Cover Story

The check is in the mail

Bush's family-friendly tax cut may have the added benefit of keeping big-spending senators in check

Issue: "Bush wins one," June 9, 2001

in Washington-In a sure sign that something big was going on, rumpled, cranky lawmakers began stumbling into the Capitol before 6:30 a.m. on May 26. It was a Saturday, and they wanted to go home. But first, the business at hand: Rubbing the sleep out of their eyes, they took their first look at the compromise tax-cut package hammered out in round-the-clock negotiations between the House and Senate. Both sides grumbled a bit about the size and speed of the cuts, but in the end, the package sailed through both chambers with bipartisan support. The result of that extraordinary weekend session may well have Americans rubbing their own eyes later this summer-not from fatigue, but rather disbelief. Beginning in late July, millions of taxpayers will open their mailboxes to find a refund check from the Treasury Department. No forms to fill out, no papers to sign. Just a check. From the government. Those checks-$300 for most single taxpayers, $600 for married couples-are the down payment on the biggest tax cut in two decades. When and if Congress fully enacts all the provisions nine years from now, the IRS will have left an extra $1.35 trillion in the pockets of working Americans. The Bush administration is betting all that extra cash will jump-start a sputtering economy, provide for future growth, and, just maybe, pay some political dividends in 2002 and beyond. Few pundits had given Mr. Bush any hope of delivering on the tax-cut promise that was at the center of his campaign. Yet, just 109 days into his first term, a closely divided Congress gave him 80 percent of the $1.6 trillion rollback he'd asked for. Small wonder he was all smiles a few hours after the final vote. "The check will literally be in the mail," he promised, adding: "The checks are the first installment of lasting, long-term reductions in tax rates." The win cemented Mr. Bush's relationship with his Republican base. Popular among both economic and social conservatives, the tax-cut package passed the House without losing a single Republican vote. Only two GOP senators-John McCain of Arizona and Lincoln Chafee of Rhode Island-voted against the plan, while 12 Democrats bucked their party leadership and sided with the Republicans. Even Jim Jeffords, whose defection from the GOP ruined what would have been a perfect week for the president, supported his former party on the tax-cut measure. Lower taxes are a sure crowd-pleaser among country club Republicans, but the Bush tax cut won praise from family groups, as well. "I think it's very family friendly, especially considering the rate reductions at all income levels," said Lori Cole, executive director of the Eagle Forum. Phased in over five years, those reductions should mean more money in the pockets of almost every taxpayer. According to the new law, the richest Americans will eventually have a marginal rate of 35 percent, compared to 39.6 percent today, while the broad middle-class rate of 28 percent will eventually fall to 25 percent. While many Democrats pushed more targeted cuts for favored groups, the president held firm, insisting that across-the-board cuts for every taxpayer were the fairest option. Still, other provisions of the massive bill clearly mark traditional families as a favored group, much to the delight of social conservatives. The much-hated marriage penalty, which allowed many unwed couples to pay lower taxes than their married counterparts, has been removed from the tax code, though relief won't kick in until 2005. Family groups watched that debate closely, because the president's original proposal would have addressed the marriage penalty with a 10 percent deduction for two-earner couples. Critics like Phyllis Schlafly objected that that would create a new "homemaker penalty," since households in which the wife stayed at home would be ineligible for relief. "This is something we had to take up several years ago when tax bills were first being introduced," said Ms. Cole. "Unfortunately the Bush tax plan, when it was introduced, provided relief only to working couples. So we worked hard with conservative members of Congress-and especially with our two champions, Rep. Jerry Weller and Sen. Kay Bailey Hutchison-to assure that all families are treated equally instead of picking winners and losers." To avoid penalizing either stay-at-home moms or two-income married couples, the final tax bill treats all joint filers the same as two unmarried taxpayers filing separately. Andrew Taylor of the accounting firm Taylor Company in Indianapolis says the biggest inequity in the current tax code is that dual-income singles living together can earn more than dual-income married couples before they're bounced into a higher tax bracket. Next year, for instance, two single