Congressional Deal Pushes Tax Hikes to Next President

Democrats controlling Congress are leaving difficult decisions on automatic tax increases to the next president and the newly elected Congress under a freshly negotiated House-Senate blueprint for the upcoming budget year.

The fiscal 2009 budget plan worked out in private talks between House Budget Committee Chairman John Spratt Jr., D-S.C., and his Senate counterpart, Kent Conrad, D-N.D., awards an approximately 4 percent increase on average to nondefense Cabinet budgets passed by Congress each year. But it makes no effort to rein in the rapidly rising cost of federal benefit programs such as Medicare.

Conrad told reporters Tuesday that he anticipates the nonbinding budget plan would pass both House and Senate by the end of next week. He declined to reveal key details.

On taxes, the measure would let many of President Bush's tax cuts expire as scheduled at the end of 2010, and would rely on the resulting influx of tax revenues to produce a small budget surplus in four years.

Conrad said the compromise budget retains a Senate plan to renew tax cuts aimed at the middle class, including the $1,000 per child credit, relief from the marriage penalty, estate tax cuts and the 10 percent tax rate on the first $7,825 of income for individuals.

But there's not enough money to extend cuts on income tax rates, capital gains and dividend income and still produce a surplus under the Democratic plan, which rejects Bush's proposed cuts to domestic programs.

Congress' annual budget debate involves a nonbinding resolution that sets the stage for later bills affecting taxes, benefit programs such as Medicare and the annual appropriations bills. Unless such follow-up legislation is passed, however, the budget debate has little real effect and is mostly about making statements about party priorities.

This is such a year. Congress rarely tackles difficult budget issues as elections loom, and a standoff with Bush means Democrats may even take a pass on advancing the 12 annual appropriations bills.

The next president, on the other hand, will have no choice but to confront an enormous fiscal dilemma, starting with a deficit likely to exceed $400 billion and scheduled automatic increases in taxes on income, investments, large inheritances, married couples and people with children.

Republicans are poised to assault the Democratic plan for permitting many of Bush's tax cuts to expire. Fully extending them would cost $161 billion in 2001, according to congressional estimates, and would quickly rise above $250 billion a year.

The first year of an administration is typically when heavy lifting on the budget is done, but all the candidates' campaign plans seem to promise more than they can deliver, especially considering the entrenched budget deficit and the huge cost to the Social Security and Medicare programs of the retirement of the Baby Boom generation.

"This country is in a deep fiscal hole," Conrad said.

Barack Obama's "Keeping America's Promise" manifesto, however, is full of costly prescriptions for the economy. Obama proposes tax cuts for senior citizens and college students, and $500 for every wage-earner, totaling $80 billion to $85 billion a year. He says he would pay for the tax cuts by closing loopholes and offshore tax havens, but those steps would fall far short of fully offsetting their costs.

John McCain wants not only to extend the Bush tax cuts, but also to eliminate the alternative minimum tax, or AMT, which would add more than $2 trillion in accumulated deficits to the federal ledger from 2010-2020. The AMT was enacted in 1969 to ensure the wealthy paid at least some tax, but it now also threatens about 20 million additional taxpayers with levies averaging $2,000 if annual fixes aren't renewed.

Democrats say their budget plans would put the budget back in balance while also making investments in infrastructure, education, community development, clean energy and other programs. They dropped $196 billion worth of Bush-proposed cuts to Medicare and the Medicaid health care program for the poor and disabled.

Critics say the surpluses are illusory since they do not account for any war costs for Iraq and Afghanistan beyond 2009 and assumes revenues exceeding $50 billion a year from the AMT.