Bush is still likely to win congressional approval for the first major wartime tax cut in U.S. history, including accelerated individual rate reductions, a boost in incentives for small businesses, and a scaled-back reduction in taxes on stock dividends. But even after the Senate compromises with the House, which made room for Bush's $726 billion tax cut in its budget, the package will be a lot smaller than he expected.
In the midst of the Iraq war, Bush wanted to demonstrate he could take care of business at home. His strategy: persuade the Republican-controlled Senate to give a wartime President his $726 billion cut -- already less than half of the $1.5 trillion package he had requested in February.
But, distracted by Iraq, Bush didn't lobby for a tax cut that has never generated much public enthusiasm. And in a huge tactical error, the White House pushed ahead with key Senate votes on the day it announced that just the first six months of war-related costs would total $74.6 billion. With war sticker shock, rising deficits, and growing demands for programs such as a prescription drug benefit for seniors, Dems and moderate Republicans were unwilling to put Uncle Sam that much deeper in the red. "I would still be open, at some point, to proposals to stimulate the economy with tax cuts," says Senator John McCain (R-Ariz.). "But not now."
The Senate vote, orchestrated by Senator John B. Breaux (D-La.), is the latest skirmish between the House and Senate over both tax and spending policy. It will almost surely slow what had been a fast-track effort to get a tax cut to the President by May. And stunned GOP leaders are scrambling to salvage as much of the Bush agenda as possible: Sources say they are now aiming for a $450 billion to $500 billion tax cut. Says one glum business lobbyist: "After this, a victory is anything north of $350 billion."
By slashing the plan's overall size, the Senate increases the likelihood that the centerpiece of the President's ambitious program -- a cut in individual taxes on corporate profits, including dividends -- will be trimmed. Backers may now either limit its size or phase it in over several years. Says G. William Hoagland, top budget aide to Senate Majority Leader Bill Frist (R-Tenn.): "The final tax bill might significantly limit or exclude the elimination of double taxation of dividends." The Senate also doomed a second $729 billion package of tax cuts Bush proposed in his February budget, including new tax-free savings accounts and over $100 billion in tax subsidies for health insurance.
In the end, the fate of the Bush tax cut will be in the hands of a half-dozen Senate GOP moderates. For months, they warned that the package did not do enough to stimulate the economy in the short run and was a long-term budget buster. But the White House ignored the message -- confident that the moderates would cave, as they nearly always have. That miscalculation has left Bush hunkering down for a tougher-than-expected fight on Capitol Hill -- instead of planning a tax-cut victory parade.