Union Tribune

January 19, 2003 

NATION 
GOP leaders speak out against dividend plan
Provision may hurt Bush's tax proposal


By FINLAY LEWIS and PAUL M. KRAWAK 
COPLEY NEWS SERVICE 

WASHINGTON To assess the trouble ahead for President Bush's
sweeping tax-cut plan, start with Sen. George Voinovich.

The Ohio Republican, an administration loyalist on many issues, has stepped into a pivotal role by voicing opposition to the keystone of the president's $647 billion plan: eliminating federal taxes on stock dividends.

Voinovich is a conspicuous member of what appears to be a growing band of GOP lawmakers with misgivings about that provision. While the group includes senators considered moderates or mavericks, no one questions Voinovich's
credentials as a conservative and deficit hawk.

With Republicans holding a slender Senate majority, concerns of such critics are forcing the administration and the Republican Senate leadership to consider either dramatically trimming the dividend plan or dropping it from the package.

"We may not be able to sell (the dividend tax plan). ... We should sell the whole thing or not at all," Sen. Charles Grassley, R-Iowa, chairman of the tax-writing Finance Committee, said recently.

The skeptics include Republican Sens. Lincoln Chafee of Rhode Island, Olympia Snowe of Maine and John McCain of Arizona. All share qualms about the overall package's tilt in favor of wealthy taxpayers and its effect on the federal deficit. They agree the provision that would eliminate taxes on stock dividends is
particularly problematic on both counts.

Political analysts, pointing to Voinovich's conservative profile and record of administration support, say his stance sends a particularly loud and dramatic signal.

"If a politician like Voinovich has trouble with a (Republican) proposal, that indicates there's a serious flaw somewhere. ... With him you're getting to the heart of the party," said Stuart Rothenberg, the editor of a respected political newsletter.

With Democrats already massing in opposition, the White House's margin for error on the dividend issue may have already vanished.

Politicians in both parties are nervous about the sagging economy, and there appears to be ample incentive for compromise.

Congressional Democrats have advanced their own tax-cut plan that would leave dividend taxes untouched, favor middle-income taxpayers and limit the focus to stimulating the nation's sagging economy this year.

In an interview, Voinovich framed his objections to the dividend plan in the context of the rising tide of red ink in the federal government's bank account.

Voinovich said if spending continues apace and all tax reductions are passed and stay in place, "we could have a deficit of about $865 billion in 2012."

"I'm supportive of a stimulus package, but I really believe the elimination of the tax on dividends is better handled in a tax-reform piece of legislation that is long overdue in this country," he said.

With the administration showing little interest in tackling fundamental tax reform, the practical effect of Voinovich's suggestion would be to kill the dividend tax proposal for at least the balance of this year.

"In its current form, it has no chance," said a Republican Senate aide. " . . . There's not a strong constituency for that at all. That part of the plan has bombed."

Ari Fleischer, White House press secretary, said last week that Bush would fight for his plan but added Congress is "just beginning the process."

The opening rounds in the tax-cut fight will occur in the House, where Republican gains in last fall's elections have padded the GOP majority sufficiently to make it likely that Bush's proposal will pass largely intact.

House Majority Leader Tom DeLay, R-Texas, has suggested that Republicans might muscle through several additional tax cuts that would be acceptable to Bush. The add-ons are likely to include a possible reduction in the capital gains tax, added inducements for retirement savings, a beefed-up incentive for
business investment, and elimination of the alternative minimum tax a levy designed to apply to taxpayers who make extensive use of loopholes to escape their fair share of the tax burden.

"A lot of House members want something bolder because they understand that when they go to the Senate, they are likely to water it down," said Stephen Moore, president of the Club for Growth and a top strategist for the GOP's tax-cutting wing. "It puts them in a stronger position to compromise."