Bush’s Weird Tax Cut

1.

The tax bill is the proudest achievement of George W. Bush’s first six months in office, and it could turn out to be the most important legislation of his entire presidential term—but in ways he didn’t intend. In several respects, the bill typified Bush’s approach to the presidency. The tax bill was based on conservative ideology: not only did it offer the largest rate breaks to the richest people, but it had the explicit purpose of reducing the activities of the federal government. Bush made much of this in the presidential campaign, saying that if the money wasn’t given back to the people, “the politicians in Washington will spend it.” But the harsh intentions behind his tax bill were blurred by his talk about “compassionate conservatism,” his appearances with black children, and the like. Few in Washington were prepared for the determination with which he pursued his tax bill once he took office. He kept adding to the justifications for it: as the economy worsened he said it would help the economy; later he said it would help people hit by rising energy costs.

Bush’s perseverance with the tax bill was typical of the administration’s bulldozing approach to government: pick a few goals and push them and keep pushing them—without showing much concern for how the policy actually turns out, or what its consequences may be. (A Republican senator well disposed toward Bush said to me this spring, “He wants his bills too badly.”) Further, for all his talk of bipartisanship, the administration rushed its $1.6 trillion tax cut (the actual cost was higher) through the House when it thought it had the votes—without regard even to conservative Democrats whose support it might need on other matters. This action, in early March, set off the very partisanship Bush had said he wanted to end.

Bush chose the constituency for his tax bill carefully. The Bush administration is thought, with good reason, to be particularly sympathetic to large corporations and Wall Street. Big business generally favored the Republican Party in 2000, giving it 59 percent of its contributions, or $496 million. The oil and gas industry gave Bush 78 percent of its donations, and the pharmaceutical industry 68 percent. But big business was not the beneficiary of the tax bill. In designing it, Bush and his advisers were appealing to two segments of the party whose backing he needed and craved, both to get elected and to govern. One, whose influence is widely underestimated, but which provides activists and votes, was small business; the other consisted of the leaders and organizations of the Republican right.

Lobbyists for large companies have complained, with reason, that their clients got precious little out of the Bush administration’s tax bill. This is not to say that corporate America has been hurt by the Bush administration. Some companies, such as the extractive industries, made out very well in the President’s proposed energy program. The steel industry got a quota on imports. Large companies that contributed to the campaign bought that most precious Washington commodity, “access” to the President and his top aides as well as to key Republican members of Congress. They will be listened to in matters concerning federal regulations, approval of sales to foreign governments, government contracts, labor disputes, legislation they seek or oppose—the many things that the federal government does that can affect a company’s bottom line.

“Small business” is an elastic term: it can include the corner grocery store or your dry cleaner or farmers or companies with up to five hundred employees. The main small business group behind the bill was the National Federation of Independent Business, one of the most powerful forces in the Republican Party. The NFIB, which claims 600,000 members—two thirds of them companies with ten employees or less—helped deliver the House of Representatives to the Republicans in 1994. (They had acquired new energy from their opposition to Hillary Clinton’s health plan.) Well organized from its Washington headquarters, it has between 1,200 and 1,500 members in each of the 435 congressional districts. According to Vin Weber, a former Republican member of Congress and now a successful Washington lobbyist, “The NFIB is a real constituency that delivers votes; big business doesn’t.” Grover Norquist, a prominent conservative activist, told me, “They wanted a tax bill with as broad support as possible. It’s completely true that the bill is more beneficial to small business than to big and Wall Street.”

The most important tax priority for the NFIB has been repeal of the estate tax—or what repeal advocates started calling the “death tax” a few years ago. Before the new tax law, estates above $650,000 were taxed at a progressive rate, up to 55 percent. (There were numerous ways to mitigate such taxes through estate planning and insurance, so that the average estate tax has in fact been less than 20 percent.) Opponents of the estate tax argue that it could force the liquidation of their businesses, but the estate tax doesn’t really apply to truly small businesses: a couple could leave a business worth over a million dollars without its being subject to the tax. (Despite the sob stories about “having to sell the family farm,” The New York Times reported in April that there was no evidence that a single farm had had to be sold because of the estate tax.)

