OPED18 EGTRRA - Whither the surplus?

Critics of EGTRRA's rate cuts have blamed them for the huge drop in the projected unified surplus (initially projected at $5.6 trillion over 2002-2011, now projected to be reduced to $2.6 trllion over the same period) and have called for 'freezing' or delaying EGTRRA's marginal rate changes. President Bush, on the other hand, is calling for more tax cuts in the budget he submitted to Congress. So, is EGTRRA to blame??

Several factors are responsible for this decrease. The economy was already slowing down as EGTRRA was being debated (hence the Congress' inclusion of the tax rebate that was hoped to stimulate the economy by increasing consumer spending). The terrorist attacks of 9/11 further weakened the economy. They also led to increased Congressional spending (e.g. the $40 billion spending package, $5 billion in aid to the airlines, federal compensation for attack victims, etc.) Thus, approximately half of the (projected) change is due to EGTRRA, approximately 20 percent is due to the recession, approximately 21 percent is due to increased spending due to the terrorist attacks, and the rest by increased spending unrelated to the attacks.

There are also a couple of 'gotchas' in EGTRRA. First, the law is set to expire 12/31/2010, when all the rates automatically go back to their pre-EGTRRA values! Presumably Congress will act before this to avoid these hikes... Second, EGTRRA did not effect the individual alternative minimum tax (AMT). The AMT was adopted in 1978 to ensure that taxpayers could not avoid paying income tax by having sufficient tax deductions to offset their income. A taxpayer calculates their tax liability as well as the AMT, then must pay the higher of the two. Since EGTRRA did not effect the AMT the 1 million taxpayers already on the AMT will receive very little benefit from the law. Also, since EGTRRA decreases the tax burden, the result will be that more people will find themselves responsible for the AMT. Though AMT rates are low the AMT is not indexed for inflation and does not allow many deductions and credits (e.g. for dependents, for state and local taxes, etc.). An estimated one third of all taxpayers will find themselves paying the AMT by 2010, assuming no Congressional action.

Of course the numbers are fluid and will change. The Congress is likely to exceed President Bush's requested increase in the military budget, while not holding to the 2% increase he has called for in non-military discretionary spending. And the economic recovery may be 'U' rather than 'V' shaped as hoped for...

© SNi 03/01/2002