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Bush agenda may still weather Katrina
Tax cuts, Social Security reform are still in play, observers say, despite focus on Gulf.
September 20, 2005: 2:59 PM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) Hurricane Katrina did more than devastate residents of the Gulf Coast and blow away their economy.

It significantly altered Washington's course, and it put in doubt whether some of President Bush's tax-based economic initiatives will get the attention (and lawmaker votes) needed to make them a reality.

Some of those initiatives have already come under fire because of their cost. And in light of the more than $200 billion the federal government is likely to spend on the Gulf Coast's recovery, the initiatives' price tags are likely to be an issue in what is expected to be a heated battle over spending.

On Tuesday, Treasury Secretary John Snow told the National Association of Federal Credit Unions that he thought recovery from Katrina "will push to the back burner some issues that otherwise would have been on the agenda now -- the estate tax, tax cut permanence and other things."

The White House quickly issued a statement saying that while recovery from Katrina was a top priority, the White House remained committed to its economic agenda.

Here's a status report on where some of the president's key agenda items are currently and what some Washington observers think will happen with them this fall and next year:

Extension of reduced capital gain/dividend rate: Still likely

Before Katrina, Congress was expected to extend until 2010 the 15 percent tax rate on long-term capital gains and dividends Currently, it is expected to go up in 2008.

There's a better than 50 percent chance that that could still happen this fall, said Greg Valliere, managing director of Schwab's Washington Research Group.

If it proves politically unviable in the wake of Katrina, expect to see the extension granted in 2006, said Chris Edwards, director of tax policy at the Cato Institute.

Chances are high the extension will go through for a few reasons, Valliere and Edwards said: the markets like it, and, since up to $70 billion for tax cuts was already appropriated in the 2006 budget, it only requires 50 votes in the Senate.

Repeal of the estate tax: Polarizing, but not dead

There's far less of a chance that lawmakers will permanently repeal the estate tax this fall, observers say.

Soon after Katrina, the Senate postponed a vote on the measure, which would benefit a minority of taxpayers. Only about 2 percent of estates in the country are large enough to be subject to the estate tax.

"It's too polarizing," Valliere said, particularly while the country's attention is focused on the large population of poor people made homeless by Katrina.

Even among groups that favor the repeal, "there's some disagreement as to whether there should be a push this fall. There is concern that if it's pushed now, it will be demonized," Edwards said.

But what you may see is a compromise repeal next year, said Edwards and Thomas Mann, a senior fellow in governance studies at the Brookings Institution.

One such compromise might be a reduction of the top estate tax rate from 47 percent to 15 percent.

Tax code reform: Delayed, but still on course

The president's bipartisan Advisory Panel on Tax Reform, created in January of this year, has been asked to explore ways to reform the tax code so that it's simpler, fairer, and more pro-growth, and to do so in a manner that would be revenue neutral.

The panel was scheduled to have its last two public meetings in September and to submit its proposals to the White House at the end of this month. A week after Katrina struck, the meetings and the report were postponed.

The panel still intends to submit a report to the president this fall, but it's not likely to be out before the end of October, the panel spokeswoman Tara Bradshaw told CNN/Money.

Given the complexity of tax reform, with or without Katrina, it's unlikely that much would have happened this fall beyond the panel's submission of the report to the president, Edwards said.

Alternative minimum tax (AMT) reform: Band aid likely

The same might be said of AMT reform, which the tax reform panel has already endorsed.

The AMT system was originally designed to prevent wealthy individuals from avoiding most or all federal taxes by taking an inordinate number of exemptions. Under the AMT, many of the deductions and personal exemptions taxpayers are entitled to under the regular tax system are eliminated.

What is likely to happen this fall or sometime next year is that lawmakers will, as they've done in years past, make a temporary fix to the system, observers said.

That fix will be an increase in the amount of income that is exempt from AMT for tax year 2006. Otherwise, Edwards said, some 20 million taxpayers, many of them middle income, could be ensnared by it.

Social Security reform: Not quite dead

Talk of Social Security reform's death may be exaggerated.

In the immediate aftermath of Katrina, some speculated the hurricane provided President Bush with a face-saving excuse to walk away from what was widely acknowledged this summer to be an unsuccessful campaign to garner sufficient support to add individual investment accounts to the system.

But in the past two weeks, there has been talk among Republican lawmakers that Social Security reform will be on the docket this fall.

Two senators plan to introduce Social Security legislation and Sen. Jim DeMint (R-SC) will continue to push his proposal to fund accounts with the surplus paid into the system, according to published reports.

And Rep. Bill Thomas (R-Calif.), chairman of the House Ways and Means Committee, is still expected to propose a broad retirement security bill, one piece of which will involve Social Security.

"At this point, because Hurricane Katrina has really pushed the whole agenda back, it's unclear what the timing will be," said Rob Vandenheuvel, a spokesman for the Ways and Means Committee.

Meanwhile, President Bush is scheduled to meet with members of the President's Commission to Strengthen Social Security on Wednesday.  Top of page

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