Go on Taxes, Slow on Energy

In their accelerating dismay over the state of the economy, Republicans could hardly be distinguished from Democrats, business executives from labor leaders. All were making much the same speech and the same plea to the President and Congress: do something and do it now. Testifying before the Joint Economic Committee, United Auto Workers President Leonard Woodcock warned of the "worst economic upheaval since the Great Depression. The auto industry is in a state of collapse." Addressing the same group, Henry Ford II agreed: "I have never before felt so uncertain and so troubled about the future of both my country and my company. It is not too much to say that the very survival of our free society may depend on finding good solutions to these economic problems."

Meeting for three days in Washington, the nation's Governors were equally gloomy and concerned. Said Illinois Democrat Dan Walker: "There should be some plan to do the job on righting the economy without hurting further the very people who are already being hurt. Maybe we're going to have to look elsewhere for leadership." Added Michigan Governor William Milliken, a fellow Republican from Jerry Ford's home state: "There is in my judgment a very urgent need on the part of the Federal Government to recognize some of the very immediate problems we face."

Among those problems was January's .8% drop in the average number of weekly hours worked and 1.2% decline in real gross average weekly earnings. Another twelve major labor areas were added to the list of places with "substantial"--6% or more--unemployment. The only comfort was provided by a rise of .6% in the consumer price index, the lowest increase since April 1974--an indication that the recession is slowing the rate of inflation.

Permanent Cut. Goaded by the criticism and their own perceptions of the situation, both the President and Congress showed signs of speeding up last week. The House Ways and Means Committee approved a tax cut substantially higher than that originally requested by Ford. The President had sought a $16 billion tax reduction, most of it in 1974 rebates with a limit of $1,000 for each individual. Ways and Means approved a $21.3 billion cut that is weighted much more heavily in favor of lower-income groups. The measure provides for a 1974 rebate of $8.1 billion. It rebates all taxes paid up to $100, and 10% of all taxes up to a maximum rebate of $200. At that point, as income levels rise higher, it begins to scale back to $100.

Unlike Ford's proposal, the Democratic bill calls for a permanent tax cut, beginning this year, of $8.1 billion. Both the standard deduction and the minimum standard deduction, or low-income allowance, would be raised. Low-income individuals would also receive a 5% refundable tax credit. Corporate taxes would be reduced $2.4 billion this year and $1.5 billion next year by boosting the investment tax credit from 7% to 10% for most businesses and from 4% to 10% for utilities. Another $1.2 billion would be cut from corporate income taxes by applying the 22% tax rate to the first $50,000 of profits instead of only the first $25,000.

May Rebates. The House is likely to pass the tax cut without many modifications. Once the measure reaches the Senate, however, more relief may be given to higher-income groups that itemize their deductions. In conference, some of the Senate amendments may be accepted, bringing the total tax cut to some $25 billion--much higher than Ford initially wanted but still below the $30 billion reduction demanded by AFL-CIO President George Meany, who complained last week that the Government grossly underestimates the severity of the recession (see following story). If all goes smoothly, the Democrats expect the Internal Revenue Service to get most of the rebates in the mail in May and all of them out by mid-June. The new withholding rates should take effect at midyear, thus sparking spending power in the second half of 1975.

Both houses of Congress also moved ahead with their energy plans. First, the Democrats gained time when the Senate, following the House, voted 66 to 28 to postpone for 90 days the President's three-stage, $3 per bbl. tariff increase on imported oil. Thus they cleared the way for enactment of an alternative program that will concentrate on reducing consumption without raising prices. Both houses have ad hoc committees working on energy programs. Said Texas Representative Jim Wright, who heads the House task force: "Relying on a tariff to cut domestic consumption is roughly analogous to a husband's arranging with a merchant to raise the prices on women's clothing in the hope that his wife could be induced to buy fewer dresses. Such a husband might discover that he has outsmarted himself."

The Democrats on the Hill were backed up by the Governors, who voted 28 to 12 against Ford's tariff plan and then approved by a 30-to-l vote a resolution calling for a more voluntarist program. Minnesota Democrat Wendell Anderson added his voice to the protests of the Northeastern Governors, who oppose the tariff increase because of their region's heavy dependence on foreign oil. "The $3 import tax would have a disastrous effect on Minnesota," said Anderson. "One-half of our fuel comes from Canada, and from 60% to 80% of the state heats homes with heating oil. The price of nitrogen fertilizer would increase by $16 a ton. So the price of food is bound to go up. The whole program is counterproductive."

