President Bush and Republican lawmakers are being forced to temper their anti-tax ambitions, as the party that consolidated power in Washington by promising to shrink government grapples with the high cost of its efforts to expand the Defense Department and the nation's two largest entitlement programs.
The president's only new tax initiative for the second term — a broad restructuring of the tax code — will be crafted in a way that results in a simpler system, not lower taxes, White House aides said.
At the same time, Bush's call for Congress to make permanent all the tax cuts enacted in his first term faces increasingly strong resistance among some Republicans concerned about rising deficits. The chairmen of the Senate Budget and Finance committees said in interviews last week that Republicans might wait until next year, or later, to consider the Bush plan, because the cuts do not expire until the end of the decade.
GOP pushing tax increase?
And, for the first time in years, Lindsey O. Graham (S.C.) and other Senate Republicans are advocating increasing taxes — as a way to pay for a restructuring of Social Security. Bush has not ruled out backing the effort.
"What is different this year is deficits loom larger over the debate in the Senate," said Graham, who opposes extending some the Bush tax cuts he supported. "I believe senators will be more balanced in what we can afford."
Federal Reserve Board Chairman Alan Greenspan warned Congress last week that rising deficits beg new scrutiny of tax cuts. "Addressing the government's own imbalances will require scrutiny of both spending and taxes," he said.
To be sure, Bush and most congressional Republicans, especially in the House, remain committed to cutting taxes as a guiding principle. Some leaders are considering pushing this year to extend some of the tax cuts enacted in 2001 and 2003, including those for capital gains, at the very least. But after cutting taxes aggressively over the past four years, a growing number say it would be unwise to reduce the amount of money the government is taking in at a time when bills for Medicare, Social Security and the Iraq war are piling up.
Bills pile up
The shift is pragmatic, not philosophical, and reflects a trend playing out around the country. Many governors are facing large deficits and rising costs, especially for Medicaid, which provides medical coverage to low-income Americans. Indiana Gov. Mitchell E. Daniels Jr. (R), Bush's budget director in the first term, recently drew the wrath of conservatives by proposing a 29 percent increase in the state income tax rate on the richest residents. Republican governors in Colorado and Alabama have championed tax boosts as well.
"The large deficits and apparent inability of Republicans to constrain spending has made it impossible for sensible folks to advocate" big tax cuts, said Kevin A. Hassett of the conservative American Enterprise Institute. "Sooner or later government has to pay for everything."
'Starve the beast'
Hassett said Republicans might be experiencing the unintended consequence of the "starve the beast" theory, which holds that lower taxes could force Congress to cut spending because there is less money in Washington. In this case, the deficits are forcing Congress to hold back on tax cuts, too, Hassett said.
Nicolle Devenish, a top Bush adviser, said the tax cuts enacted in Bush's first term jump-started the economy and are ample to keep it humming, as long as Congress makes them permanent. "We cut taxes when the economy needs it," she said. "Recent [gross domestic product] figures and job stats show a healthy, growing economy. For that reason we strongly believe the tax cuts must be made permanent so we don't backslide."
This is no easy task for Bush, especially in the Senate. Several Republicans are voicing opposition to making permanent some or all of the first-term cuts, which include reductions in tax rates on income, dividends and capital gains. To hold down the cost of the cuts to $1.7 trillion, Republicans designed the tax cuts to expire no later than 2010. Extending the 2001 and 2003 cuts for five years beyond 2010 would cost more than $1 trillion, according to White House figures.
Sen. George V. Voinovich (Ohio), one of several Republicans who voted for some or all of the tax cuts, is expressing serious concerns about making them permanent this year.
'Cuts need to be offset'
Voinovich, who bills himself as a deficit hawk, believes the nation cannot afford to run up large short-term deficits, especially with projections that spending on Medicare and Social Security will explode in coming decades, his spokesman Scott Milburn said. Voinovich believes "any cuts need to be offset," through reductions in spending elsewhere, Milburn said. "If they are not, he has made it clear to people he will not be there for them."
In the next 75 years, the government will fall $3.7 trillion short of meeting Social Security's needs and nearly $28 trillion shy of Medicare's growing demands, according to the Government Accountability Office. The nonpartisan GAO estimates Bush's plan to provide prescription drug coverage to seniors is responsible for more than 25 percent of Medicare's projected shortfall.
Many Republicans said Bush's decision to increase spending in the first term will make it much harder to reduce taxes in the second. After overseeing a large expansion of government over the past four years, especially for the Pentagon and other agencies involved in fighting terrorism and the war in Iraq, Bush is pushing a Social Security plan that Vice President Cheney said would cost "trillions of dollars" in the short term. Many Republicans are expressing reservations about the plan to carve private Social Security accounts out of the current system because it would drive up deficits unless benefits are slashed or taxes raised.
'The spenders are fighting back'
This has put Republicans such as Voinovich and Graham in the uncomfortable position of having to abandon, to some extent, their anti-tax inclinations and infuriate some fellow Republicans in the process. "If you are serious about Social Security, you are going to have to say no to other things," Graham said.
"The spenders are fighting back," said Grover Norquist, president of Americans for Tax Reform, which advocates lower taxes. "The deficit is the word they use because they think it sounds more acceptable than saying they want to spend more money."
Senate Finance Chairman Charles E. Grassley (R-Iowa) said at least six Senate Republicans have signaled opposition to extending the cuts. "They could keep it from getting done," he said. "But I think most people would like to make them permanent."
Higher fees, payroll taxes mulled
Grassley, who supports the Bush plan, said the Republican decision to produce a five-year budget — instead of the traditional 10-year model — has prompted some lawmakers to think about delaying action for a few years. "You can only extend tax cuts for a couple of years, so is it really worth dealing with this year?" he asked.
Of most concern to Norquist and other longtime advocates of lower taxes are calls by Graham and others to consider raising taxes to help finance Social Security changes, Bush's top domestic priority. Graham proposes subjecting more of a person's income to the payroll tax, which funds Social Security. Under current law, $90,000 is subject to the tax. If the cap were raised to $140,000, millions of Americans would be hit with a $3,000 tax increase, or $6,000 if they own a business.
To help pay for other programs, Bush, in his budget plan, proposed raising "user fees" for airlines, explosives makers and others, which some conservatives consider akin to tax increases.
