GOP Not Backing Savings Changes
Bush Plan Won't Pass, Leaders Say

By Jim VandeHei
Washington Post Staff Writer
Friday, February 7, 2003; Page A01

A key element of President Bush's ambitious tax-cutting agenda -- his proposal to create new tax-free savings accounts -- has virtually no chance of passing and should be replaced with a bipartisan proposal to expand existing retirement programs, House Republican leaders have told the White House.

"I just don't think we can realistically go as far as the president proposes," Rep. Rob Portman (Ohio), chairman of the GOP leadership team and a close Bush ally, said yesterday.

House Speaker J. Dennis Hastert (R-Ill.) agrees with Portman, said a source close to the speaker. "It hasn't gained any currency at all," the source said of the president's savings account plan.

Portman has informed Joshua Bolten, the president's top domestic policy adviser, of growing opposition to Bush's proposal to dramatically change the way Americans -- especially upper-income people -- save money and reduce tax obligations. Portman relayed complaints that the plan was sprung on Republicans with no forewarning, GOP lawmakers said.

In response, Bolten and other administration officials have indicated to House members that they will not wage an all-out fight for the new savings plans, at least over the next two years, according to people familiar with conversations.

In fact, they are laying the blame on Paul H. O'Neill, the recently ousted Treasury secretary. They said he developed the idea in secret and froze key lawmakers, such as Hastert and Portman, out of the decision-making process.

An economist with close ties to the White House was told to play up other parts of Bush's tax plan, not the savings accounts, when he briefs GOP lawmakers at their annual retreat, which started last night, administration sources said.

The programs in question constitute a significant portion of the president's sharply debated 10-year, $1.46 trillion tax cut proposal. They would establish three new savings plans -- two for retirement and one for anything. They would resemble 401(k) or IRA plans, but generally would be funded with after-tax money, with earnings and withdrawals going tax-free.

They would have much higher contribution limits than current IRAs, and no restrictions on contributors' income. That would allow wealthy families to put hundreds of thousands of dollars into the accounts, a move that could dramatically affect the government's revenue picture in years and decades to come.

The savings plans aren't the only parts of Bush's tax-cutting agenda being questioned by key Republicans. With federal budget deficits projected to rise past $300 billion this year and next, a half-dozen Senate Republicans have come out against the package's centerpiece: a proposal to eliminate taxes on stock dividends.

The tax cut proposals caught many administration allies by surprise, and have triggered stinging criticisms from Democrats and liberals, who accused the president of trying to shift tax burdens from wealthy Americans to those with modest incomes. Bush accused critics of engaging in "class warfare," but many moderate GOP lawmakers appear wary of an all-out battle for his priorities.

Portman and others worry that Bush's plan for savings accounts would interfere with bipartisan congressional efforts to increase contribution limits to traditional IRAs and 401(k) plans, and to encourage more small business owners to offer retirement plans for employees.

Bush's savings plan -- billed by the Treasury Department as an innovative way to encourage people to save more -- would allow retirement and nonretirement investments to grow tax-free. Under most current short- and long-term savings plans, interest, dividends and capital gains are taxed when the investor withdraws money. The Bush plan would place a greater tax burden on wages and consumption, a longtime goal of some conservative groups.

The proposal is projected to cost the federal government little in the short run, as many people would be expected to pull money out of their IRAs, pay taxes on any gains, and invest what's left in the new accounts. But it might be hugely expensive over the long run, as withdrawals would no longer generate tax revenue.

The Treasury Department announced the new savings plans shortly before the budget was released Monday, and Bush has said nothing publicly about them since. Several congressional Republicans questioned why the proposal was included in the budget plan in the first place.

White House spokeswoman Claire Buchan, asked about Portman's comments, said the president is committed to giving taxpayers new incentives to save, and will work with Congress on the details. "The top priority is to pass the jobs and growth package," she said.

Portman first raised concerns about Bush's savings plan last weekend at a retreat for congressional Republican leaders, participants said. But he said Bush's emphasis on greater savings could generate new momentum for increasing contribution limits to existing 401(k) plans and traditional IRAs.

Under a plan that Portman and Rep. Benjamin L. Cardin (D-Md.) plan to reintroduce next week, contribution limits would immediately rise to $5,000 (from $3,000) for IRAs, and to $15,000 (from $12,000) for 401(k) plans. The legislation also would make it easier for workers to take their pensions from job to job.

Senate Democrats blocked action on pension changes last year and are reluctant to back any tax cuts beyond measures such as a payroll tax holiday, which would quickly pump money into the economy.

Staff writer Albert B. Crenshaw contributed to this report.