Not to be outdone, Clinton is mulling a five-year, $25 billion package of breaks aimed at everything from child care to stimulating the use of nonpolluting energy. He is hoping that such targeted cuts will give congressional Democrats ammunition for their '98 reelection bids. But instead of unbalancing the budget, Clinton would pay for the package by closing business loopholes, such as one that allows companies to get tax credits for some foreign investments.
The states have more flexibility to cut taxes because they actually have the money in hand. And with chief executives in 36 states facing reelection this year, 1998 promises to be the fifth straight year of state tax-cutting. In Connecticut, Governor Rowland will propose a $200 million tax cut--although he's backing away from a pledge to repeal the state's income tax. "It's taxpayers' money, though a lot of us [politicians] think it's our money," says Rowland. Arizona's newly elected gop governor, Jane D. Hull, may propose $300 million in cuts in income, vehicle, and business-property taxes.
GOODIES. Other states are guarding their tax bases by offering one-time rebates instead of rate cuts. In Ohio, families will get back 4% of their state taxes this spring, and Colorado residents will get checks for $37 to $80. New York Republican Governor George E. Pataki not only wants to cut property taxes but vows to repeat his popular sales-tax holiday week in January, when clothing and shoes costing up to $500 will be exempt.
National politics is helping to feed tax-cut fever. In California, Wilson hopes to leave Sacramento and launch his campaign for the White House with a $1 billion tax cut. To bolster their national antitax reputation, gop activists have persuaded 10% of all state legislators to sign a no-tax-hike pledge. "Success breeds imitation," says Grover G. Norquist, president of Americans for Tax Reform.
That's for sure. In '98, the political fad will be copycat tax-cutting. The public may be content with the humming national economy, but incumbents are figuring that a few extra goodies won't hurt when voters go to the polls next fall.