Economics, Not Politics,
To Challenge Bush Agenda

Expect to see details of President Bush's plans to make his earlier tax changes permanent and to privatize Social Security for younger workers as soon as late January, veteran tax lobbyists say. While the president won't face the political constraints caused by a deadlocked Senate that he did in his first term, he will face economic constraints as a result of the cost of financing the war on terror, ballooning budget deficits and a weak U.S. dollar.

"I'd expect to see a proposal to make the tax cuts from 2001 and 2003 permanent in the President's budget," says Bill DeReuter, the Financial Planning Association's assistant director of government relations and a former tax lobbyist for Merrill Lynch for 15 years. "I think he'll attempt to make permanent the 15% capital gains and dividend rates (scheduled to disappear in 2009), and make the repeal of the federal estate tax and generation-skipping taxes (scheduled to expire in 2011) permanent right out of the box."

The FPA lobbyist also thinks President Bush will use his budget to formally release his plan for creating private Social Security investment accounts for younger employees. "I fully expect that we'll see the particulars for giving younger workers an option to divert a portion of their FICA taxes to a personal investment account," DeReuter says. "They've been talking about it for four years, so I'd expect to see some details soon."

While it's likely that the 30-seat majority that Republicans hold in the House means a Bush budget can pass fairly easily, in the Senate, despite the party's ten-seat advantage, it is a different story. A group of moderate Republi-cans, including Sen. Olympia J. Snow of Maine, want to see "pay-as-you-go" restraints, so recruiting Democrats and others from across the aisle could become critical to passing legislation with hefty price tags.

Making President Bush's 2001 and 2003 tax changes permanent should cost about $1.3 trillion over the next ten years, according to the Office of Management and Budget. This is not an easy feat, in the face of the president's promise to reduce the deficit by half over the next five years and at a time when many are worried about the weakness of the dollar. Creating private Social Security accounts could cost another $2 trillion. Of course, the cost of these changes pales in comparison to the estimates for unfunded ten-year Social Security liabilities ($11 trillion to $14 trillion) and Medicare liabilities (estimated to be $67 trillion).

Though some experts consider complete repeal of the estate tax a done deal, others don't. "Trying to predict what Congress is going to do is like trying to predict where interest rates or the Dow will be in a year," says Kevin Meuse, a partner at Kirkpatrick & Lockwood in Boston. "My gut tells me there will be some reduction in the estate tax burden."

If complete repeal isn't feasible, Meuse suggests two alternatives. One would be limited repeal, accelerating the year of elimination from 2010 to 2007 while extending the sunset provision when estate tax rates return to pre-2001 levels five years, to 2015. Another would be raising the exemption to somewhere between $3 million to $5 million, while lowering the top rate for estates larger than the exemption rate.

Competing for attention with the estate tax is the alternative minimum tax, which Meuse says is likely "to suck more and more people under its umbrella, and Congress will hear about that." Unlike the AMT, the group targeted by the estate tax is already more capable of avoiding it.

Others are even more skeptical about the feasibility of more tax cuts. Speaking at Schwab Institutional's annual conference in Philadelphia in early November. Greg Vallierre, chief political strategist of Washington Research group, told attendees that President Bush would be "pressed to show spending restraint" and he needs to make "it clear he could veto something."