The 1997 Budget Deal - What It Means to Taxpayers

Policy Backgrounders | Taxes

No. 144
Wednesday, February 04, 1998
by Bruce Bartlett


Still smarting from their defeat in the 1995 budget battles with President Bill Clinton, congressional Republicans entered the 105th Congress in January 1997 determined to avoid another such confrontation. Having retained control of Congress in the 1996 elections, they hoped to make a deal with the president to both cut taxes and achieve their goal of a balanced federal budget in 2002. In May 1997, Republican congressional leaders signed off on a budget agreement negotiated with the Clinton administration. The agreement broadly outlined the features to be included in budget legislation, providing for a net tax cut of $85 billion between 1998 and 2002.1 Gross revenues would be cut by $135 billion, offset by $50 billion in revenue increases, most of it ($33 billion between 1997 and 2002) from an extension of the airline ticket tax.

"Republicans entered the 105th Congress determined to make a deal with the President."

A major factor allowing the agreement was the Congressional Budget Office (CBO) decision to sharply revise upward its estimate of the federal government's future income absent any budget deal. In a May 2, 1997, letter to the chairmen of the House and Senate Budget Committees, CBO Director June O'Neill estimated that revenues for 1997 would be $45 billion higher than the CBO had forecast in January. (The CBO never explained the exact source of the additional revenue.) Dr. O'Neill also said revenues would be higher by "similar amounts" in the years 1998 through 2002.2 Both Congress and the White House took this to mean that projected deficits would be lower by $225 billion between 1998 and 2002. This anticipated revenue "windfall," gained by multiplying $45 billion by five years, made the budget deal possible.3

Figure I - Projected Federal Budget Surplus%2FDeficit

Significantly, the details of the tax legislation were not spelled out in the budget agreement. But Republicans received the cuts in capital gains and estate tax rates they wanted, along with a $500 per child tax credit. President Clinton came away with a commitment reserving $35 billion for education tax initiatives. Both sides agreed to extend the Airport and Highway Trust Fund excise taxes, due to expire on September 30, 1997. Beyond these specifics, the chairmen of the tax-writing committees, Bill Roth (R-Del.) of the Senate Finance Committee and Bill Archer (R-Texas) of the House Ways and Means Committee, reserved the right to draft their own bills.

The lack of clear understanding about key details led to considerable wrangling between the White House and congressional tax-writers throughout the summer of 1997. The Clinton administration and congressional Republicans had sharp differences of opinion and so did the Senate Finance Committee and the House Ways and Means Committee. Eventually, however, the details were worked out. The Taxpayer Relief Act of 1997 was approved by overwhelming majorities in both the House and Senate. President Clinton signed it into law on August 5.4

A CBO report after passage concluded that on balance the deal reduces the budget deficit. However, its impact is far more modest than its supporters would have us believe. The economy rather than the budget deal deserves most of the credit for reducing the deficit. As Figure I shows, revised economic assumptions and technical adjustments would have reduced the deficit in 2002 to just $63 billion if there had been no budget deal at all. Indeed, the budget deal actually increases the deficit by more than $20 billion in 1998.

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