Future Tax Fights Ahead

WASHINGTON – Besides this year's modest refund checks, American taxpayers are going to have to wait years to benefit from most of the tax cuts President Bush is ready to sign into law. Then, they disappear in December 2010 unless made permanent.

"Congresses change, and demands for revenue change," said former Rep. Bill Archer, a Texas Republican who was chairman of the tax-writing House Ways and Means Committee from 1994-2000. "It basically hangs in the balance of who controls the Congress and who controls the White House."

Congress sent the $1.35 trillion package of tax cuts to the White House on Monday, with Bush set to sign it into law Thursday. It was passed May 26 under congressional budget rules requiring the tax cuts to end, or "sunset," at the end of 10 years.

This bill's expiration day falls on New Year's Eve, 2010.

Some provisions are set to sunset even sooner: the college tuition deduction begins in 2002 and ends in 2005. Odder still is the estate tax, which is set for repeal at the beginning of 2010, only to be automatically reinstated at year's end.

"Some people are going to say this is a political gimmick, and they're not going to make that tax go away," said Steve Parrish, second vice president for individual markets at the Principal Financial Group in Des Moines, Iowa.

Aside from the broad sunset date, the bill is a collection of delayed starts and gradual phase-ins:

--The new 10 percent income tax rate is retroactive to Jan. 1, generating those soon-to-be mailed refund checks for millions of taxpayers. Cuts in other income tax rates start July 1 but are not fully in effect until 2006. The 15 percent tax rate stays in place.

--Relief from the marriage penalty paid by many two-income couples, in the form of a bigger standard deduction and enlarged 15 percent income tax bracket, doesn't begin until 2005.

--Increasing the tax-favored retirement contribution limits for traditional and Roth IRAs from $2,000 to $5,000 takes until 2008. Raising the limit for 401(k) plans from $10,500 to $15,000 phases in by 2006.

--Raising the $500 child tax credit to $1,000 takes until 2010.

--Little was done to stop the complex alternative minimum tax from affecting increasingly more people as their incomes rise. This relatively unknown tax, which struck only 1.4 million taxpayers this year, is projected to hit 35.5 million in 2010.

A future Congress and president will have to decide whether to extend the tax cuts, either temporarily or permanently, at a cost estimated by Democrats to reach $4 trillion over the second decade. The landscape could be dramatically changed if projected budget surpluses don't materialize or programs such as Medicare and Social Security become strained by retiring baby boomers.

"The bill creates the equivalent of a huge mortgage with a balloon payment in 2010 and later years," said Rep. Charles Rangel of New York, ranking Democrat on the Ways and Means Committee.

That could become a major issue in the 2008 presidential and congressional campaigns. Yet Bush, whose 2000 campaign for the presidency centered on cutting taxes, fully expects each of the tax cuts to become permanent, spokesman Ari Fleischer said.

"To do anything other than that is to raise taxes on the American people, and he does not support that," Fleischer said.

Republicans have relentlessly pushed tax cuts since winning control of Congress in 1994. Should Democrats control Congress and the White House in 2010, it isn't certain these tax cuts would continue beyond their expiration date.

"If the Democrats were swept into power in five or 10 years, they can do what they want," said Grover Norquist, president of Americans for Tax Reform. "But they'd have to change the whole debate."

Most members of Congress take a dim view of reversing tax cuts. But lawmakers will almost certainly continue to pass tax legislation year after year, providing ample opportunity to tinker with the current plan.

"The nature of the income tax creates an environment that pushes you toward wanting to make changes," Archer said. "Every time you make a change, you create an imbalance somewhere else. If you fix one problem, you end up creating other problems."