GIVING AND TAKING AWAY

The Senate yesterday properly approved financial aid to the states to both support health care for the poor and act as economic stimulus. It was an important advance lacking in the original version of the tax-cut bill offered by President Bush. But this relatively modest good news was offset by a phony dividend tax-break that will result in large federal deficits while contributing minimal stimulus.

The state aid comes through the persistence of Sen. Susan Collins, who negotiated with her party’s leadership to ensure that a popular bill was included in the package and that at least half was dedicated to Medicaid funding, a crucial source of revenue at a time when all states are short of funding for this program. Sen. Olympia Snowe, serving in a key role on the Finance Committee, was as supportive of the $20 billion measure, which would bring an additional $116 million to Maine, including $65 million to Medicaid and $20 million to local governments.

Unfortunately, Sen. Collins was also a supporter of the dividend tax-cut amendment that also passed the Senate. That amendment, by Sen. Don Nickles, phases in the tax break on dividends then purports to cancel it in 2007, an expiration few expect but allows the Senate, after also using a false sunset date on other tax breaks, to stay within its $350 billion, 10-year cap. Even if Congress were to ignore the many economists who have concluded the dividend cut’s effect on the deficit would harm the economy long term, they should acknowledge that their accounting does not present the public with an accurate reflection of the probable 10-year cost of the cuts. The liberal Center on Budget and Policy Priorities estimates that, without the sunsets, the Senate’s $350 billion tax package rises to $660 billion through 2013.

Sen. Collins argues that the temporary nature of the tax cut is not a problem, and she would prefer that the tax increase if it proved ineffective as stimulus. “Just like we do when we start a new federal program,” she said yesterday, “we have made this plan temporary so we can evaluate its effectiveness. If it has worked, it makes sense to continue with it. If it has not, we can let it fall by the wayside. The economy is in tough shape, and we must act quickly and decisively to turn it around.”

Certainly the amendment that appeared in the Senate Thursday was much improved over earlier versions, but some of the same problems with it persisted beyond its doubtful accounting within the 10-year budget. Earlier in the week, a commentary from the more conservative American Enterprise Institute urged readers to “Think, for a moment, of the likely wacky effects of such a plan.” Among them are the incentives for firms not to pay dividends until the rate falls to its lowest level, which would take a year – so much for short-term stimulus – and to assume that bottom rate would be in effect temporarily before shooting up again. AEI resident scholar Kevin A. Hassett says these effects make the idea, “one of the most patently absurd tax policies ever proposed.” And that’s from a friend; opponents are less kind.

Sen. Snowe properly opposed this measure because, from early on in this debate, she said the $350 billion cut could not be met with sleight of hand and she has kept her word despite prolonged, intense pressure from

Senate leadership, the White House and various interest groups. She has stuck to sound economic principles and fair accounting, which should hearten Maine, even as the tax cut looks worse and worse.