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Washington Windfall

A booming economy helps Congress and Clinton glide to a historic budget-balancing deal. But a tricky detail remains: tax cuts

By James Carney and John F. Dickerson/Washington

TIME magazine

(TIME, May 12) -- When they announced their historic budget deal last week, the big players all had their historic smiles on. In Washington they know how to produce those expressions even when they sign bills declaring National Sawdust Week. But this time that look of thoughtful satisfaction was right for the occasion. Out-of-control deficits, like the ones heaped up in the 1980s, are historic disasters. Bringing them under control requires a rare convergence of wisdom, determination and good fortune. So when those things came together last week, everybody made a grab for the glory. Bill Clinton called the deal "a balanced budget with balanced values." Senate majority leader Trent Lott, with House Speaker Newt Gingrich behind him, exulted that "Washington must learn to make do with less, while Americans will keep more of what they earn."

What they meant to say was that they were astonished the thing had happened at all. The last time Republicans and the White House got together to make a budget deal, late in 1995, their grudging talks ended in two messy government shutdowns. This time it resulted in an agreement to balance the budget for the first time since 1969, the year the Beatles crossed Abbey Road. What made the difference between then and now was a dose of political realism and a last-minute avalanche of projected cash that undid Democratic sticking points on Medicare caps, domestic spending and cost of living adjustments on Social Security. As recently as last Wednesday, nearly three months into the budget talks, a settlement was just within reach and just out of reach. Republicans wanted deeper tax cuts. The White House wanted more spending for education and children's health insurance. Offstage was a contingent of House Democrats who were worried that Clinton was cutting a deal they couldn't live with. The tension was making John Kasich, chairman of the House Budget Committee, get antsy. "The only time that I remember when you could get everything you wanted was on Dec. 24," he said. "You wrote your letters to Santa, and he put everything on the floor the next day."

Enter Santa, dressed as the GDP. Late in the week, with both sides still struggling to close the deal, a bounding U.S. economy closed it for them. The Congressional Budget Office quietly informed budget negotiators that the economic boom would produce an unexpected surge in tax revenues that would shrink the deficit by an estimated $225 billion over five years. As if to confirm it was not a mirage, evidence of the economy's strength kept emerging all week. First came news that during the first quarter, gross domestic product was up 5.6%, the biggest gain in a decade. Then came word that joblessness during April hit a 24-year low, falling to 4.9%. That kind of vigor promised to pay for much of what both sides wanted and still meet their shared goal of balancing the budget by 2002. Lott told Clinton, "This is not going to get any easier. We have to do it now."

What he meant was that balancing the budget doesn't require nearly so much pain when times are as good as they are now. How good? The budget deficit is expected to drop to $67 billion this year, 40% lower than the CBO had predicted. When negotiators found out that the shrinking deficit would give them an extra $225 billion to play with, the final knots in the deal dissolved. Christmas in May. Sometimes the mixture of money and politics is not so bad after all.

"We had some very heated arguments," says Senate Budget chairman Pete Domenici of the months of intense negotiations in his Capitol hideaway. "But this was big adult men knowing we had something to do." Before it was over, the can-do spirit in the negotiating room had grown so heady that Kasich, 44, reached over to hug Gene Sperling, Clinton's 38-year-old national economic adviser. "C'mon, Gene!" cried the gung-ho Kasich. "Let's do it for our generation!"

Washington is still a fair distance from Woodstock, so don't expect too many more hugs across party lines. But even before the new projections provided the necessary wiggle room, the deal was offering something for everyone. Late Wednesday night, Gingrich sold it to 25 skeptical fellow Republicans who were called to his office, some of them from their beds. He reminded them that while negotiators agreed to educational tax breaks that Clinton had wanted, they also accepted Republican demands for a capital-gains rate cut, an increase in the estate-tax exemption and a $500-per-child tax credit. Altogether Republicans had wrung $85 billion in net tax cuts out of the President, $60 billion more than he had first proposed. Plus Gingrich was able to argue that the deal's $115 billion in Medicare savings, in which the parties split their difference, would rid the G.O.P. for a while of the issue that had nearly lost them control of Congress in 1996. So what, Gingrich said, if they had to accept a modest "signing fee" by allowing Clinton $34 billion in new spending on domestic programs?

