Washington Way, President's Agenda Daunting, But Is It Workable?
The President cannot have it both ways. He cannot reform Social Security, wage several regional wars and fight terrorists while simultaneously cutting taxes
By Mike Conlon
No matter what your political persuasion, no one can accuse President Bush of backing off or slowing down now that he has been re-elected.
The debris from the inaugural parade and the many inaugural balls had barely been swept away before the administration began pushing its second term agenda. Many of these programs, such as Social Security reform, tax reform, and amending the Clean Air Act, will have an effect on rebuilders and all those in the vehicle aftermarket.
One Bush initiative, reform of the class action litigation rules, has already been passed. For many years, large and small corporations alike have complained that the loose rules under which plaintiffs may band together to bring large suits are not fair and only seem to create opportunities for creative-minded lawyers. In particular, businesses have claimed that state courts with their less-restrictive rules often allow greater leeway to groups of plaintiffs seeking redress for alleged negligence and/or fraud. Moreover, because state laws differ widely in many substantive areas, the result of a case might depend upon where it is brought. This often leads to forum shopping by attorneys looking for the best law and the most sympathetic judge (Unstated by the law's proponents, but clearly a motivating factor, is that lawyers are attracted to the big paydays even a moderately successful class action generates. If lawyers are forced to represent only individuals or small groups of claimants, the monetary rewards will not be as great and the incentive to bring such suits will be curtailed.).
The new legislation strips state courts of most of their authority to hear class action suits. Almost all actions will now have to be filed in federal court where the business community is hoping that the rules which determine whether a suit can be brought as a class action or not are much stricter. Only in situations where two-thirds or more of the plaintiffs are from one state and the defendant has its headquarters in the same state, would the courts of the state have jurisdiction to hear the case as a class action. These rules assure that only a few class actions per year will ever arise in state courts.
Social Security reform and tax reform are the two major initiatives of the Bush second term. Reforming Social Security appears to be necessary to save this retirement system, not so much for those now retired or nearing retirement age, but for the 20, 30 and 40 year olds who will contribute to Social Security but, unless some action is taken, will not receive the benefits currently promised.
However, the only fix to Social Security which doesn't hurt some group of retirees is finding additional funds for the program. The President's idea is to allow younger workers to invest part of the money which otherwise would have gone into the Social Security trust fund into individual investment accounts. These accounts, at least theoretically, would supply them with more retirement income than Social Security (of course, this depends on how the funds are invested, but that is another issue). To divert dollars, though, would leave the Social Security system short of funds to pay those who will be retiring in 2030 and beyond. Therefore, unless benefits are reduced, some additional source for these funds must be found, and some increase in taxes would seem to be the only legitimate source. Even the President has indicated that he might raise the maximum amount of earnings which are subject to social security taxes (presently $90,000) so that higher wage earners will foot some of the bill. This of course is a back door tax increase.
The President also wants to make permanent many of the tax reductions passed during his first term. For budgetary reasons, most of these deductions, including elimination of the estate tax, were enacted with a sunset provision and will end sometime between 2008 and 2011. The President also wants to eliminate the alternative minimum tax (AMT) because many individuals and corporations have to pay a high AMT even though the new reductions have lowered their regular taxes.
But substantial tax reform also creates financial problems. Not only does it seem incompatible with Social Security reform, but with the increasing cost of military spending, the daily cost of the wars in Iran and Afghanistan and the sizeable funds being devoted to protection from terrorism, the federal government is straining to find funds to meet its needs at present tax levels.
However, many Administration officials are promoting greater borrowing by the federal government and large budget deficits as the magic elixir which will allow tax reduction and Social Security reform at the same time (over the last twenty years the political parties have reversed positions on deficit spending. Republicans, formerly the guardians of the federal purse, now promote deficit spending in favor of tax reduction. Meanwhile the Democrats have become the party of fiscal restraint). But deficit spending only can go so far. The overall economic consequences of creating large budget deficits are very complex.
But since higher demand always leads to higher prices, any increased government borrowing should cause an increase in interest rates.
To attract more money, higher rates will have to be offered. In addition because a large part of U.S. government debt is held by foreigners who see their returns being eaten away by the falling value of the dollar against their home currencies, they will demand higher rates to compensate for that loss, or will find other uses for their funds. Therefore, if deficit spending continues, the rising interest rates triggered by it could wipe out any business stimulus caused by reducing taxes.
The bottom line is that the President cannot have it both ways. He cannot reform Social Security, wage several regional wars and fight terrorists while simultaneously cutting taxes. Therefore, it seems likely that while some minimum reduction may be made in taxes, the major reductions which are set to expire, including the termination of the estate tax, will have to be significantly modified if they are to be continued or even allowed to expire.
Moreover, any change to the alternative minimum tax will probably be a small incremental change to make it applicable to fewer middle class individuals rather than a wholesale reduction or elimination.
Also of interest to rebuilders is a bill introduced with Presidential support which would allow trade associations to offer health care plans to their members. Currently, large corporations and labor unions have a distinct advantage when negotiating with health insurers over coverage and premiums. These groups have large numbers of members and can spread the risk to the insurer over these larger numbers. They are also usually subject to the more favorable federal insurance regulations rather than state rules. As a result, the premiums they pay are substantially smaller than those small businesses pay for the same coverage. Allowing trade associations to sponsor plans would allow them to use the combined employment of their members to generate better coverage and premiums. But unless the Federal law is changed, associations cannot offer such plans.
The new bill (H.R. 525) would remove that barrier and would establish rules for association-sponsored health insurance plans. A similar bill passed the House last year but died in the Senate. However, with the change in membership in the Senate this year and Presidential backing, the bill has a much greater chance of success.
Also pending is the proposed bill to establish a trust fund for corporate victims of asbestos-related illnesses. This bill has languished for many years because of the concern by victims groups and plaintiff's attorneys that the existence of the trust fund will impose an artificially low limit on recoveries by victims.
The bill has a better chance for passage this year because it enjoys bi-partisan support. But there are still many contentious issues that must be resolved before it becomes law.
The President has given himself some daunting tasks, especially because he must essentially have them completed by the Congressional elections in 2006. After that election he will be a lame duck and the focus will switch to promoting issues to enhance the chances of those who want to succeed him.
Mike Conlon is legal counsel for the Engine Rebuilders Association (AERA) and the Automotive Parts Rebuilders Association (APRA). He is an attorney with the Washington, DC, firm of Conlon, Frantz, Phelan, Knapp & Piers.