Pre-occupied with local budget woes, the anemic economic recovery, and the looming war, many Oregonians aren’t paying much attention to the President’s $1.6 trillion tax cut proposal, which includes exempting dividends from taxation and accelerating rate cuts passed in 2001. This is a mistake, because the proposal has profound implications for Oregon and the rest of the country.
Republicans and Democrats alike have criticized the administration’s proposal, but it continues to advance. Unless the Senate produces only a tiny tax cut with no long-term impact on the deficit, the final bill will be fiscally irresponsible and harmful for most Oregonians.
Oregon is not alone in slashing public services due to revenue shortfalls. Yet, the President’s proposal does not include relief for states. Instead of using the federal government’s ability to deficit spend to help states that are cutting school days and kicking the poor and elderly off of publicly-provided health insurance and out of nursing homes, the Administration wants a massive tax cut for wealthy households. Perhaps we have a new definition of compassionate conservatism.
Most economists reject the President’s assertion that this plan will stimulate the economy. Fully 95 percent of the proposed tax cuts will occur after 2004, when the economy has recovered. Nearly one-third of Oregon households will get no tax cut, while the richest one percent get cuts averaging more than $19,000. An economy drowning in unused productive capacity needs additional demand, not massive windfalls for the rich and larger “incentives” to save.
The tax cut’s implications for the Nation’s fiscal outlook are frightening. We are headed into war and expecting mass retirement of the baby-boom generation in a decade. At the same time, the Administration’s budget projects federal deficits indefinitely, even without the cost of a war. Fighting a war without new taxes means cuts to other valued programs and more federal debt.
Locking in long-term deficits will make it more difficult to fill the Social Security shortfall. Considered over the same timeframe, the Administration’s proposed tax cuts, on top of the 2001 tax cuts, are more than three times as large as the actuarial shortfall faced by the Social Security trust fund. If this tax cut passes, the future of Social Security will be bleak.
Oregonians will be further impacted by the linkage between the federal and state tax codes. The federal exemption of dividend income will cost Oregon’s coffers $90 million annually.
State and local governments are cutting services left and right, and the Bush budget and tax cut plans will guarantee even deeper cuts. Adjusted for inflation, the Administration’s budget, excluding Medicaid, reduces grants in aid to state and local governments by 2.8 percent in fiscal year 2004. Federally-funded programs in Oregon like Head Start, Adult Basic Education, and agricultural programs, will suffer.
The House of Representatives appears poised to give the President whatever he asks. Some expect the Senate to deliver a smaller tax cut, with the final bill falling somewhere in between. To prevent shackling the nation to huge deficits for years to come, the Senate has to hold out for a very small, or no, tax cut. Dumping the dividend tax cut is a good start, but it only reduces the size of the Administration’s tax cut by one-sixth. Senators should also reject proposals to accelerate income tax rate cuts benefiting only the affluent, currently scheduled for 2006, and consider reversing them altogether.
Oregonians need Oregon’s two US Senators to protect Oregon’s state budget from federally-induced cuts, to safeguard federal programs that Oregonians rely on, and to secure stability for Oregon’s seniors. Senators Smith and Wyden need to push for small short-term federal tax cuts that are targeted to low- and middle-income people and that do not produce long-term deficits.
Jeff Thompson is a policy analyst at the Oregon Center for Public Policy