Tuesday, February 07, 2006

Treasury says extending tax cuts would cost billions

Treasury says extending tax cuts would cost billions

By Mark Felsenthal

WASHINGTON (Reuters) - Key White House tax proposals would cost the U.S. government tens of billions of dollars in lost revenue, the Treasury Department said on Monday, although the administration says they will help boost revenues in the long run.

Making permanent expiring tax breaks for dividends and capital gains, which expire at the end of 2008, would cost the government $7.74 billion in 2008 and $37.02 billion in 2009, Treasury said in its "Blue Book" description of revenue proposals in President Bush's fiscal 2007 budget.

Making dividend and capital gains tax breaks permanent is a central Bush administration goal in 2006, but critics say the administration will be hard-pressed to both keep the tax breaks and achieve its other priority, cutting the federal budget deficit starting in fiscal 2007.

The White House projects the deficit will widen in the current fiscal year.

Extending lower marginal tax rates for individuals, which are set to expire at the end of 2010, would push foregone tax revenues to $119.39 billion in 2011, Treasury said.

Although Treasury shows the tax cut extensions as losing revenue, administration officials say increased investment from extending the breaks will lead to greater investment and economic growth, and in the end, more returns to government coffers.

Lower tax rates on profits from investment have "been integral to generating economic growth," Treasury spokesman Tony Fratto told reporters at a briefing.

Separate White House economic forecasts issued with the budget proposal project revenues climbing to $2.42 trillion in fiscal 2007 from $2.29 trillion in the current fiscal year that ends September 30. Revenues would continue to rise, to $2.6 trillion in fiscal 2008, and $2.71 trillion in fiscal 2009.

So even though spending is also projected to rise in the next budget year to $2.77 trillion from $2.71 trillion, the White House says the budget deficit would drop to $354 billion in fiscal 2007 from $423 billion in the current fiscal year because of higher revenues.

Similarly, the deficit is projected to fall to $223 billion in fiscal 2008 and $208 billion in fiscal 2009.

Another administration tax initiative is extending for a single year provisions shielding taxpayers from the Alternative Minimum Tax, a levy originally aimed at making sure high-income filers with many deductions pay some taxes, but that now applies to increasing numbers of middle-income taxpayers.

The AMT fix would forego $13.66 billion in revenues in the current fiscal year and $20.5 billion in income to the government in fiscal 2007, Treasury said.

The administration does not want the AMT protection to be any longer than a year, officials said, because changes to the program should ultimately be part of any broad tax overhaul.

That is because other changes to the tax code proposed last year by a presidential panel could actually raise taxes for some taxpayers, so providing relief from the AMT would be an essential balancing element.

The administration is not expected to announce its tax overhaul plan this year.

"We'll continue to work on that. We're not going to set a timetable," Fratto said.

The president's proposals to expand health savings accounts, which allow people set aside pretax earnings to pay for medical expenses, would total $5.48 billion in lost revenue in 2007 and $10.24 billion in lost revenue in 2008, Treasury said.