Congress Passes Budget; Hurdle Remains

Democrat-backed budget plans have cleared the House and Senate, but tough spending fights lie ahead with President Bush, and Republicans hope to have gained some ammunition for the fall campaign on the issue of tax cuts.

The House acted first late Thursday on a 212-207 vote, but the final Senate roll call, 51-44, didn’t come until early Friday morning.

House and Senate Budget committees must now reconcile their differences, and the politics could get harder as Democrats come to grips with many of the same tax issues raised by Republicans. Over the horizon, Bush has little say in the nonbinding budget deliberations, but the White House has warned it will veto appropriations bills if Congress adheres to the House-Senate domestic spending levels, about $18 billion to $22 billion above the president’s request for the new fiscal year that begins Oct. 1.

On taxes, the biggest House-Senate difference lies in the question of how faithful Democrats will be to anti-deficit “pay-go” rules that require new revenues or savings to pay for tax cuts.

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These budget rules have become a battle cry for fiscal moderates in the House — a key part of Speaker Nancy Pelosi’s coalition. And the House-passed budget seeks to put in place a set of “reconciliation” procedures intended to enforce this view and get around Republican filibusters in the Senate.

But given the tone of Thursday’s debate in the Senate, it will be hard to carry out this mandate this election year, especially as middle-class families again face the threat of the alternative minimum tax. By the time the Senate plan cleared the floor, Democrats had already committed to spend most of the projected surpluses on tax cuts, and the tax debate was punctuated by the return of all three presidential hopefuls: Sens. John McCain, Barack Obama and Hillary Rodham Clinton.

The often sleepy Senate seemed ground zero in American politics as the candidates mingled on the chamber’s floor, and even Vice President Cheney weighed in as needed by Republicans. In one colorful exchange, Obama called out Sen. Wayne Allard after the Colorado Republican sought to embarrass him with an estimated $1.4 trillion tax amendment said to pay for all of the Democrat’s campaign promises.

Like the budget itself, the tax cut amendments were more symbolic than law. But the political stakes were real as Republican McCain sought to shore up conservative support and draw a sharper line between himself and the two Democrats, Obama and Clinton.

At the same time, the Arizona Republican’s wholesale embrace of tax cuts — which he once thought were fiscally imprudent — could hurt him with independent voters.

“These are all steps that John McCain rightly said were irresponsible when they first came up,” Obama told reporters traveling with his campaign. “He made a decision to reverse himself …That was how I guess you got your ticket punched to be the Republican nominee.”

Among the Republican rank and file, Thursday’s House debate also left questions as to how much appetite there is for the spending cuts needed to make room for the rate reductions and still get to balance. An austere Republican alternative lost badly, 263-157, with more than three dozen Republicans shying away from the required spending cuts or savings to finance tax cuts.

In the Senate, the biggest single tax question was the fate of President Bush’s signature marginal rate reductions for the income tax due to expire after 2010. Thursday’s amendments also touched on estate tax relief, the alternative minimum tax and a new option floated by Democrats: a $1,000-per-couple standard deduction for property taxes which would appeal to suburban and rural swing voters.
One of the most tightly fought battles was over a Republican amendment to roll back a 1993 tax increase — enacted under former President Bill Clinton — which raised the rate charged taxpayers under the alternative minimum tax, or AMT.

The proposal, which would have cost about $185.3 billion over five years, was billed as a more modest alternative to outright repeal of the AMT — something favored by McCain. The result was a see-saw series of votes in which it first failed, then won a vote for reconsideration with Cheney’s help, and then failed again, 51-49.

A later Republican amendment on estate tax relief failed 50-50 after a last-minute scramble by Democrats. This time, the vice president was not called in, and Senate Finance Committee Chairman Max Baucus (D-Mont.) predicted that the debate showed the rising political importance of AMT as an issue.

As reported by the House and Senate Budget committees, the Democratic budgets offer no long-term relief for the AMT and are largely silent on the president’s tax cuts, allowing the panels to show surpluses of about $175 billion to $160 billion in 2012 and 2013.

Faced with dozens of Republican challenges in the Senate, Baucus moved early to try to inoculate his party against the charge of raising taxes. His own $340 billion package was tailored to preserve some surplus in 2012 and 2013, but this required him to pick and choose among the provisions due to expire.

For example, the Baucus amendment would do nothing to stop rates from rising for investment income from capital gains and only ensures enough money to keep the current 10 percent and 15 percent brackets intact for personal income taxes.

Marriage penalty relief and child tax credits, both important to middle-income families, are also preserved, but as a practical matter, couples in the 25 percent bracket or higher could begin to face higher rates on that portion of their taxable income which exceeds roughly $64,000.

This created an opening for McCain. His longtime ally Sen. Lindsey Graham (R-S.C.) was tapped to offer a Republican package preserving all of the lower marginal rates in the president’s plan as well as capital gains and dividend breaks.

The precise cost of the Graham amendment was not clear, but the administration’s own budget has estimated that preserving all the president’s tax cuts would cost about $$635 billion over the same five years.

With Democrats united alongside Obama and Clinton, the measure failed 52-47, as two Republicans and sometime McCain allies, Sens. Olympia Snowe of Maine and George Voinovich of Ohio, broke with their party on the tax issue.

But Graham zeroed in on the voters in the 25 percent bracket and higher — an important constituency in November.

“The current law is 25 percent, and if we don’t pass my amendment, the tax will go up to 28 percent in 2011, a 10 percent increase,” he said. “Thirty five percent becomes 39.6 percent. That’s 23 million Americans [who] are going to pay higher taxes.”

Responding for Democrats, Senate Budget Committee Chairman Kent Conrad (D-N.D.) said the Baucus amendment was a prudent first step but that Graham’s proposal, which included no spending reductions or other sources of revenue, would “blow a hole” in any hope of balancing the budget.

“It’s just put on the debt,” Conrad said. “If you want to borrow more from China, if you want to borrow more from Japan, vote for the Graham amendment. If you want to balance the budget and get this country back on the road to fiscal responsibility, vote no.”