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Key GOP Senators Object to Bush Plan
President Has Difficult Sell on Tax Package

By Dana Milbank and Jim VandeHei
Washington Post Staff Writers
Saturday, January 11, 2003; Page A01

Key Republican senators are raising objections to President Bush's $670 billion tax cut proposal, an early sign that the White House will face a tougher fight than it did on two previous rounds of tax reductions.

Although the president and his aides have signaled they intend to fight fiercely, at least five GOP senators have now voiced serious doubts about Bush's plan, especially the centerpiece elimination of the dividend tax. Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said yesterday, "we may not be able to sell it."

Grassley, whose committee handles tax legislation, raised the prospect that Bush's proposal to repeal the dividend tax could be dropped altogether. "We should sell the whole thing or not at all," he said, suggesting that other forms of tax cuts might be more achievable. "It would be easier to do something on capital gains than on double taxation of dividends," he said.

Soon after the president detailed his plan Tuesday, Sen. John McCain (R-Ariz.), a longtime Bush antagonist, signaled his objections, and Sen. Lincoln D. Chafee (R-R.I.) said he could not support it.

Though much of the protest has come from GOP moderates, Sen. George V. Voinovich (R-Ohio) also raised concerns. "It's heavy; it's big," he said. "I don't think it will give us the shot in the arm or rev us up like I think we need to be revved up."

Voinovich said lawmakers need to focus more on eliminating the federal deficit, which some economists predict will exceed $350 billion in 2004, the highest ever in dollar terms. "As far as the eye can see, I see red," the senator said.

Two moderate Republicans, Sens. Olympia J. Snowe and Susan Collins of Maine, will seek major changes to Bush's proposal. "The elimination of tax dividends is very controversial," Collins said. "I would guess that will be the piece changed the most." Collins is considering calling for the dividend portion to be dropped from the economic package.

Bush aides, who plan to send the president on a road show to sell the tax cut as he did his $1.35 trillion, 10-year tax cut in 2001, brushed aside concerns about wavering Republicans and broad opposition from Senate Democrats. Vice President Cheney defended the tax plan in a speech yesterday. On CNBC last night, Cheney predicted the package that survives "will be fairly close to what the president recommended."

Bush had defended the plan Thursday, and top Bush advisers will tout it on Sunday's television talk shows.

"Just as happened in 2001, the process will begin in the House and move to the Senate, and the president is confident that support will pick up as the process goes along," White House press secretary Ari Fleischer said yesterday.

The president's aides have told allies that, as one Republican who consults with the White House put it, "they're going to ram it through." Bush is aiming for a quick victory in the House, where Republican discipline is firm. One person working with the White House said Bush has sent word to House GOP leaders that he would not mind their increasing the package's size, which could increase Bush's leverage in the Senate.

"The White House is saying this is the second 100 days the president will have because of the strength of the 2002 election," said Grover Norquist, an anti-tax activist who is close to Bush aides. "It is as if the president has been reelected."

In one indication of the White House determination to build momentum, Cheney delivered a forceful argument for the plan during a 25-minute speech to the U.S. Chamber of Commerce. Responding to budget deficit worries, Cheney said Bush's plan "ultimately will reduce the deficit." Arguing that the federal deficit is not high by historical standards, he said the tax cut will spark growth "and thus increase tax revenue to the federal government ultimately."

Cheney also took issue with economists who said budget deficits would push up interest rates, saying "the evidence is clear that interest rates do not move in lock step with changes in the budget deficit." Eliminating the dividend tax, he said, "will also transform corporate behavior in America and encourage responsible practices" by moving companies away from debt and from falsely inflating profits.

Stephen Moore, a conservative economist who backs the Bush plan, said White House officials have "been very emboldened by the reaction" from Bush's conservative base and see no reason to retreat. "He's going to fight this out," Moore said. "They feel politically it was a masterstroke." Still, he added, "I'm not sure how confident they are it's going to pass."

