In Congress, Rising Deficit Hangs Over Bush Tax Cuts

WASHINGTON —  President Bush’s push to extend his trademark tax cuts, a goal that Congress once seemed all but certain to ratify, is running aground on the shoals of an enormous budget deficit.

Bush repeatedly called on Congress to make permanent the tax cuts enacted over the last three years, which he presented as the cornerstone of his policy for economic growth and job creation. But Republicans in Congress say there is no way that will be accomplished this year -- and it will not get any easier in the future.

The debate over Bush’s tax cuts is central to the presidential campaign. Bush wants them to be made permanent so that one of his biggest first-term achievements will endure.

The foundering of Bush’s tax cuts is part of a political and fiscal climate that has changed with projections that the federal deficit could reach $521 billion this year, nearly double the record before Bush took office. After three years of piling up unchecked, the deficit is beginning to impinge on the legislative ambitions of the White House and lawmakers of both parties.

Bush’s long-sought energy bill will have to be trimmed if it is to pass. Some advocates of repealing the estate tax are considering a stripped-down alternative. Republicans may even try to trim Bush’s budget for once-sacrosanct defense and homeland security programs.

While the deficit’s precise effect on spending remains to be seen, its impact on the revenue side of the budget is already evident. This year is shaping up as the first since Bush became president in which Congress will not give him just about everything he wants on the tax front.

“The question is, how do we get this deficit under control?” said Rep. Rob Portman (R-Ohio), a close Bush ally. “People will want to extend whatever tax cuts we can, but not all of them.”

Instead, Congress this year is likely to extend only three elements of Bush’s tax cuts that expire this year -- an increased credit for families with children, relief for married couples and rate cuts in the lowest income bracket -- and to put off action on tax breaks that expire later. Even some Republicans are having second thoughts.

“I and many others have reservations about making the entire tax package permanent,” said Sen. Susan Collins (R-Maine). “I would have considerable concerns about making the top rate cut permanent as long as we are still running significant deficits.”

Among the other signs of Congress’ dwindling appetite for big new tax cuts:

* A business tax bill before the Senate last week was expressly designed not to increase the deficit. The bill would replace an existing export tax break, which had been ruled illegal by the World Trade Organization, with a broader business tax cut. But the cost of the new tax breaks is covered by repealing the old export credit and closing other tax loopholes. Meanwhile, a key House Republican who had been pushing a bigger tax break for months agreed last week to sharply cut the bill’s price tag.

* Some Republican opponents of the estate tax -- which is scheduled to be repealed in 2010 and reinstated in 2011-- are backing down from the effort to make repeal permanent. Instead, Sen. Don Nickles (R-Okla.) and others are developing an alternative that would reduce but not repeal the estate tax.

* Republicans are scaling back the tax breaks included in the Bush-backed energy bill, which stalled in part because of objections from conservatives about its price tag. To revive the bill, proponents have cut its cost from $31 billion to about $14 billion over 10 years.

Bush’s all-but-certain Democratic challenger, Sen. John F. Kerry (D-Mass.), cites the president’s tax cuts as an emblem of Bush’s tilt to the wealthy. He calls for repeal of the tax cuts that benefit upper-income people -- a proposal Bush says amounts to a tax increase.

“Come November, the voters are going to have a very clear choice,” Bush said in a recent speech. “It’s a choice between keeping the tax relief that is moving the economy forward, or putting the burden of higher taxes back on the American people.”

One Bush aide argued that the president would have the best of both political worlds if Congress made only the most popular parts of the tax cut permanent. That would give Bush bragging rights for some election-year tax relief and leave it to voters to reelect Bush to finish the job.

At issue is the 2001 law that cut taxes by $1.35 trillion over 10 years. The law called for gradually reducing income tax rates, phasing out the estate tax, cutting taxes on married couples and doubling the $500-per-child tax credit for middle- and lower-income families. A 2003 law, intended to stimulate the economy, accelerated most of the 2001 tax cuts.

Both laws included expiration dates for most of the tax cuts -- “sunset” provisions that were designed to keep their costs politically acceptable.

Most elements of the 2001 law were written to expire at various points between now and 2011. Many provisions of the 2003 law also phase out this year.

When the “temporary” tax cuts were enacted, it was widely assumed that Congress would not let them lapse as scheduled. The skyrocketing deficit has raised questions about whether Congress can afford to extend all of them -- at a cost of some $1.9 trillion over the next decade.

Even ardent supporters of making all the cuts permanent acknowledge they cannot prevail until the deficit is in check.

“The numbers aren’t there right now,” said Rep. Paul Ryan (R-Wis.).

Such supporters are resigned to doing no more this year than temporarily extend the three breaks that expire at the end of this year. Without congressional action, the per-child tax credit would drop from $1,000 to $700 next year, the standard deduction for married couples would shrink, and the amount of income covered by the 10% tax rate would drop from $7,000 to $6,000 with the extra $1,000 moved back to the 15% bracket.

Most other tax breaks do not expire until 2009 or 2010, and lawmakers calculate that they can postpone action on them. Bush argued for quicker action. “Uncertainty in the tax code will make it harder for our citizens to make rational decisions about spending money,” he said.

The budget resolution that came before the Senate on Monday assumes that only the three expiring provisions would be extended this year, at a cost of some $80 billion over five years. The House Budget Committee is expected to adopt a companion resolution this week that assumes the same.

Those resolutions, which are to guide Congress as it enacts annual spending and revenue bills, reflect a determination by many Republicans to move more aggressively against the deficit than did Bush’s budget, which calls for cutting the deficit in half within five years. The Senate resolution would halve the deficit in three years.

Although most recent efforts to curb spending have focused on domestic programs, some lawmakers argue that defense and homeland security spending should also be scrutinized. The Senate resolution would provide $7 billion less for defense than the $421 billion Bush requested. House Budget Committee Chairman Jim Nussle (R-Iowa) is considering a plan to shave $2 billion from Bush’s Pentagon request.

But even those modest restraints on defense spending have met strong opposition from many Republicans. And lawmakers have resisted pleas from Bush to scale back a big election-year highway bill.

Still, Maya MacGuineas, executive director of an anti-deficit group known as the Committee for a Responsible Federal Budget, is encouraged that some lawmakers consider Bush’s tax-cut promises unaffordable.

“I thought I would spend months getting people to even mention the word ‘deficit,’ ” she said. “Now you hear it all the time. The issue has come onto the agenda much more quickly than anyone anticipated.”

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Times staff writer Richard Simon contributed to this report.