CUT AND PAY

In crafting a palatable tax bill last year, members of Congress managed to pare down its cost by allowing the most popular tax cuts to expire quickly. Now, with an increase in the child tax credit, a reduction of the marriage penalty and expansion of the lowest tax bracket set to expire at the end of the year, Congress is poised to extend these cuts for another five years. Doing so, of course, will blow the $350 billion price tag that made the cuts politically acceptable in the first place. Fortunately, there is a bipartisan group of moderate senators that is calling for fiscal responsibility.

The group, which includes Sen. Olympia Snowe, is not against the tax cuts. It would likely be political suicide to be against providing tax relief to middle-income families, as tax cut supporters frame the current package. However, the senators point out that the tax cuts come at a price and currently that price is too steep.

Extending the three cuts for five years would add $120 billion to the federal deficit. Instead, the senators, three Republicans and three Democrats, are calling for the reduction in taxes to be offset by closing corporate tax loopholes and the abuse of tax shelters. The offset package, which has passed the Senate on multiple occasions, would strengthen tax shelter enforcement efforts and increase penalties. It would also extend customs fees to help pay for the tax cuts.

“This straightforward proposal clearly demonstrates that we can extend important tax relief to working families in a fiscally responsible manner,” says Sen. Snowe.

Along these lines, the Center on Budget and Policy Priorities found that for all the talk of “middle-class tax cuts” the biggest beneficiaries of last year’s tax bill are the wealthy. Increasing the child tax credit, for example, saved 26 million families $16 billion in taxes. However, other tax cuts in the same bill saved $17 billion for 184,000 people with incomes exceeding $1 million, according to the center.

The biggest tax cut was the decrease in the tax on dividends and capital gains, which interestingly, were not set for a quick expiration. According to the Brookings Institution’s Tax Policy Center, about 40 percent of the 2003 tax cuts will benefit one-tenth of 1 percent of income tax filers.

As House and Senate negotiators soon set working out their differences over a new tax cut package, the moderate senators can show the way, as they did when the original tax bill was crafted. The Senate version of the bill extended the three taxes now set for expiration for five years. That provision was dropped in conference, in part, to keep the cost under the $350 billion cap.

Setting expiration of these taxes for the end of this year was a good political move for Republicans. If the tax cuts are extended, President Bush and Republicans running for re-election in the fall can claim victory. If the cuts fail, they can blame Democrats ? and a few pesky Republicans – for standing in the way of tax relief for working Americans. However, such a victory would come with a price.

Raising the child tax credit to $1,000, expanding the 10 percent tax bracket and easing the marriage penalty make sense. But these cuts must be paid for. Under the package supported by Sen. Snowe they would be.