Wish Lists, Not Ideas, Drive Emerging Tax Cuts

WASHINGTON — The big tax-cut bill that Congress is sitting down to write is, in the end, a triumph of politics over philosophy.

Despite high-flying rhetoric about the need to reform a loophole-ridden tax code, some analysts say the emerging legislation looks more like a shopping list for competing constituencies than a fundamental redirection of government policy.

Unlike Congress’ ambitious effort to reform the tax code in 1986 or its across-the-board cuts of 1981, analysts say the tax bill of 1997 is turning into a fiscal hodgepodge: family tax credits favored by suburban voters and social conservatives, estate tax breaks for property owners and small businesses, capital gains tax cuts for investors and education credits for the broad middle class.

“There is no overarching purpose,” said David Wyss, an economist at DRI/McGraw Hill, an economic forecasting firm. “It seems to be much more of a shopping list.”

The measure, which House Republicans are expected to begin drafting this week, has set off a mad scramble by lawmakers seeking to include pet provisions for home-state interests. It has provoked lobbying fights among an army of special interests, pitting big commercial airlines against discount carriers, corn farmers against oil and gas interests, and the real estate industry against other investor groups.

Republicans herald the emerging tax bill as a “pro-family, pro-investment” package that is a step in the right direction toward their broader promises to replace the tax system with a flat tax or national consumption tax. And they say it is the best thing tax-reform advocates could hope for with a Democrat in the White House.

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“There is no guarantee, especially with Clinton in the White House, that we will be able to achieve major change to the tax code,” said Ari Fleischer, spokesman for the House Ways and Means Committee. “But the American people are due tax relief, and it would be foolhardy to make them wait.”

But some tax reform advocates are concerned that elements of the bill--such as the education tax breaks sought by President Clinton--ultimately will make it harder to reform the tax code because they would increase the number of people with a stake in new or expanded loopholes.

“The pressure for tax cuts has been pressed into a junk package rather than into a significant step toward tax reform,” said William Niskanen, chairman of the Cato Institute, a conservative think tank. “It creates a set of new tax entitlements. Once in place, there is an established constituency for the entitlement.”

The parameters of this year’s tax bill were set not by a single big idea about tax policy--like tax simplification in 1986--but by the political rough-and-tumble of negotiations between Clinton and congressional leaders that produced a compromise plan to balance the federal budget.

House Ways and Means Committee Chairman Bill Archer (R-Texas) is scheduled Monday to unveil specific tax-cut proposals to fill in the details of the budget agreement. His plan will represent the crucial starting point of debate when the committee begins writing the legislation later this week.

In the GOP’s national radio address Saturday, Archer said the bill would “give people tax relief for life” by providing $500 family tax credits for each child younger than 17, breaks for families with children in college, incentives to save for retirement, relief from estate taxes at death and capital gains tax cuts for when people sell assets.

Those basic elements were already stipulated by the budget deal. The key question is how tax writers will finance all those initiatives with the $85 billion that the budget agreement allows. (The deal calls for up to $135 billion in tax cuts, but they would have to be offset by $50 billion in tax increases.)

The whole enterprise has set off fierce fights among competing interests for a piece of the $85-billion pie, and a scramble to avoid having the $50 billion in tax hikes taken from their hide.

A war has been raging within the airline industry, between major commercial carriers and upstart discount airlines, over proposals to restructure the ticket tax, currently 10% of the ticket price. The budget agreement calls for raising $30 billion in revenue by extending the tax. But a coalition of the nation’s largest airlines has been lobbying to base the tax on mileage flown instead of the price of the ticket. The big airlines say the current tax unfairly eases the tax burden of discount carriers.

Elliot M. Seiden, a vice president of Northwest Airlines Inc. and head of the big-airline lobbying group, says he expects Archer to propose some modification of the ticket tax that would require passengers on discount flights to pay a bigger tax.

The real estate industry has swung into action to fight a proposal being considered by House tax writers that would deny the full capital gains tax cut to real estate investors.

“An ugly surprise lies ahead for the real estate industry,” warned a memo from the National Assn. of Realtors to its members. The proposal, which would affect owners of rental and business properties who depreciate the value of their holdings, could reduce the cost of a capital gains tax cut by more than $5 billion, according to industry estimates. That has great appeal to tax writers trying to find ways to make more room for other tax breaks while bringing the capital gains rate for other investors as low as possible.

Another industry likely to take a hit is ethanol producers and the farmers who grow the corn used to make the alternative fuel. Archer has promised to take a whack out of the tax subsidies provided for ethanol, which critics characterize as a form of corporate welfare and proponents say is a needed boost for an important alternative to gasoline. That could raise about $2 billion in revenue, but it puts Archer at odds with Archer-Daniels-Midland Co., the industry giant that lost one of its strongest GOP defenders in Congress with the retirement of Sen. Bob Dole.

Because this is likely to be the only tax bill of the year, lawmakers have a great sense of urgency about hitching their favorite proposals to it. “This is the Velcro that everything’s getting attached to,” Fleischer said.

Archer has invited every member of the Ways and Means Committee to submit a tax cut wish list to him. He has been meeting with them individually to see what it would take to win their support.

Archer also is wooing some Democrats in hopes of giving the bill a bipartisan imprimatur. Rep. Barbara B. Kennelly (D-Conn.) talked to him about her big-picture concerns about keeping the budget in balance, but added that her support for the bill might hinge on a more local concern: She strongly opposes possible plans to tax the profits of Indian-owned casinos; two huge ones are in her district.

Robert Shapiro, vice president of the Progressive Policy Institute, a centrist Democratic think tank, says the pending legislation may be the last significant tax cut for a long time.

As Congress confronts the huge fiscal pressures of baby boomers moving into retirement, Shapiro predicts the focus of tax debate will shift dramatically.

“The issue is not whether we are going to raise taxes” after the turn of the century, he said. “The only question is how much and how will we go about it.”