But if the value of the business has appreciated significantly, eliminating the estate tax allows the heirs to avoid paying any taxes on capital gains when they sell assets. While many of those who head small businesses are well enough off to be in the top tax bracket, and many small businesses file individual returns and therefore would benefit from Bush’s proposals to cut tax rates, this was of far less urgency to the small business lobby than the estate tax. Dan Danner, senior vice-president of the NFIB in charge of its lobbying, says, “Individual rates are important, but in terms of our focus the death tax has been more our issue and more emotional for our members.”

While repeal of the estate tax would of course benefit other well-to-do people, such as top corporate executives, they did not organize a significant lobby in support of it. And if Bush expected an outpouring of popular support for his cuts in tax rates, it didn’t materialize. Congress passed a repeal of the estate tax in 2000, but Clinton vetoed the bill. NFIB officials worked successfully with Bush campaign officials to include repeal in Bush’s campaign and in the party platform.

What the NFIB can contribute is its ability to stir up a “grassroots” campaign in which its members, with encouragement from the Washington headquarters, write, call, and fax their congressmen and let their opinions be known. Danner says, “What’s important about that is it puts a real face on an issue. A lot of the members come here to testify and participate in events and say ‘This is my business and this is important to me.'”

Such “grassroots” campaigns have become a major industry in Washington. It’s considered important to convince the elected politicians that “real people”—people who vote—are behind whatever the lobbyist or interest group or corporation is pushing. Unlike the NFIB and similar membership organizations, most corporations don’t have natural “grassroots” supporters and entire businesses have been established in Washington whose specialty is creating them. The professional grassroots-growers, acting on the principle that the most important thing to a politician is to get reelected, draw on people from the town or region where a corporation is located, trying to persuade politicians that there is support “back home” for a client’s request. David Rehr, the president of the National Beer Wholesalers Association, says, “Not many grassroots movements begin outside of Washington, D.C.”

To pursue its goal this year, the NFIB formed the Tax Relief Coalition with other groups of small—or somewhat larger—businesses. They included the National Association of Manufacturers, which represents both large and small manufacturers; the US Chamber of Commerce; and the National Association of Wholesaler-Distributors, who are essentially middlemen. Others, such as the Beer Wholesalers—who are powerful because they have beer distributors in virtually every congressional district—and the National Association of Realtors, also joined the coalition of 1,001 companies and trade associations. The officials of the major organizations know each other well and have been comrades-in-arms during numerous congressional fights, so coalescing in support of the Bush tax bill was natural. Though large corporations heavily finance the NAM and the Chamber of Commerce, Danner says, “This was clearly not a large corporate tax bill—not as proposed by the President or as the process went along.”

One can glimpse lessons from his father’s presidency in much of what George W. Bush has done—especially on the tax bill. One lesson was not to go back on a tax pledge, as the elder Bush did so disastrously. Another was to embrace the party’s right and hold it close. The right essentially abandoned the elder Bush and threw Bob Dole overboard in 1996 as insufficiently ideological. George W. Bush seems in fact more conservative than his father; but people who know him believe that his father’s failure to be reelected remains much on his mind.

The Republican Party’s right consists of several overlapping groups including social conservatives (anti-abortion activists, politically active religious conservatives, home schoolers); anti-tax groups; landowners who want no federal encroachments (the basis for James Watt’s “Sagebrush Rebellion,” of which the current interior secretary, Gale Norton, is a disciple); and intellectuals in such think tanks as the Cato Institute and the Heritage Foundation. Grover Norquist, who heads something called Americans for Tax Reform (meaning the lowest taxes and least government possible), has managed to put all these elements together into a coalition of about ninety groups which meets each Wednesday in his L Street office. He enthusiastically organized them to support Bush’s tax bill.

