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Enormous costs of Katrina will strain the U.S. budget, put pressure on Congress to reconsider tax-cutting agenda

WASHINGTON—Hurricane Katrina's cost to the U.S. Treasury in spending and lost revenue will strain a federal budget that had recently shown signs of improvement despite the war in Iraq and the tax cuts passed in 2001 and 2003.

The $10.5 billion that Congress approved in emergency session last week is only the first installment of at least a $50 billion effort toward relief and rebuilding in the ravaged Gulf Coast states, officials and analysts said.

"The fiscal implications are going to be huge, and they're all going to be on the increased deficit side," said Stan Collender, an independent budget analyst and manager of the Washington office of Financial Dynamics Business Communications. "There also will be secondary and indirect effects. The government is one of the biggest users of oil and gasoline in the country. And the reduced economic activity overall means (gross domestic product) is not growing as fast. Therefore, revenues aren't flowing in to the government as much."

Bush administration officials last week downplayed the long-term costs to the budget. The one-time expense of addressing the disaster's aftermath and the impact on the economy would be short-lived, they said, and President Bush could still meet his goal of cutting the budget deficit in half by 2009.

"We do not foresee this rising to a level that takes us off track for achieving the president's budget objectives," Treasury Secretary John Snow said.

But the additional spending is bound to slow or block the president's agenda in Congress, where Republican leaders are considering further tax cuts, costly changes to Social Security and additional spending in Iraq.

Before Katrina hit the Gulf Coast, the top priority in the Republican-controlled Senate was repealing the estate tax.

Republican leaders still want a vote on what they derisively call the "death tax." But Democrats already were pressing to delay the vote, portraying the Senate's work this week as a choice between helping the mostly poor victims of the hurricane or cutting taxes for the nation's wealthiest.

"With thousands presumed dead after Hurricane Katrina and families uprooted all along the Gulf Coast, giving tax breaks to millionaires should be the last thing on the Senate's agenda," said Senate Democratic Leader Harry Reid of Nevada.

Attending to the hurricane's destruction will also delay efforts in the House of Representatives to write a broad retirement security package that includes changes to Social Security.

House Speaker Dennis Hastert, R-Ill., said Friday that Republicans will consider putting together a package of spending and targeted tax cuts designed to stimulate the hurricane-battered economy. Much of that work would be done by the House Ways and Means Committee, whose chairman, Bill Thomas, R-Calif., had been devoting himself almost exclusively to writing sweeping retirement legislation.

The Congressional Budget Office last month projected that the budget deficit for fiscal 2005 would be $331 billion, an $81 billion reduction from the record deficit of 2004. An unexpected increase in revenues helped offset the costs of the war in Iraq and of tsunami relief earlier this year. But budget office analysts concluded that the revenue increases were temporary.

Collender, echoing other budget analysts, ventured that the hurricane's cost in higher federal government spending and lost revenue from a weakened economy would add $100 billion to the deficit.

"Obviously at some point they will start to rebuild the gulf area and that will increase economic activity, but the timing of most of that GDP boost doesn't happen until 2007," he said.

Despite the deficit pressures, the Bush administration wasn't backing down from its goal of permanently extending the 10-year tax cuts adopted in 2001 and 2003.

"Making the tax cuts permanent would be a real plus in a situation like this because people would know they had, going forward, the advantage of lower tax rates," Snow said. "And when people know they have lower tax rates locked in going forward, it affects their behaviors. It makes them more confident of the future."

Former Sen. John Breaux, a Louisiana Democrat whose son and daughter are helping relief efforts in New Orleans, urged Congress to put off politically divisive tax debates and address the hurricane aftermath as its top priority.

"We can't continue to do everything all at once all the time and everything being first priority," he said. "If you're spending a billion dollars a day in Iraq, I mean how long can you continue to do that and neglect the domestic needs of the country's infrastructure?"

Katrina also is sure to spark debate over who pays to rebuild the tattered Gulf Coast region and whether the time has come for a new approach to disaster reconstruction. The federal government and insurance sector repeatedly have been exposed to losses from a large number of natural disasters in recent years and the 2001 terrorist attacks.

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Knight Ridder reporter Kevin G. Hall contributed to this article.)

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(c) 2005, Knight Ridder/Tribune Information Services.

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