Why George Bush Is Torn about Tax Cuts

Dueling agendas have put the President in a tough spot

Throughout the Presidential campaign, George W. Bush countered Democrats' "morning in America" paeans by insisting that the high-flying U.S. economy was headed for a fall. Bush's prescription: a 10-year, $1.6 trillion tax cut. Well, the slump is here. And with gross domestic product nearly flat this quarter and expected to grow at barely 2% for the year, enormous pressure is building on Capitol Hill for a quick shot of tax relief.

So is Bush overjoyed to have been proven right and to have the opportunity to turn his tax vision into reality? Not exactly. The rapid deterioration of the economy has sent some Capitol Hill lawmakers into a near-panic--one that could result in the passage of a tax cut that imperils Bush's much larger package of structural reforms. That dynamic explains why the President journeyed to Kalamazoo, Mich., on Mar. 27 to demand that any short-term tax cut be coupled with his plan for long-term cuts in marginal rates.

REAL RISK. Bush--ever mindful of his father's infamous tax flip-flop--wants to hang tough. It's a strategy the White House believes will maximize his bargaining clout over a final bill. But with many on Wall Street and Main Street also looking to Washington to give the economy a fiscal jolt, the strategy holds real political risk. Bush could end up looking ineffective as the tax-cut express leaves Congress without him. Indeed, that risk grew sharply in late March, as Congressional Democrats and Republicans began to coalesce around an immediate $60 billion tax cut that could reach consumers by mid-summer.

Bush, of course, still has some time to maneuver. Lawmakers are divided on what should be included in any such rapid-fire plan. Senate Democrats want to couple it with a new bottom 10% tax bracket on the first $6,000 of income. They also want to defer Bush's plans to trim all marginal rates, provide marriage-penalty relief, and kill off the estate tax. Conservatives, on the other hand, want more than Bush is proposing. They'd like to add a quick stimulus to Bush's across-the-board rate cuts. "It should be done in addition to the President's plan, not instead," says House Majority Leader Dick Armey (R-Tex.).

There's no doubt the push for immediate relief--most likely through a rebate--threatens Bush's strategy to win support for his tax agenda. The slowdown has given GOP moderates an opening to call for a faster but scaled-down package. With Democrats obsessed by the notion that Bush's across-the-board cuts represent a windfall for the rich, the economic crunch also gives them more leverage for a quick remedy incorporating elements of their alternative. They insist the right weapon for a stagnant economy is a rapid, laser-beam tax-cut aimed at low- and moderate-income families.

Bush also faces a challenge from conservatives. Supply-siders insist that his plan is too puny to lift an economy plagued by deflationary forces. They're pushing a $2 trillion-plus package that piles a capital-gains tax reduction and other business incentives on top of Bush's goodies. "The package [under discussion now] is too small," scoffs supply-side champion and former GOP Presidential contender Steve Forbes. "It's an hors d'oeuvre."

This cross-pressure puts Bush in a delicate spot. If he resists an immediate tax cut for too long, he risks looking like a President who's behind the curve--or worse, standing in the way of helping cure an ailing economy. But if he embraces fast tax relief too quickly, he could jeopardize the rest of his package--angering conservatives he's gone to great lengths to placate.

FEEDING FRENZY. Timing may be the least of his problems. Bush's most immediate fear is segmentation of his tax package. That could happen if lawmakers split their differences and enact a stimulative tax cut based on a scaled-down version of the Bush rate reductions. The remaining elements of his proposal would be kicked into the indefinite future. Already, small-business lobbyists are going to the barricades to fight for estate-tax repeal; with support on Capitol Hill weakening, it could be the first thing jettisoned.

Bush fears that deferring components of his package could make passage far more difficult. But even if they're considered in a later tax bill, there's another problem. Business lobbyists who have been ordered to keep their pet provisions off of Bush's plan could try to load up a second bill with special breaks. The feeding frenzy would cause the measure to collapse as its price tag grows.

For now, Bush is still playing for time. The day after his Kalamazoo speech, he met with GOP congressional leaders. His message: "Reducing just one rate is not enough. We need to cut all rates."

Senate Democrats, at least, don't seem to be listening. On Mar. 27, a powerful group, including minority leader Tom Daschle (D-S.D.), senior Budget Committee Democrat Kent Conrad (D-N.D.), and former Vice-Presidential candidate Joseph I. Lieberman (D-Conn.) unveiled their own stimulus proposal. Their idea: give every taxpayer an immediate $300 rebate and create a new 10% tax bracket for the first $6,000 of income. The initiative would cost about $460 billion through 2011 and is aimed at middle-income families.

Such a proposal, though, does face obstacles. While the idea of an immediate rebate, linked to long-term rate reductions in a follow-up bill, may also have the backing of top Senate Republicans such as Finance Committee Chairman Charles Grassley (R-Iowa) and Budget Committee chairman Pete V. Domenici (R-N.M.), they are not about to buy into the Democratic plan to target relief just for the bottom brackets. They want to stick with Bush's across-the-board rate cuts.

Ultimately, according to Senator Mary Landrieu (D-La.), a key swing vote, Bush "is going to have to compromise." But it's unlikely that this standoff will be resolved any time soon. Next week, the Senate will try to approve a nonbinding resolution that sets the size of any tax cuts, the first key test of strength in the evenly-divided chamber. Then, lawmakers will head home for a two-week Easter recess. There they'll have an opportunity to hear first-hand just what voters think about the economy, a sinking stock market, and the need for tax cuts.

If the pols get an earful from the homefolks, they'll be under tremendous pressure to cut a deal fast. Already, says Representative Robert Matsui (D-Calif.): "People are starting to ask, `What are you people doing back there?"' If backlash occurs, lawmakers will start jawboning the President and an agreement could be reached within weeks.

For now, the polls suggest the public remains almost evenly divided on the Bush plan, despite the economic slowdown and the President's dogged salesmanship. According to a Mar. 22-25 Washington Post-ABC News poll, less than half of those responding felt his plan was the right size. And a new Gallup poll found that 62% of independents think Bush's tax cut is oversized. "Voters want a tax cut," says Democratic pollster Fred Yang. "They don't necessarily want Bush's tax cut."

For his part, Bush knows that he does not yet have the votes to pass his campaign plan intact. And he may never get them. The President's track record as governor of Texas was pretty consistent: fight hard--and cut a deal when the time is right.

That's a route he may well have to take this spring to get the Rose Garden bill-signing ceremony that he so badly covets. But to make this magical photo-op happen, the price may be high: downsizing his most important policy goal, and perhaps explaining to voters why it took him so long to do so.

By Howard Gleckman, with Lorraine Woellert and Richard S. Dunham in Washington

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