wage earners can bring home $54,100 and pay only 15 percent in taxes. A married couple filing jointly, on the other hand, can earn just $45,200 to stay in the 15 percent bracket. The government taxes every dollar after that nearly double, at 28 percent. By equalizing the tax brackets, the new plan will treat all couples the same, whether married or unmarried, one income or two. Mothers won't feel pressure to join the workforce to get tax relief, as Mrs. Schlafly had feared would happen under the original proposal. Lower-income married couples will also see some relief as standard deductions for joint returns slowly grow to exactly twice the level of two individual filers. (Currently, unmarried couples enjoy a standard deduction of $8,800 while married couples can take only $7,350.) The catch? None of these changes will even begin to phase in for another four years. The tax code still seems to suggest that "people should just shack up until 2005," Mr. Taylor joked. One change will kick in next year: Parents will enjoy a $600 tax credit for every dependent child, up from $500 in 2000. Because tax credits represent a dollar-for-dollar reduction in total tax liability, a family with three young children will see an immediate savings of $300 compared to this year. Combined with a 1 percent decrease in marginal tax rates and a lower tax on the first $6,000 of income, the average family of five should easily see a $1,000 reduction in next year's tax bill. Moreover, because the IRS will adjust its withholding tables this summer, taxpayers will start to bring home much of those savings in their paychecks, rather than having to wait for a refund at tax time. Another provision of the bill has gone almost unnoticed by the mainstream press, yet family groups see it as a major victory. The adoption tax credit, a temporary, $5,000 incentive scheduled to expire soon, will not only become permanent, but will double in value to $10,000, helping to offset adoption expenses that can sometimes be astronomical. Parents who adopt special-needs children will get a $10,000 tax credit regardless of their expenses. And couples whose employers help with adoption expenses won't have to pay taxes on up to $10,000 of that financial assistance. Compassionate conservatives pushed for the adoption tax credit, but Congress dropped another of their key proposals: giving a tax deduction to contributors to charity who do not itemize on their income tax returns. That would have allowed 80 million Americans to take a deduction and might have generated $14 billion in new contributions, with half of that likely to go to religious organizations. But most social conservatives are applauding the repeal of the death tax, which sometimes forced children to sell the family-owned farms and businesses their parents had spent a lifetime building or forced parents to buy costly insurance. Like marriage penalty relief, however, this is a fix that's phased in slowly: The estate tax exemption, now pegged at $675,000, will rise to $1 million in 2002, $2 million in 2006, and $3.5 million in 2009. In 2010, the death tax itself will die completely, unless Congress decides to resurrect it. Unless the Democrats manage to strangle tax reform first. In a town where nothing is permanent, tax cuts seem to be especially ephemeral. Exhausted lawmakers had barely finished congratulating themselves before Sen. Tom Daschle, soon to take over as Senate majority leader, vowed: "We will revisit these issues. We will try to find ways to make corrections." Those "corrections" could come as soon as next week. After six years in the minority, restless Senate Democrats are eager to push aggressively for new and expanded social programs. There's just one problem: The Bush tax cut has left them with practically nothing left to spend on their pet projects. If they want to hire 100,000 new NEA members for public-school classrooms at a cost of say, $30 billion, they'll have to reinstate $30 billion in taxes. But which tax cuts to repeal? Reducing the limits on tax-free savings accounts from $2,000 back to $500 would net about $29 billion, but can Democrats risk the anger of hundreds of thousands of students-and their parents? Reverting to lower limits on IRA and 401(k) plans would kick in around $50 billion, but aging baby boomers might turn on the party that tinkered with their retirement. Thus, as the Democrats move into their spacious new Senate offices, they'll likely find themselves with majority perks but minority problems. Pushing an agenda is one thing, but funding it is another. The president's dogged pursuit of a tax cut-criticized by some conservatives who wanted a greater emphasis on social issues-now appears prescient. If a simple lack of money hinders a liberal assault on family values, then cutting taxes may be the most family-friendly thing Mr. Bush could have done.

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