Norquist first met with Bush ten days after Bush was reelected governor of Texas in 1998, and was won over by Bush’s assurances that he would run for president as a tax-cutting candidate. Norquist says, “Bush viscerally understands we should cut the size of government.” For Bush, Norquist was an important intermediary with the Republican right. Karl Rove, Bush’s chief political strategist, worked closely with Norquist during the campaign and has cultivated him since the election. Norquist strongly favored both the rate cuts and the repeal of the estate tax. Along with some of the groups he has mobilized, he likes anything that deprives the federal government of money. As opposed to the “supply-side” theory of the Reagan tax cut, whose proclaimed goal was to promote growth, the purpose of the Bush tax cut was simply to reduce the size of government. Norquist, a cheerful, bearded fanatic, has a Manichaean view of the world: his goal is to destroy “the left” by “defunding” it.

On March 1, Norquist organized a press conference at which about eighteen groups on the right endorsed Bush’s tax plan. “The most important thing about that press conference,” Norquist told me, “is that it showed that the social conservatives—the pro-family and traditional values conservatives—were behind the bill.” At that point, he says, there were two fears. The first was that the business lobbies would not only not actively support Bush’s bill but would try to rip it apart to make room for their own specific tax breaks. The second fear, he says, was that the “traditional values conservatives would look at it and say, as they started to, ‘This doesn’t do enough about the marriage penalty, so we won’t back it.'” (The bill reduces the marriage penalty that now affects many wage-earning couples, but it doesn’t extend the deduction to stay-at-home mothers, a longtime goal of “family values” groups.) But the social conservatives decided to back the Bush bill as written because, Norquist says, “they recognized that the best way to get more was to start with this.”

Norquist’s new strategy for the tax bill was to organize state legislators, particularly in Republican states that had elected Democrats to the Senate, to pass resolutions endorsing the tax bill. Of the ninety-nine legislative bodies, twenty-seven did so, and the resolutions were presented to the senators by a delegation from their state. According to Norquist, “It had never been done before. It conveyed broad-based support for the bill in their state: state legislators talk to people all day. It sent a powerful message to senators. Politicians are selfish people and they don’t line up with other people’s initiatives if it doesn’t help them. The state legislators were saying this is a Bush initiative I want to associate my career with. I could not have gotten state legislators to sign on to loosening the restrictions on arsenic.”

The White House was so appreciative of Norquist’s work that when he brought a group of state legislators to Washington in May, Bush met with them for nearly an hour.

Not just corporate interests but some of the strong backers of the bill didn’t get what they wanted. (The Beer Wholesalers, for example, also want reduction of the excise tax on beer.) But these groups, as well as large corporations for which the tax bill offered little, were held in line by a relentless effort on the part of the administration. The idea was planted firmly with the trade associations and the big corporations that if they didn’t support the administration on this tax bill, they shouldn’t expect administration support on the next tax bill. That there would be a next one, or several future ones, was implicit—and sometimes explicit.

Charls Walker, a longtime lobbyist for corporate tax cuts, now semiretired at seventy-seven but still influential, saw the arrival of a president committed to tax-cutting as a fresh opportunity for his long crusade. Walker knew both George W. and his father and had become friendly with Karl Rove. After organizing the American Council for Capital Formation in the 1970s, he broke with Reagan when his tax cuts didn’t include sufficient breaks for businesses, and he joined with others in getting Congress to add more of them to Reagan’s bill. On February 7 of this year, Walker was invited to the White House for a meeting with the President. He told me, “I thought it would be a rah-rah for the tax bill, and I had some problems with that because there was nothing in it for corporate capital formation.” But Walker reluctantly decided that he should go. He found himself among a group of about thirty such business luminaries as Jack Welch, the head of GE, Kenneth Lay, the head of Enron, and others who had been strong supporters of Bush’s campaign.

