Tax FAQs: A Guide to the 2001 Debate


By Howard Gleckman The Great Tax Cut Debate of 2001 appears to be heading toward a showdown on Capitol Hill. But with all the feints and shuffles, with dueling cost estimates and budget forecasts, it's tough to figure the bottom line. As a public service, BW Online presents the following guide:

Q: How big will this tax cut really be, and when will it pass?

A: It will be big, though it may not be the $1.6 trillion that President Bush proposed. And it certainly won't include all of the cuts he has promised, though it could come pretty close (you'll see why a little later in this column). As far as what's in it for you personally, that depends on your income. It could be hundreds of dollars for most Americans. For the wealthy, it could be many thousands of dollars, though the lucky ones won't see most of the benefits for years.

The "when" is tougher to predict. There's a chance that Congress could pass a $60 billion stimulus package by Memorial Day, and taxpayers could see either rebates or lower tax withholding from their paychecks by summer. If, as is more likely, the Senate continues to plod along, don't expect any cash until yearend.

Q: But isn't the House moving ahead quickly?

A: The game being played in the House is very interesting, but it doesn't have much to do with getting the Bush plan signed into law. GOP leaders have the votes to muscle tax cuts through the House, and they're not in a compromising mood. If they wanted to meet Democrats halfway, they could write bills that would get overwhelming bipartisan support.

But House GOP leaders are more interested in retaining control of the House in 2002. So their strategy is to send a series of tax cuts to the floor, force conservative Democrats from swing districts to vote against them, and then use those votes as fodder in the coming campaign. The result: A bunch of House-passed tax cuts that will amount to nothing more than political ammunition.

Q: So where will the real tax cut be decided?

A: This bill is going to be written in the Senate. A growing number of senators want the tax cut split into two -- a quick stimulus package followed by the rest of the Bush tax plan. But they can't agree on how to pull that off.

At the same time, a handful of GOP senators worry that the Bush bill is too big. They want to make future tax cuts contingent on projected surpluses actually developing. Some are mulling "triggers" -- provisions that will allow tax cuts to happen only if future black ink flows as predicted.

Q: O.K., but does Bush have the votes to win in the Senate?

A: The vote in the evenly divided Senate is a toss-up. We should get the first hint later this week, when the Senate is expected to vote on a 2002 budget framework. Remember, though, that vote is mostly symbolic, and its tax-cut targets are nonbinding. Still, the tally will give us a good idea of how much support the Bush plan has.

Q: How much impact will the economic slowdown have on the tax debate?

A: Huge. Lawmakers are about to go home for a two-week spring recess. If they get an earful on the slumping economy and the sagging stock market, that would almost guarantee a quick stimulus package. But ironically, that could be bad news for the rest of the Bush plan. Once Congress passes Tax Cut I, pressure to do Tax Cut II will diminish rapidly. By contrast, if voters are blasabout the economy, stimulus talk may quiet. That would make a single big bill more likely -- good news for Bush.

Q: Wait a minute -- I thought Bush wanted a tax cut to jump-start the economy.

A: Right. And the Democrats wanted to wait until Congress passed a budget before doing anything about taxes. Now, the Democrats are demanding immediate relief, and Bush wants to slow things down so he doesn't lose the momentum for a larger tax cut. What can I say? It's Washington.

Q: Why is this taking so long?

A: Treasury Secretary Paul O'Neill, the hard-driving former CEO of Alcoa, keeps asking the same question. Actually, things are moving pretty quickly -- at least by Washington standards. It took Congress eight months to pass the Reagan tax cuts of 1981, and the debate over the Tax Reform Act of 1986 took almost two years. Bush has been President for only nine weeks.

Q: Who are the key players on Capitol Hill?

A: If you want to know how the tax cut is faring, keep an eye on four senators.

Lincoln Chafee of Rhode Island: Newly elected from a heavily Democratic state, Republican Chafee thinks the Bush tax cut is too big. GOP leaders already figure they've lost liberal Republican Jim Jeffords of Vermont. But if they can turn Chafee, the President could be in for a big win.

Ben Nelson of Nebraska: The mirror image of Chafee, he's a freshman Democrat from a Republican state. My BusinessWeek colleague Rick Dunham has dubbed him "half-Nelson," since he's likely to vote with his party only 50% of the time. Georgia's Zell Miller has already endorsed the Bush tax cut. Dems can't afford to lose Nelson as well.

John McCain of Arizona: Fresh from a huge Senate win on campaign-finance reform, McCain could be a wild card in the tax debate. Democrats hope that he could put together a centrist coalition in favor of a scaled-down tax cut.

Strom Thurmond of South Carolina: The 98-year-old dean of the Senate is increasingly frail. If he can no longer serve, he will likely be replaced by a Democrat, since his successor will be chosen by South Carolina's Democratic governor. That would give the Democrats a one-vote majority in the Senate. And that could alter the dynamics of tax cutting in all sorts of ways.

Oh, and keep your eye on the President: Sooner or later, he'll have to abandon some of the specifics of his campaign plan -- he can't make them fit, even in a $1.6 trillion bill. More than anything else, the way rookie Bush finesses this tough political situation will be the key to the fate of his signature issue. Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online


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