- The Washington Times - Wednesday, April 19, 2000

The strong Internet-driven economy is doing it again: fooling the experts by outpacing all forecasts and generating an overabundance of tax revenues to federal coffers.

The fiscal 2000 budget numbers are now pointing to an incredible $230 billion surplus. This would be more than $50 billion higher than official Congressional Budget Office estimates and would likely produce a $65 billion non-Social Security operating budget surplus.

This new information comes from senior Senate staff members who follow budget trends closely by tracking the daily and monthly financial statements published by the Treasury Department. According to these sources, while non-defense discretionary spending is rising slightly above 4 percent relative to fiscal 1999, tax revenues are exploding. This stems largely from economic growth of more than 7 percent in the October-December period and the expectation of 5 percent growth in the January-March period.

So, total tax collections look to rise by as much as 12 percent. Of this total, personal tax receipts are increasing by nearly 15 percent, capital-gains revenues by 10 percent, Social Security payments by 8 percent and corporate tax receipts by 3 percent. So once again new-economy growth has exceeded official estimates. And when growth is strong, tax revenues pour in.

What will Uncle Sam do with this tax windfall? If the most recent Senate vote on the gas tax is any guide, the answer is: Washington will keep the money.

An amendment by Sen. Robert C. Byrd, West Virginia Democrat, recently passed handily expressing the sense of the Senate that lower gas taxes will not be included in the budget resolution. There were some surprising Republican defections that helped bury a gas-tax cut. Conservative Sen. John Ashcroft, Missouri Republican, for example, as well as McCain lieutenant Sen. Chuck Hagel, Nebraska Republican, voted against cutting the gas tax. So did Utah's Republican Sen. Robert Bennett, along with Republican Sens. Pat Roberts of Kansas, Tim Hutchinson of Arkansas, Christopher Bond of Missouri, Michael Dewine of Ohio, Lincoln Chafee of Rhode Island, Fred Thompson of Tennessee and John Warner of Virginia. Senate Budget Committee Chairman Pete Domenici of New Mexico voted against cutting gas taxes, as did Wyoming's conservative Republican Sens. Craig Thomas and Mike Enzi. Even the venerable Sen. Jesse Helms, North Carolina Republican, voted against the gas-tax cut.

Kudos, by the way, should go to moderate Republican Sens. Olympia Snowe and Susan Collins, both of Maine, and Arlen Specter of Pennsylvania for voting in favor of lower gas taxes.

If the Republican Party wants to regain the high ground on tax cuts, it should send a clear signal to the public that every on-budget surplus dollar will be returned to the taxpayers, not five years from now, nor 10 years from now, but right now.

Fiscal 2000 ends Sept. 30, roughly five weeks before the presidential election. A $65 billion surplus delivered back to taxpayers would be worth much more than the tens of millions of the usual squishy, bland TV campaign ads.

The options for how to do this are limitless. One way would be to take square aim at that enemy of the working class: the payroll tax. The Social Security surplus for this year is projected to rise by $153 billion. Each percentage-point reduction in the payroll tax would cost about $6 billion. The payroll tax is unquestionably the most oppressive middle-class tax. A working mom earning about $40,000 a year pays a 43 percent combined marginal tax rate. That's even more than the 40 percent marginal rate levied on those who make more than $250,000 per year. Republicans should provide desperately needed relief from this onerous tax (talk about a "toll booth" to the middle class).

And part of any tax-cutting agenda should be a cut in the capital-gains tax rate, which might help to offset the stock-market shock from the Justice Department's anti-Microsoft vendetta and would actually increase revenues. Since the last capital-gains cut in 1997, capital gains tax revenues have exploded.

But as an absolute bare minimum policy message, the congressional Republicans should provide a strong endorsement of Texas Gov. George W. Bush's tax-cut plan in their party caucus. This is how Jack Kemp laid the groundwork in 1978 and 1979 for Ronald Reagan's tax-cut message in 1980.

Economic growth in the new economy has produced an unbelievable budget surplus. The GOP must now signal clearly that they intend to send it back to Main Street, which, through its enterprise and risk and toil, created it in the first place.



Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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