Statement by Senator Feinstein
- Urging her Senate Colleagues to Reject the Proposed Tax Cut -
May 14, 2003
Congressional Record Version

Washington D.C. -- Citing record projected deficits and the uncertain economic picture, U.S. Senator Dianne Feinstein (D-Calif.) has announced her opposition to the tax package currently being considered by the Senate.

The plan before the Senate would provide a tax cut in excess of $350 billion. Senator Feinstein, however, believes such a tax cut would be a mistake and that the only way to return to a path of long-term growth is by "balancing the budget and by proving our ability to act as long-term stewards of our economy."

The following is the prepared text of a speech which Senator Feinstein delivered yesterday on the Senate floor:

"I would like to take a few minutes today to discuss the state of the American economy and discuss why I believe new tax cuts are the wrong economic medicine right now. I was one of the 12 Democrats who voted for a major tax cut in March of 2001. And I want to just bring to everybody's attention what the situation was then.

In March 2001 we were in our third year of surplus in the budget. We were projected to run a $5.6 trillion surplus through 2010. So it seemed an appropriate time to return some of that surplus to taxpayers, just as a business would do when that business was doing well. That is when a business would consider dividends for its investors or bonuses for its employees. That was 7 months before 9/11. Today we face cumulative deficits of approximately $2 trillion over 10 years. And that is the conservative estimate. Goldman Sachs estimates it at double that. We also face huge long-term shortfalls in the Medicare and Social Security trust funds.

Since late last year, the administration has been pushing for a second large tax cut, some $726 billion in tax breaks that would actually provide little upfront stimulus. The centerpiece of the President's proposal is a plan to eliminate taxes on corporate dividends.

Half of the benefits of that plan would be realized by taxpayers earning over $200,000 a year, and the plan would do nothing for the millions of Americans who hold stocks only through retirement plans that are already tax advantaged. At the same time, my State, California, would lose over $20 billion over the next 10 years as a result of lower direct tax revenue and higher interest rates on municipal bonds.

State budgets cannot afford to lose these costs, and neither can the Federal budget. The budget report which recently passed Congress locks us into deficits for the next 10 years, totaling some $2 trillion over that period.

In his State of the Union Message, the President stated: 'We will not deny, we will not ignore, we will not pass along our problems to other Congresses, to other presidents, and other generations.'

I cannot agree with that sentiment more, but that is not what has happened. Exactly the opposite has happened. Whether the tax cut ends up at $150 billion or $350 billion or $550 billion, it will all be financed by deficit spending. Every dollar in new tax cuts that passes this Chamber is a dollar we cannot afford to spend. We will not pay for it now, but our children are going to pay for it later.

Our current deficit is projected to be $347 billion this year, although many estimate the number will more likely be closer to $400 billion by the end of the fiscal year. And it is estimated to be $385 billion next year. These estimates do not include additional costs of rebuilding Iraq or new legislation not included in the President's budget. The deficits now projected are neither small nor are they short term. Rather, they are the largest in history. The only way that the budget resolution which came out of conference committee achieves balance is by expecting unrealistic cuts to discretionary spending after 2008.

To put some perspective on the size of the deficits expected this year, it is useful to compare it to nondefense discretionary spending. This year we are projected to spend $385 billion for everything outside of entitlement programs and defense. That includes funding for education, law enforcement, transportation, environmental protection, and hundreds of other uses.

If the Federal Government were required to balance its budget each year, as do 49 of our 50 States, it could cut nondefense discretionary spending by 90 percent--by 90 percent--and only just manage to reach balance. Imagine the impact that would have on Government services that we rely on every day.

Let me explain that further. If you look at a pie chart for the year 2003, 64 percent of all of the expenditures, the outlays this year, is for interest on the debt and entitlement programs. Entitlement programs are Medicare, Medicaid, Social Security, veterans benefits, and welfare. If you are entitled to them, you get them. They cannot be cut in the budget process. So 64 percent of all of the expenditures cannot be controlled. Defense is 17 percent, and non-defense discretionary--every other department--is 19 percent. That is why you could cut 90 percent of that 19 percent, and you can't really bring the budget into balance because of these other items in the expenditure area.

The only reason the Federal Government is not facing cuts in service is because it can take on new debt to cover the shortfall in tax revenue. When the occupant of the chair was mayor of a great city and I was mayor of a great city, we couldn't do this. We had to balance our budgets. The Federal Government can do this. Should the President's proposed tax cuts be adopted in their entirety, our public debt would nearly double over the next 10 years, from $6.7 trillion today to $12 trillion in 2013.

Later this month, the Senate will take up a bill to increase the Federal debt ceiling by almost $1 trillion--$984 billion, to be precise. That is the largest increase in our Nation's history. That increase represents $3,400 in new debt for every American citizen, whether they pay taxes or not. That increase is shocking, but the unfortunate truth is that the $1 trillion in new debt Congress is set to authorize will cost Americans much more than $3,400 each because interest in our debt drives up interest rates, because there is a limited appetite for debt at home and abroad, and investors must be given incentives to take on new debt in the form of higher interest rates.

Those interest rates are not just paid by the Government; they are also paid by homeowners who take out a mortgage. Look at the low mortgage rates today and what they are worth to an individual. William Gale, senior fellow at the Brookings Institution, predicts that interest rates could rise by as much as four-tenths of a percent due to the effects of the President's proposal.

What does that do to the average citizen? I will tell you. An increase of that magnitude would add $800 to the cost of a $200,000 home mortgage in the first year alone. It would increase costs by thousands of dollars more over the life of the mortgage.

