The Bush administration is understandably upset that its proposal for a $726 billion tax cut has effectively been watered down to $350 billion in the Senate and $550 billion in the House. However, this is less of a barrier to enactment of the administration's initiative than it may appear at first glance. The situation is very confusing, but bear with me.
First, it is important to understand that President Bush actually asked for a tax cut of $1.3 trillion in the first place, not $726 billion. The balance is mostly an extension of tax cuts enacted in 2001 that, because of a Senate rule, were required to expire in 2011. This rule mandates that tax cuts (or increases) may not be in effect for more than 10 years if
enacted under a procedure called "reconciliation."
Reconciliation is a provision of the Budget Act of 1974 originally designed to enact spending cuts or tax increases necessary to achieve budget targets. These targets are contained in a budget resolution that Congress is required to enact annually, which sets a limit on spending and a floor on revenues. The critical importance of reconciliation is that it imposes a limit of 20 hours on debate.
Although designed to cut spending or raise taxes, Republicans figured out that reconciliation could also be used to cut taxes. The benefit is that it prevents Democrats from filibustering such legislation in the Senate. It is important, therefore, to understand that all of the numbers we hear in the press -- whether $726 billion, $550 billion or $350 billion -- apply only to that portion of the tax cut that would be passed under reconciliation. Larger tax cuts could be passed under the budget resolution, but would be threatened by a Senate filibuster. It takes 60 votes in the Senate to break a filibuster, but Republicans only have 51 votes.
It is also important to understand that whatever number governs the tax cut is a net number -- that is, its impact on the deficit. Consequently, even if forced to work within a $350 billion tax number, Congress could enact a tax cut much larger so long as sufficient revenue raisers offset it. For example, Congress could enact a $1 trillion tax cut that includes $650 billion in tax increases, leaving the net increase in the deficit at the $350 billion allowed in the Senate.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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