Better Mileage. In contrast to the President's proposal, the Democrats were planning to have gasoline bear the brunt of the price increases. The cost of gasoline could go up more, they reasoned, because more than half of it is consumed in the pursuit of pleasure and not in the line of work. The Senate was considering a penny-a-gallon tax that would gradually increase to 100 per gal. as unemployment declined. The House task force was devising a gasoline tax that would be partly rebated at the end of the month for "necessary" driving, say up to 40 gal. a month. Both chambers were working on a system of tax incentives to encourage better mileage for automobiles. Wright suggested that people buying the biggest gas guzzlers might be taxed an additional $600, for example, while those purchasing cars with the best mileage might receive a $400 rebate. Tax revenues would go into a trust fund for the development of new energy sources: coal gasification, perhaps, or geothermal and solar power.

Ford promised to veto the bill suspending his tariff hike even though more than two-thirds of the Senate voted for it --enough to override a veto. Yet in the hope of sustaining his veto, he moved toward a compromise, what he called "committing ourselves to a gasoline tilt." He was willing, he suggested, to let the price of gasoline rise higher than that of other oil products. While his original program would have entailed a 100-per-gal. boost on all oil products, he would now permit gasoline to absorb most of the price increase. He was also considering a rebate to farmers whose energy bills would soar under his program.

Throughout the week, Ford entertained a steady stream of Senators and Congressmen at the White House (see The Presidency) to try to persuade them to support his tariff plan. He was constantly conferring and commiserating with aides involved on the Hill, such as his deputy assistant for legislative affairs, Max Friedersdorf. But it is doubtful if the President tilted far enough to suit the Democrats, who have found little public support for his energy program and no end of opposition. Senators Edward Kennedy and Henry Jackson have already offered alternative programs of their own.

Even so, the Administration is prepared for the worst, so that in a sense it cannot lose, whatever the Democrats do. If Ford's veto is sustained, the Democrats will have to go along, however grudgingly, with his program. Says a high-ranking member of the Federal Energy Administration: "The Democrats will have to sit down and talk with us. They'll realize they can't get away with just throwing up roadblocks. The ball will be in their court." But if the Democrats override the veto and enact their own program, the President will be able to claim that he at least prodded them into action. Said Ford: "If we hadn't been tough, we wouldn't have gotten this far this fast."

There was evidence last week that Congress also will compromise if it has to, or even retreat. Wisconsin Democrat Henry Reuss, chairman of the House Banking Committee and a zealous critic of the policies of the Federal Reserve Board, introduced a pair of bills to make the Fed more of a "creature of Congress." One was a reaction to Chairman Arthur Burns' tight-money policy in 1974; Reuss called for increasing the money supply at an annual rate of 6% with the aim of bringing down interest rates. His second bill would establish a mandatory credit allocation program to divert funds from speculative purposes to such productive uses as capital investment, housing, small business, and state and local government.

In an unusual evening encounter with the Banking Committee, Burns wagged his finger in rebuke as he declared that Reuss's bills would "undermine our market system and wreck chances for an economic recovery." Lowering interest rates at a faster pace than the Fed has set, argued Burns, would lead to an "explosive" expansion of money and credit and fire up inflation. Burns also said that he was not aware of any shortage of funds available to credit-worthy borrowers. He apparently made a persuasive case, since Reuss backed down, withdrew his bills, and accepted a largely meaningless compromise. The committee voted to urge the Fed to pursue a policy that would reduce interest rates, and to set up voluntary guidelines for the allocation of credits--much as the Fed has done since last fall.

Public Apprehension. The White House policy of confronting, then compromising with Congress has its risks. If the Senate overrides the President's veto, it may not be in a mood to bargain with Ford. He could be bullied and disregarded for the rest of his term, with a resulting stalemate Government. The public seems to share this apprehension. A Louis Harris poll disclosed last week that only 39% of the respondents think Ford will "surprise people by being a strong and decisive President." Another 41% feel that he does not "seem to be very smart about the issues facing the country." On the other hand, an impressive 78% consider him "a nice guy," and 70% are persuaded that he is "running an open Administration and listens to people, which is good."

In the political struggles that lie ahead, obviously the best thing Ford has going for him is his unimperial presidential temperament. As his aide Bob Hartmann puts it: "The Democrats would love for the President to lose his cool, get mad and have a temper tantrum. But he doesn't look back and brood. His philosophy is that each time you huddle, you line up for a new play regardless of whether you've gained or lost on the last one."

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