Moore called the early GOP Senate defections "very troubling," and added that Bush "can't afford many more defections than two." Any more than a single defection would need to be offset by gains among Democrats in the 51-49 chamber.

On Wall Street, where the rally that greeted news of Bush's proposal has stalled, many analysts expect Bush's package to be significantly scaled back. David Wyss, chief economist at Standard and Poor's Corp., has built into his federal budget forecast a large reduction in the Bush proposal.

Mark Zandi, chief economist at Economy.com, an economic forecasting and research firm, said he expects a smaller reduction in dividend tax rates -- to the lower rate now applied to capital gains. And Susan Hering, a senior economist at UBS Warburg in Chicago, said: "I'm convinced it's going to die. When you look at the opposition this is going to face, it's going to be huge."

Bush has shown a remarkable ability to overcome congressional opposition. He persuaded 12 Senate Democrats to support his 2001 tax cut, and he gained broad support for an economic stimulus package last March. Many Bush allies believe the same will happen this year.

"In 2001, the president was disciplined enough not to compromise unnecessarily," said GOP strategist Haley Barbour. "I think they'll be just as smart this time."

This time, however, the federal budget is in deficit and going deeper. New spending is expected for domestic security and a possible war in Iraq. Many legislators in both parties believe the dividend tax cut does not meet the immediate need for a short-term economic boost.

Bush said his plan would inject $59 billion in cash into the economy this year, far less than Democratic plans would. Even proponents such as the American Enterprise Institute's Kevin A. Hassett say Bush's plan "is not a stimulus."

Most of the Democratic senators who voted for his tax cut proposals the past two years are opposed to his new plan, with the exception of conservative Democrat Zell Miller (Ga.). Bush is again likely to put strong pressure on Democrats who face potentially tough reelection campaigns in 2004. But one likely target, Sen. Blanche Lincoln (Ark.), said she sees little political danger because less than 8 percent of her state's residents would benefit from a dividend tax cut.

Two other Democrats who might have tough reelections, Minority Whip Harry M. Reid (Nev.) and Byron L. Dorgan (N.D.), are members of the Democratic leadership and, therefore, unlikely to break rank.

The result, lawmakers in both parties say, is likely to be a large reduction in the Bush proposal to end the so-called double taxation on dividends. Considering the president's opening offer of $674 billion and the House Democrats' initial bid of about $136 billion -- which they say would amount to $100 billion after 10 years -- the final package is likely to fall somewhere in between.

The most popular components of Bush's proposal are the acceleration of an increased child tax credit and tax relief for married couples. Sen. Evan Bayh (D-Ind.) has proposed accelerating the marriage relief, and Sen. Max Baucus (Mont.), the top Democrat on the Finance Committee, said there is also "significant" support among moderate Democrats for that.

Democrats and Republicans also are likely to agree on some form of incentive for business investment, possibly larger than the $16 billion Bush proposed. House Democrats and the three Democratic senators running for president have all proposed some form of business incentives.

Congress is also likely to include significant aid to states -- an element Bush unexpectedly omitted from his plan. GOP Sens. Gordon Smith (Oregon) and Collins want to add $20 billion to the package to help states.

In the House, Ways and Means Committee Chairman Bill Thomas (R-Calif.) is looking at several tax cuts not offered by Bush, while technology companies and other industries are lobbying for other tax breaks.

One business lobbyist close to the White House said it would make sense for Congress to reduce the dividend tax by 50 percent, which would cut its cost in half. As for the rate cuts, Dan Gerstein, spokesman for Sen. Joseph I. Lieberman (D-Conn.) said flatly: "That won't happen."

Norquist said the acceleration of the various 2001 tax cuts "is in generally good shape." On the dividend tax, he said, "the administration is going to fight down the line and not compromise from abolition."

That increases the likelihood that a dividend tax cut could fail completely, but Norquist said the administration might then shift its emphasis to capital investment tax breaks, which Democrats and moderate Republicans would more readily accept.

Staff writer Jonathan Weisman contributed to this report.