Sun, Feb 01, 2004 - Page 11 News List

Bush nixes tax cuts, Iraq funds

SYSTEM OVERHAUL As the US president gears up for a bruising re-election campaign, he is attempting to address what is seen as a key weakness

REUTERS , WASHINGTON

US President George W. Bush will leave out of his budget widely anticipated Iraq-related costs and an expensive tax system overhaul to meet his election-year goal of cutting the federal deficit, congressional aides and budget analysts said on Friday.

Bush is banking on strong economic growth and spending restraint from Congress -- neither of which is a certainty -- to reduce the deficit from this year's projected record high of US$521 billion to less than US$260 billion by fiscal 2009.

Congressional officials and analysts say Bush will also rely on budget gimmicks -- from stretching the definition of homeland security to sidestep spending limits to proposing only a temporary extension of provisions that prevent the alternative minimum tax from raising taxes for potentially millions of middle-class workers.

Even though the Pentagon is all but certain to need US$40 billion or more to fund operations in Iraq in the next fiscal year, the White House has told lawmakers that Bush's US$401.7 billion military budget for next year will leave that out, congressional aides and analysts said.

Doing so makes it easier for the administration to project a reduction in the deficit next year. But the decision is already drawing fire from Bush's Democratic challengers, as well as fiscal conservatives, who say the administration could provide at least a partial cost estimate.

An administration official defended the decision to put off any Iraq-related requests until Congress convenes in 2005 after the election.

"It is too early to adequately predict what the needs will be," he said.

Congressional aides said the White House was taking a similar approach toward taxes.

But Bush has little choice, if he hopes to cut the deficit in half on schedule. According to congressional estimates, fixing the alternative minimum tax and related changes could cost US$658 billion over 10 years, and push the deficit well above US$260 billion in 2009.

Bush can ill-afford to let the current alternative minimum tax relief expire at the end of this year since doing so would raise taxes for millions of mid-level earners, a critical voting block in the November presidential election.

Republicans and Democrats criticized the practice as deceptive.

"It's irresponsible," said one senior Senate aide of Bush's plans for the alternative minimum tax, which requires some middle and upper-income taxpayers to calculate their taxes in two ways and pay the higher bill.

Congressional aides say the White House has settled on a stop-gap measure to minimize the budget impact.

Instead of proposing a budget-busting long-term fix, the administration is expected to propose one to two-year extensions of the alternative minimum tax provisions, delaying the issue and the costs.

Unlike the regular income tax, the alternative minimum tax is not indexed for inflation. This means that the number of people affected will skyrocket -- and reach further into the middle class. By 2010, the alternative minimum tax could affect one-third of all tax returns.

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