Tax-Cut Plans Could Reseed Deficit

WASHINGTON — Prospects for keeping the federal budget balanced after 2002, the year that President Clinton and Congress hope to eliminate the deficit, are being threatened by a ticking time bomb: the tax-cut bills that Congress will take up this week.

Under versions approved by the Senate Finance Committee and the House Ways and Means Committee, the revenue loss to the Treasury would take off, starting in 2003, and continue for many years after that, most budget experts say.

Robert Greenstein, an analyst for the nonpartisan Center on Budget and Policy Priorities, says both tax-cut measures have been crafted to keep the impact of the cuts “artificially low” for the first few years to stay within the bipartisan balanced-budget agreement.

Such “back-loading” of the maximum revenue impact, he and other fiscal experts say, could threaten the government’s fiscal integrity just as it is likely to be saddled with added costs related to the aging of the baby boom generation.

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Robert D. Reischauer, a Brookings Institution budget-watcher, warns that of all the debate surrounding the House and Senate tax bills--whether the reductions are skewed too much toward the wealthy, or whether they would overheat the economy--”this is the critical issue.”

“If the tax bill explodes, it will explode just at the time that the baby boom generation is beginning to retire and when we will need every penny we can get our hands on to pay for Medicaid, housing, transportation and food stamps,” Reischauer said.

Moreover, many of the tax cuts contained in the two bills “would not be easily reversible” if the government decided that it needed the extra revenue after all, Reischauer contends. Adjusting capital gains for inflation, for example, would be difficult to undo.

The figures are stark by any standard.

Estimates compiled by the congressional Joint Committee on Taxation show that during the first five years, the tax cuts would result in a net loss to the Treasury of $85 billion--precisely what the budget agreement has allocated for the measure’s cost.

But the figures show that the House tax writers have held down the initial costs by phasing in some of the reductions slowly. Once the provisions are fully in effect, the cost of the package jumps dramatically.

As a result, while the House provisions would drain about $18.4 billion from the Treasury in 1999, by 2007, the annual cost would soar to $41.8 billion--more than double the earlier amount.

And Greenstein’s group estimates that if the cost of the Ways and Means Committee package escalates at its 2004-2007 pace, the cumulative revenue loss for the second 10 years--from 2008 to 2017--would surge to $600 billion or more.

The Senate Finance Committee version of the bill is only slightly less explosive. The revenue drain rises from $19.7 billion a year in 1999 to $40.2 billion in 2007--again totaling $85 billion for the five years covered by the bipartisan budget accord.

Once more, however, calculating the second decade’s cost once the provisions have been fully phased in raises the annual revenue shortfall to $74 billion in 2017, Greenstein’s group estimates. For the measure’s second decade--from 2008 to 2017--it swells to $550 billion.

Greenstein and Iris J. Lav, another researcher at the center, attribute the bulk of the explosion in 2004 and beyond to a handful of provisions that primarily benefit higher-income taxpayers: cuts in the taxes on capital gains, inheritance and individual retirement accounts.

All three provisions “make heavy use of gimmicks--including delayed effective dates, slow phase-ins and timing shifts in revenue collections--to minimize the revenue losses [that] these tax cuts cause during the first five years,” the two analysts argue.

“Their costs then begin to rise sharply, with the pace at which these costs increase accelerating in 2006 and 2007.”

The House provision to allow taxpayers to adjust their capital gains to eliminate the impact of inflation is particularly vulnerable to cost spiraling. Under the terms of the House bill, taxpayers would not actually begin using it to lower their taxes until 2004.

Republicans are unapologetic about the apparent trends. Senate Majority Leader Trent Lott (R-Miss.) told a news conference Friday that while Republicans deplore the possibility that the cost of the tax cut might explode, that is not the important point.

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While Lott said Republicans “agreed we would not take actions” that would cause fiscal distress beyond 2002, he added: “The idea of having significant tax cuts for working Americans, I love it!”

But Reischauer and other critics are less sanguine. The nation already is facing a possible revival of large budget deficits when the baby boom generation retires, they say, and the prospect that policymakers will be able to cut spending then is dubious.

Many budget analysts predict that the bipartisan accord Congress and Clinton reached this past spring already runs the risk that the budget balancing--if it actually does occur in 2002, as predicted--will be brief and that the deficit will begin widening again.

“With the vanguard of the baby boom generation having already reached age 50, the nation cannot afford to budget with this type of sleight of hand,” Greenstein said.