Tax Relief in 2000? No Way! Despite surpluses as far as the eye can see, partisan politics and personal animosities will likely block major tax relief next year.
By Jeffrey H. Birnbaum

(FORTUNE Magazine) – The time couldn't be riper for a tax cut. The federal budget surplus is expected to total $3 trillion over the next decade, and both political parties are clamoring to reduce taxes. Next year would be a perfect time. It is an election year.

But don't even think about how you'll spend your refund. Politicians are almost certain to miss their opportunity for significant tax relief in 2000. "As long as Bill Clinton is in the White House," says veteran tax lobbyist James Rock, "it will be extremely difficult for the Republicans to get a large tax-cut bill signed into law." The reason is politics, both personal and partisan.

First, the personal. Anything as complex as tax legislation requires backroom negotiations over a long period between people who trust each other. That trust was hard enough to muster during the rocky run-up to 1997's tax legislation; now, post-impeachment, it's nonexistent. The chasm between the Clinton administration and the Republican majority in Congress has shut down almost all cooperation. The two camps rarely talk privately and don't seem to want to. "There has been very little contact between anybody in the White House and me about what might emerge as tax relief," laments Republican Representative Bill Archer of Texas, chairman of the House Ways and Means Committee.

Democrats grouse, too, about Republicans' intransigence. "Their idea of working with us is saying, 'Take our bill or nothing,' " complains New York Representative Charles Rangel, the ranking Democrat on the House Ways and Means panel. "I just don't get their thinking, [but] it's not going to change."

Politics of a purely partisan kind are also an obstacle. Republicans want a tax cut. They always want a tax cut. Congressional Democrats don't, though not because they dislike tax relief. They like it fine and would be happy to vote for it. But Democrats don't want Republicans to get credit for accomplishing anything before the next election. The Democrats' best hope of winning control of the House is to run against a do-nothing Congress. That means Democrats can--and probably will--use delaying tactics in the Senate, as well as their large numbers in the House and their president's veto power, to block GOP action on any significant tax changes. The ideal outcome from their perspective is stalemate, especially on anything as potentially popular as tax reduction.

GOP lawmakers intend to press ahead with a tax-cut bill, if for no other reason than to show that tax relief is what they stand for. "I expect the budget document next year will provide for significant tax relief," Archer says, "and that will mean we'll have another major tax bill." Its components are likely to mirror the measure that Clinton vetoed this year, with heavy emphasis on shaving levies for small businesses and upper- and upper-middle-income taxpayers. Expect any GOP bill to reduce the capital gains tax, phase out the estate tax, expand IRAs and 401(k)s, and permit self-employed people to deduct their health-insurance premiums. There would also be plenty of help for middle-income folks. The legislation probably would give everyone an across-the-board income tax cut of perhaps 10%; reduce the so-called marriage penalty; and alter the alternative minimum tax, which was designed to make sure rich people paid some tax but has lately been ensnaring average-income people too.

How will we know whether next year's legislation is destined for the trash heap? One tip would be if its cost approaches $792 billion over ten years--the amount of this year's doomed bill. Clinton won't accept anything that soaks up that much of the projected non-Social Security surplus. Another sign would be if GOP leaders proceed without regard to Clinton's top two priorities: fixing Medicare and Social Security. Clinton has said he won't support any tax cut, even one that's more modest than the full Republican wish list, unless Congress also tackles those two volatile issues. The prospect for that is near zero. Despite the rhetoric and hype, there is no consensus about how to fix Medicare and Social Security, both of which are hurtling toward insolvency early in the next century. "To get anything done in those areas, there has to be a broad bipartisan consensus with leadership from the White House," says Republican Senator William Roth of Delaware, chairman of the Senate Finance Committee. "And that's going to take time."

In the meantime, Republicans can pass as sweeping a tax cut as they please next year, liberated by the knowledge that the President will veto their handiwork. "It's called virtual government," sneers Democratic Representative Robert Matsui of California. "Do something that doesn't mean anything, but you can always use it as a campaign issue." That goes for both parties. Democrats also believe they are on the right side of the tax debate and would welcome another symbolic battle. They think their partisans would prefer a smaller cut, targeted to people of modest means, that also addresses Social Security and Medicare. Says Rangel: "We can't even talk about a tax cut until we have fixed the roof of Social Security and Medicare while the sun is shining." In other words, diehard Democrats would be as energized by another veto as die-hard Republicans.

But Republicans see more than politics in their efforts. They are so confident that Texas Governor George W. Bush will win the presidency next year that they view any tax legislation as spadework for the real bill that President Bush, unlike President Clinton, will sign in. "There's an emerging theme among Republicans," reports Ken Kies, a former top congressional aide who is now a lobbyist with Pricewaterhouse Coopers. " 'Why cut a deal with this guy [Clinton] when we can wait and cut a deal with a guy we like [Bush] to get the kind of legislation we like?' "

While huge tax cuts are out of the question in 2000, smaller ones may not be. Ten popular tax breaks are scheduled to expire soon, and if history is any guide, they will probably be extended. One of the "extenders" is the research-and-development tax credit, a favorite of the high-tech industry, itself the new darling of D.C. Another is a provision that allows one million families to claim the $500-per-child tax credit even if they pay the alternative minimum tax, which normally disallows many credits and deductions. "We're very hopeful we're going to be able to do something about extenders," says Roth. "That's a top priority."

Eventually lawmakers will surely find it impossible to resist doling out all manner of tax giveaways, especially if budget surpluses remain large. The size of that relief and its beneficiaries, however, will depend largely on who next occupies 1600 Pennsylvania Avenue.