It was not so simple at first to pitch the deal to congressional Democrats, who thought Clinton had given up too much in tax cuts and got too little in return. More than half the 206 House Democrats issued a letter to Clinton to make sure he knew about "our deep concern about the tax cuts being considered." So in meeting after meeting last week, Administration officials were insisting that the deal was good for Democrats. The President, they said, had delivered on his promise to protect sacred social programs while increasing spending on education, the environment and children's health care. The White House still counted on getting the deal through the House by recruiting moderate and conservative Democrats to ally with Republicans. But a "victory" like that would mean Clinton's relations with his party had returned to the dark days of his first two years. Even if disaffected Democrats did not have the numbers to break the deal, they could make life difficult for him later on free-trade issues or, if it comes to that, deny him cover during campaign-finance hearings.

To the last minute, House Democratic leader Richard Gephardt looked ready to walk away from the deal. Two weeks ago, Clinton had summoned top House Democrats to the White House to argue that the agreement would remake the Democratic Party's image. The President insisted that it was only because he had embraced a balanced budget that he was re-elected last year, while Democrats failed to recapture Congress. By actually passing a balanced budget, Clinton claimed, he would "make it safe to be a Democrat again." Gephardt sat next to him, saying nothing.

By then, Gephardt was convinced that the White House had never intended to try to win his support for a budget deal. He was right. The President's advisers decided early on that the man who is Al Gore's likely opponent for the Democratic presidential nomination in 2000 would stake out his own territory on the budget. But when White House chief of staff Erskine Bowles tried to persuade a group of House Democrats on Thursday evening, he was met with groans and complaints from them as well. One member, George Miller of California, stalked out of the room. By Friday, however, the White House had managed to cajole more than half the Senate Democrats into supporting the plan, including minority leader Tom Daschle. In the end, Republican concessions that followed the new CBO numbers softened Gephardt too.

The economic windfall enabled the dealmakers to forgo one of their bitterest pills: the proposed change in the formula for calculating the Consumer Price Index. The CPI determines not only the size of annual increases in Social Security checks but also how much money someone has to make before crossing over into a higher tax bracket. Many economists believe it overstates annual inflation by more than one percentage point, costing the government billions of dollars, but fully correcting the formula could reduce the adjustment on monthly Social Security checks an estimated $8 in 1997, $17 in '98 and eventually $108 in 2006. As it turned out, the new deficit projections came Wednesday just as White House officials were handling objections about the CPI from angry members of their party. The following morning Kasich and Domenici decided to help the White House quell the Democratic revolt by offering $24 billion of the new money to eliminate the CPI problem and an additional $8 billion to ease cuts in Medicaid. The President had the bait he needed. Within hours, it looked like majorities in both parties would support the deal.

All the same, much of the hardest work--and with it the potential for the deal to fall apart--is yet to come. The present deal is just an outline. Congress still has to write in the gritty specifics on potentially explosive issues like the size of the cut in the capital-gains tax. Ways and Means Committee chairman Bill Archer was so adamant that he alone should have jurisdiction over taxes that he phoned Clinton in his limousine Wednesday night to make the case. During the next 36 hours, the dispute between the White House and Archer almost scuttled the deal.

"It's almost like being in a dream that we actually got there," Kasich said late Friday night from the Speaker's office. In the White House, after advisers briefed him on all the elements of the agreement, the President turned to Al Gore and gave him a high five. If the deal holds, it will alter America's political landscape. Ever since Ronald Reagan ran on a promise to balance the budget in 1980, eliminating the deficit has been a stated goal of almost every major American politician. The goal is now within sight.

--With reporting by Tamala M. Edwards/Washington

The heart of the budget deal

Key provisions of the new budget agreement--and their impact

Tax Cuts

The Change: $135 billion in tax relief over five years, offset by $50 billion in tax increases. Cuts include a child tax credit and lower estate and capital-gains taxes

The Impact: Families are to receive a $500 tax credit per child, but exact eligibility criteria have not been set. Details of the estate and capital-gains taxes also remain to be worked out

Children's Health Care

The Change: About $18 billion allocated for health insurance for uninsured children

The Impact: Projected to extend coverage to about 5 million children of the working poor

Medicare Financing

The Change: $115 billion in Medicare savings, in part through small increases in home-care premiums

The Impact: Expected to extend the life of the Medicare trust fund through 2008

Social Security Cost Of Living

The Change: Assumes the Bureau of Labor Statistics will slightly reduce the annual inflation increase used for figuring benefits

The Impact: Cost of living adjustment expected to be lowered about 0.15%, starting in 2000, saving $10 billion to $15 billion over two years

Welfare Benefits

The Change: Puts back $15 billion in welfare benefits over five years that were cut in last year's welfare reforms and adds grants and tax credits targeted at the poor

The Impact: Among the beneficiaries will be immigrants who were disabled when they entered the country, adults cut off from food stamps and welfare recipients in high-poverty areas

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