I have always believed for many Americans low interest rates are much more worthwhile than a tax cut that they may only see slightly. But when they refinance their house, they see it big time, or when they are able to draw out from the accrued equity of the house. So interest rates not only affect homeowners, but they also affect businesses seeking to make new capital investments in the cost of money they borrow. The effect is to crowd out private investment and stifle economic growth.

Let's talk for a moment about the 2001 tax cut that I voted for, that 12 of us on my side of the aisle voted for, when times were good, before 9/11, with a $5.6 trillion surplus and a surplus in our budget 3 years in a row.

At the same time that the administration pushes for new tax relief, it does little to acknowledge that tax relief already scheduled to occur is, in fact, taking place. I don't understand. If I were President of the United States, I would be out on the hustings saying: The Congress, in 2001, gave you tax relief, Mr. and Mrs. America, and this is what it looks like: In 2001, $41 billion was paid out to taxpayers. In 2002, $71 billion was paid out in tax cuts to taxpayers. In 2003, $90 billion is going to be paid out in tax cuts to taxpayers. That totals, Mr. and Mrs. America, $202 billion that you have already or are getting from the 2001 tax cut. And next year, 2004, you will get another $100 billion. That totals over $300 billion being paid out in tax cuts today from the 2001 tax cut.

Why, in our current fiscal circumstances, should we add on such a large amount of tax relief when that relief is now beginning to take effect from the 2001 tax cut? Next year, which is the earliest a new tax cut could reasonably take effect, we are already scheduled to see a 1-percent drop in marginal income tax rates, an increase in the individual estate tax exemption from $1 million to $1.5 million, and relief from the alternative minimum tax, or AMT. So these things are happening as a product of our 2001 tax cut. Why doesn't the President speak about them? That would reassure the American public, I believe.

Today I have heard two primary arguments in favor of this tax cut. I have found neither argument to be logical or persuasive. The first argument is that the tax cut will be stimulative. In fact, we know it will have little or no stimulative impact as it is currently structured. Let me mention a few of the reasons why. Less than 20 percent of the tax cut can take effect within a year. Less than 20 percent of it can take effect within the next year. Economists agree that in order for tax cuts to be stimulative, they must be front loaded, and they must be large enough to make a meaningful impact.

The President's package fulfills neither requirement because its benefits largely accrue in the outyears. They would amount to a stimulus of less than 1 percent of GDP over the next 12 months. A dynamic analysis of the effect of the package on the economy predicts it will generate little or no economic growth. The newly appointed head of the Congressional Budget Office, Douglas Holz-Eakin, recently conducted CBO's first foray into dynamic scoring. Dynamic scoring is a method of economic analysis that looks at the ripple effects of tax and spending bills on economic growth beyond their direct cost or benefit.

The results of the CBO study were eye opening. The President's tax cut proposal was projected to have little or no impact on economic growth and could actually reduce growth in the later years. The administration's own economic team released data indicating that over the long term, the plan creates few new jobs. The tax cuts included in the plan provide very little bang for the buck.

The second argument in favor of the President's tax cut is that without the threat of large budget deficits, Congress will never act to rein in spending. Therefore, large budget deficits are actually a tool of responsible government. To me, this argument boggles the mind. Far from reining in spending, large deficits will actually increase spending by sending interest costs on our debt skyrocketing. Discretionary spending over the past several years has, in fact, been held tightly in check, and nearly all new discretionary spending is allocated to defense and homeland security.

Mr. President, the only way I believe we can return to the path of long-term growth is by balancing our budget and by proving our ability to act as long-term stewards of our economy. Right now, the biggest drags on this economy are uncertainty and distrust. Corporate leaders remain uncertain about geopolitical developments, such as the war against Iraq, North Korea, India/Pakistan, and what might happen next, and the risk of domestic terrorism. They are holding off investments until those concerns abate. Consumers share similar concerns and fear the loss of jobs or further deterioration in their retirement savings. Remember, large companies have crashed--Enron, Arthur Andersen, Global Crossings--and with them went retirement benefits. People have fear, and fear has entered the marketplace.

At the same time, small investors show little inclination to get back into the stock market as corporate scandals continue. So I believe the appropriate medicine for this uncertainty and distrust is strong regulatory action by agents such as the Securities and Exchange Commission and the Accounting Oversight Board, to increase accounting transparency and to stop corporate criminal behavior before it begins.

In the Senate, I have tried to push for corporate accountability in the energy sector. God knows it is necessary, and I hope to introduce an amendment on the energy bill. The return of investor confidence will have a positive impact on our markets and our economy. Coupled with strong congressional leadership committed to keeping our budget in balance, I believe we can quickly return to healthy rates of economic growth.

What will not work, however, is further deficit spending for tax cuts we cannot afford. When I last voted for a tax cut in March of 2001, we were projected to run a $5.6 trillion surplus through 2010. Our economic outlook at that point could not be more different than our current circumstances. Now we face cumulative deficits of approximately $2 trillion over 10 years, if interest costs are included. Those are unified deficits and do not reflect the one-time boost we are getting from surpluses in the Medicare and Social Security trust funds. If those surpluses were not included, our deficits over 10 years would add up to over $3 trillion.

Unfortunately, Congress cannot ensure an immediate return to economic growth. What we can do, however, is prove to those Americans who contribute to the economy that Congress can properly manage the government's finances. Yet our current course is taking us in the opposite direction.

I urge my colleagues to oppose any new tax cuts, no matter what the size, and focus on laying the groundwork for a return to long-term economic growth."

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