Businessweek Archives

What A Tax Cut Deal Will Look Like


Government: TAXES

WHAT A TAX-CUT DEAL WILL LOOK LIKE

Forget the bluster. A compromise seems likely by August

Call it the war of the soccer moms. On July 10, the Democrats trotted out Gloria Pressley of Gaithersburg, Md., a single mother of two who earns $24,000 a year and will pay $1,836 in Social Security taxes this year. Under the House Republicans' tax-cut proposal, they fumed, she'd get back not a dime. That's because she qualifies for a credit that erases her income-tax liability. Under President Clinton's plan, though, she'd collect $1,000.

Not to be outdone, House Republicans on July 15 introduced their own poster girl--Debra Wilson, a divorced mother of three from Dale City, Va. An accountant making $62,400 in salary, Wilson would get tax breaks of $800 in 1998 and $1,000 in 1999 under the House GOP plan--but nothing under Clinton's because her income level is too high. The Republicans littered the Capitol lawn with items she could buy with her GOP windfall: everything from groceries and a blender to--what else?--a soccer ball.

Working women such as Pressley and Wilson have become ammo in the fierce tax-cut battle over whose plan is fairest to average Americans. Clinton accuses the Republicans of raiding the Treasury for the rich; the GOP claims he is using the tax code to issue new welfare checks.

But even as they exchange broadsides, both parties see the outlines of a final accord to cut taxes by $135 billion through 2002. Barring a rebellion by the Republican right, Clinton could sign the measure--the first tax cut in 16 years--before Congress heads home for its August vacation. "A deal is in the making," says Representative Robert T. Matsui (D-Calif.). Agrees a senior House GOP aide: "It's remarkable how close we are. The will is there."

Indeed, both sides have compelling reasons to seal an agreement. GOP lawmakers want to go home and boast that they've enacted the "crown jewel" in their Contract With America. They also fear the public's wrath if negotiations collapse and Democrats again succeed in tarring them as extremists who prefer confrontation to compromise. And Clinton is eager to fulfill his 1992 pledge to provide middle-class tax relief, hijack a potent GOP issue, and erase the Dems' image as the tax-and-spend crowd.

GIVE AND TAKE. What are the key points of compromise? For starters, Clinton will swallow a broad-based capital-gains tax cut, possibly to a rate of 20%, as long as House Republicans ditch their cherished goal of indexing gains for inflation--a trade-off GOP negotiators are ready to make. The White House also will go along with GOP plans to create expanded individual retirement acounts, but it will insist on setting income-eligibility limits.

Administration officials say Clinton is prepared to accept the broader estate-tax relief sought by the GOP and give up his proposal to target aid to small companies and family farmers. One solution under discussion: embrace the Republican plan to raise the estate-tax exemption to $1 million from the current $600,000 over 9 or 10 years but phase it in more slowly. Says a top Clintonite: "You've got to let the Republicans characterize it as a win. Then they can all go home and be proud and hold their heads high."

For its part, the GOP will move much closer to the $35 billion in education tax incentives demanded by the President. And Republicans are likely to accede to Clinton's desire to lower the $110,000 family-income ceiling for receiving a $500-per-child tax credit. "Nobody wants to get blamed for bringing the deal down," gripes a hesitant GOP compromiser. "Some people are willing to give away the store to get a deal."

A nagging issue remaining is Clinton's demand that the child tax credit be available to low-earning families even if they owe no income tax. Republicans reason that if you don't pay income taxes, you don't deserve a rebate. Clinton counters that many of the working poor pay thousands of dollars per family in Social Security taxes. The White House has signaled a willingness to consider compromises such as a $250 credit for families that don't owe income taxes. And House Speaker Newt Gingrich, despite earlier labeling the proposal "welfare," hinted on July 15 that he, too, is seeking a middle ground to find tax relief for lower-income workers.

POLL TOLL. The reason for the retreat: The success of the Democrats' class-warfare rhetoric. Republicans acknowledge that the steady drumbeat of attacks has taken a toll. Recent polls show that most voters believe the GOP tax cuts are a boon for the wealthy while Democratic proposals will bring more tax relief to the middle class. "We're losing," laments Republican Governor Tommy Thompson of Wisconsin. "There's no question that Democrats are better at rumor-mongering and getting their message out."

That has made Republicans defensive--and ready to deal. GOP leaders fear they'll get clobbered if they take a hard line. They're still smarting from their disastrous miscalculations over the 1995-96 government shutdown and the recent flood-relief bill. In both showdowns, the President sent the GOP limping off the PR battlefield. "If Clinton decides to veto [the tax-cut bill], he'll crush us," says a Hill Republican. "So we'll go out of our way to avoid a veto."

Still, the leadership's willingness to horse-trade could spark a mutiny among 20 to 30 GOP hardliners. Many of these lawmakers thought the original House bill didn't cut taxes deeply enough, and they'll mightily resist further concessions. "There has to be a time to draw a line in the sand," says Representative Matt Salmon (R-Ariz.). Reining in the rebels will be a key test for the embattled Speaker, but veteran Hill-watchers predict he'll prevail. Conservatives "may grouse a bit, but most will go along," says Michael P. Andrews, a political analyst for Salomon Brothers Inc.

Even if the firebrands succeeded, the taste of victory would be bitter: Clinton is certain to veto a hardline tax bill, and Republicans would take a political beating without winning any concessions. That's why all the photo ops with working moms won't change one key fact: Republicans are likely to take the best deal they can get.By Richard S. Dunham and Amy Borrus in WashingtonReturn to top


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus