Tax Cuts May Shrink In Battle Over Budget

As the federal budget battle drags on, a growing number of legislators and economists are raising red flags over a key issue: tax cuts.

The White House and the Republican Congress agree that their plan to balance the budget should include some form of tax relief. But many analysts are questioning the prudence of cutting government revenue before the federal books are in the black. And pollsters say public support is waning even for the middle-class tax cut, especially if it means cuts in such popular programs as as health-care and environmental protection.

At issue is not only how much to cut taxes but how to target the trims. A growing camp of moderate Republican and conservative Democratic legislators are fighting measures to offer child tax credits, a lower capital-gains tax, and relief for corporations. Some lawmakers, such as Senate minority leader Tom Daschle (D) of South Dakota, are pushing plans that would balance the budget without any tax cuts at all.

David Weiss, director of research at DRI/McGraw-Hill in Lexington, Mass., supports the efforts to back away from tax cuts.

"The basic answer is no, tax cuts are not a good idea, especially now when the Fed has spent all year trying to slow down the economy. We don't need to speed it up," and risk inflation, he warns.

"Keep the income-tax cuts as low as possible, because it's a lousy way to spend money," argues William Dunkelberg, chief economist for the National Federation of Independent Businesses and an economics professor at Temple University in Philadelphia. "If we burn all the money now for tax-cut measures that just trim around the edges, that means the government will have less money later" for more fundamental tax reform.

Negotiators would be "better off taking the same amount of money they're willing to spend on a $500 per-child tax credit and reducing marginal tax rates," Mr. Dunkelberg says. "That would really spur more economic growth and job creation because people would not be so penalized for working, saving, and investing."

Earlier this month, Congress's Joint Economic Committee released a report that asserted the "balanced budget plan must include tax cuts which will assure strong economic growth." Its research on states should "provide a clear lesson for the balanced budget debate," it said. Relatively low-tax states, the JEC found, grow nearly one-third faster than high-tax states. The difference, it claims, translates into higher income of about $2,300 per person or $9,000 for a family of four living in low-tax states compared with those living in high tax states.

But states seeking ways to boost their economic growth should use a tool more refined than tax relief, says Mr. Weiss. What's needed, he says, is regulatory reform. "The bureaucratic process, with its 574 different forms," is often far more repellent than taxes to the very investors states are anxious to attract.

But as the JEC concedes, state taxation is "dwarfed by the federal tax system." Analysts say that Washington must carefully target its tax changes if it is to make a difference in the economy.

"The GOP package doesn't easily lend itself to growth-oriented analysis," says Kevin Phillips, publisher of the American Political Report. "The capital-gains proposals would put more money into the hands of investors who over the past year, for example, did squat for the average person. Getting rid of the alternative-minimum tax on corporations is not very growth related, either. Whether these companies are likely to create jobs with their extra money is questionable."

Andrew Kohut, director of the Times Mirror Center for the People and the Press, says his polls as well as those of other major media organizations show little popular support for tax cuts as linked to the larger budget package. "If you ask people if they want tax relief, they'll say yes, but not relative to reducing the rate of spending on Medicare or cutting popular programs like education or environmental protection. Then people give it a much lower priority."