- The Washington Times - Wednesday, August 28, 2002

The loss of surplus revenue from taxpayers hit by the stock market's $7 trillion collapse since 2000 will affect the federal budget for years, the Congressional Budget Office said yesterday.
Deficits will linger for the next four years, and small surpluses will return by the end of the decade only if Congress holds the line against big new spending and tax cuts, the agency said in a forecast that for the first time projects massive losses of income and capital gains tax revenue from reduced stock earnings in the next decade.
"Even if the economy recovers any time soon, the stock market hasn't," said Astrid Adolfson, senior economist at McCarthy Crisanti and Maffei. "You're not going to get the benefits of stock market gains" with major indexes trading from 20 percent to 80 percent below their March 2000 highs, she said.
The congressional agency projects that the economy will recover in coming months and gradually increase the revenue reaped by the government. But even so, it foresees a permanent reduction of $60 billion to $75 billion a year in receipts for "technical" reasons that appear to be mostly related to stocks.
Many top-earning business executives, who pay a large share of U.S. income taxes, in recent years have been paid mostly in stock options, which are taxed as ordinary income. They often earned bonus income in the form of stocks, which are taxed as capital gains.
The CBO noted that income from stock options appears to have dropped by 50 percent last year, while capital gains distributions by stock mutual funds plummeted by 80 percent. Typical taxpayers also benefited from such stock gains and paid taxes on them during the boom years.
Congress, which has been laying plans for another year of double-digit spending increases, for years was able to indulge because of pleasant revenue "surprises" that emerged each April with last-minute payments of taxes on stock-related income.
Now, Congress is faced with an unpleasant and long-lasting revenue surprise that reverses much of the trend that created the huge surpluses of as much as $236 billion between fiscal 1998 and 2001, the CBO said.
President Bush and Republican leaders have said the increasingly dim budget outlook, with about $5 trillion of the CBO's projected 10-year surpluses disappearing through "technical" revisions just in the past year and a half, calls for a return to discipline and tough spending trade-offs.
Congress will no longer be able to shower increased funding on favored and neglected programs, including education and mass transit. And big tax cuts beyond the $1.2 trillion in rate reductions last year also appear beyond reach.
The two parties went on a bipartisan spending spree after September 11, passing bills to fight terrorism, aid terror victims and stimulate the economy out of recession, a development the CBO said was responsible for about $60 billion of the $157 billion deficit this year.
A supplemental spending bill passed in the spring, mostly for defense and homeland security, raises the deficit by nearly $270 billion in the next decade, the CBO said.
"The return of short-term deficits is really no surprise in light of what happened over this last year," said House Budget Committee Chairman Jim Nussle, Iowa Republican. But he noted that the forecast holds out hope that small surpluses of up to $50 billion may reappear by 2007 if Congress controls spending.
The brief era of surpluses would end, however, if Congress adopts any of a range of big budget-busting plans pending which include a $600 billion prescription drug bill for seniors in the Senate and $500 billion more in tax cuts advocated by some Republicans the CBO estimated.
Even extending Mr. Bush's tax cuts beyond 2010, when most are scheduled to expire, would mostly eliminate the surplus, it said.
Mr. Nussle conceded that Republicans may have to set aside expansive new tax cuts such as eliminating the marriage penalty and estate taxes.
But he said there is still room in the House budget for a smaller tax cut of about $28 billion to aid seniors and investors hit hard by the market tumble this year.
Congress will have to find ways to offset additional spending this year such as on drought relief, a category of spending that during the surplus years was often exempted from spending limits, he said.
Democrats blamed Republicans for the role tax cuts played in extinguishing the huge surpluses projected by the CBO. But they acknowledged that escalating spending and the revenue toll from the stock collapse contributed to Congress' dilemma.
"CBO's not sure when revenues will recover, but they see a significant problem with revenues, which accounts for at least half of the deterioration in the budget since March," said Rep. John M. Spratt Jr., the budget committee's ranking Democrat.
"We're all betting assuming that you could continue to have the phenomenon of the 1990s, where tax revenues exceeded taxable income. It's not going to happen. It's not happening now," the South Carolina Democrat said.
One important side effect of replacing surpluses with deficits, he noted, is that the cost of servicing the government's massive debts rises, accounting for $456 billion out of $688 billion of increased outlays in the next decade.

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