The “Jobs and Growth Tax Relief Reconciliation of 2003” bill (HR 2) that President Bush signed into law with much fanfare on May 28 is chock full of tax cuts that “sunset” – that is, they revert back to pre-2003 law. When combined with the previous Bush tax cut, “The Economic Growth and Tax Relief Reconciliation Act of 2001,” which is also full of tax cuts that slowly phase in and then end altogether, the result is like something out of Kafka. However, the difficulty for the IRS of creating forms and instructions to reflect yearly changes and taxpayer confusion are not the worst consequences of these bills.

The “Jobs and Growth Tax Relief Reconciliation of 2003” bill (HR 2) that President Bush signed into law with much fanfare on May 28 is chock full of tax cuts that “sunset” – that is, they revert back to pre-2003 law. When combined with the previous Bush tax cut, “The Economic Growth and Tax Relief Reconciliation Act of 2001,” which is also full of tax cuts that slowly phase in and then end altogether, the result is like something out of Kafka. However, the difficulty for the IRS of creating forms and instructions to reflect yearly changes and taxpayer confusion are not the worst consequences of these bills.

This variety of gimmicks is supposed to keep the “official” price tag lower than the true cost of the plan. Congress works with a 10-year budget, so by passing a law that restores taxes after 9 years (as in the 2001 law), or after 2 years (as for some provisions in the 2003 law) they get to pass bigger cuts this year and claim that the overall price is lower.

Any reasonable estimate by outsiders of the true cost of tax legislation should include what is most likely to happen over the next ten years if the tax reduction were to be passed -- and since no one believes that the tax is intended to actually expire after 9 years, the true cost is not likely to be the same as the official number used by Congress and the President.

Now, everyone really knows what is going on, and if a Representative or a Senator chooses to vote for a bill with these kinds of gimmicks, that is their right. But to do so, and to claim that the “official” cost is anything other than a convenient fiction, is to engage in fundamentally dishonest rhetoric.

Some details on the zigzags…

• The new tax bill includes an increase in the child tax credit, scheduled for 2003 and 2004 (from $600 to $1,000). They then decrease to $700 in 2005 before slowly rising to $1,000 again in 2010. (The current $1,000 is actually an acceleration of the 2001 tax cut bill that more slowly phases in higher child tax credits until they expire in 2011.)
• The top dividend tax rate was lowered to 15% through 2009, but then reverts to 39.6% in 2009 and after.
• The top capital gains tax rate was also lowered to 15% through 2009, but then reverts to 20% in 2009.
• Individual income tax rates revert to pre-2001 levels in 2011.

Given the intention to make the tax cuts permanent, the bills are outrageously expensive. The phase-in and sunset provisions were used to underestimate the cost of the tax cuts. If the tax cuts are made permanent, the actual cost, according to a Center on Budget and Policy Priorities (CBPP) analysis, the newest $350 billion tax cut will cost between $807 billion and $1.06 trillion through 2013. If the tax cuts contained in the 2001 tax cut bill are extended, the cost will be $2.3 trillion through 2011, and the costs in the following decade would be even greater—an estimated $4.1 trillion from 2012 to 2021. See the CBPP analysis.

So, the next decade will bring many opportunities to argue against tax cuts-- both efforts to extend the “temporary” cuts as well as the efforts to pass more tax cuts from the remaining $1 trillion set aside in the budget resolution for tax cuts.

If we don’t succeed, domestic discretionary spending-- almost all that government does outside of entitlement programs and military spending will be decimated. This will happen in spite of the state government cut-backs, the slow economy, the rise in the national debt, and increasing costs of Medicare and Social Security as the Baby Boomers retire. Since there is no firewall to protect domestic spending within the discretionary spending pool, military and defense spending increases will make further inroads. Cuts in discretionary spending will hit low-income families the hardest, but the state cuts in services are evidence that middle-income families will also be affected. Since the benefit of the tax cuts flows to wealthier families and corporations, not low- and middle-income families, the bad effects will be a double-whammy.