- The Washington Times - Monday, August 27, 2001

The White House may be saying the new surplus estimates are great news, but lobbyists throughout Washington are battening down the hatches.

While the Office of Management and Budget estimate shows that there will be $1.3 trillion in budget surpluses over the next decade, business types are nervous that Treasury may start rooting around the tax code looking for cash.

For example, one proposal, a Clinton legacy, would reverse a U.S. Supreme Court ruling allowing certain small business owners to reap the financial benefit of being forgiven a debt and then face no tax consequences for that financial gain. Similarly, there has been a long-standing hope to crack down on abusive tax shelters.

Senate Finance Committee Chairman Max Baucus, Montana Democrat, has said that any new tax cuts must be offset with "revenue raisers," and his staff is combing the code for money.

That same treasure hunt may breathe new life into a politically sensitive proposal, a reduction in the capital gains tax rate. Individuals already pay a lower rate on capital gains than they do on other income. Some would like to lower those rates further and extend the benefit to businesses, too.

While liberals criticize the proposal as a boondoggle for the rich, cutting the tax would actually raise money for the government in the short run.

Because some investors hold onto an asset to avoid paying higher tax rates on gains, lowering the tax rate would encourage sales, according to the Joint Committee on Taxation and other economists. Those increased sales, while being taxed at a lower rate, would still boost revenues in the short term beyond what would have otherwise been expected.

These machinations may seem bizarre, given a surplus of $1.3 trillion which seems like an impossibly large sum of money, even when spread over a decade but the problem is that OMB estimates only $77 billion of that surplus will be realized before 2005.

Some lobbyists also note that the OMB made some decidedly optimistic assumptions about the economy to reach that number. For example, while most blue chip estimates say growth in 2002 will hover around 2.8 percent after the 2001 slump to 1.7 percent, the White House says the growth rate will nearly double to 3.2 percent in 2002.

The Congressional Budget Office, which is the official scorekeeper for Congress, will likely take a more pessimistic view when it releases its revised estimate of the state of the federal budget next week. That will mean even less money in the early years and a longer wait until surpluses begin to bloom again.

The Bush administration wants much of the remaining surplus to be spent on new defense programs, to create a prescription drug benefit for Medicare beneficiaries, and to make the tax cut Congress passed earlier this spring permanent. If those proposals are accepted, there will be just $10 billion in surplus remaining for the next four years, and $575 billion over the next 10 years.

"The budget surplus for the next couple years just simply doesn't exist," said one tax lobbyist. While there may be room to enact a few "cats and dogs" there will not be enough money to enact anything of any significance, the lobbyist said.

There is an industry-wide assumption that an extension of a dozen expiring tax provisions might be enacted this fall.

The so-called extenders include tax breaks for financial corporations doing business abroad and companies hiring low-income and "at-risk" workers. They also include provisions that allow individuals to claim certain tax credits, including the District's first-time home buyer's credit, when calculating the alternative minimum tax.

According to the Joint Committee on Taxation, a one-year extension of those provisions would cost just $600 million in fiscal 2002.

Mr. Bush has backed an extension of those provisions but did not specifically provide room for them in his mid-session review of the budget released last week. He did, however, ask Congress to pass seven energy-related tax provisions that would provide businesses about $378 million in tax breaks in 2002 and about $9 billion over the next decade.

Meanwhile, the House has already backed a far more substantial energy tax plan which would cost $1.7 billion in 2002 and $14 billion through 2004.

The chances for any energy tax bill, however, have dimmed in part because of the difficulty of cutting the tax bill back to an affordable size, and in part because of a general apathy for the bill. Lower fuel prices have sapped any public outcry for relief.

"It just really doesn't have any juice," said one lobbyist of the energy tax bill.


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