Congress and Tax Policy

"In every war in our history, Congress has raised taxes to help fund the costs of war—-at least until now," observed Julian Zelizer, associate professor of public policy at the State University of New York, Albany at a March 16 Congress Project Seminar on "Congress and Tax Policy". Although President George W. Bush succeeded in enacting his big tax reduction package in 2001 before the September 11 attacks, when we were still running budget surpluses, the President and Congress have pursued further cuts over the last three years after going to war in Afghanistan and Iraq, and after the budget moved back into large deficts.

In a paper prepared for the seminar, Zelizer compared President Lyndon Johnson's call for a 10 percent income tax surcharge in 1968 to fund the Vietnam war to President George W. Bush's successful efforts to reduce taxes in the face of two wars. It's not just a change in party control of the White House and Congress, Zelizer said, though Democrats have been more willing to increase taxes for wars and expanded domestic programs; the country has changed as well. There has been declining trust in government since the mid-1960s and less willingness to give it more money to do new things. Even liberals have changed over time. Whereas in the immediate post-World War II era, liberals supported defense spending to fight communism as well as to address domestic social problems, Vietnam split the liberals down the middle over supporting our military policies. In the meantime, the country became more suspicious and skeptical about government programs and about how their taxes were being spent. Ronald Reagan rode to power on the heels of a tax revolt and anti-government mood.

Bill Dauster, deputy Democratic staff director and general counsel to the Senate Finance Commitee said, "We have today record deficits and little indication that anyone wants to do much about them. Over the long haul of history, we as a nation have tended to believe in a balanced budget." But, starting with President Nixon's statement that "We are all Keynesians now," in the early 1970s, Dauster noted, through President Reagan's tax cuts in the early 1980s, the belief has grown that tax cuts are good for the economy and deficits aren't all that bad. Now, said Dauster, we are told that if you don't extend tax cuts that are expiring, you are increasing taxes. This leaves Congress little room to bring deficits under control since so much of the budget today is entitlement spending which is relatively uncontrollable.

Dauster, who previously served as chief counsel to the Senate Budget Committee and as a member of President Clinton's economic team, said that in 1990 Congress took a Hippocratic oath to "do no harm" by enacting so-called "Pay-as-you-go" rules for new taxes and spending as part of the "Budget Enforcement Act" enacted that year. Those strict, "pay-as-you-go" rules, which expired in 2002, required both tax cuts and entitlement spending increases to be offset by tax increases and/or entitlement savings. Now, says Dauster, they are talking about operating under the "hypocritic" oath that we should "pay-as-you-go" for everything except tax cuts, so long as they are assumed under the current budget resolution. Dauster said some in Congress are trying to get back to the 1990 "Paygo" rules as the Senate demonstrated in adopting an amendment to their budget resolution restoring the enforcement mechanism for taxes. But it seems unlikely the House will go along given the opposition of the President and Republican leadership to requiring offsets for extending expiring tax breaks enacted in 2001.

Congress Daily reporter Martin Vaughan, who covers tax and trade issues for the National Journal group, sees three environmental factors affecting tax policy in the Congress today. The first is the deficit situation which is causing even some Republicans to rebel against the full plate of Bush tax proposals this year. The second is the presidential election campaign in which the president will make the case that the tax cuts are working because the economy is improving, so Congress should not mess with a good thing. And the third environmental factor is the "lingering effect of the corporate accounting scandals" and growing public suspicions that the rich are not shouldering their fair share of the tax burden. Vaughan said both parties, in Congress and on the presidential campaign trail, try to find ways to tell their side of the story to the public through the media as to why their approach to the economy is best.

None of the panelists would speculate on how much tax and deficit issues would figure in the decisions of the electorate next fall, though some of the talk in Congress and in the White House about cutting the deficit and providing a more enforceable budget regime does reveal a political sensitivity to the possibility that the issues could resonate with voters.