Bush's Tax Cut: Attacked from All Sides

With even GOP leaders dubious about the President's plan, it's likely to see plenty of changes

You could forgive George W. Bush, at this time of rifts in the Western alliance and continuing economic malaise at home, if he were to find some solace in the words of the 29th President, Warren G. Harding. "I can take care of my enemies, all right," Harding famously complained. "But my damn friends ... they're the ones that keep me walking the floor nights!"

So it is with the current President. As he seeks international support for action against Iraq, longtime allies Germany and France are treating him like an out-of-control little brother. Earlier this month, when he floated a plan to fundamentally restructure Medicare, key Republicans shot it down.

Now, his ambitious $1.46 trillion tax-cut agenda is facing resistance from some of his strongest allies, including GOP lawmakers and business interests. Even Federal Reserve Chairman Alan Greenspan knocked the tax plan in congressional testimony on Feb. 11.


  Business lobbyists think large chunks of Bush's "growth and jobs" package will be pared back -- particularly his $385 billion proposal to end double taxation of dividends and his plan to create new tax-free savings accounts. And while many corporate reps offer public support for the plan, they are privately critical. Some have begun pushing competing ideas that would benefit their business clients, such as corporate tax-rate cuts or new investment incentives.

More important, many leading Republicans have been unwilling to offer the same unqualified support for the Bush tax agenda that they did in 2001. Says Senate Budget Committee Chairman and Bush loyalist Don Nickles (R-Okla.): "There may be different ways to achieve the President's goals."

Greenspan made it tougher for Bush to win Hill approval for his plan when he told the Senate Banking Committee he favors ending the double taxation of corporate dividends, but not at the expense of huge budget shortfalls. "Deficits must be maintained at minimal levels," Greenspan testified. The Fed boss, who backed Bush's 2001 tax cuts, argues that the economy is "being held back" by uncertainty over war with Iraq. And he questions whether any fiscal stimulus is appropriate now.


  Why is 2003 so different from 2001? Huge deficits have spooked a small but critical block of senators. And the massive size of the plan stunned many lawmakers. Also, public support for Bush's handling of the economy has sagged.

The President is fighting back. He has deployed his economic generals in an all-out attempt to sell his blueprint to voters. And Bush is raising his own profile with a series of public speeches and private meetings with key lawmakers. "It's a marathon," says Treasury Secretary John W. Snow. "And we're in the first hundred yards."

Still, White House insiders concede that they stumbled at the starting line by blindsiding key GOP lawmakers with the scope of the package and failing to seek their support before the rollout. To make amends, Bush and his Cabinet have launched a belated charm offensive, pleading with senior Republicans to hold their fire.


  The debate is just beginning, however, and by the time it's over, Bush is likely to come away with significant new tax cuts. Many elements of his plan -- accelerating tax-rate reductions, providing immediate tax breaks for married couples and children, and giving small business new incentives for capital investment -- have broad bipartisan support.

Even the most controversial parts of his package -- the dividend and tax-free savings measures -- are likely to be scaled back rather than eliminated. And lawmakers seem inclined to add at least one tax break that Bush left out -- new investment incentives for larger companies. "I think when all is said and done, the President is going to have a very major victory," says Senate Finance Committee Chairman Charles E. Grassley (R-Iowa).

Indeed, some insiders speculate that the White House is playing a clever tactical game. Bush may have proposed a dramatic plan, fully expecting Congress to chop it down but still approve major tax reforms. Others say the dividend debate has diverted attention from politically explosive rate cuts for the wealthy. The dividend plan, says one lobbyist, "has been the ultimate neon red herring. It's absorbing all the shots."


  It certainly has plenty of critics. Deficit hawks fret that the costly package will throw the government deeply into debt just as the first baby boomers start drawing retirement benefits. Centrist Republicans such as Senator Olympia J. Snowe (R-Me.) are unwilling to back a big tax cut now that creates perpetual deficits in the future -- especially one that does little for the many low-income residents of her state.

Moderate Democrats are even more recalcitrant. They're still angry at Bush's aggressive attempts to topple Democrats who voted for his 2001 tax cut, such as Senator Mary L. Landrieu (La.), and are unwilling to side with the President again. "Its support is very shaky," says one '01 backer, Senator Max Baucus (D-Mont.).

Centrists want to scale down the size of the Bush plan. Senator John B. Breaux (D-La.), is pushing for a cap of $500 on any dividend tax break. And moderates have met with Greenspan and plan to consult with former Treasury Secretaries Robert E. Rubin and Paul H. O'Neill, dismissed by Bush in January. Still, cautions Senator Ben Nelson (D-Neb.): "There is probably more support for tax cuts than resistance, but [they] have to stimulate the economy as quickly as possible."


  That's a position echoed on the other side of the aisle, too. "We need measures that put money into the economy right now," says Senator George V. Voinovich (R-Ohio), who supports Bush's dividend-tax repeal in theory but not in these days of growing deficits. "The dividend tax doesn't [offer stimulus], so we need to put it off until later."

Administration officials are hoping to overcome the reluctance of centrists by drumming up support in the business community. But they may get a rude awakening. Some high-tech companies, for example, feel that the Bush plan would pressure them to pay dividends instead of using profits to build their businesses.

Techies also oppose the requirement that shareholders get a dividend- or capital-gains-tax break only if companies pay corporate taxes. That may sharply reduce the value of common tax credits that companies now use to reduce their own liability. A possible compromise: scale back the dividend plan and boost incentives for corporations that buy capital equipment.


  Other businesses have more fundamental problems. Stuart Boesky, president of Charter Municipal Mortgage Acceptance Co., says the plan will undermine the value of tax credits, which are key to financing housing for the poor. "It will reduce the amount of new affordable housing that will be built in America," says Boesky.

At the same time, some investment firms object to the Administration's tax-advantaged savings accounts. Larry D. Zimpleman, executive vice-president for retirement and investor services at Principal Financial Group, says the accounts "could undermine employer-sponsored retirement plans."

Amid a widespread feeling that the President's package will undergo significant changes, corporate lobbyists are taking advantage of the opportunity to push their own pet tax breaks. Telecom companies are angling for new investment tax relief, some manufacturers are seeking lower corporate rates, and others are urging repeal of the corporate minimum tax. "The sharks," says one Senate GOP aide, "are circling."

After getting off to such a rocky start, White House strategists know it will take a lot of work to sell the tax package, and the newly reconstituted economic team is fanning out across the country. With congressional committees unlikely to tackle the plan for at least a month, that gives Bush time to make up some ground. And given his tax-cut track record, it would be foolhardy to count him out. But with so much friendly fire, don't expect a Rose Garden signing ceremony anytime soon.

By Howard Gleckman and Richard S. Dunham, with Alexandra Starr, in Washington

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