Sunday, May 21, 2006

Stop the Clock. Keep the Problem.

The New York Times
Stop the Clock. Keep the Problem.


IT was only natural for President Bush to boast a bit last week as he signed a bill that locked in one of his biggest tax cuts through the end of 2010.

"We reduced taxes for every American who pays income taxes," Mr. Bush said in a Rose Garden signing ceremony. "We doubled the child tax credit, reduced the marriage penalty, created new incentives for small businesses to invest. We put the death tax on the road to extinction."

But before anybody sighs with relief that their tax cuts are not about to vanish, they may want to look more carefully at what Mr. Bush and the Congress did not do.

Lawmakers did not permanently extend any of Mr. Bush's tax cuts from 2001 and 2003 — not the lower tax rates for individuals, the bigger tax breaks for families with children, a suspension of the estate tax on inherited wealth (the "death tax," as Republicans say) or the tax cuts on stock dividends and capital gains.

Instead, and only after months of intraparty indecision, Republican leaders extended Mr. Bush's signature tax cuts on stock dividends and capital gains for two more years. By accident or by design, the tax cuts for stock investors are now set to vanish on the same day as most of Mr. Bush's other major tax cuts, on Dec. 31, 2010.

Congress has long employed "sunset" dates for tax cuts, routinely renewing provisions year after year. But "temporary" tax cuts now occupy a larger share of the total federal budget than ever before. To the extent that the tax cuts are never supposed to expire, which is the way Mr. Bush views them, the sunset dates mask big budget gaps that lie just ahead.

The problems come in both the short- and long-term varieties. The main short-term problem is the alternative minimum tax, a parallel income tax that is set to engulf tens of millions of middle-class and upper-middle class taxpayers over the next several years.

The A.M.T. prevents families above a certain income level from using standard tax breaks — exemptions for children, deductions for state and local tax payments. Because it is not adjusted for inflation and because of the way it interacts with Mr. Bush's own tax cuts, the alternative tax is now expanding at a furious pace.

But the costs of preventing an expansion are huge, and rising every year. So instead of coming up with a permanent solution to the alternative minimum tax, a goal that Democrats and Republicans all support, Congress merely froze the tax for 2006 at a cost of $34 billion.

Holding the alternative tax in place for 2007 would cost more than $50 billion, according to estimates by the Tax Policy Center and Congressional analysts, and the costs snowball after that.

President Bush promised more than a year ago to come up with a comprehensive proposal to deal with the A.M.T. as part of an overhaul of the entire tax code. But even though a presidential advisory group came up with recommendations last fall, Mr. Bush has been so buried in other problems that he has put off any proposals of his own.

"We are not on any artificial timetable," said Treasury Secretary John W. Snow, when asked about the issue in a meeting with reporters last week. "You only get a chance to do this every couple of decades, so you want to make sure that you are doing it right."

But the mounting costs of temporary patches are coinciding with intense political pressure on Republicans to reduce the budget deficit. Despite surprisingly big jumps in tax revenue this year and last, the annual deficit is running at nearly $350 billion because of spending on the war in Iraq, on hurricane relief and on new entitlements like the prescription drug program.

In a sign of the fiscal pickle that Congress is in, House and Senate Republicans are still haggling about how to extend a dozen crowd-pleasing tax breaks that expired at the end of last year.

The list of unfinished business has been pushed into a still-secret "trailer" bill that House and Senate Republicans have been negotiating for more than a month. It includes a renewal of tax credits for research and development (at a one-year cost of $10 billion); tax deductions for college tuition ($1.7 billion for one year); a "saver's credit" for low-income families ($2.9 billion for three years); and the "Work Opportunity Tax Credit" for companies that hire former welfare recipients ($1.3 billion for two years).

The House and Senate have voted to extend all of those tax breaks. But Senate leaders could not fit them into their main tax bill, which was protected from filibusters under a special budget rule, if they were also to extend the tax cuts for stock investors and freeze the A.M.T. for one more year.

REPUBLICANS are betting that Democrats will not dare to filibuster against a bill that extends the tuition tax break. But the Senate's wish list of tax-extenders would cost $42 billion over five years, and that is without so much as one extra year of protection from the alternative minimum tax.

The choices become harder with each year of procrastination. By 2010, according to calculations by the Tax Policy Center, it will cost more to repeal the A.M.T. than it would to repeal the regular income tax.

By then, the nation's oldest baby boomers can start receiving Social Security retirement benefits — the start of a surge in federal old-age entitlement costs that frightens budget experts across the political spectrum.