At the meeting, Bush talked about his various goals—education, missile defense, privatizing Social Security—and stressed the importance of his building “political capital” at the outset of his presidency. He said that getting the tax bill through that he had promised in the campaign would be an important step toward building political capital so that he could get other things done as well. Walker recalls, “It was Saul on the Road to Damascus. It was an epiphany. After that, I told my coalition that we would hold back.” But what made other corporate lobbyists willing to hold back any criticism of Bush’s bill? According to Walker, “They concluded, like I did, that having this man, who was tremendously, tremendously underestimated in the campaign, get to the White House, there were things other than taxes that were important. They saw so many goals they agreed with that the previous administration hadn’t done anything about. And therefore as I called around town we said though we’re not completely happy with this guy let’s help him get this bill—cutting marginal rates was overdue—and help him build political capital by passing his campaign proposal and then see if we can move more constructively in later years.” Perhaps not coincidentally, Treasury Secretary Paul O’Neill, a longtime ally of Walker’s, has called for the elimination of corporate income taxes in the future.

Some of the meetings with White House officials were more explicit. An officer of a trade association backing the bill recalls a meeting on February 22, at the US Chamber of Commerce, between an official of the White House Public Liaison Office and representatives of about seventy business groups, some of them members of the Tax Relief Coalition. The White House official said, “We want to know what you’re doing to support us on the tax bill. This is not the vehicle for special breaks. It’s important for us to know what you’re doing, for future consideration.” The trade association officer told me, “It was made very clear that you had to support Bush on this first effort to be considered in the next effort to reduce taxes.”

The following day, the leaders of the Tax Reform Coalition met with the President, Paul O’Neill, and Bush’s chief economic adviser, Lawrence Lindsey, who had drafted the tax bill. Bush told the group that he had decided on his tax bill some time ago, that it was best for the country, and that he was sticking to it. He also told the corporate representatives that he believed that there would be other opportunities to cut corporate taxes in the future. That those who weren’t satisfied with Bush’s bill would get tax help in the future wasn’t left in doubt. “In a hundred private conversations,” Grover Norquist says, “the Bush White House and Republicans in the House and Senate made it clear that there would be a tax cut every year.” The idea, Norquist says, was, “If you help us pass this one you will be first in line for next year’s tax cut. Corollary: try to be selfish and push your own tax cut at the expense of the overall Bush package and your concerns will not see the light of day next year.” Norquist says, “Everybody was on board.”

Of course, in view of the size of Bush’s tax cut, not many think it likely that there will be another major tax-cut bill anytime soon, and that the idea of one every year is a delusion. But lobbyists for the left-out corporations, dubious though some were that there would be another significant tax bill, believed that to push their own cuts would put them on the wrong side of the administration.

2.

The tax bill that emerged from Congress is, according to several tax experts, the most peculiar, misshapen, and irrational one in memory. To comprehend the full fiscal folly of the tax bill, it has to be understood that Congress’s work on it was almost totally disconnected from a real federal budget, into which it was supposed to fit. This was a deliberate strategy on the part of the administration. The House passed the President’s $1.6 trillion tax cut (more when interest on the debt is counted) pretty much intact on March 8, long before there was even a budget resolution on which it was supposed to be based. The budget resolution sets forth the overall amounts for spending on various government activities and for revenues to be collected in the next fiscal year; it also projects spending and revenues over ten years. But the budget resolution adopted by Congress in mid-May wasn’t based on reality. The administration didn’t even submit a real budget before the House or the Senate had to consider a budget resolution, because it didn’t want to disclose the implications of the tax cut for other programs, including some popular ones that would have to be cut.

Instead, the administration sent to Congress a few vague details. The figure for defense, for example, didn’t include the increase that would be needed as a result of Defense Secretary Donald Rumsfeld’s ongoing review of ways to restructure the military. The ten-year budget resolution adopted by Congress in mid-May went along with this rather large omission and also didn’t take into account money that would be needed for natural disasters (which require additional funds every year), or the new money that would be required for the education bill, or funds for popular tax credits that are routinely extended, or for other things in the President’s agenda. As part of the budget resolution, Congress provided for a tax cut of $1.35 trillion.

James Jeffords was one of three Senate Republicans who voted to reduce the tax cut in the budget resolution below the President’s $1.6 trillion. This angered his more intemperate Republican colleagues and was one of the episodes that led to his resignation from the Republican Party. Kent Conrad, Democrat from North Dakota and now, as a consequence of Jeffords’s decision, chairman of the budget committee, says of the budget resolution, “It was a tax cut masquerading as a budget.” After the Senate, shortly before Memorial Day, voted on the tax bill itself, reducing the tax cut to $1.2 trillion, a Senate and House conference agreed on the $1.35 trillion tax cut. (The top rate was cut to 36 percent, rather than the 33 percent the President sought.)

