GOP tax wobble?

The Wall Street Journal

Somebody needs to tell congressional Republicans that eight months before an election is no time to go wobbly on tax cuts. Democrats who once predicted tax cuts would doom any economic recovery are now using the size of the federal budget deficit to justify repealing them. This won't work with voters, unless enough Republicans get nervous and start retreating on their own.

Notwithstanding Friday's weak February jobs report, the economy is in high gear. Household net worth (the value of homes and financial assets) is back above its 2000 peak. Productivity and business spending are brisk. The big economic story of the Bush Presidency is how much worse the downturn could have been without the tax cuts. Their increased incentives to work and invest helped offset the depressing effects of the bursting stock-market bubble, 9-11, two wars and the corporate scandals.

Businesses remain wary of hiring new workers, much as they were in the early days of the 1990s' expansion. But talk of repealing the tax cuts won't make them any more eager to hire. What investors and businesses want is some assurance that the policies that have fueled this expansion will continue. That means making President Bush's tax cuts permanent.

The opposition cry is that Mr. Bush came into office with budget surpluses, and somehow it was his recklessness that led to the current deficits. But according to a Senate Budget Committee report, the tanking economy he inherited was responsible for 49 percent of the deficit, while the costs of war and homeland security added another 13 percent.

This year's estimated budget shortfall, at $521 billion or 4.5 percent of GDP, will be as high as we'll see as long as growth continues and Congress shows some domestic spending restraint. The President's budget proposal has the deficit falling by more than half over the next five years. That's because revenues are forecast to grow by 13.2 percent in 2005, as the expansion continues and deepens.

However, some Republicans seem to be losing their nerve just as the tide is turning in their favor. Spooked by the charge of deficit spending, they are balking at making the Bush tax cuts permanent or murmuring about raising taxes on the rich. It's critical that they don't go further and, in the name of phony fiscal rectitude, concede the Democrats' point that tax cuts are a drag on the budget, rather than an investment in the future that will bring in revenues.

At immediate issue is a form of budget legerdemain known as "paygo," which requires that during the budget process any spending increase or tax cut be offset by corresponding revenue from cutting programs or new taxes. This rule expired in 2002, but some would like to revive it.

If applied only to spending, this makes sense and Mr. Bush has already proposed doing so. But some Senate Democrats also want paygo applied in a way that would make future tax cutting that much more difficult. Paygo was one of the main reasons there was no major tax cut between the Reagan years and 2001, despite booming federal revenues.

Sen. Pete Domenici of New Mexico was reported to be pushing a bad paygo amendment, something his staff now says he is not pursuing. But we hear the ghost of paygo may come back after the Senate Budget Committee's current mark-up period is over, with Chairman Don Nickles promising to hold hearings on the idea.

It's bad enough that, because of Senate rules, the 2001 and 2003 tax cuts had to be written so that they disappear after 10 years. Passing permanent cuts requires a supermajority of 60 votes, which the Republicans could not muster at the time. The hope was that a future Congress would be able to extend the cuts.

That is admittedly unlikely this election year, as Democrats line up behind John Kerry's tax increase agenda. But that's all the more reason for Republicans to make permanent tax cuts a central campaign issue. The White House is all for it, and the last thing Mr. Bush needs is sniping from backbenchers trying to pose as fiscal "hawks."

It's certainly true that the deficit shouldn't be allowed to run out of control. But if these Members really want to rein in the deficit they can always lead the fight to reduce the growth of federal spending. Instead, what we mainly hear from Capitol Hill is whining that Mr. Bush may have the nerve to veto their pork-laden new highway bill. Republicans need to take control of the deficit debate by shifting the focus back onto spending, where it belongs, and pointing to the rebounding economy despite large external shocks as the true legacy of the Bush tax cuts.