By Alan K. Ota, CQ Staff

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid face a split in their party’s ranks over the best medicine for a tired economy: tax cuts or more spending.

Liberal Democrats, committee chairmen and appropriators want to boost spending on traditional Democratic priorities such as infrastructure and heating oil subsidies. Moderate Democrats would prefer to spur consumer spending and job creation with new tax breaks for middle-class families and businesses.

Pelosi and Reid want to offer an economic package to compete with the tax cuts expected to be the centerpiece of President Bush’s fiscal 2009 budget proposal. Senate Majority Whip Richard J. Durbin , D-Ill., said party leaders in both chambers will soon sift proposals by committee chairmen.

Democratic aides said they will look for measures that would avert bad economic news close to the November elections or inoculate Democrats against political fallout.

Although they are miles away from Bush on economic policy, Pelosi and Reid are publicly calling for a bipartisan approach. In a Jan. 11 letter to the president, they proposed a summit meeting before either the White House or congressional Democrats unveil their proposals.

One senior Democratic aide said a bipartisan approach would be preferable because “it’s not a stimulus if it’s not enacted.”

Aides said that if the White House declines to meet, Democratic leaders will likely outline a stimulus plan before Bush’s Jan. 28 State of the Union address.

Although it appears that no decisions have been made on the details or cost of such a package, tax rebates enjoy widespread support. Some liberal Democrats would also like to boost spending on unemployment benefits and food stamps.

And Rep. Ellen O. Tauscher of California, chairman of the moderate New Democrat Coalition, suggests an enhanced earned income tax credit, a payroll tax rebate, sales tax or property tax breaks and more spending on broadband, bridges and energy technology.

The GOP Perspective

Republican leaders predict that Bush will propose either extensions of the earlier administration-backed tax cuts or temporary measures like the accelerated depreciation for business investment provided after the Sept. 11 terrorist attacks.

House Minority Whip Roy Blunt , R-Mo., said Republicans would probably oppose new spending.

But Blunt said the GOP would be open to a package of $50 billion to $75 billion in tax cuts like those promoted by Harvard economist and former Treasury Secretary Lawrence Summers in a December meeting in Pelosi’s office with business leaders and senior Democrats.

Summers, who is scheduled to testify to the Joint Economic Committee on Jan. 17, has called for steps that could have a quick impact, such as increased unemployment benefits or temporary reductions in payroll withholding for income taxes, Social Security and Medicare.

Other participants in the December meeting included Barney Frank , D-Mass., the House Financial Services Committee chairman and a proponent of measures to deal with the subprime mortgage crisis, as well as George Miller , D-Calif., House Education and Labor Committee chairman.

The House’s top tax writer, Ways and Means Chairman Charles B. Rangel , D-N.Y., did not attend.

A stimulus package could push aside or absorb parts of Rangel’s priorities, such as extensions of expired tax provisions and the chairman’s ambitious tax overhaul.

Some senior Democrats said it would be a mistake for their party to emphasize tax cuts rather than spending on programs that would create jobs and help low-income families.

“It’s an ongoing debate in the party,” said Melvin Watt , D-N.C., an outspoken proponent of infrastructure funding. “One of the best ways to stimulate the economy is to create jobs for unemployed workers. That puts money in their pockets, and it is well demonstrated they spend it quickly.”

Scott Lilly, a former Democratic House Appropriations staff director who is now a senior fellow at the Center for American Progress, predicted that a Democratic stimulus plan will resemble a smaller version of the package of tax cuts and spending House Democrats offered in the 108th Congress.

That plan called for income tax rebates of $300 per person or $600 per couple, faster writeoffs for small businesses and manufacturers and more funding for homeland security, highways and Medicaid.

If such a package carried an overall price tag of about $70 billion, Lilly said, up to $30 billion of that might be additional money for programs such as bridge inspections and heating oil subsidies that rapidly create jobs or funnel money to low-income families.

Tax cut proponents are divided on whether they want to focus on extending Bush’s 2001 and 2003 tax cuts (PL 107-16, PL 108-27) or on providing new targeted investment incentives, such as those in the 2002 economic stimulus law (PL 107-147).

Business lobbyists have their own ideas. Thomas J. Donohue, president of the U.S. Chamber of Commerce, said he favors a blend of infrastructure spending and tax cuts for families and businesses. Grover Norquist, president of Americans for Tax Reform, wants expensing of business investment.

“Both parties are afraid of being blamed if there is a recession,” Norquist said.

But some senior Republicans, including Rep. Jack Kingston of Georgia, say they are against any costly stimulus deal unless there is more evidence of a coming economic slowdown. “I don’t think the economic case is there,” he said.

Opponents of a stimulus package may be aided by the new pay-as-you-go budget rule that requires offsets for the cost of new spending or tax cuts.

First posted Jan. 11, 2008 7:41 p.m.

Correction
Corrects to say that Grover Norquist is the president of Americans for Tax Reform.