CongressNow: Hill Democrats See Target in McCain Tax Plan

Extension of Bush’s Tax Cuts at Issue

Posted September 2, 2008 at 2:55pm

If Sen. John McCain (R-Ariz.) wins the White House this fall, one of his biggest challenges when facing a Democratic Congress will be advancing his multitrillion dollar tax plan. Democrats label McCain’s tax proposals as an extension of the Bush administration’s policies — something that the likely enlarged Democratic majority is expected to fight aggressively.

The Arizona Senator’s plan centers on extending temporary tax cuts that were enacted during President Bush’s first term. These include the creation of a 10 percent tax bracket, “marriage penalty” relief, an increase in the child tax credit, as well as lower taxes on capital gains and dividend income. McCain also seeks to permanently repeal the alternative minimum tax, a move his predecessor did not attempt.

When combined, this portion of his proposal would cost $3.7 trillion over the next 10 years — fiscal 2009 through fiscal 2018 — according to the Joint Taxation Committee and the nonpartisan Congressional Budget Office.

Add in McCain’s desire to cut the corporate tax rate to 25 percent from 35 percent and to allow businesses to write off machinery and equipment purchases, and the cost of his plan skyrockets to more than $5 trillion by 2018, according to the Urban Institute-Brookings Institution Tax Policy Center that based calculations on figures from the JCT and the CBO.

“By 2018, tax revenues would be 16.3 percent of GDP, a level not seen since the early 1950s, before enactment of Medicaid, Medicare, or the national highway system,” said Len Burman and Greg Leiserson from the Urban-Brookings Tax Policy Center in a paper on McCain’s tax plan. “It seems clear that the promises Sen. McCain makes, or implies, in his speeches could not be sustained without a radical and unprecedented downsizing of government.”

Cuts of this magnitude go against the Democratic grain since they leave little to nothing for nondefense discretionary spending and could hamper the government’s ability to respond to economic emergencies or catastrophic disasters. Democrats with an eye on shoring up entitlements like Medicare and Social Security are also unlikely to embrace McCain’s plan.

Lawmakers have tapped into these surplus accounts to make up for revenue shortfalls elsewhere. But under McCain’s plan, tax inflows would be significantly curtailed, thus making it harder to cover what is owed. This dilemma would hit just as the surplus from those accounts is needed: Starting in 2010, 70 million baby boomers begin to retire, and many of them will depend on government checks to help cover medical costs and living expenses.

Still, McCain might be able to improve his hand with at least some Democrats by picking a Treasury secretary whom Democrats respect and who can enthusiastically make the case for extending the Bush tax cuts. Initially, former Sen. Phil Gramm (R-Texas) and former Hewlett-Packard CEO Carly Fiorina were frontrunners for the post, but both have created public relations problems for the campaign, Gramm by seemingly dismissing the pain from the current economic slowdown and Fiorina by sometimes taking the campaign off-message.

One option would be to keep Treasury Secretary Henry Paulson on board. Paulson joined the Bush administration just over two years ago and unlike his predecessor, John Snow, is respected by many Democrats. He’s also had a high-profile role in handling the current housing crisis and the economic downturn, and in that capacity he has worked constructively with Congressional Democrats on a number of occasions.

When Paulson initially took the position, one of his overriding goals was retooling the tax code. Last year, he hosted a reform conference advocating the need to lower the corporate tax rate, a goal McCain has as well. Many thought the meeting laid the groundwork for reform talks in Congress, but few thought there was enough time in the current administration to achieve the objective. Re-enlisting at Treasury under McCain would afford Paulson at least four more years to see his plan to fruition.

But McCain would also have to finesse the issue of offsets if he wants Congressional leaders to seriously consider his proposal. Upon assuming the majority in 2007, Democratic House and Senate leaders vowed to uphold the revenue-neutral pay-as-you-go rule requiring tax breaks be offset either by tax increases or spending cuts. The Senator’s proposal closes about $30 billion in corporate tax loopholes a year. Locating additional loopholes and closing them to offset the rest of the $5 trillion-plus package will be arduous, if not impossible.