Revised May 15, 2003
AMENDMENT RELIES ON BUDGET GIMMICKS, WOULD BALLOON
ULTIMATE COST OF SENATE PACKAGE TO ABOUT $660 BILLION
by Joel Friedman and Robert Greenstein
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Senator Don Nickles plans to offer an amendment on May 15 that would rely on massive budget gimmicks to squeeze a larger dividend tax cut into the $350 billion Senate Finance Committee tax-cut package the Senate is considering. According to a statement that Senator Nickles made on the Senate floor May 14, the amendment would exempt 50 percent of dividend income from taxation in 2003, with the exemption rising to 100 percent of dividend income in 2004. The exclusion would then expire at the end of 2006.
Even with this artificial sunset, the provision would cost significantly more than the dividend tax cut in the Finance Committee bill. As a result, the Nickles amendment is reported to include proposals to offset these higher costs, primarily or entirely by artificially sunsetting after a few years one or more of the other provisions in the bill as well. It is highly unlikely, however, that any of these tax cuts will be allowed to expire; the intention clearly is that the artificial sunsets never take effect and that the provisions all be extended. As a result, once these gimmicks are stripped away (and the reasonable assumption is made that the tax cuts will not be allowed to expire), the ultimate cost of the Senate Finance bill with the Nickles amendment is sure to be more than $660 billion through 2013.
High Cost When Gimmicks Are Removed
The Nickles amendment resorts to the same strategy as the tax-cut package that recently passed the House relying on phony sunsets. They are phony because everyone knows the intent is to have these tax cuts extended permanently. Regarding the expirations of popular family tax breaks in the House bill, Ways and Means Chairman William Thomas was quoted in the Los Angeles Times on May 2 as stating, No one believes there will be any difficulty in extending them. The phony sunsets in the Nickles amendment reduce its official cost, allowing the Senate bill technically to meet its $350 billion cost limit. Once these tax cuts are extended, however, the long-term cost rises substantially.
Little Economic Benefit
Although supporters of a costly 100 percent exclusion for dividend income argue that a full exclusion is needed for this tax cut to yield its full beneficial effects on the economy, those positive impacts are greatly exaggerated. In the short term, a dividend tax cut does little to boost the economy and create jobs.
The value of the Nickles dividend amendment as short-term aid to the economy is further eroded because it would have the effect of reducing state revenues. Currently facing their worst fiscal crisis in 50 years, states are placing a drag on the economy as they cut spending and raise taxes to meet their balanced budget requirements. Because of the linkages between state and federal revenues, states would begin to lose revenues immediately as a result of the Nickles dividend tax cut, with the revenue loss rising to $4 billion a year when the proposal is fully in effect. Assuming the proposal is extended, states could lose about $40 billion through 2013, or twice the $20 billion of fiscal assistance provided to the states in the bill.
Recent dynamic analyses by both the Congressional Budget Office and the Joint Committee on Taxation also show that a tax-cut package that reflects the Administrations priorities, including a sizable dividend tax cut, would have only a small impact on the economy over the long run.
Further, even if one did have a more sanguine view of the long-term impact of a dividend tax cut, the design of the Nickles amendment with its phase-ins and phase-outs would undermine any positive effects. In an analysis of the type of provision proposed by Senator Nickles, American Enterprise Institute economist Kevin Hassett a strong supporter of dividend tax cuts concluded that [i]t would be hard to imagine that this would be good for the stock market or the economy. He finds if the dividend tax cut were to phase in and then expire, firms will have difficulties setting dividends and shareholders will have even more difficulties figuring out what current dividends signal about future prospects. Since the elimination of dividend taxes is only temporary, investors must evaluate the risk that dividend taxes will come back. If they do, then the cash flows to investors from owning stock will plummet, as will the value of shares. Under such circumstances, it is undeniable that government policy significantly increases the fundamental risk of stocks.
In its analysis of the various dividend and capital gains provisions the one proposed by the Administration, and those included in the House-passed and Senate Finance bills the Urban-Brookings Tax Policy Center concluded that a common feature of all the proposals is that they would represent large, regressive tax cuts. This is not surprising given that the top five percent of households receive a majority of all taxable dividend income.
Of the various proposals, the Senate Finance dividend measure is the least regressive, with 12 percent of its benefits flowing to households with income over $1 million and about one-third going to households with income over $200,000. The Administrations plan, by comparison, would direct 26 percent of the benefits to millionaires, and more than half would go those with incomes over $200,000. Because the Nickles amendment follows the Administrations approach, it would make the Senate bill significantly more regressive.
The Nickles amendment should be seen for what it is a gimmick to circumvent the $350 billion limit imposed on the Senate tax-cut bill in order to increase sharply the size of the tax cut for dividend income. This gimmick is being advanced despite new CBO estimates of revenue collections, issued May 9, that show revenues falling well below CBO projections of just two months ago. As a result, federal revenues are expected to be much lower as a share of the economy in 2003 than they were during the more severe economic downturns of the mid-1970s and early 1980s, in no small part because of the large tax cuts enacted in 2001. Indeed, even with the tax cuts assumed in the $350 billion Senate Finance package, revenues this year are on track to fall to their lowest level as a share of the economy since 1959, the next-to-last year of the Eisenhower administration. Overall, these strikingly lower tax collection figures have disturbing implications for revenues and deficits for years to come.
 Robert Greenstein, Richard Kogan, and Andrew Lee, Tax Policy Center And CBPP Analyses Show That Thomas Tax Plan Would Be More Tilted Toward The Very Wealthy And More Expensive Than Bush Plan, May 7, 2003.
 Goldman Sachs, Fiscal Policy In Search of Balance, Creativity, and Grit, May 2, 2003.
Timothy M. Koller and Susan L. Nolen Foushee, Much
The Joint Committee on Taxation report was printed in the
Congressional Record on
 Congressional Budget Office, An Analysis of the Presidents Budgetary Proposals for Fiscal Year 2004, March 2003.
Hassett, The Dividend Fiasco, American Enterprise Institute,
Burman, William Gale, and Peter Orszag, Thinking Through the Tax