News Column

Democrats Counter With Own Plan for The Economy

January 7, 2003

Juliet Eilperin and Dana Milbank

House Democrats yesterday unveiled a $136 billion, 10-year economic stimulus package that would extend unemployment benefits for more than six months and provide every taxpayer with a $300 tax credit.

The proposal is much smaller than a plan President Bush will introduce today in Chicago that would cost nearly $674 billion over the same 10 years. Democrats suggested that their plan, which includes short-term benefits for businesses and ailing state governments, could jump-start the nation's sluggish economy without permanent tax cuts that drain the federal treasury.

Democrats said their plan favors middle- and lower-income Americans and contrasted it with the Bush package. Administration officials say the White House plan is based largely on expedited cuts in income taxes and the elimination of the tax on dividends, both of which tend to help upper-income Americans.

Yesterday's Democratic move begins a political and policy battle that will consume much of Congress's attention in the coming weeks. Though Bush and congressional Republicans have by far the stronger hand, Democrats hope at least to temper some of the big-dollar, long-term tax cuts in the president's plan with more of a short-term approach.

Democrats, still smarting from their election losses last fall, want to draw sharp contrasts with Republicans on the economy, highlighting increasing budget deficits and weak growth. In a news conference yesterday afternoon, Democrats alternately blamed Bush for doing too little on the economy and for proposing too costly a plan.

"The Democratic plan stimulates; the president's plan procrastinates," said Rep. Robert Menendez (N.J.), who chairs the Democratic Caucus. "The president's plan is too little, too late, and much too irresponsible."

The administration responded that its plan, designed to boost stock prices and cut tax rates, would restore growth that would eventually boost government receipts. The president told reporters that his plan was fair to "working citizens," adding: "The way to encourage revenue growth is to encourage the private sector to grow. And tomorrow I'll be talking about ways to encourage the growth of the private sector."

Outlines of the two plans present a contrast in philosophy. Bush's initiative would provide about $100 billion in tax cuts in the current year, plus aid to states and private-sector tax breaks to encourage investment. The bulk of the cost would come in the next nine years. The Democrats' $136 billion plan would spend a similar amount in the current year but virtually nothing after that because its boost is temporary.

The Democratic plan has no cut in dividend taxation or income tax rates. It calls for spending $55 billion on the one-time, $300-a-person income tax rebate, $32 billion in business investment incentives, $31 billion in aid to states and $18 billion to extend unemployment benefits.

Democrats portray the Bush proposal as a sop to upper-income taxpayers.

"Our proposal is targeted to consumers," said Rep. Steny H. Hoyer (D-Md.), the incoming House minority whip. He said the president's plan "is targeted to wealthy families."

Democrats said their $300 tax credit would be refundable, so those who do not make enough to pay federal income taxes would still receive it.

An analysis by the Urban-Brookings Tax Policy Center of the effects of eliminating dividend taxation found that the average benefit for those making less than $10,000 would be $6, and the average benefit for those making more than $1 million would be $45,098.

Accelerating the tax cuts slated for 2006, as Bush has proposed, would give 70 percent of the benefit to the top 5 percent of taxpayers, and the lowest 80 percent would receive 6.5 percent of the benefit. His expected proposal to accelerate the 2004 tax cuts would provide 64.4 percent of the benefit to the wealthiest 5 percent and 7.7 percent to the lowest 80 percent.

Economists had mixed reactions to the Democrats' plan. Bill Gale, a senior fellow at the left-leaning Brookings Institution, said the proposal trumped the president's plan in terms of "effectiveness, fiscal discipline and equity."

Conservatives, who are skeptical of the Keynesian belief that government can stimulate the economy, said the Democratic plan is ill-conceived. Kevin Hassett, a resident scholar at the American Enterprise Institute, said Bush's strategy to target the higher tax brackets would help more. "It's just generally a bad idea to do tax policy with an eye on short-term effects," he said.

The House Democratic plan would extend unemployment benefits, which ran out late last month, for 26 weeks. Administration sources say the president will propose a somewhat shorter extension.

In an effort to help state and local governments struggling with budget shortfalls, the Democratic plan would provide $10 billion to defray the costs of homeland security, $5 billion for highway funding, $10 billion more for Medicaid payments and $6 billion for the unemployed and other Americans hurt by the slow economy. Bush also will recommend $10 billion for the states.

On the business side, House Democrats recommend two one-time incentives for investment. The first would allow small businesses to deduct as much as $25,000 of the cost of new investments. The second would accelerate tax relief for all businesses, by allowing firms to write off a 50 percent bonus in 2003, dipping down to 10 percent in 2004.

Some Democratic senators have their own plans to stimulate the economy, which will complicate party efforts to make a united front on economic policies.



Source: Copyright 2003 The Washington Post Company


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