Many of the peculiarities of the tax bill arose from a Senate rule that forbids commitments on budgets beyond ten years, unless there are sixty votes for such commitments (which no one then believed could be mustered for this tax bill). The House–Senate conferees, realizing that there were not enough projected revenues to keep the tax bill going for ten years, decided to terminate (“sunset”) it after nine years. Further, the cuts in tax rates will be phased in slowly, so that the full reductions don’t take effect until 2006, a few years before the bill comes to an end. And one of the most peculiar provisions of the final bill is the one governing the estate tax. Because of its cost ($138 billion over ten years), the repeal is phased in gradually and will take full effect only for one year. Then, since the tax bill will be terminated, the estate tax will return, and all the other tax breaks, including the income-tax rate cuts, will revert to what they were before the bill became law. Moreover, the bill leaves millions of taxpayers newly subject to the alternative minimum tax (AMT), which disallows large deductions; and, for many of those taxpayers, the AMT will cancel out the rate cuts. To remedy this problem was considered to be too expensive. But it’s widely agreed that it will have to be fixed somehow.

The House approved the final tax bill by a strong vote (including twenty-eight Democrats) and the Senate approved it on the Saturday before the Memorial Day recess by a vote of 58 to 33. (Some senators had already left.) Twelve Democrats supported it: some were self-styled centrists who had supported it all along; some gave in to the pressures behind the bill from the White House and the anti-tax lobbies; some voted for it out of fear of seeming to be against a tax cut. Sometimes, when a bill has won a majority of the votes, others go along because they figure they might as well (and their leaders don’t try to stop them), even if, as in this case, they know there’s trouble ahead. Only two Republicans, John McCain of Arizona and Lincoln Chafee of Rhode Island, voted against the bill on the grounds that it was unfair.

In any event, the $1.35 trillion tax reduction is bound to cause ferocious pressures on government spending. It uses almost all of the non-Medicare and non–Social Security surplus (a surplus that itself was a bit of a chimera). It puts very tight limits on defense spending—about which Rumsfeld and the defense contractors are predictably unhappy. At the end of June, Lawrence Lindsey said that the slowed economy could reduce government revenues this year by about $56 billion but that the tax bill (which lowers the revenue further) would help stop the economic downturn by putting more money in people’s pockets. This is widely believed to be a Panglossian view.

On the eve of the Fourth of July, Senator Conrad released figures indicating that if the expenditures called for by the even incomplete budget were made, the administration would this year have to dip into the money that is supposed to be saved for Medicare, and next year into funds to be saved for Social Security. According to Conrad, “This is the worst fiscal mismanagement since the l980s.” Tom Daschle says that the tax bill is going to have to be “revisited.” There is talk in Washington that the country may have to return to deficit spending—a prospect that some of the Republicans who used to denounce it now seem quite willing to accept.

Meanwhile, there are all those interest groups that held their fire this year so that the President could get his own tax bill. The small business lobby is less than satisfied with the outcome on the estate tax and remains determined to pursue its goal. Grover Norquist is calling for deeper cuts. Some Republicans are talking about cutting the capital gains tax, and even making the new tax bill permanent, which would cost $4.1 trillion for the second ten years, according to the respected Center on Budget and Policy Priorities. A prominent lobbyist told me that he and his colleagues aren’t going to be so patient the next time the administration asks them for restraint on tax legislation. The President, he says, will no longer be able to argue, “this is what I campaigned on, help me build political capital”: “People will say we’ve heard that before. We heard how we had to help you, how there would be a second train that we could be on. The White House is going to have to take these people into account.” Bush, for his part, can now claim to have cut taxes. But his bill will leave the government short of revenues sufficient to fill basic needs, while his administration is left with promises, actual or implied, of future cuts that will be impossible, or dangerous, to keep.

—July 10, 2001